Performance Management

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Increasingly, organizations are understanding that their management systems must be brought into the 21st century if they are going to be competitive in the current market.

Research shows that previous systems, such as yearly appraisals, are outdated and can even serve to decrease employee engagement and motivation. In light of this, more companies are turning to performance management than ever before.

This dynamic and strategic approach to developing improved performance in employees is gaining ground in companies large and small, including many Fortune 500 and industry-leading organizations.

What is performance management?

Performance management is a strategic approach to creating and sustaining improved performance in employees, leading to an increase in the effectiveness of companies.

By focusing on the development of employees and the alignment of company goals with team and individual goals, managers can create a work environment that enables both employees and companies to thrive.

Based on the definition of performance management, a system is built within an organization to measure and improve the performance of the people in that organization.

In practice, performance management means that management is consistently working to develop their employees, establish clear goals, and offer consistent feedback throughout the year.

In contrast to other systems of reviewing employee performance, such as yearly performance appraisals, employee performance management is a much more dynamic and involved process with better outcomes.

For the Human Resources department, performance management is an important system for onboarding, developing and retaining employees, as well as reviewing their performance.

It is increasingly understood that a yearly performance appraisal system does not effectively engage employees, fails to consistently set and meet company objectives, and does not result in a strong understanding of employee performance.

Why is performance management important?

In any organization, no matter the size, it is important to understand what your employees are doing, how they are doing it, and why they are doing it.

Without a system in place to define roles, understand individual strengths and weaknesses, provide feedback, trigger interventions and reward positive behavior, it is much more difficult for managers to effectively lead their employees.

Smart organizations pair their performance management with an incentive management process. The two systems have a lot in common, from defining roles and setting goals to reviewing and rewarding employee behavior, and as such, do very well when run simultaneously. Using incentive management also means that the all-important ‘reward’ step of performance management is done properly.

The importance of performance management

Talent management is an important part of every organization. Three of the main problems that organizations face are:

  • keeping employees engaged
  • retaining talent
  • developing leaders from within

These are the issues that performance management very effectively targets.

1. Keeping employees engaged

Engagement of employees is a focus of any management team. In a yearly appraisal system, goals would be given at the beginning of the year and then revisited 12 months later to see if they had been met. This long stretch of time without feedback or check-in is an almost certain engagement killer.

In fact, 94% of employees would prefer their manager gives them feedback and development opportunities in real-time, and 81% would prefer at least quarterly check-ins with their manager, according to the Growth Divide Study.

Organizations want to improve performance management graph

Studies show that employees do best with feedback on a monthly or quarterly basis, with regular check-ins serving as a zone to problem solve, adjust goals as necessary, and to refresh their focus on the goal. In fact, companies where employees meet to review goals quarterly or more frequently are almost 50% more likely to have above-average financial performance.

When surveyed, employees had some negative feelings about a yearly appraisal system:

  • 62% of employees feel that their performance review was incomplete
  • 48% did not feel comfortable raising issues with their manager in between performance reviews
  • 61% feel that the process is outdated
  • 74% feel that they would be more effective with more frequent feedback
  • 68% of executives don’t learn about employee concerns until the performance review

All of this adds up to a lot of missed opportunities to solve problems and increase employee performance and engagement.

As employee engagement rises, nine key performance indicators show successful outcomes. Absenteeism, turnover, shrinkage, safety incidents, patient safety incidents and defects in quality are lessened by at least 25%, and often more, across the board. Customer experience, productivity and profitability all show positive outcomes.

This study, by Gallup, was conducted across a broad range of industries, showing that employee engagement is a critical factor, no matter the industry.

Engagement’s effect on key performance indicators (KPI's) graph

2. Retaining talent

Employees who have frequent meetings with management to discuss performance, solve problems and receive training are more likely to stay with the company.

If employees see that their management team is putting in the work to develop them professionally, help them succeed with their goals, and reward performance on a consistent basis, then they are more incentivized to both stay with the company and work harder.

