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What is performance management?

10 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Performance management shouldn’t be a one-way process or an outdated annual review.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.

Performance management definition

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 behaviors 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

5 things a performance management system must do

1. Define and set 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 aligned with business objectives. And it’s easy to identify key result areas and improve upon them if necessary.

2. Set clear expectations

This needs to be done 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 analyze 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 organization.
  • Track: employees logged progress at any time, reaching milestones on their way to bigger targets.
  • Review: a more formal 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 recognized for their sterling work with rewards such as an annual bonus, salary increase, promotion, autonomy or awards.

Continuous performance management – the new approach on the block

Many big brands have largely jettisoned this annual performance management approach, and in its place 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, 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 occurs 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 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 pulse 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 organizational structure and job-specific skills and competencies.

What makes an effective performance management system?

It should be:

  • Tailored to your organization: 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 realize their objectives aren’t really tied to business’ goals or their successes are not properly recognized
  • 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 organization, to avoid any biases or favoritism
  • 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

4 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 strategy then deciding to try to fit it into a software system. Start with the system – the best ones are customizable, 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. 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, they’re more committed, more motivated and more engaged.

3. Make learning continuous

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 organization 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.

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