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Home / Blog / Performance Management Systems: What is it, Benefits, Uses, & Examples (2023)

Performance Management Systems: What is it, Benefits, Uses, & Examples (2023)

A guide on performance management systems and boosting your organizational efficiency.

Sheriff Subair
HR and SaaS Journalist
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A common cause of most performance management failures is rooted in the misunderstanding of performance management systems and insufficient resources to support effective performance management

This article sheds some light on the types of performance management systems available to HR teams, crucial components, and the role performance management plays in the creation of a high-performance workforce.

In This Article


What Is a Performance Management System?

A performance management system is a structure designed to establish performance expectations and review employee performance within an organization. It typically includes a series of informal check-ins with individual employees, as well as a formal review at the end of each performance management cycle.

These systems can be paper-based or operated via dedicated performance management software to track success metrics. Either way, a performance management system’s objectives are to establish clear employee goals, assess and improve individual and team performance, and uphold performance standards in a way that is measurable and sustainable.

Types of Performance Management Systems

The most common methodologies for performance management are the Balanced Scorecard, 360-Degree Feedback, Objective and Key Results (OKRs) and Management by Objectives (MBOs)

The Balanced Scorecard

The Balanced Scorecard is a tool used by organizations to measure and manage their performance across several areas of the business.

Imagine it as a report card for your business but instead of just grades in one subject, the Balanced Scorecard grades the business across multiple areas.

This review process focuses on four key business aspects:

  • Learning and growth: Focuses on the company’s progress in areas like employee skill development, innovation, and adaptability.
  • Internal processes: Measures the efficiency of the company's internal operations in managing product or service delivery.
  • Customers: Focuses on the company's ability to serve its customers effectively and assesses factors like satisfaction and loyalty.
  • Finances: Evaluates the company's financial performance, including aspects such as profits and growth.

Priyanka Swamy, the founder of online hair extensions store Perfect Locks, told us why her organization sticks with The Balanced Scorecard system:

“We love this system because it gives us a 360-degree view of how our business is doing. By looking at many different things, we can figure out what needs improvement, make smart choices, and keep up with the ever-changing market. Plus, it helps us be more open and honest with each other. This holistic approach ensures we're not just focused on numbers but building a sustainable, well-rounded business.”

360-degree Feedback System

360-degree feedback evaluates an individual’s performance based on anonymous feedback gathered from various people with whom an employee has a working relationship.

In other words, you are assessing how a team member has performed from the multiple perspectives of their teammates. These people include their managers, peers, direct reports, and sometimes even external stakeholders.

To maintain anonymity throughout this process, it is best managed through dedicated 360-degree feedback software.

Here’s a high-level outline of how a typical 360-degree feedback process is carried out:

  • Planning: Define the objectives of the evaluation and identify the people who will take part in the process.
  • Select a feedback tool or method: Most HR professionals use questionnaires, surveys, or face-to-face interviews to gather feedback. Ensure that your questions focus on the individual’s competencies, behaviors, and skills relevant to their role.
  • Communicate the process: This process can be time-consuming so it is important that everyone understands the purpose and confidentiality of the evaluation.
  • Collect feedback: Share your feedback tool to all participants. A 360-degree feedback tool would have this as a native feature.
  • Collate and analyze data: Look for trends, strengths, and areas for improvement in the employee.
  • Feedback delivery: Provide feedback to the individual. Ensure that your feedback is given in a supportive and constructive manner.
  • Action planning: Collaborate with the employee to create a development plan that addresses the areas for improvement highlighted in the evaluation.
  • Follow-up and review: Schedule follow-up discussions to review progress and ensure continuous improvement.

The 360-degree feedback system works well when you’re trying to evaluate an employee in these areas:

  • Leadership.
  • Character.
  • Teamwork.
  • Workplace behaviors.

Objectives and Key Results (OKRs)

Objectives and Key Results (OKR) is a simple way to track and measure your organization’s progress towards a particular goal.

Objectives are the qualitative goals that your organization aims to achieve within a time frame. Key Results are the specific, measurable outcomes that indicate whether your objectives have been met.

This is probably the most popular performance management system – 83% of organizations agree that OKRs have a positive impact on their organization.

OKRs differ from KPIs in that they are more broadly related to performance instead of day-to-day productivity. 

