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Performance management: Moving beyond annual reviews

17 min read
Performance management shouldn’t be a one-way process or an outdated annual review. When done properly, it’s the keystone of good people management. Performance, responsibilities, learning and development, and business objectives are discussed in a safe and supportive environment.

What is performance management?

Although there is no standard definition of performance management, it can be best summed up as:

Balancing the relationship between employees and the value they deliver to a business through communication with, and support from, their line manager.

Performance reviews include establishing objectives, improving performance and reinforcing employee accountability.

Your company culture shapes how performance management is done. A traditional, hierarchy culture which is very much bottom-line-driven may set employees specific targets early in the year and measure their performance strictly against those. A horizontal culture, which is more collaborative and agile, may allow employees to take risks, innovate and bounce ideas off leaders, needing only a light management touch. Only when company results come in can performance be assessed, and if the hands-off approach has worked, left well alone.

Whatever your company culture, performance management is about continuously supporting your employees to attain individual goals, so that your business achieves its wider objectives. It’s a multifaceted set of processes and behaviours to encourage high performance. And the very best systems create a close link between successful employees and successful companies.

Learn from the Global Employee Experience Trends Report

What is the business impact of performance management?

More talent retention

People are your business’s most important and valuable asset, so it’s essential to find ways to retain your employees. Replacing an employee can cost 50% to 200% of their annual salary, and 52% of all voluntary resignations are preventable – if leaders know what’s causing disengagement. Having the opportunity to work continuously and autonomously towards performance goals while highlighting areas they want to work in, gives employees good reasons to stay with your company.

Identification of potential risks

Performance management enables you to identify under-performing or unmotivated employees. In some industries, underperforming employees pose real risk, and the earlier you can identify them, the quicker you can re-engage them. Performance management can help you to find out why, and support the employee back onto the right path.

There are many reasons why an employee may be struggling: mental or physical health, burnout, personal issues, lack of training, poor resources, workplace conflict, having too high a workload or not being challenged enough. Performance management data will flag up problems with a particular employee, and then it’s up to you to have an open, human-to-human conversation to dig deeper and resolve the issue.

Higher employee engagement and motivation

Higher employee engagement leads to improved customer satisfaction, which leads to increased profitability. A continuous approach to performance management means that you ensure your employees are working towards goals and objectives in real-time, allowing them to get the most out of their skills and roles, as well as iron out issues before they become bigger and more problematic. This approach gives employees greater job satisfaction and a sense of achievement.

Identification of career progression opportunities

An agile performance management approach means that you can readily identify those employees who are performing well, going the extra mile, and perhaps suitable for promotion.

Better business performance generally

All of the above contribute to better business performance overall. Employees who are engaged and thriving deliver better work and are more motivated to innovate and keep making progress. Performance management, when done correctly, brings value to the whole workforce and organisation.

What are the benefits to employees of a good performance management process?

A wellbeing early warning system

Wellbeing at work is vital. A recent study by Gallup showed that 61% of employees give ‘greater work-life balance and better personal wellbeing’ as a reason to change jobs.

Where a performance management system flags up an employee as underperforming or lacking motivation, an open conversation with a line manager in a performance appraisal can help you get to the root of disengagement. You can then put measures in place to help and support the employee so they choose to stay, and not leave or burn out.x

Increased employee engagement and motivation

“If you do a job you love, you’ll never do a day’s work in your life”, so the old saying goes. Every employee wants job satisfaction, motivation, and engagement. With continuous performance management, leaders help employees to work towards goals and objectives in real-time, support them to get the most out of their skills and roles, and nip issues in the bud.

Clear objectives and expectations

We all like to know what we are doing, when, and with what available resources, so we can simply get on with the job. SMART goals in performance management provide employees with clear objectives to strive towards and the opportunity to contribute to their development. Defined expectations mean your employees always know what’s expected of them, which reduces work stress and conflict, and in turn means that leaders can be confident that everyone is working to the best of their abilities.

Identification of development and progression opportunities

No employee wants to stay in the same role for the rest of their life. With performance management, employees can analyse their own career development, and choose the areas they want to develop and work towards. Regular catch-ups with managers review their progress.