3. Developing leaders from within

This consistent development and partnership between managers and employees allow for the development of leaders from within the company.

Recruiting costs can be extremely high, as are costs for onboarding and training new employees. To be able to groom leaders from within the company means that there is already a proven culture fit with this individual and that training costs and resources spent developing this person into an asset are not lost.

This leadership path also serves as a motivating force for employees, who can see that their hard work will be rewarded with promotions and other benefits.

Performance management also creates a need for management to consistently focus on company objectives and goals, and to consider how best to achieve them. This continual revisiting of goals means that they are more likely to stay relevant, as goals will be adjusted in light of new technology, changes in the market, or other factors throughout the year.

According to Forbes, ‘companies that set performance goals quarterly generate 31% greater returns from their performance process than those who do it annually, and those who do it monthly get even better results.’

The purpose and goals of performance management

The purpose of performance management is to give both managers and employees a clear and consistent system within which to work that, in turn, will lead to increased productivity.

  • This system shows employees the pathway to success, allows for the measuring of performance coupled with feedback and offers training and development opportunities.
  • Performance management allows management to understand what their employees are doing and track progress on company objectives while providing consistent feedback.

There are five main objectives of performance management:

  1. Develop clear role definitions, expectations and goals
  2. Increase employee engagement
  3. Develop managerial leadership and coaching skills
  4. Boost productivity through improved performance
  5. Develop a performance reward program that incentivizes accomplishment

These performance management goals show a clear path from the developing of goals to the rewarding of increased accomplishment. If one of these performance management objectives is not done well, then the others will suffer as a result.

The benefits of performance management

Performance management has a multitude of benefits for employees and managers, as well as for the company as a whole. If a company can successfully create an environment of engagement where customers are equally engaged by employees on the front line, their outcome is even better.

240% boost in performance-related business outcomes

When organizations successfully engage their customers and their employees, they experience a 240% boost in performance-related business outcomes compared with an organization with neither engaged employees nor engaged customers.
- Gallup
  • Having well-defined roles and performance standards makes hiring an easier process, as candidates know what is expected of them, and HR can more easily understand if a candidate is a right fit for the role.
  • Those well-defined roles and standards make training easier, as trainers know exactly which areas need to be covered, and which information is nonessential.
  • Consistent developing and revisiting of goals ensure that the organization keeps up with changing market forces easily, and reacts quickly as a whole, regardless of the size of the organization.
  • Clear expectations and roles set employees up for achieving goals from the start, providing a springboard to success.
  • Employees who feel that their company is invested in their success stay with their companies, increasing employee retention.
  • Consistent feedback and coaching from managers lead directly to increased engagement from employees while developing the ability to provide good coaching and feedback leads to more skilled managers.
  • As employees become more skilled, they can move up through the company, creating a leadership pipeline.
  • Productivity will increase thanks to increased engagement, clear goals and upskilling of employees.
  • Employees remain incentivized to perform long-term, as they are properly rewarded for their hard work.

What is the performance management process?

The performance management process is a collaborative, communication-based process where employees and management work together to plan, monitor and review the employee’s objectives, long-term goals, job trajectory and comprehensive contribution to the company. This process is continual, with regular sessions where both management and employees have the opportunity to give and receive feedback.

According to the Gallup State of the American Workplace study, only 22% of employees are engaged and thriving. Employees who are engaged and thriving are more likely to maintain strong work performance, even during difficult times. This also means that 78% of the workforce could do better work if only their organization had the right type of management process.

Some reasons cited in this study for lack of motivation are seeing less deserving employees receive promotions, lack of actionable feedback, and management not involving employees in goal setting. All of these taken together show the importance of the performance management process, and why each part of it must be done well for the process as a whole to succeed.

The performance management process, when done correctly, is designed to fix those problems in the workplace, setting employees up for success in achieving both their goals and overall company objectives.

