As private equity firms become more institutionalised one lesson a number of GPs are learning is that performance appraisal needs to become more formalised.
Unlike large corporations where managing performance is something of an industry in and of itself, the entrepreneurial roots and small teams of most private equity firms have meant that performance could be managed on an “as need” basis. However, firms past a certain growth point are finding a “flexible” performance review process unreliable.
One obvious solution is for GPs to at least once a year schedule a time for employees to receive feedback on their performance. Here the employee and his or her direct superior (who work closely together on a daily basis) can identify successes and failures, future goals, or perhaps why a pink slip is being handed.
Performance reviews should use objective criteria when possible. A junior dealmaker, for instance, should not be encouraged “to review more deals”, but given hard numbers on how many deals per month should be analysed. This provides staff clear-cut guidance on what their expectations are.
Indeed in a firm’s beginning years, when team sizes are small, performance appraisal is relatively simple. In a team of 20 everyone knows each other by name, and more importantly, who to blame when something goes wrong. It is at this stage in growth that senior management can appraise the abilities (and shortcomings) of team members simply through personal observation and provide feedback on an ad-hoc basis as situations arise.
But as teams grow in size – and suddenly not every face in the office break room comes with a name – challenges arise. Founding partners begin to lose touch on how each employee is faring. Workplace relationships take on new complexities as divisions emerge. And it may take longer to identify any weak link in a growing chain of command. If left unaddressed, team stability can become weakened, an issue more LPs today take notice of.
GPs with more formalised performance review processes are better able to identify and reward competent employees. And with a more organised review process in place, that nameless face can still receive some level of attention from the senior echelons of the firm.