How Much Do Performance Reviews Actually Cost and Are They Really Worth It?

Here is a simple way to estimate the cost of your performance appraisal process:
Let’s assume the average manager earns $50 per hour (including benefits) and spends an average three hours per review (including gathering feedback, preparing documents, and holding discussions with employees).  Remember, that’s the average; managers can earn much more (and a few obviously earn less).  Let’s also assume that the average employee earns $30 per hour (including benefits) and that they spend about the same amount of time on their own reviews (including preparing a list of achievements, documenting development goals, and meeting with their manager).  To make the math simple, let’s say the organization in question has a total of 500 employees:

The cost for the annual performance review process is about $120,000 just in the value of time spent. Take the number of employees to 5,000, and the cost soars to $1.2 million.
These numbers do not include software or IT maintenance costs associated with implementing and maintaining an online system.  Nor have we included costs for the HR resources used to orchestrate the process and consult with managers.  Nor have we included any group management meetings wherein relative performance and rankings are discussed and finalized.  And the list could go on with opportunity costs associated with focusing on the performance review cycle instead of attending to opportunities that could boost organizational profitability or other success in the market.
Is it worth it?
To justify the cost and time of this annual process, you would think that an organization could easily recognize the results the process produces. We’ve found that it’s the rare organization that actually tracks –or even knows how to track- the impact of performance reviews and conducts a cost-benefit analysis.  Instead, organizations tend to only measure participation rates, adherence to guidelines, and completion of documentation.
How does your organization measure the effectiveness of its performance review process? Do you measure how much the process costs and how much impact the process has on increasing company performance?
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