What is an annual performance review?

An annual performance review is a formal assessment conducted by employers to evaluate an employee’s job performance over the past year. This process typically involves a one-on-one meeting between the employee and their supervisor, where they discuss the employee’s achievements, strengths, areas for improvement, and future goals.

The review often influences decisions regarding promotions, salary adjustments, and professional development opportunities.

What is the purpose of an annual performance review?

The primary purpose of an annual performance review is to provide a structured opportunity for managers and employees to discuss the employee’s performance over the past year. This review helps to:

• Align the employee’s work with the organization’s goals
• Identify areas where the employee excels
• Pinpoint opportunities for improvement
• Identify training needs

Annual performance reviews also serve as a platform for setting future performance goals and career development plans. Additionally, performance reviews can inform compensation decisions, such as merit-based raises or bonuses.

What are the key components of an effective annual performance review?

An effective annual performance review typically includes several key components:

1. Preparation involves gathering performance data, setting the agenda, and reviewing past objectives
2. Evaluation assesses the employee’s achievements, skills, and behavior against predetermined criteria
3. Feedback should be specific, balanced, and constructive, highlighting both strengths and areas for improvement
4. Goal setting involves collaboratively creating realistic and challenging objectives for the upcoming year
5. Follow-up ensures the employee receives ongoing support and resources to achieve their goals

What usually happens in an annual performance review?

In an annual performance review, employees and managers discuss the employee’s performance over the past year, including achievements, challenges, and growth. They review progress toward set goals and assess alignment with company values and objectives. Together, they also set new goals for the next year and may discuss areas for skill development. This review provides a formal opportunity for feedback, alignment, and planning, and in some cases, may include a salary or role adjustment conversation.

Complementary resources:

• How to Master the Skill of Managing Expectations at Work
• How to Conduct a Performance Review Meeting
• 7 Effective Goal-Setting Frameworks Analyzed (+Tips for Selecting the Right One)
• How to Measure Employee Performance: Effective Tools and Technique

Do you negotiate salary during the annual performance review?

Yes, salary discussions often take place during the annual performance review, but it depends on company policy. Many organizations use performance reviews as a basis for salary adjustments, bonuses, or promotions. However, it’s important for both employees and managers to understand if and how compensation is tied to the review process before initiating these discussions.

Read more: Linking Performance Appraisal and Compensation: A Comprehensive Guide

What questions should managers ask employees during an annual performance review?

Here are some questions to ask your people during annual performance reviews:

• What accomplishments are you most proud of from this past year?
• What challenges did you face, and how did you handle them?
• Are there any resources or support you need to improve further?
• What goals do you want to set for yourself in the upcoming year?
• How can I support your growth and development?

How can annual performance reviews improve employee performance?

Annual performance reviews can significantly enhance employee performance by providing clear, constructive feedback.

When employees understand how their work contributes to the organization’s success and receive guidance on how to improve, they are more likely to be engaged and motivated. These reviews also offer a chance to acknowledge and reward high performance, which can boost morale and productivity.

Furthermore, setting specific, measurable, achievable, relevant, and time-bound (SMART) goals during the review process can help employees focus their efforts and track their progress throughout the year.

How do annual performance reviews contribute to professional development?

Annual performance reviews are a critical component of professional development. They provide employees with feedback on their current skills and competencies, helping them understand their strengths and areas for growth.

Reviews often include discussions about career aspirations and development opportunities, allowing employees to set goals for acquiring new skills or advancing their careers. By identifying specific training needs and aligning them with organizational objectives, employers can facilitate targeted development programs that benefit both the employee and the organization.

What are the disadvantages of relying on annual performance reviews?

Relying solely on annual performance reviews has several drawbacks:

1. They lack timeliness—feedback is often delayed and may not address issues promptly, which can hinder immediate improvement
2. They can be stressful—they condense a year’s worth of feedback into one meeting, which may feel overwhelming for employees
3. They may unintentionally lead to a check-the-box approach—managers and employees may view them as a formality rather than a valuable discussion for growth
4. They risk overlooking smaller achievements or incremental progress—since these reviews are infrequent, they might fail to capture the complete picture of an employee’s contributions

Regular feedback sessions or quarterly check-ins can mitigate these issues by providing more timely, actionable, and continuous feedback.

What are the best practices for conducting an annual performance review?

Best practices for conducting an annual performance review include preparation, active listening, and focusing on development.

1. Managers need to prepare by reviewing the employee’s performance data and setting an agenda for the discussion
2. During the review, active listening is crucial to understanding the employee’s perspective and fostering a two-way conversation
3. The review should prioritize development by discussing career aspirations, setting future goals, and identifying training opportunities
4. Providing balanced feedback and recognizing accomplishments can also reinforce positive behavior and motivate employees

What should managers write in their direct report’s annual performance review?

Managers should objectively assess the employee’s performance, highlighting specific accomplishments, strengths, and areas for improvement. They should give balanced feedback, recognizing successes, and addressing any challenges or missed goals.