Performance management process steps

The steps in the performance management process can be broken down into four broad categories: Planning, coaching, reviewing and rewarding. Each step is equally important, and together form the backbone of a company’s performance management process. The first step of the performance management process is planning.

1. Planning

1.1 The defining stage

The performance management process begins with the planning stage.

HR and management need to define the job itself, including a comprehensive description, long and short-term goals, identify key objectives and develop a clear metric for how those objectives and goals will be assessed.

Goals should be clear, done in the SMART format (specific, measurable, attainable, relevant, time-based) and clear performance standards should be set.

1.2 The feedback stage

Once management has completed the defining stage, employees should have the opportunity to give input on this material. They are the one doing their job and will have a key insight into what skills, competencies and goals will best assist the company to achieve organizational goals.

1.3 The approval stage

Management and employees both agree to the definition of the role, goals and objectives.

By making this first step of the performance management process collaborative, management sets the stage for the process as a whole to be collaborative, and the employee feels that they are involved in goal setting - an important thing, as evidenced by the Gallup study.

2. Coaching

2.1 Organize meetings on a timely, regular basis

Once the parameters of the job and objectives for the future have been set, the next step of the performance management process begins.

The coaching process is extremely important and must be done on a regular basis. Meetings should be at least quarterly, although monthly meetings are the ideal.

2.2 Provide necessary training, coaching and solutions

These meetings should focus on solutions and coaching opportunities, rather than punitive measures for lackluster performance.

If accountability is made into a negative, then employees will avoid it rather than being honest about where they are struggling.

In some cases, management training in this area can be very helpful to an organization.

2.3 Solicit feedback on both sides

Management should be able to give - and receive - honest feedback and work with employees rather than adopting a combative stance. The ability to give actionable feedback is important here.

2.4 Revisit objectives as necessary

As the performance management process continues, management should revisit objectives to see if adjustments should be made, as well as pay attention to career development opportunities for their employees.

This step involves reviewing the overall performance of the employee, how well the process itself worked, and it also includes the reward - which is an extremely important part of the overall process.

3. Reviewing

3.1 Reviewing employee performance

At the end of the yearly performance management cycle, there should be an employee review, which is sometimes also called a performance appraisal. Typically, these are held once a year, to look at how well the employee performed over that span of time.

There should be a clear record from previous check-ins to show the employee’s progress throughout the year. The monthly check-ins are to help the employee with problem-solving, adjusting goals and other future-looking tasks. This performance review is the only step that looks backward, to assess the behavior of the past year.

3.2 Reviewing the performance management process

At this stage, it is important for both management and employees to look over the previous year and see how well the performance management process worked.

Questions that can be asked are:

  • Were personal and organizational objectives met? If not, why?
  • What challenges did the employee face?
  • What training would help the employee perform better?
  • How did management feedback help? If not, why?
  • How could the process be made better?
  • Was the time spent on this process effectively?

3.3 Reviewing overall goal completion

Of course, one of the main questions to answer is ‘did the employee reach their goals?’ How well did the employee succeed at the tasks given to them throughout the year?

It is important to look at both smaller and larger goals, as this can give an indication to problem areas where training or interventions can be applied.

3.4 Giving actionable feedback

A key part of the review is to give and receive feedback.

Management should give actionable feedback for the employee so that they know areas where they can improve future performance.

The employee should also be invited to give feedback on the process, and how management can do better on their end.

4. Action

4.1 Reward and recognition

The last step of the performance management process is the reward and recognition.

This step is absolutely key - employees will not stay motivated if they are given no reason to. This does not necessarily have to be monetary, although it likely will include monetary compensation. Other rewards could be new projects, company-wide recognition, time off, or leadership opportunities.

4.2 Setting the stage for next year’s performance management cycle

The end of the performance management cycle gives management and employees one last chance to offer feedback on the process as a whole and asks for thoughts and feedback for the planning stage for the next year’s cycle.

