The New Manager's Dilemma: How to Run Fair Performance Reviews with No Budget and Little Context

You've recently joined a new company as a manager, and you're faced with the challenge of reviewing people and rewarding them with a small envelope. How do you handle that effectively?

Today's article is the first from a series inspired by recent conversations in the Sudo Make Me a CTO Community.

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• Week 1 (today): 50% discount for the first 12 months

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• Week 3: 30% discount for the first 6 months

• Week 4: 20% discount for the first 6 months

Each coupon will be redeemable 5 times before it expires.

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The Wake-up Call

You landed a new leadership role. You’re excited to build, lead, and make an impact. Then, just a few weeks in, the calendar notification arrives: "Performance & Compensation Cycle Kick-off."

Suddenly, you're faced with a classic new manager's nightmare: you have to evaluate an entire team you barely know. To make things even more challenging, due to financial constraints, you only have a small budget for the annual salary reviews.

You need to distribute a small amount to a group of people you barely know, who might have expectations and might have been promised raises you're not in the situation to deliver.

This case is way too common.

In fact, one of our community members has been facing it lately. It's a perfect case study in navigating one of the toughest challenges a new leader can face.

Here's a practical guide based on the conversation we had to help you turn a potentially high-stress situation into a trust-building opportunity.

Step 1: Start with Radical Transparency

In such situations, your best tool is honesty.

Your team knows you're new, so don't pretend otherwise. The first step is to openly acknowledge the constraints you’re working with and make sure each one of them understands the situation as it is.

In your one-to-one conversations with each team member, be upfront about the challenge you're facing:

• Acknowledge your context: There is no risk of stating the obvious here. Instead, reminding everyone of the context you're working with will set the stage for their ability to understand and respect your approach. Open the conversation with something along the lines of

  "I want to be open about this topic, and I want you to know how I intend to deal with it. I've only been working with you for a few months, so I have limited context on your performance over the entire year".

• Set clear expectations: Here is where you'll inform your team members about the principles and approach you'll adopt, given the limited data and budget available. Aim for understanding, not necessarily for agreement. For instance, if you take a cautious approach to leave more room open for the future, you might present it as follows:

  "Because of this, I'm going to be more conservative with this round's ratings. I'd rather be conservative now and be able to raise your rating later than be too optimistic and have to correct it downwards in the future".

  This would be my recommended approach, as it is always better to level people up than down. The important piece is ensuring people understand how to interpret your rating to avoid unnecessary frustration.

• Commit to the future: This is where you declare your intention for a more accurate and fairer process next time around. It's important to include it as you're signalling two things. The first one is that you're currently facing an exceptional situation for real, and not just making up excuses. The second one is an invitation for them to hold you accountable for your promise. Only promise what you can deliver, namely, a more informed rating. Not necessarily a better one. You might declare your intentions as follows:

  "I plan to still be your manager for the next review cycle. I can promise you that the next performance conversation will be significantly more detailed and better informed".

This approach disarms anxiety and shows respect for your team. You are role modelling the behaviours you expect them to adopt, too. In essence, rather than making uninformed judgments, you're making a responsible decision based on the information you have. Equally important, you're being transparent about the approach and the underlying motivations.

Some people might still disagree with the strategy, but as you stick to what you declared, they'll learn to trust your words.

Step 2: Create a Fair Process to Fill the Gaps

Having a limited amount of first-hand observations about your team member's performance should not be an excuse for not trying to gather as much information as possible from other sources. Acknowledge that the information you collect will be partial and biased: it will be up to your judgment to decide what to do with it. What's important at this stage is to bring in a diverse set of perspectives and look for areas in which they tend to diverge significantly. These will be areas you'll want to observe closely going forward.

To build such a holistic picture, you can do a combination of the following:

• Create a self-evaluation form: This might already be part of your company's performance appraisal process, in which case, just use what's available. If it isn't, I'd recommend you prepare a simple form or document to share with all your team members. Ask them to document their accomplishments and challenges, their trajectory in the company, and their ambitions for the future. This gives them a voice in the process and provides strong signals about people's self-awareness and how they think about their role's goals and expectations. If you have a decently structured career ladder in your company, you might want to ask them to do their self-assessment against it. It'll also be a good way to familiarise yourself with the framework, assuming it exists.