Spotlight on training gaps

Another major benefit of employee performance management is the ability to identify areas where people would benefit from further training and development opportunities. Working with SMART goals and performance management tools also helps employees to highlight these areas themselves and communicate specific training needs to managers and leaders.

Performance management system benefits

5 things a performance management system must do

1. Define and set company goals

When goal setting is done well, it benefits both the employee and the business, and is an integral part of performance management. Employees can focus on those important things, with their individual objectives and employee performance expectations aligned with business objectives. And it’s easy to identify key performance indicators and improve upon them if necessary.

2. Set clear expectations

Performance management programs must do this for both managers and employees, and the main consideration is that expectations must be manageable.  A below-par performer won’t start improving immediately, and even your best people will have off-weeks and may not achieve consistently.

3. Set the standard

Every job has a particular performance standard that must be met, e.g. time, quality, output or sales, and these are helpful parameters in managing employee performance. If standards are consistently not met, robust performance management will generally pinpoint one or more of the following issues:

  • The standard set was unrealistic
  • A lack of resources
  • Cooperation, communication or collaboration failure
  • Inadequate employee effort, for a variety of reasons

4. Encourage effective communication

A company with a good culture of communication results in engaged employees whose individual objectives align with business objectives. To make communication the lifeblood of your performance management strategy:

  • Managers should have regular 1:1s with team members
  • Use continuous 360 feedback to help with development so your people feel they’re reaching their full potential before performance becomes an issue. We recommend only using a 360 program to help develop your people, rather than as part of your performance management program
  • Make constructive use of performance reviews and appraisals
  • Create a culture of communication, with social activities, always-on chat channels, and team-building activities

5. Determine training and development needs

There’s an agricultural saying: ‘If you want a prizewinning pig, don’t keep weighing it, keep feeding it’. Merely measuring employee performance is pointless if it’s not backed up with relevant training and development. And this is where an effective performance management program comes in:

  • You can ask employees what skills development or training they need
  • You can plan and budget for that training
  • You can target training to aspects of the business that need improving
  • Trained employees may spot new business areas or opportunities

What is the performance management cycle?

Traditionally, performance management processes would run on a yearly cycle. An employee would sit down with a manager at the start of the year and set objectives with them, then 12 months later they would analyse how they’d done. They usually followed this routine:

  • Plan: Setting SMART (Specific, Measurable, Agreed, Realistic and Timely) objectives, and other types of development planning.
  • Act: where the employee gets down to the business of working and achieving their objectives, with consistent coaching from their managers and the wider organisation.
  • Track: employees logged progress at any time, reaching milestones on their way to bigger targets.
  • Review: a more formal performance appraisal sit-down between a manager and employee, to look at how things went, and either maintain or evolve individual objectives.
  • Reward: Employees with high performance are recognised for their sterling work with rewards such as an annual bonus, salary increase, promotion, autonomy or awards.

The performance management cycle

Performance management cycle

Continuous performance management – the new approach on the block

Many big brands have largely jettisoned this annual performance management approach, and in place of annual reviews is now continuous performance management. The ‘Plan – Act – Track – Review – Reward’ cycle is still there, but it has been shortened, allowing employers to get more connected to their employees, break achievement into smaller chunks, gather real-time feedback, and avoid issues festering for months before there’s an opportunity to deal with them.

Continuous performance management means more regular communication about what’s going well, and how that can be maintained, as well as what could be improved. It’s a two-way process where employees feel empowered to share feedback on their progress and on the managerial support they’re receiving, and managers feedback on employee efforts.

This agile approach allows more flexibility, rapid problem-solving and opportunity for feedback and action. It ties neatly in with the five objectives of performance management, because:

  • Priority is given to employee training and development
  • Goals are more short term, more flexible, and can be achieved quickly
  • Collaboration and communication occur naturally in a continuous environment
  • Good performance can be rewarded, and poor performance picked up to be remedied much sooner
  • Rewards can be made more frequently

What exactly is a performance management system?

It’s a mechanism for tracking employees’ performance consistently and measurably. Spreadsheets and manual tools are out, in favour of performance management software, powered by AI, natural language processing (NLP) and machine learning.

