At many companies, performance reviews are a rote affair: an awkward annual sit-down with your manager that reveals little, except whether you can expect a raise that year. The best companies, though, have turned performance reviews into a source of true competitive advantage.

How to Capitalize on Performance Reviews: 3 Strategic Best Practices

A recent NCMM survey of 300 C-suite leaders of middle market companies revealed that "companies that rate themselves as proficient in performance management have faster revenue growth and better profit margins than their competitors and are less likely to have to reduce staff." Indeed, 76 percent of companies that said they had a strong culture of performance management increased revenues last year, while only 4 percent saw a decline. How can your company emulate these best practices? Here are three strategies to follow:

  1. Set clear goals. Performance reviews are almost irrelevant if your employees don't have clear goals. After all, how can you measure success if the criteria have never been established? The best companies make sure all employees understand their roles and how they fit into the big picture. Your company should ensure that the individual's goals "derive from and link back to departmental goals and company strategy." It's also useful to help your employees break down larger goals into manageable subgoals (e.g., to reduce costs by 10 percent this year, the employee first needs to identify potential cost savings, then pilot the program and evaluate it). This helps the larger goal feel less overwhelming and makes overall progress easier to track.
  2. Institute second-level reviews. Employees will be a lot less willing to learn from their performance reviews if they feel the system is rigged. In the survey, 41 percent of respondents believed that managers too often coddled their favorites, downplaying their shortcomings during the review process in order to reward them financially. One antidote is implementing second-level reviews, in which managers must — prior to finalizing the reviews — submit drafts to their own bosses, who presumably have some direct knowledge of the employees in question. That second set of eyes is a barrier to overt favoritism.
  3. Give honest, ongoing feedback. Sadly, the survey revealed that "fewer than half of all executives at midsize organizations see performance conversations as being open, honest and fact-based." It's obvious that employees can't improve if they're not being leveled with, but managers are human, and it's not easy to give someone bad news about their performance. Indeed, 64 percent of the self-reported top performers in performance management said that they believed their managers could make tough calls, but only 48 percent believed that they were actually willing to do so. It's essential, then, for your company's leaders to encourage and model honest communication. One of the best ways to do this is to make performance reviews an ongoing part of your company culture, rather than just a nerve-racking annual process. Conversations become incredibly stressful when they're centered around a verdict that's linked to one's pay and livelihood. Instead, it's useful to touch base with employees on a regular basis, both formally and informally, to share how their work is lining up against the goals you've set together.

To employees, performance reviews may sometimes be more indicative of a bureaucracy than a collaborative relationship between co-workers, but when done well, they can help your company develop a powerful talent pipeline and ensure competitiveness for years to come.

Should employee reviews be silo-focused (i.e., departments review within their own departments), or should HR take the lead? Let us know what you think by commenting below.

Dorie Clark is an NCMM contributor, marketing strategist and professional speaker who teaches at Duke University's Fuqua School of Business. She is the author of "Reinventing You" and the forthcoming "Stand Out." You can subscribe to her e-newsletter and follow her on Twitter.