Performance Reviews and Feedback at Zappos: The Power of Peer Feedback

In a traditional performance management system, managers use performance reviews to make compensation decisions or devise an action plan to improve performance.

However, this approach did not make sense for a holacracy-based organization like Zappos, where the company is divided into several self-organizing teams that guide each other. Holacracy replaces the traditional management hierarchy, which would authorize every decision. Instead, teams closest to the work enjoy higher autonomy and decision-making powers and are able to move much faster to tackle new opportunities and challenges.

Zappos took on the mission to make performance management work without managers solely based on peer feedback. This choice brings many interesting lessons.

This article will explore how Zappos uniquely yet systematically conducts performance reviews, and how their system evolved to keep up with their new organizational structure.

How does Zappos run performance reviews?

Zappos did not adopt holacracy during its early foundation years. At that time, they would run traditional performance reviews driven by managers and later shifted to real-time feedback. We will go through the evolution of their process below.

Performance reviews 1.0: Annual appraisals

Like most companies, Zappos initially engaged in the process of annual performance reviews, which managers owned. But with a twist—while most companies review their employees only around performance metrics, Zappos divided reviews into two parts:

1. Culture reviews

The culture review evaluates how much an employee contributed to each of the key drivers of the Zappos culture. The core values of Zappos are these key drivers:

1. Deliver WOW Through Service
2. Embrace and Drive Change
3. Create Fun and A Little Weirdness
4. Be Adventurous, Creative, and Open-Minded
5. Pursue Growth and Learning
6. Build Open and Honest Relationships With Communication
7. Build a Positive Team and Family Spirit
8. Do More With Less
9. Be Passionate and Determined
10. Be Humble

With cultural reviews, leaders would assign one of the following scores:

• Outstanding (O) = Exceeds expectations
• Satisfactory (S) = Meets expectations consistently
• Needs Improvement (N) = Did not meet expectations

2. Performance reviews

A performance review is a discussion focused on the topics of employee strengths and opportunities for growth. In the culture review, the assessment focused on core values. On the other hand, the performance review focused on the following parameters:

1. Performance: How competitive the employee is in their job skills and knowledge
2. Leadership: Does the employee have the required work ethic to be a future leader?
3. Growth potential: Whether the employee is seeking opportunities to learn and upgrade their skill sets

Combined performance report format | Source: The Zappos Experience: 5 Principles to Inspire, Engage, and WOW

Performance reviews 2.0: Real-time peer feedback and reflection

With time, Zappos shifted to holacracy, replacing traditional annual reviews with more frequent peer feedback. Here are the key changes they brought:

1. Peer feedback

Managers no longer owned the employee performance process, and Zappos decided to distribute the responsibility to peers, who feel the most significant impact of an individual’s work.

Peers share insights on what their respective team members did well and how they can improve. The feedback collected on trustworthiness and strengths is publicly available, but the improvement elements are kept private.

Darshan revealed that the founding belief behind this decision was ” ‘coach in private’ while ‘praising in public.’”

Peer feedback with no boss to report (as a result of their holacracy model) encourages accountability and develops a high-performance work culture. To make the process even more engaging, Zappos also allows coworkers to nominate each other for cash rewards.

2. Zuddles

Zappos also encourages real-time feedback through weekly team huddle meetings, or “Zuddles.” The goal is to help employees reflect on their wins and losses in the last week. Team members also reflect on the core values, often testing each other for knowledge of the ten values.

In addition to these meetings, the client-facing employees perform a quality check by listening to their recent calls with customers to identify areas of improvement for the next call.

Compensation

At Zappos, instead of job titles, employees collect skill badges. Compensation decisions consider the badges or skills they collect and how that directly impacts business metrics. Collecting more badges is equivalent to leveling up and getting a higher paycheck.

While this system may seem too zany for other companies, it works wonders for Zappos. Upgrading an employee’s base salary is self-deterministic and not under the control of a manager. It is entirely up to an employee to decide on a customized path where they can contribute in different verticals and pick up multiple skills.

Top reasons behind Zappos’ current performance review system

Zappos’ feedback process evolved over the years due to the following strategic vision and beliefs:

1. Strong focus on culture

Tony Hsieh, the Zappos’ CEO, firmly believed that if you get the culture right, everything else falls into place.

Zappos recruits and trains for culture. They also encourage their people to have fun and work in an uber-relaxed environment with scrumptious food, ice cream parlors, and the freedom to be zany and creative both in their working style and in any professional endeavor.

