Germany's SAP, maker of software used to grade the performance of millions of employees worldwide, is ditching its own annual performance reviews as too expensive, time-consuming and often demotivating.

Once championed by business leaders as the key to better productivity, annual appraisals are falling out of fashion with companies including IBM, Gap and even General Electric, whose long-time Chief Executive Jack Welch is credited with popularising the system.

SAP, which for the last two years has had an American CEO and employs almost a third of its staff in the United States, is one of the first major European companies to join the trend that began across the Atlantic.

The ritual of the annual performance review is widely disliked by employees.

SAP's human resources head Wolfgang Fassnacht said Europe's biggest software maker had found the annual review process, with its focus on separating over- from under-performers, was often counter-productive to the goal of constructive dialogue.

"Grading workers did not work. People are open to feedback, also to harsh criticism, until the moment you start giving scores. Then the shutters go down," he told Reuters.

SAP is testing a new process, which includes more regular check-in talks, on about 8,000 of its workers and aims to implement it for all of its almost 80,000 workforce next year.

"The old system is too static," said Fassnacht. "It no longer reflects the dynamic circumstances we are operating in."

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SAP is a world leader in human-resources (HR) software and made a big bet on performance-management tools with the $3.4 billion acquisition of US cloud-computing company successfactors.com in 2012.

It gets a lot of feedback from its customers, Fassnacht said, a factor that may have influenced its decision to ditch the dreaded annual review.

"I meet many HR managers at other companies. The topic is on everyone's mind at the moment," he said. "This is actually one of the hottest topics discussed in the HR area."

SAP is not putting itself out of business, however. It will continue to sell its performance assessment software and it announced in February it would also introduce software for continuous performance management of employees.

Although many companies are re-assessing the annual review, Sydney-based management consultancy Strategic Factors, a specialist in strategic planning and performance measurement, warned against ditching employee reviews wholesale.

"Regular check-ins are great, this ongoing conversation and coaching model, but we also need performance measurements. We need to be careful to not chuck out the baby with the bath water," said managing director Graham Kenny.

Audit and advisory firm PwC concluded in a report last year there was a general trend among companies of reforming performance reviews but that removing ratings was still perceived as a "more radical" change. - Reuters