Employees can report regular, candid feedback on how they’re performing against their individual goals, then evolving those objectives as they’re reached or become irrelevant due to changing business priorities. It also includes giving constant and job-specific coaching in between major reviews.

Practically speaking, your performance management system can include many different, interconnected processes, such as:

  • Personal achievements: a list of major successes in an employee’s career aligned to the company’s strategic objectives
  • Employee journey: from application to exit and all the moments in between
  • Attendance statistics: how many days absence and presence
  • Individual goals and objectives: these should be matched to the job description and required competencies
  • Surveys: including pulse360 feedback and employee engagement
  • Personal development plans: with actions and objectives for the employee
  • Performance appraisals: annual or quarterly, usually led by a manager
  • Leadership development programs: to nurture your current leaders and identify your future ones

What you include will depend on your organisational structure and job-specific skills and competencies.

What makes an effective performance management system?

It should be:

  • Tailored to your organisation: and your industry and structure, as well as taking into consideration your current appraisal system and performance periods
  • Supported by senior management: if the C-suite isn’t signed up to your performance management system, it will eventually fail, as employees realise their objectives aren’t really tied to business’ goals or their successes are not properly recognised
  • Clearly communicated: employees should understand what’s expected of them and how they fit into the company’s wider goals
  • Fair, consistent and constant: from the vice president of sales to the junior sales rep, everyone should feel as though the system will assess them even-handedly and reward their successes
  • Measured properly: you should use metrics that have been tested and validated outside your organisation, to avoid any biases or favouritism
  • A model of continuous development: if it’s simply a box-ticking exercise, it won’t work
  • Linked to rewards: you can integrate performance-based rewards as part of your system: a powerful way of rewarding good work
  • Trackable: managers and employees should use software that allows them to log how they’re doing and get an idea of how they’re tracking against objectives

5 tips for excellent performance management

1. Invest in the best performance management system you can afford

There’s no point getting halfway through developing a performance management process then deciding to try to fit it into a software system. Start with the performance management systems – the best ones are customisable, with all the basic functions you need, and options to add on ones that are more specific to your business. Then build your strategy with your system.

2. Use 360 feedback

360 feedback combines timely feedback from an employee’s manager, direct reports, team and the employee themselves. These surveys are becoming more popular in employee performance management, and the most successful ones are:

  • Relevant – aligned with business goals and performance targets
  • Credible – people need to be trained to understand and use them effectively.
  • Accountable – 360 insights need to drive tangible action and continuous improvement.
  • Completed – it’s up to management to encourage people to take 360 surveys seriously and complete them.

3. Involve employees

Gone are the days of performance management being only what your boss told you to do. There’s now a manager/employee shared responsibility to do a good job and achieve results. When employees take shared ownership of their performance management process, they’re more committed, more motivated and more engaged.

4. Create a culture of belonging to encourage high organisational performance

Employee performance drives business results, so only shortsighted companies don’t take effective performance management seriously. Employees also need to feel like they belong to an organisation and are doing things they value.

A culture of belonging is linked to an extraordinary 56% increase in job performance, a 50% drop in turnover risk, and a 75% reduction in sick days. It’s therefore essential to foster a culture of belonging that nurtures everyone at your company, whatever their level. When you implement a culture of belonging:

  • Each individual understands how their team efforts contribute to the organisation’s wider vision and greater good
  • Each manager knows their team well, appreciates everyone, and is equipped to monitor and manage team performance effectively
  • Leaders, who have a clear appreciation of their people as well as the company’s strategy, purpose and values, will find they deliver the expected results

Without a culture of belonging woven into the company — departments work in silos, employees are disengaged, and even the most impressive, high-tech performance management systems and processes are wasted. Instead, a culture of belonging does much of the heavy lifting when it comes to ensuring employees perform at their best.

5. Make learning a continuous process

Few people want to remain static in a job, doing the same thing day in, day out, and not developing – and do you want people like this in your organisation anyway? The best businesses create an environment where their people can develop, by:

  • Setting goals
  • Making full use of feedback
  • Offering training, coaching, and development activities
  • Tracking and measuring development progress

You’ll notice how similar continuous learning and performance management are. Get learning right and strong performance will follow.

eBook: 360° Feedback Best Practices