Managers also need to discuss how well the employee’s contributions align with department or company objectives and suggest development actions or goals for the coming year to support the employee’s growth.

Consult our comprehensive guide: How to Write a Performance Review for Direct Reports

What should workers write in their annual performance review?

Workers should focus on summarizing their key achievements, progress toward goals, and any skills or knowledge they’ve developed over the year. They should also discuss any challenges they encountered, how they addressed them, and areas they plan to improve. Additionally, employees can reflect on their contributions to team or company objectives and propose new goals or development opportunities for the upcoming year.

Read more:

• Actionable Self-Assessment Tips for Employees Writing Performance Reviews
• Self Evaluation Examples: 70+ Sample Answers to Inspire You
• 60+ Self-Evaluation Leadership Examples to Inspire Current and Future Leaders

What are common challenges associated with annual performance reviews, and how can they be overcome?

Common challenges with annual performance reviews often stem from biases, unclear criteria, insufficient feedback, and infrequent evaluations.

Feedback bias

Feedback biases such as recency bias, where recent events overshadow a full year’s performance or favoritism—can significantly distort evaluations, leading to unfair outcomes.

Solution: To address this, companies can:

1. Implement standardized evaluation criteria that clearly define expectations across roles
2. Ensure managers are trained in giving feedback and recognizing and reducing unconscious biases

These two steps help create a more objective, balanced review process that focuses on the employee’s full contributions over the year rather than recent events or personal preferences.

The lack of clear, objective criteria in evaluations

Without specific benchmarks, performance reviews can become subjective and inconsistent, making it hard for employees to understand how to meet expectations.

Solution: Organizations can overcome this by setting measurable goals and performance indicators at the start of the review period, ensuring that employees know exactly what is expected.

These criteria need to be transparent and relevant to the role, fostering a sense of fairness and alignment. This clarity also empowers managers to provide focused, constructive feedback that helps employees see their strengths and pinpoint areas for growth.

Read also: Key Performance Indicators Examples to Measure Success—This comprehensive guide covers 100+ KPI examples across various departments, such as sales, marketing, finance, customer support, and more, as well as department-agnostic KPIs that apply to all employees, such as productivity, quality of work, and team collaboration.

Infrequent feedback and communication

Infrequent feedback and communication can make annual reviews feel like a one-time, high-stakes assessment rather than a tool for growth. When feedback is limited to once a year, employees may lack the guidance needed to improve continuously, making it harder to adjust or develop skills throughout the year.

Solution: Companies can adopt a more frequent performance review structure with quarterly or monthly check-ins to address this challenge. Regular discussions allow for timely feedback, course corrections, and support for development goals, transforming performance management from an annual event into an ongoing dialogue that fosters engagement and continuous improvement.

How do annual performance reviews differ in remote work environments?

In remote work environments, annual performance reviews may require adjustments to account for the lack of physical presence and direct supervision.

Communication tools such as video conferencing become crucial for conducting reviews effectively. Managers must focus more on output and results rather than hours worked or physical presence.
Additionally, the criteria for evaluation may shift to emphasize self-motivation, time management, and digital communication skills. It’s also important to ensure remote employees have equal access to feedback and development opportunities as their in-office counterparts.

Further reading: Essential Performance Management Insights for Remote Teams

How can organizations measure the effectiveness of their annual performance review process?

Organizations can measure the effectiveness of their annual performance review process by evaluating several factors:

• Employee engagement and satisfaction
• Alignment of individual and organizational goals
• Improvement in employee performance
• Retention rates

Employee surveys and feedback can provide insights into their perceptions of the review process. Tracking the achievement of performance goals and analyzing subsequent performance improvements can also indicate the process’s success. Additionally, comparing turnover rates before and after implementing changes in the review process can help assess its impact on retention.

How does technology impact the conduct of annual performance reviews?

Technology plays a significant role in modernizing and streamlining the annual performance review process. Performance management software like Deel Engage can automate and organize data collection, making it easier to track employee achievements and provide evidence-based evaluations. These tools often include features for setting and monitoring goals, facilitating continuous feedback, and generating performance reports.

Technology also enables virtual reviews, essential for remote and global teams. By leveraging technology, organizations can enhance the efficiency, accuracy, and accessibility of their performance review processes.

Streamline performance reviews with Deel Engage

Deel Engage massively enhances the performance measurement process by providing tools for:

• Setting performance goals at individual, team, department, and organizational levels
• Collecting and analyzing feedback from multiple sources (peers, managers, and self-evaluations)
• Automating performance review workflows (automatically adding employees according to criteria such as hire date or belonging to specific departments or groups)
• Streamlining notifications and reminders for all participants
• Identifying skill gaps and areas for improvement
• Allowing HR and L&D team to accelerate training programs creation to address performance gaps

Deel Engage ensures that performance measurement is fair, consistent, and aligned with organizational goals. Use our talent management suite to support employee development and business success.

Request your free demo today.