I delivered this presentation at the Agile Austin (www.agileaustin.org) Leaders' SIG on June 1, 2012. This covers, at a high level, the reasons why we decided to deprecate the annual performance review when we switched to an agile philosophy/mindset for delivering valuable and usable customer software. The system we put in place was primarily designed to encourage/codify alignment of the work of all team members with the highest business priorities, while remaining flexible enough to deal with important change.
A "side" benefit was that the amount of waste avoided in the effort that allowed the team to stay razor focused on innovative product development. I talked with a few other companies in Austin that were considering doing something similar. One of them had calculated that they spent a fully month of their organization's capacity (i.e. November) doing annual performance appraisals. Once they stopped doing them, they received over 8% productivity back immediately!
Note that I am a strong proponent of putting in performance plans in place when it makes sense from an improvement basis. There are good reasons for doing so legally, in order to protect all parties (including the individual contributor).
Like all things it was a bit of a compromise as I was still against the compensation payouts, but our agile culture was a constant reminder to not implement incentives that would take away from teamwork and collaboration. Once we came into CA Technologies, this system was deprecated for a more traditional annual performance review system (I'll blog about that later), but the team was still laser focused on the top business priorities, without the need for any other extrinsic motivation mechanism.
I would be interested in hearing others' learnings in this area, as I see traditional annual performance reviews as key impediments to adopting an agile culture and enjoying the full impacts of its benefits.
Here's the slideshare link:
Another source of wisdom is Dr. Deming, the quality prophet who taught Japan to dominate the U.S. auto industry. In this video, he talks about the Five Deadly Diseases of Modern Management. Number three is: Annual Rating of Performance at 4:58. It's only a few minutes long but has a very large impact.