15 Employee performance management best practices

15 Employee performance management best practices

While performance management can sound deceptively simple, with just four steps as outlined above, the process itself is very complicated. That’s why we have put together this list of best practices for performance management.

Think of it like the essentials of performance management - these will help make sure that your employee performance management system is performing the way it should.

1. Identify the goals of your performance management initiatives

As you are creating your performance management program, you need to understand what you want to accomplish.

Asking the following questions can help you:

  • Is increased productivity a priority?
  • Does your organization want to identify leaders from within and develop them?
  • Do you want to streamline the compensation process?
  • Are you seeking to improve employee retention or engagement?

If you know what you want your program to do, it will be easier to build it to accomplish that goal.

2. Define and describe each role

We mentioned this above, but it bears repeating. It is much harder for an employee to be successful if they don’t know exactly what is expected from them, how they should do it, and what the end result should look like.

3. Pair goals with a performance plan

As you set goals, develop a performance plan to go alongside. Year-long goals often fail, as they are too large and employees can get overwhelmed before they start. A performance plan helps them visualize their path, making it much more likely that they will meet their goal.

4. Monitor progress towards performance targets

Review key areas of performance. Use metrics and analytics to your advantage, tracking how goals are progressing to make sure that interventions can happen early, if necessary.

5. Coaching should be frequent

The point of coaching is to help identify and solve problems before they get too big. If it’s not frequent, it’s not going to help at all. Monthly or quarterly meetings should be held to help keep employees on the right track.

6. Use guidelines to your advantage

Guidelines should be created for each role as part of the first stage of the performance management cycle. These policies or guidelines should stipulate specific areas for, or limits on, opportunity, search and experimentation. Employees do their jobs better when they have solid guidelines to follow.

7. Build a performance-aligned culture

Make sure your workplace has shared values and cultural alignment. A sense of shared values, beliefs and expectations among employees creates a more harmonious and pleasant workplace. Employees should be committed to the values and objectives outlined, and exemplified by, top management.

8. Organize cross-functional workshops

This helps employees - and managers - understand what other departments do, how they think and what their strengths and weaknesses are. They can discover something new and find new connections, which can help them in future work.

9. Management should offer actionable feedback

During these coaching meetings, tensions can arise if the feedback is not given in a constructive, actionable manner. It is not very important to look backward and point fingers, rather management should guide employees towards future success.

10. Keep it professional, not personal

Giving less-than-stellar feedback is hard on both managers and employees, it’s one of the reasons that performance appraisals tend to be a least-liked task. Managers should make sure to keep feedback professional and remember to focus on behavior, rather than characteristics.

For example, pointing out that David regularly turned in important reports late is feedback about a behavior. Saying that David is lazy, and that’s why the reports were often late is feedback about a characteristic. One of these can help an employee own their role in a project’s success (or lack thereof) and the other will make them defensive instantly.

11. It’s not only employees that need training

Management should be trained too. Coaching and offering good feedback are not easy jobs, which is why there are so many specialist coaches out there. For managers to be able to lead well, they should be trained in these skill sets.

12. Take advantage of multiple-source feedback

Ask employees to write feedback for each other. This will give management a more holistic view on employee performance, understand the challenges that teams are facing, and be able to better offer feedback.

13. Don’t depend only on reviews

While the review process is important, it is only one part of the system as a whole. Planning, coaching, and rewarding employees are equally key parts of the system.

14. Problems are not always employee-based

It can be easy to assume that problems are always caused by employees, but that simply is not the case. Problems can arise from external factors such as availability of supplies, internal processes that are causing issues, or organizational policies. Seek out the source of problems as precisely as you can in order to fix them.

15. Recognize and reward performance publicly and frequently

Management cannot expect employees to stay motivated if they are never rewarded, yet many companies overlook this key step. Make sure that employees are compensated and recognized for their hard work, and they will continue delivering for your organization.