For instance, your Objective as an HR leader could be: Enhance employee engagement and development.

Your Key Results in this case could be:

  • Key Result 1: Increase employee engagement score by 15%.
  • Key Result 2: Implement at least two new professional development initiatives.
  • Key Result 3: Reduce employee turnover rate by 20%.

OKRs provide a framework that encourages focus and alignment throughout the team. This is why it is widely used by organizations globally.

Management by Objectives (MBOs)

Like OKRs, Management by Objectives (MBOs) is a goal-setting framework aimed at improving organizational performance.

Here, the top leadership decides and directs the organization’s objectives for a cycle (typically 12 months). The focus is on cascading goals from higher levels to lower levels within the organization.

There is a key difference between MBOs and OKRs.

MBOs primarily focus on setting objectives without necessarily spelling out key results. The focus is on defining the "what" to be achieved.

OKRs, on the other hand, involve setting both qualitative Objectives and quantitative Key Results. OKRs focus on both the "what" and the "how" to achieve it.

An example of an MBO is: Enhance customer satisfaction.

But if it were to be an OKR, the corresponding Key Results would look like this:

  • Attain a 90% or higher rating in customer feedback surveys.
  • Decrease average resolution time for customer issues by 20%.
  • Increase customer retention by 15% through improved service.

Crucial Components of a Performance Management System

The best performance management systems have certain crucial components. These are:

  • Planning and goal setting.
  • Ongoing communication.
  • Performance review.
  • Rewards and recognition.
  • Feedback and suggestions.

Planning and Goal Setting

Take your pick of any of the performance management systems we highlighted in the previous section and you’ll quickly recognize that establishing clear expectations is crucial to their success.

Setting clear expectations means choosing your objectives and defining your success metrics. One way to do this is by using the S.M.A.R.T goal-setting framework.

S.M.A.R.T stands for Specific, Measurable, Achievable, Relevant, and Time-Bound.

An example of a S.M.A.R.T goal statement looks like this:

Our goal is to increase employee engagement survey scores by 10% within the next two quarters through the successful implementation of targeted initiatives, fostering a more positive and collaborative workplace environment.

Using the S.M.A.R.T goal-setting framework ensures that everyone is clear on what goal they are working towards.

A guide for setting SMART goals for performance management.

Ongoing Communication

Open and regular communication ensures that your employees understand the company goals, objectives, and performance expectations.

It cultivates a culture of transparency, where employees feel not just heard but also supported, leading to increased commitment.

A study by Gallup showed that nearly half of U.S. employees don’t know what is expected of them at work. When employees are unclear about their roles, it becomes challenging to align their efforts to the overall objectives of the organization.

This underscores why continuous communication is a necessity to guide individuals toward high performance.

Performance Review

A performance review is the process through which your team members are evaluated on their work performance and given formal feedback.

A performance review is a crucial component of any performance management system because it serves as an opportunity to reflect on past performances.  It is also the optimal time to set new goals and outline the priorities that will affect future performances.

There are different examples of performance reviews and they all serve as an opportunity for managers and employees to discuss strengths, weaknesses, and areas for improvement.

Rewards and Recognition

Employee rewards and recognition involve acknowledging and incentivizing your employees for their contributions to the organization.

While there are many types of employee recognition, it is invariably the acknowledgment of an employee’s efforts. Employee rewards imply a monetary or non-monetary gift that is given to employees to simply thank them for their work, or to reward them for attaining a predetermined goal.

Rewards can include things like bonuses, pay raises, promotions, and even benefits like extra time off. Recognition can come in the form of verbal praise, awards, or public acknowledgment and can be organized using employee recognition software. Both are important tools used to motivate employees and improve their performance.

The combination of rewards and recognition reinforces good performance and aligns employee goals with those of the organization.

Feedback and Suggestions

Continuous feedback, as a manager’s tool, provides team members with a clear understanding of their performance. It not only acknowledges their efforts but also provides actionable insights for their ongoing development.

Feedback can be given on the spot, when an employee presents a report or performs their daily duties, or it can be given in a one-on-one setting. One-on-one meetings can be structured to include time for feedback from the manager, and feedback from the employee regarding barriers, successes, and next steps.

