What Is Performance Management?

The Complete Guide

Written by Erik van Vulpen
12 minutes read

Effective performance management helps organizations ensure that employees

understand their roles, receive constructive feedback, and have the support they
need to achieve their goals and business objectives. Let’s look at what
performance management is, what the performance management process looks like,
and some examples.

Contents
What is performance management?
Performance management goals
Why is performance management important?
What are the stages of performance management?
Performance management process: Best practices
Performance management examples

What is performance management?

Performance management is a set of processes and systems aimed at developing
employees, so they perform their job to the best of their ability. The goal is to
help employees build on skills that enable them to perform better in their roles,
reach their potential, and boost their success while also accomplishing the
strategic goals of the organization.

Effective performance management establishes a continuous conversation between

employees, managers, and HR.

The performance management process is strategic and systematic. It combines

verbal and written components, which take place throughout the year, culminating
in an annual performance appraisal. The process involves the following:

Establishing clear expectations,

Setting individual objectives and goals that align with team and organizational
goals,
Providing ongoing feedback, and
Evaluating results.
Career decisions, including promotions, bonuses, and dismissals, are linked to
the performance management process.

Effective Performance Management: Key Elements

Performance management goals
Performance management aims to develop the skills and competencies employees need
to improve performance and success in their job. In turn, these skills help the
organization meet its goals.

However, a Betterworks study reported that 21% of employees say their goals are
set annually and never looked at again, while 16% say they do not set any goals.
A third of employees report that they don’t have one-to-ones with managers or
receive feedback to help them work towards goals more than twice a year. 1 in 10
employees claim they rarely or never receive this type of feedback.

Performance management goals include setting performance expectations so that

employees have clarity on what is expected of them and what they can gain by
meeting these expectations, including compensation, rewards, or even a promotion.

Continuous, real-time feedback helps employees understand where they are, learn,
self-correct, and grow. They can constantly improve their performance at work,
providing them with a greater sense of accomplishment. This equips the
organization with a skilled, engaged, and qualified workforce.

A Willis Tower Watson study found that companies using performance management
programs effectively are 1.5x as likely to outperform their competitors
financially and 1.25x as likely to see an increase in employee productivity.

Performance management improves individual and team performance which helps

businesses achieve their goals and objectives. For example, if a business
objective is to grow revenue, effectively managing the performance of your sales
employees can help you achieve this.

Performance management also allows employees to see how their individual goals
align with the company goals and understand how they contribute to achieving
those, encouraging engagement.

Why is performance management important?

If the above performance management goals are achieved, there are several
benefits for both your employees and the wider organization.

Future-proofing your workforce’s skills

Establishing a continuous line of communication with employees and monitoring
their skills, learning, and training developments helps uncover potential skills
and performance gaps in the organization. You can then work to close these,
providing the business with a strong competitive advantage.

Increased employee engagement

When carried out effectively, performance management sets expectations for your
employees in a transparent way.

It provides them with learning and development opportunities, a clear career path
in the organization, and an understanding of their role’s impact on meeting
organizational goals. Plus, continuous performance management helps employees
feel valued and cared for, making them more open to receiving constructive
feedback and working to improve.

Higher employee retention

When an employee can see their progression at work and clearly understands their
career path and what they need to do to earn a promotion, it leads to more
engaged employees who are likely to stay with your organization.

Culture of feedback and trust

Establishing a culture of communication, transparency, and trust begins with
leadership and HR initiatives that will trickle down to the rest of the
organization. That includes the nature of your performance management process and
a transparent performance management policy.

When managers are open and give honest, constructive feedback to employees, this
encourages employees also to be open and honest, building mutual trust. It also
fosters a healthy overall company culture.

Improved organizational performance

Managing employee performance ultimately leads to significant improvements in
organizational performance, including revenue growth and customer satisfaction.
Helping your employees learn, develop and perform better in their roles has a
positive knock-on effect on the wider business.

According to Bryan Adelson, a consultant at Red Clover HR, organizations need to

understand the “why” behind their performance management strategy.

“Why are they conducting these conversations in the first place, what is their
value, and what takeaways do they want from them? Understanding these questions
will ultimately help structure and provide the most effective outcomes to the
employee and organization,” Adelson points out.

What are the stages of performance management?

A typical performance management cycle has four key stages. Let’s explore them in
more detail.