For these reasons, Zappos also assesses employees on the company’s core values as part of reviews.

2. Pivotal shift to holacracy

Zappos began adopting a culture of holacracy, which advocates self-governance and autonomy, aka no managers in the traditional sense of the word.

At the core of it, holacracy is the belief that employees know what is expected of them from a business standpoint and enjoy the trust and freedom to operate fast and with ease to meet those expectations. Managers mainly help employees to meet those expectations and provide adequate resources.

In a traditional annual performance management system, managers use performance reviews to make compensation decisions or devise an action plan to improve performance. However, this approach did not make sense for a holacracy-based organization.

As a result, Zappos shifted to a peer feedback process where managers are no longer the owners of the employee performance process. Zappos decided to distribute the responsibility to those who feel the more significant impact of an individual’s work: their peers.

3. Increased need for continuous feedback

Three reasons drove Zappos’s HR leadership to eliminate the annual performance review system:

1. Moving from a singular yearly event to real-time feedback would encourage more frequent conversations between the employees, peers, and leaders, resonating with Zappos’ growth and learning culture
2. The employees should perform consistently and sync with the team’s expectations
3. Employees should consistently align with the company’s core values

The key to Zappos’ performance review success

Here’s why Zappos’ performance review process is a hit:

Conducting peer reviews

Peer feedback is one of the best forms of feedback. A study involving 327 teachers in China found that actively seeking feedback from coworkers is positively associated with both task performance and workplace well-being. This behavior not only improves individual performance but also strengthens coworker relationships.

Investing in employee development

All the people at Zappos have access to the Goals Department to set goals. One of the core values at Zappos is “Pursue growth and learning,” and the goal-setting exercise directly aligns with this tenet.

The goals are typically short-term, 30-day challenges. A Goals Coach guides people. The coach helps the employees set personal and professional goals, as Zappos believes in the holistic growth of all its people.

This goal system accelerates employees’ growth curve, encourages them to be at the top of their game, and makes them feel genuinely cared for.

Providing continuous feedback

80% of employees who say they have received meaningful feedback in the past week are fully engaged. With regular check-ins and Zuddles, employees receive continuous feedback on areas to work on and create development plans for growth.

How can you run a performance management process like Zappos?

The four pillars of Zappos’ performance review process are:

• Enabling employees to set goals
• Scheduling regular check-ins
• Coupling feedback and development
• Conducting peer reviews

You can do all of this in Deel Engage. Here’s how:

Assign transparent career paths and create development goals

With our career management module, you can create transparent career progression paths for roles in all departments and outline clear expectations for each role.

Employees create personalized development plans aligned with career paths and organizational goals. These plans can include concrete goals (e.g., courses, certifications, shadowing) and timelines. The HR department can provide templates to guide employees and their managers so they never start from a blank page.

Schedule regular check-in

Deel provides a Slack plug-in for setting up 1-on-1 calls. Managers can use it to set up regular check-ins with their team members. The plug-in includes built-in reminders to increase call participation and a note-taking feature to jot down key discussion points.

Conduct peer reviews

Deel Engage’s performance management module automates the peer review process by allowing you to:

1. Define peer nomination and approval rules so that it’s clear who nominates who and who makes the final approval
2. Define (if applicable) limits to the number of peers one can nominate, or the number of peer reviews a single individual can participate in
3. Set anonymity settings for defining who can see what feedback
4. Pre-set review surveys with rating, open questions, or both
5. Link competencies to reviews so you can understand each person’s skill levels
6. Add specific questions focused on compensation so peers can nominate each other for compensation rewards
7. Define participants. For example, you can assign reviewers according to custom rules, such as belonging to a specific department or location, or according to specific dates (e.g., 8 weeks after the hire date)
8. Define the timeline of the entire process

Run compensation reviews

With Deel’s acquisition of compensation management software, Assemble, you can soon run compensation reviews on the platform. You’ll be able to link performance feedback with compensation outcomes and more.

Launch an online learning library for continuous development

You can create a centralized learning management system, a single source for all organizational training and mentorship. You can upload your existing learning resources to make it a one-stop learning library for employees and help them achieve their development goals.

Automate performance reviews and development with Deel Engage

Development and feedback are tightly coupled, and you can run both processes harmoniously with Deel Engage. We support learning and feedback during the entire employee lifecycle, from onboarding new hires to providing regular training and automating feedback to help them reach the next level of their careers.