Ročné hodnotenie výkonnosti je najdrahšou ilúziou v oblasti ľudských zdrojov
Why SMEs can no longer afford them?
Performance management in SMEs: from annual evaluations to quarterly dialogue
The Best HR Solutions in V4 Countries project is an international community of business leaders, HR professionals, and academic researchers exploring how scientifically proven HR practices can be translated into everyday business operations to create HR systems that genuinely work and deliver business value. The article series launched by the community examines the most important HR areas from both SME and large-enterprise perspectives.
In Hungary, performance management in most small businesses still means one single tense event each year: the annual review that both managers and employees simply want to survive.
Yet an international study covering more than 2,000 organizations across the V4 countries — including SMEs — found that nearly 40% of companies operate without any regular performance management system at all. And where such systems do exist, they are most often used for only one purpose: justifying salary increases. The result is predictable: unclear expectations, delayed feedback, and organizations operating “by intuition” rather than through data and meaningful dialogue.
Today, the real question is no longer whether SMEs need performance management, but how they can implement it simply and without unnecessary administration.
Why annual reviews do not work
Traditional annual performance evaluations fail in most SMEs for three main reasons.
1.
Time distortion
When the conversation finally takes place in December, both the manager and the employee are trying to remember what happened back in February. Events close to the end of the year remain vivid, while earlier achievements or issues fade away. As a result, the evaluation reflects what people still remember — not actual performance throughout the year.
2.
Pressure and tension
If employees receive feedback only once a year, the moment inevitably becomes stressful. Managers dislike uncomfortable conversations, and employees do not want to be confronted with problems they have never heard about before. In these situations, everyone tends to avoid conflict, and eventually “everyone becomes good or excellent” — exactly as one HR director from a global IT company described during our research interviews.
3.
Lack of real usefulness
If the only practical purpose of the review is to justify pay increases, neither managers nor employees feel that the “mandatory” conversation is truly about development. The entire process turns into a theatrical “let’s get this over with” exercise and a form of unnecessary administration.
A “performance management maturity mirror” for SMEs — in four questions
If you lead a small or medium-sized company, the following four questions can quickly reveal how well your performance management system actually works. If your answer is “no” to several of them, what you need is not fine-tuning but genuine redesign.
1.Do your employees clearly understand what is expected from them over the next three months?
This is not about general job responsibilities — everyone already knows those. The real question is whether employees have a few concrete, measurable goals linked to current business priorities that they genuinely feel ownership over. International SME research shows that companies using short-term, measurable goals with direct business impact tend to have higher engagement and lower turnover.
2. Do you have regular, short feedback conversations — not just one annual review?
According to V4 HR research data, feedback processes in many organizations across the region remain irregular and ad hoc. In SMEs, this is especially paradoxical: managers and teams work closely together, creating natural opportunities for feedback — yet regular conversations still rarely happen. A structured 30–45 minute quarterly discussion is not a major time investment, and the IT company examined in our case study found that this is the only way to prevent goals from becoming one-off administrative exercises.
3. Are managers truly required to differentiate between levels of performance?
This is one of the most sensitive questions. If salary increases are “automatic,” and everyone in the team receives roughly the same raise, then performance has no real value — either positively or negatively. In the case study we examined, this issue was addressed through a simple rule: approximately 80% of the team could receive a raise, while 20% would not, and the highest performers would receive the largest share. This is not about punishment; it is about ensuring that exceptional performance actually matters.
4. Do you regularly track at least 3–4 basic performance indicators?
According to the V4 research, nearly 39% of organizations use no HR controlling tools at all. From a performance management perspective, this means managers have little visibility into where energy is being lost, who may be approaching burnout, or where teams need strengthening. At minimum, companies should review several indicators quarterly: goal achievement rates, turnover in critical roles, the number of development and feedback conversations completed, and whether salary increase decisions are supported by documented reasoning.
Four practical steps toward effective performance management in SMEs
1.
Replace annual reviews with a quarterly rhythm
One of the key lessons from the IT company case study was this: as long as evaluations remain a once-a-year “ceremony,” few people take them seriously during the rest of the year. However, when companies build a structured rhythm — setting goals at the beginning of the year, conducting short quarterly reviews, and closing the year with a summary discussion — goals remain continuously visible and can be adjusted when priorities change.
Quarterly discussions do not need to be lengthy. A few focused questions are enough:
- “How are you progressing with your goals?”
- “What is making progress more difficult?”
- “How can I best support you right now?”
A handful of guided questions every quarter often produces more valuable information than a complex annual evaluation form.
2.