1. Planning
The planning stage is dedicated to establishing performance expectations with
employees. Job descriptions should clearly outline these goals to attract the
right candidates. After hiring the candidate, you need to reconfirm these
expectations and set SMART goals and employee performance metrics together.

Performance management plans must also be flexible so they can be adjusted as

organizational objectives change along the way.

The employee should be actively involved in the planning process because this
increases satisfaction and motivation to improve.

HR plays a key role in performance management. According to Jonathan Westover,

OD/HR/Leadership consultant from Human Capital Innovations, HR can enable
managers to effectively manage performance by providing them with the necessary
tools, resources, and training.

“This includes performance management software, performance metrics, goal setting

templates, and training on effective communication and feedback. HR can also
support managers by conducting regular check-ins with them to ensure they are
following best practices and addressing any performance issues in a timely and
constructive manner,” says Westover.

2. Monitoring
The second stage is monitoring. During this stage, HR and managers must regularly
monitor employee performance concerning the goals set and provide feedback to
employees on their progress. Doing this regularly rather than annually allows
issues to be highlighted and corrected sooner rather than later.

Performance management software can assist in tracking employee performance in

real time. Still, data and reports should not be a substitute for face-to-face
discussions.

4 Stages of Performance Management

3. Developing
During the developing stage, the data collected during the monitoring stage is
analyzed and used to boost employee performance.

Underperformance may be corrected by suggesting refresher courses, further

training, performance coaching, and other L&D methods. Managers and HR could
further facilitate superior performance by assigning an extra project to help
improve knowledge and performance, allowing the employee to excel further.

4. Rating & rewarding

The final stage is rating and rewarding. Employee performance needs to be rated
regularly throughout the year and during a performance review or appraisal. This
helps quantify employee performance, determine the value added by each employee
to the organization, and make any changes as needed. Both employees and managers
should give their evaluations for 360-degree feedback.

Continual sub-par performance could lead to a cross-function move or dismissal.

Your organization should also recognize and reward superior performance, whether
it’s through praise and recognition, a raise in salary, or a promotion.

Performance management process: Best practices

Evaluate what currently is and isn’t working
Before you make any changes to your current performance management process or
tools, you must understand what is currently working, what’s not, and why. HR
should survey both employees and managers and collect opinions on the current
process and suggestions on what could be done better.

You can then convey these internal findings, coupled with studies and
evidence-based research, to business leaders and decision-makers who can sponsor
and drive change in the business. Show them the impact of an improved performance
management process on business results.

Choose the right approach

There are two common approaches to performance management: a behavioral approach
and a results-oriented approach.

Behavioral approach: Behaviors are identified and evaluated, and employees are
evaluated based on their behaviors and effort. This approach is suitable for
giving detailed feedback on behaviors by mapping desirable future behaviors and
when individual results are hard to measure. Examples include individual players
in a team, support staff, and HR professionals.

Result-oriented approach: Employees are evaluated based on objective criteria.

The focus is not on input but on output in terms of quality and quantity. This
approach is suitable when there are multiple ways to do the job. The end result
matters rather than how it has been achieved. Examples include contact center
employees who have specific success metrics, as well as sales professionals. The
evaluation of lawyers and accountants is also highly result-oriented, as they
keep track of their billable hours.

Consider what the role is when choosing the approach to ensure the effectiveness
of your performance management process.
It’s also important to reevaluate the process with changes in your work model,
for example, remote or hybrid working methods. A Willis Tower Watson study
reported that only about one in six employers (16%) had altered their performance
management process to align with remote and hybrid work models.

Meet & train managers

Managers are integral to the success of your performance management program. They
play a vital role in engaging, motivating, and developing employees. Therefore,
it’s essential that HR has a clear plan in place for training managers to give
and receive constructive feedback.

Managers should also get coaching on how to maintain a continual, open feedback
dialogue with their staff.

Help set SMART goals

Managers and employees should set SMART goals for employee performance, and
involve HR when setting goals for employee development.

Every employee should have their own clear, personalized set of key performance
indicators (KPIs) so that they understand their manager’s expectations and so
that their manager can keep track of their scores and achievements.
Personalization is important based on the job and function and the employee’s
personal and professional ambitions.

With these goals, you can effectively measure performance and spot opportunities
for improvement. Shaun Wilde, CEO and HR Director at the learning platform Think
Learning, highlights the importance of monitoring progress.

