Why Performance Reviews Are Broken by Design
The incentive problems with backward-looking assessments, and what actually works
In a famous 1957 article in Harvard Business Review, Douglas McGregor stated his “Theory Y” approach to management: most employees want to perform well and will do so if supported properly.
Why then do we spend so much time focusing on past performance, instead of people development?
The Problems with Traditional Reviews
Problem 1: Individual goals in team-based work
Why do we set personal goals when most of us work in teams? The work that matters is collaborative. Individual metrics create incentives to optimize for what’s measured, not what’s valuable.
Problem 2: Assessing the past is harder than it looks
Even when business cycles are stable enough to establish measurable goals, we’re all subject to cognitive biases. Hindsight makes everything look obvious. Context gets flattened. The person doing the assessment wasn’t there for most of the moments that mattered.
Problem 3: Unstable environments break the model entirely
What happens when business cycles aren’t stable and jobs become increasingly complex? Can you really go back and assess whether it was possible to do better, given the context an employee was in six months ago?
The honest answer is no. But we pretend otherwise.
What the Agile Manifesto Got Right
The manifesto outlined several key values:
- Responding to change over following a plan
- Collaboration over individual performance
- Self-organizing teams over top-down direction
- Reflecting on how to improve on a regular basis
Notice: none of these are backward-looking. They’re all about creating conditions for future performance.
A Better Model: OKRs + CFRs
John Doerr’s Measure What Matters provides two tools that actually align with how work happens:
- OKRs (Objectives and Key Results) — Set ambitious goals, get people onboard, align teams, and track progress toward outcomes that matter. The key word is progress, not judgment.
- CFRs (Conversations, Feedback, Recognition) — Support continuous improvement through regular dialogue. Not annual reviews. Not quarterly check-ins. Continuous.
The Incentive Problem
Traditional performance reviews exist because organizations need to make compensation and promotion decisions. That’s legitimate.
But conflating “how do we allocate rewards” with “how do we help people improve” creates a system that does neither well.
- People optimize for looking good in reviews rather than actually improving.
- Managers avoid honest feedback because it affects compensation.
The solution is to separate these functions. Use lightweight, continuous feedback for development. Use different processes for compensation decisions.
The Meta-Lesson
Performance management systems are themselves complex systems. They respond to incentives, not intentions.
If you design a system that rewards individual metrics, you’ll get individual optimization — even when collaboration would produce better outcomes. If you design a system that punishes honest disclosure of problems, you’ll get hidden problems.
The question isn’t “how do we assess performance better?” It’s “what behaviors does our assessment system actually incentivize?”
Usually, the answer is uncomfortable.