The Purposes and Objectives of a Performance Management System

Performance management, in some shape or form, exists in every organization, ranging from loosely organized processes to highly documented performance management strategies.

Here are some major objectives of performance management that you should consider when establishing or reformatting your system.

Align Employee Goals with Organizational Objectives

A solid reason for rethinking your performance management is to align employee goals with organizational objectives.

Most employees join organizations that they believe will support their personal growth. This means that the work they take up must prepare them to meet their individual goals by enhancing their knowledge and helping them build skills.

Provide a Basis for Feedback and Coaching

Another major objective of performance management is to provide a basis for real-time feedback and coaching.

If your performance management is primarily focused on ratings without providing constructive feedback or coaching, your employees may feel unsupported in their professional development.

In fact, 24% of employees would be ready to quit their jobs because of ineffective performance appraisals.

When an organization has a culture built on strong communication between managers and team members, the workforce becomes engaged and it is easier to connect performance to the business’s strategic goals.

Promote regular one-on-one performance conversations between team leads and team members for real-time feedback.

Also, annual reviews are still important – use them for comprehensive reflection of employee performances and acknowledgment of their achievements.

Identify Training and Development Needs

Another reason why organizations turn to performance management systems is to understand their workforce training and development needs. Reviewing where employees excel and where they need support in their work provides invaluable insight on which to develop and implement a well-designed skills development plan.

According to McKinsey, investing in employee development offers these 5 strategic benefits:

  • Attracting and retaining talent.
  • Motivating and engaging employees.
  • Developing people's capabilities.
  • Building an employer brand.
  • Creating a values-based culture.

74% of employees claim that they are not reaching their full potential due to a lack of development opportunities. Incorporating employee training into your performance management plan can help you raise the collective performance of your organization.

Provide Benchmark for Performance-Related Decisions

An effective performance management system should help you identify opportunities and strengths for your organization.

It is easier to identify these areas when there are established performance standards to serve as benchmarks. For instance, managers can make informed decisions about promotions and rewards if they already have a system that tracks employee performance.

Without a clear insight into your organization's performance benchmarks, departments may end up setting unrealistic goals which can lead to a perceived lack of effort from your employees.

How Performance Management Systems Help HR Managers

An ongoing dilemma for HR leaders is to figure out ways to demonstrate their contributions to financial outcomes.

There are a couple of reasons why HRs find this challenging: time lag in results, limited analytics, and perception of the HR function.

However, a performance management system can significantly aid you in demonstrating your impact because it gives you a structured framework to align HR initiatives with organizational goals.

You can establish measurable objectives, set Key Performance indicators (KPIs), and regularly monitor the progress of your programs.

To quantify your impact, consider the following steps.

  • Gather relevant data before and after the implementation of an HR initiative.
  • Compare your collected data to historical information to understand the impact of your initiative.
  • Identify the correlation between HR activities and critical metrics. Gather feedback from team members to get qualitative feedback on your activities.
  • You can now summarize your findings to communicate the impact of your activities on business growth.

Role of HR in Performance Management

HR's role when it comes to performance management is multifaceted.

  • HR manages, motivates, and measures employee performance, aligning individual goals with organizational objectives.
  • HR ensures consistency of performance management tools like performance appraisal strategy, performance review templates, goal-setting frameworks, and feedback workflows across the organization.
  • HR acts as a coach for managers, helping them learn the best practices for performance management and mentoring to deliver effective feedback and performance evaluations.

At the end of the day, your role in performance management is all about managing, motivating, and growing employees.

Conclusion

Mastering performance management systems is pivotal for Human Resources success.

Just remember that the key to making it work for you lies in utilizing performance management systems not just as a software tool but as a guiding force for fostering a high-performance workforce.

By establishing measurable objectives, defining KPIs, and consistently monitoring progress, HR can communicate its value more effectively.

Sheriff Subair
HR and SaaS Journalist
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Sheriff is a content writer and content marketer specializing in HR and SaaS brands. Since 2019, he has been creating long-form content, including blog posts, landing pages, and emails.

Currently, Sheriff works as a content marketer for an HR SaaS where his focus is on shaping compelling narratives that resonate with HR professionals.

Outside of work, you would probably catch him rewatching "The Vampire Diaries" or "Suits."

Also featured in: Pade HCM

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