“Investing in a talent management system can allow managers and employees to

continuously monitor their progress, and also make quick changes, evaluate, or
put on hold what’s needed. As employees progress, their goals will likely
fluctuate with them, which means you need to allow for a certain amount of
fluidity,” explains Wilde.

“Having regular developmental conversations and effectively tracking the goals

means targets stay up to date, and there’s no doubt around what needs to be
achieved to progress.”

Apply continuous performance management

The Willis Tower Watson study also found that while most (93%) organizations
cited driving organization performance as a key objective for performance
management, fewer than half (44%) claimed their performance management program
met that objective.

One of the primary reasons for this is relying on an annual performance appraisal
or review and failing to follow up on this regularly throughout the year or
conduct one-to-one check-in meetings where constructive feedback and coaching are
provided.

HR can educate managers on providing employees with this type of ongoing

constructive feedback. This drives motivation, catches issues early on, and helps
you manage underperforming employees correctly and offer them tools to improve.

“Performance management should be an ongoing dialogue that happens throughout the

year, not just during an annual review. This approach allows for timely feedback,
effective goal-setting, and more accurate assessments of employee performance,”
notes Tara Furiani, “Not the HR Lady” keynote speaker and consultant.

Innovative organizations are turning to agile performance management, which

focuses on continuous learning, frequent check-ins, and building trust and a
sense of connection to the team.

Set up a formal system

Continual performance management boosts employee engagement, motivation, and
performance. However, a formal performance review or appraisal system where
top-performing employees can get a raise, a bonus, or a promotion for meeting
certain goals and objectives is just as important. This communicates to all your
staff that great work will be recognized and rewarded.

Help workers create employee development plans

When employees have a solid plan for their career progression with the
organization, it empowers them at work and helps them take charge of their
professional development while reducing turnover rates.

Human Resources professionals can work closely with managers to understand their
employees’ needs, schedule meetings to discuss their career development, and help
provide employees with required training.

Employee development plans are notoriously hard to implement simply because

managers and employees are too busy. This is where HR can help by creating plan
templates for managers which they can use to create development plans with their
team members.

Employ technology
Leveraging HR technology and software helps improve the efficiency and
effectiveness of the performance management process. Performance management data
can offer detailed insights and patterns that manual tracking and surveys cannot
compete with.

The right technology can also save a manager’s time, but only if a clear
performance management strategy is in place. They also need to be able to view
real-time data at any time to determine the right goals for success.

However, it’s important to be mindful that performance management is a

people-centered process. Technology cannot (and shouldn’t) replace the need for
direct communication and difficult conversations with managers. Managers need to
take and remain in ownership of this. But the right data in a dedicated
performance management system can eliminate implicit bias, affirm to employees
that they are being objectively assessed, and facilitate honest discussions.

Performance management examples

HSBC
HSBC now has an HR mobile app where employees and managers can easily capture
achievements and share feedback.

Employees can access an HR-to-do list, their performance and development plans,
online learning resources, and manage their personal employment information.
Managers can handle approvals on the go, set goals, and regular check-ins to
maintain productivity and facilitate continual growth.

The app lends itself well to flexible and remote working models without
compromising results. It has created a stronger relationship between managers and
employees, where employees feel more supported, and end-of-year appraisals feel
more meaningful.

Deloitte
Deloitte rolled out a pilot performance management program that encouraged team
managers to have frequent check-ins with team members about their performance,
priorities, and strengths. Surveys completed by employees helped team leaders
understand the process from their perspective and make improvements.

Custom career development plans were created for all employees. What’s more,
everyone was provided with a career coach to help them develop.

Data has been beneficial, particularly in helping underperforming employees see

where they sit in relation to their colleagues, listen to constructive feedback,
and take action. It has also helped Deloitte understand people, team, and
leadership trends they haven’t been able to see before this. One example is the
connection between feedback conversation frequency and employee performance.

IKEA
IKEA set out to drive business performance by strengthening management and
leadership skills.

An accredited “train-the-trainer performance management coaching program” was

created for them and rolled out to 750 managers and supervisors across the UK.
This included an interactive seminar, developing coaching skills (aligned with
the International Coaching Federation), certification, and the identification of
internal coaching champions.

Departments with managers who attended performance management coaching training

saw a 5% KPI increase and went from 60% scores in management ability to 90%
scores across the board.

A final word
Performance management is a crucial aspect of any organization’s success. By
focusing on goal- and expectation-setting and creating a continuous performance
management process, you’re empowering your employees to develop and improve every
day and ultimately setting your organization up for success.