Set short-term, measurable goals with business impact
The best goals do not simply restate job descriptions — they define specific business outcomes beyond routine responsibilities. In the IT company examined in the case study, senior leadership identifies annual company priorities such as digitalization, cost reduction, or customer satisfaction. Teams then translate these into department-level goals while considering employees’ competencies and preferences when defining individual objectives.
For SMEs, this can be much simpler: every employee should have 3–5 concrete goals that are measurable within a quarter, linked to business outcomes, and aligned with company priorities. The goal is not simply to “perform the job well,” but rather to achieve outcomes such as:
- reducing customer complaint resolution time from five days to three,
- or renewing the company’s three most important contracts on time.
3.
Introduce real differentiation into salary increase decisions
This is both one of the most important and most sensitive issues. According to the IT company’s experience, managers instinctively avoid differentiation unless a clear rule requires it — simply because it reduces conflict. The consequence, however, is that performance-based compensation loses all meaning: outstanding employees receive the same rewards as average performers.
The solution does not need to be complicated. Establish a simple principle. For example:
- no more than 80% of the team may receive a salary increase,
- and top performers receive proportionally larger increases than average performers.
The exact numbers depend on company size and salary conditions, but the logic remains the same. If the average raise budget is 5%, top performers might receive 8–10%, solid contributors 4–5%, while weaker performers receive less. This approach allows managers to align salary decisions with strategic priorities while incorporating their direct experience into decision-making.
Importantly, the rule only provides a framework — managers still make the decisions and must take responsibility for them. They should be required to justify how salary budgets are allocated. This encourages more rational, evidence-based decision-making and reduces impulsive or purely intuitive choices.
4.
Do not implement 360-degree feedback organization-wide — but consider it for key employees
Even the global IT company in our example does not use 360-degree feedback for everyone. It is reserved for future leaders and key talents because the process is time-consuming and only creates real value when connected to meaningful development programs.
For SMEs, this means it may be worthwhile once a year to gather feedback on key employees not only from direct supervisors but also from close colleagues. This does not require formal questionnaires — a short structured conversation is often enough:
- What does the person do well?
- Where could they improve?
- How effectively do they collaborate with the team?
This type of feedback often reveals insights that managers alone may not see — and in many cases, it can be even more accurate.
What not to overcomplicate
The biggest trap in introducing performance management in SMEs is the same as in talent management: leaders read about large-company best practices and conclude that they need expensive software, consultants, and complex evaluation systems. This is simply not true.
Do not begin with five-level rating systems if your organization has no culture of honest differentiation yet — otherwise everyone will receive a “4 out of 5.” Do not launch 360-degree feedback across the entire organization — focus only on a small group of key employees. And during the first year, do not directly connect bonuses to performance evaluations — doing so immediately creates anxiety and undermines the developmental culture you are trying to build.
Performance management also needs to become part of organizational culture. Instead of introducing a complete system all at once, a well-communicated phased rollout usually works far better.
The most important success factors remain transparency, consistency, and managerial involvement. A simple quarterly rhythm applied consistently creates more value than a complicated evaluation form completed once a year with difficulty.
If you wanted to start tomorrow: three steps
For SME leaders who want to introduce real change within the next month, we recommend the following three steps:
1.
Decide that performance management is not a side product of annual salary discussions, but an independent strategic tool. This decision must come from the owner or CEO and should become visible in everyday management decisions.
2.
Within the next 30 days, define 3–5 concrete, measurable quarterly goals with every key employee — and schedule a quarterly feedback conversation alongside them.
3.
Introduce a simple salary increase principle that forces differentiation and encourages well-founded managerial decisions. Not everyone receives automatic raises, top performers receive more, and all decisions must be justified.
In short: performance management is not bureaucracy — it is a decision-making tool
According to the V4 survey, many organizations across the region are still trapped in the ritual of annual performance reviews — or operate without any system at all. SMEs that introduce a simple quarterly performance management rhythm with measurable goals, continuous feedback, and justified compensation decisions quickly experience the benefits: fewer surprises, stronger engagement, and teams that clearly understand where they are heading.
In the coming years, the real competitive question will not be which company introduces performance management software first. It will be which company notices in time when someone is heading in the wrong direction — and which only realizes it after the employee has already resigned.
The article was created within the framework of the Best HRM Solutions in V4 Countries project, an international community bringing together business leaders, HR professionals, and HR educators and researchers. The project aims to modernize human resource management across the V4 countries (Czech Republic, Poland, Hungary, and Slovakia), strengthen the strategic role of HR, and build bridges between academic knowledge, corporate experience, and HR leadership practice.
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