5 Real-world examples of performance management

Of course, it’s one thing to understand the theory of what performance management is, but it’s another thing to use it in a real company. Let’s take a look at some real-world examples of the performance management process in action:

Google logo

It’s no surprise that Google would show up on a list of companies that use a newer, innovative system of management. This company has always been a trendsetter, and their performance management process is one that relies on data and analysis, as well as making sure that their managers are well trained.

When assessing their performance management system, Google launched a project dedicated to assessing their managers, which has led to a thorough training and future development process that sets managers, and thus employees, up for success.

They also use a system of setting goals that have caught on across multiple industries. Using their Objectives and Key Results (OKRs) system, they reframe the goal-setting process, with great results.

Facebook logo

Another tech trendsetter, Facebook has a performance management process that puts a heavy emphasis on peer-to-peer feedback. In semi-annual reviews, they are able to use that feedback to see how well teams are performing and understand where collaboration is happening - and where it is not. They also have developed an internal software to provide continuous, real-time feedback. This helps employees solve issues before they become problems.

Cargill logo

Cargill is a Minnesota-based food-producer and distributor with over 150,000 employees and serves to demonstrate that even huge companies can ditch unwieldy performance appraisals and institute a new system. In following the latest research on the dissatisfaction of management with outdated performance management process, Cargill created their ‘Everyday Performance Management’ system. The system is designed to be continuous, centered around a positive employee-manager relationship, with daily activity and feedback being incorporated into conversations that solve problems rather than rehash past actions.

The Everyday Performance Management system had overwhelmingly positive results, with 69% of employees stating that they received feedback that was useful for their professional development, and 70% reporting that they felt valued as a result of the continuous performance discussions with their manager.

Adobe logo

Adobe calculated that managers were spending about 80,000 hours a year on performance reviews, only to have employees report that they left those reviews demoralized and turnover was increasing as a result.

Seeing a system that only produced negatives, Adobe’s leadership team made a bold leap into a performance management system that began by training managers how to perform more frequent check-ins and offer actionable guidance, then the company gave managers the leeway they needed to effectively lead.

Management was given much more freedom in how they structured their check-ins and employee review sessions, as well as more discretion in salaries and promotions. Employees are often contacted for ‘pulse surveys’ - a way for the leadership team to make sure that individual managers are leading their teams well. One of the many positive results of this has been a 30% cut involuntary turnover due to a frequent check-in program.

Accenture logo

Accenture is a massive company - over 330,000 people, so changing their systems means a huge effort. When they switched to their new system, they got rid of about 90% of the previous process. Now, they are using a more fluid performance management process where employees receive ongoing, timely feedback from management. This has been paired with a renewed focus on immediate employee development and an internal app for communicating feedback.

There are common threads in all of these examples. Each company has built a system that works for them, rather than following a one-size-fits-all approach. What works for one company might not work for another - it depends on the industry, the speed and flexibility of the company, and the overall goal of the system itself.

What is the difference between performance management and performance appraisals?

With similar names and purposes that sometimes align, it is no surprise that some people find it hard to spot the difference between performance management and performance appraisals.

In fact, performance appraisals are often part of the performance management process, although some companies still rely on performance appraisals alone.

An easy way to understand the difference between the two is that performance appraisals are reactive, and performance management is proactive.

A performance appraisal looks at all of the past actions of the employee within a set amount of time, and rates how well they performed in their role and how many goals they met.

Performance management looks at the present and future of the employee, and what can be done to help future performance and meet future goals. Performance management is focused on the development and training of an employee, and how that can benefit both the employee and the company.

A performance appraisal is a formal, operational task, done according to rigid parameters and in a quantitative manner. HR leads performance appraisals, with input from management. Performance management is much more informal and strategic, led by management with input from the employees in a more flexible manner.

Performance Management Performance Appraisal
Proactive Reactive
Forward looking Backwards looking
Led by supervisors and management Led by HR with some management input
Flexible Rigid
Strategic Operational
Ongoing Once a year
Does not use ratings or rankings Uses ratings and rankings