While working on a client project, I came across a great article by Susan Heathfield on Performance Management. Like me, she also thinks that the appraisal process is generally counterproductive.
My approach has been to ask people when they were last inspired to better performance as a result of a performance appraisal. I haven't gotten a positive answer to that one yet.
Susan's point is that managers don't like doing reviews and don't see any value, so they avoid completing them. As a result, HR gets to become the nag. Meanwhile, the employee feels that his review, and potential increase, is a low priority for his boss. Ouch!
The best reviews I have received came from one of my first bosses. He would periodically hold informal coaching sessions. There was never a formal review and I learned a lot from him.
My worst review came from a boss who used a behaviorally anchored system, that I designed, and gave me a perfect score. I know that I am wonderful, but perfect? Hmmm. It was not an inspiring moment for me. All was not lost. A copy of that review did go a long way in helping me land my next job.
So what do I advocate? Do coaching on a daily basis. Tell people what is working and what is not - as it happens. At the beginning of the year, work with the employee to set goals and expectations. Then follow up with them each month to review the progress. Compensate based on successes achieved.
What about the need for reviewing the softer items, like interpersonal skills, attendance, etc? If the goals are appropriately challenging, these items will answer themselves. It is very difficult to accomplish goals unless you come to work regularly and work well with others while you're there. An employee who tells you he could not accomplish his goals because of a lack of support from others has already told you his greatest weakness, but that's a topic for another day.