Using real-world examples and best practises, uncover what performance management is and why it is important.
Demand Generation & Capture Strategist, Valamis
March 14, 2022 · updated July 31, 2024
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Research shows that previous systems, such as yearly appraisals, are outdated and can even serve to decrease employee engagement and motivation.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.
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.
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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 constructive 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.
Talent management is an important part of every organization. Three of the main problems that organizations face are:
These are the issues that performance management very effectively targets.
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.
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:
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.
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.
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 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.
There are five main objectives of performance management:
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.
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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.
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
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.
As you are creating your performance management program, you need to understand what you want to accomplish.
Asking the following questions can help you:
If you know what you want your program to do, it will be easier to build it to accomplish that goal.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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 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 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 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.
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 |
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