• Gather peer feedback: Again, this might already be integrated into your company's performance appraisal process. If it isn't, I'd recommend you ask for feedback from other team members and stakeholders who have worked closely with your reports. It's important to bring in diverse perspectives, especially for more senior roles, for which the expectation is that they will collaborate and interact with a broad set of colleagues in the wider organization, both within and outside of engineering. My recommendation is to send an email with 2-3 structured questions around the person, such as:

  • What have been their biggest contributions over the last period?

  • What are some of the things they do best?

  • What are some of the opportunities for improvement?

  Make sure to set an explicit deadline. In my experience, the response rate is far from 100%. This means it's recommended to err on the side of sending it to more people than fewer. Especially if the process only runs once or twice a year.

• Consult previous managers: Chances are that you've been hired to replace a previous leader. If they've left the company and you forgot to ask them for detailed feedback on the team's performance during the handover process, it might be too late to get the information. Depending on the terms of your relationship with them, you might still be trying to reach out for a chat in which you'll ask them tailored questions and take notes. If the former manager is still in the organization, you'll definitely want to spend some time with them to come up with a more comprehensive picture of your team member's performance over the period before you took the lead.

Use this information to advise your judgment, but ensure you don't just abdicate your responsibility for making the final call. No amount of "they told me so" will discharge you from the responsibility of the evaluation you deliver.

If something potentially worrisome emerges from those conversations, address it respectfully in a chat with the relevant team member, asking for their perspective and their plans for dealing with similar situations in the future.

Step 3: Be Principled and Open About Your Limited Budget

Let's start with accepting the reality for what it is: with a tiny salary review budget, you cannot make everyone happy. But you'll have plenty of ways to make everyone unhappy. Even with limited information about your team's performance, giving everyone the same amount (in percentage) as some sort of Solomon's decision might not be your best strategy. Instead of spreading it so thin that it becomes meaningless, the best approach is to define and communicate the principles you're applying for allocation.

A powerful, fairness-first principle is to prioritize equity:

• Prioritize the underpaid: Unless you have observed or collected observations hinting that someone is underperforming compared to their current level, you should assume they're there for a reason. Armed with that heuristic, you'll want to look at all the cases in which people are underpaid compared to the salary band for their role. You might be lucky and not have any such case, but in my experience, that's more of an exception than the norm, especially when you're inheriting a new team. Communicate your approach transparently with the team:

  "My first priority this cycle is to address any cases where people are underpaid compared to their level".

  Hardly anyone will strongly disagree with that approach. What's more, you'll never get a second chance at handling someone else's organisational debt. While it's objectively not your fault if you inherited some unfair situations when you took over the team, it'll become your sole responsibility if you decide not to address them with priority. If you still have underpaid people in your team after that first round, it'll ultimately become your decision, not someone else's, and you'd better be equipped with strong arguments to support it.

• Explain the trade-off: Like everything else we've discussed so far, transparency is paramount. Not only about the intended approach, but also about the consequences of such a tradeoff. Make sure to be explicit by telling people

  "Given that our budget is limited, focusing on this means I will have less flexibility to increase other salaries".

  Use your own words, and watch out for signs of frustration. Make sure people understand you're informing, not consulting them, on the approach.

People are more likely to accept a disappointing outcome if they understand and respect the rationale behind it. When they see you’re using your limited resources to correct unfairness, it builds credibility and trust.

Conversely, if you were to give everyone the same amount, it might signal a lack of judgment or the unwillingness to reward merits.

Putting It All Together: Your First True Leadership Test

Facing a tough performance cycle right out of the gate feels like a test… because it is.

It’s not just a test of your judgment. It's a test of your mindset and character as a leader. By embracing radical transparency, creating a fair process to fill the information gaps, and using your limited budget to ensure fairness, you do way more than survive the review season. You build a foundation of trust that all high-performing teams are built on. Your team will remember not the size of the raises, but the integrity with which you led them through a difficult situation.

That is an investment that will pay significant dividends for years to come.

Summer Promo - Week 1 Discount Code

I hope you enjoyed the article and the topic we explored in one of the recent live sessions in the Sudo Make Me a CTO Community.

As promised, here is this week's code to join us at a special price.

Using the code SUMMER5012 you'll benefit from a 50% discount over the first 12 months, or click on the link below to have it automatically applied to your checkout.

The standard 30-day money-back guarantee applies.

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Don't miss this opportunity to join a community of talented and thoughtful engineering leaders to accelerate your personal development.

To find out more about the community and the promo, visit the official Notion page in which you'll find all the details.

I'm looking forward to getting to know you in person very soon!

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