As a small business owner, should you be doing annual performance reviews? We think so—but only if you’re willing to do the work it takes to make it a productive experience for both you and your employees.

That may sound obvious, but surprisingly few people know how to do performance reviews well, whether it’s because of a lack of training or the general dread that can come with telling people when they’re not performing up to expectations.

That said, a formal performance review process is a great way to hold employees accountable to goals they set earlier in the year, helps you record and track performance over time, and prompts you to give thoughtful, actionable feedback that—if done right—can help both your employees and your business flourish.

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Why Performance Reviews Matter

But it is important to do performance reviews well. It’s thought that when performance reviews don’t make a significant dent in employee performance, it’s because they’re poorly executed. Oftentimes, people who receive negative feedback during a performance review walk away without an action plan for addressing it. These people are told they’re performing poorly, but not coached on how to improve.

So yes, performance reviews can be a valuable tool—but only if you put some thought into them and set up a process that works. After all, if both you and the employee dread the annual performance review, you’re not going to get very much out of it just by going through the motions.

Let’s look at how to get the most out of performance reviews, along with some free templates (one for employers and one for employees) for you to use.

How to conduct employee performance reviews:

1. Set clear expectations up front

Bring your employees together to tell them about your goals for the year and what you expect of them as a team. Then, set up individual meetings to talk about what you expect from each of them, and to outline their performance goals for the year. “You’ll see immediate improvement in performance because everyone knows what the boss expects,” says Dick Grote, author of How to Be Good at Performance Appraisals. “And it earns you the right to hold people accountable at the end of the year.”

2. Give regular feedback throughout the year

An annual review is a great way to look back at an employee’s performance in a big-picture way. But if you’re doing things right, then what you say during the review shouldn’t come as a surprise (and you definitely shouldn’t wait for the annual review to bring up problem areas). To make regular feedback a priority, commit to employee check-ins on a weekly, monthly, or quarterly basis—and put them on the calendar well ahead of time.

3. Use a template

Don’t just walk into a performance review meeting and wing it. This is not a casual conversation, and both you and the employee should prepare for the review ahead of time by gathering everything that can help you gauge performance, including sales reports, client and customer feedback, notes from your check-in meetings, and so on. Remember those goals you set at the beginning of the year? Pull them out and go over them together: has the employee met those goals? Why or why not? What can they do better next time? And so on. A template can help you standardize this process and let employees know exactly how you plan to measure their performance.

Ideally, your performance review will be a two-sided process that consists of both your employee’s reflection and feedback as well as your own. We’re sharing two performance review templates (one for the employer, one for the employee) just for this purpose.

4. Back everything up with concrete examples

Be as specific as possible about the employee’s performance. If they’re doing a great job, point to a few examples (both recent and earlier in the year) of outstanding work. The same goes for negative feedback.

5. Don’t just give negative feedback—build an action plan around it

Don’t let employees walk out of your office without an action plan for addressing problem areas or blind spots. Empower them to think of solutions and brainstorm options together. The purpose of a performance review shouldn’t be to make people feel bad about their shortcomings, but to help them overcome them.

6. Give the employee time to read their evaluation

Hank Boyer of Boyer Management Group recommends sharing your written evaluation with the employee a few days prior to the performance review meeting. “Few things are less effective than trying to hold a discussion while the employee is reading their evaluation for the first time,” he says. If the employee is filling out a self-evaluation, request that they also share it with you before the meeting so you have time to prepare.

7. Handle disagreements with grace—and listen!

Your employee may disagree about your assessment of their performance. When that happens, do not get defensive or try to argue. Really listen to what they have to say first. Oftentimes, people just want to be heard. When you do address their concerns, be sure to provide the context for your thinking and back up everything you say with examples. Above all else, keep the interaction professional.

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