HR professionals know that the greatest asset companies have will always be their people. So it's important to create an environment where individual employees work most efficiently and effectively.
Performance management is essentially a human resources tool that helps with just that. The Wall Street Journal discussed that performance management has evolved throughout the years to adapt to younger generations. On paper, performance management helps keep employees focused on the objectives of the company. However, the specifics cover much more than that.
Continue reading below to understand the definition of performance management, its benefits and pitfalls, the stages of the performance management process, and the different types of performance management systems.
Defining Performance Management
Performance management can be defined as the process of monitoring and evaluating employee performance and making sure the quality of work produced is in line with the company's own expectations, goals, and overall vision.
From a different perspective, performance management can be defined as an open line of communication between supervisors and employees that involves goal setting, reviewing results, providing feedback, and so on.
Most employees are familiar with performance management in the form of performance reviews. Traditionally, these performance reviews or performance evaluations are conducted once or twice a year. However, companies have found that individual employees are more receptive to more frequent forms of feedback.
The Performance Management Cycle
Performance management may sound like a linear path, but the process actually exists as a cycle that occurs over the span of a year. Different sources may use different names, but the logic of the cycle remains. The performance management cycle typically consists of four steps: planning, monitoring, reviewing, and rewarding.
The performance management cycle begins with the planning phase. It typically revolves around setting performance expectations for the employees, expectations based on the company's own strategies and objectives.
Even new employees should be familiar with the performance expected from them, because these organizational goals are usually part of the job description in one form or another.
Many believe that performance management is a top-down process. However, it has been shown that good performance management includes the employees themselves in the planning phase. Not only is individual performance significantly better, but the perceived fairness and employee engagement are improved.
In the monitoring phase, the goals set in the planning phase are actively tracked. Continuously measuring performance and providing feedback helps employees focus on individual goals.
Although all the goals set in the planning phase will be ultimately assessed in the reviewing phase, monitoring is crucial as it tracks progress in real time. Managers and supervisors can intervene and correct suboptimal performance early instead of at the end of the fiscal year.
While monitoring tracks employee performance throughout the year, reviewing takes it all together and evaluates everything at the end of the year. Involving both supervisors and employees, reviewing entails both parties meeting and assessing whether the goals for the year have been met.
Different metrics can be used for reviewing, but companies often use key performance indicators (KPIs) as a way to measure progress and success. Commonly used KPIs include net sales, growth in revenue, or gross profit margin. Trakstar is also an excellent way of assessing competencies and deploying performance reviews.
Aside from assessing whether the goals have been met, this phase can also include other introspective discussions. Were the goals realistic? Did the employees learn new skills? Were the employees' goals in line with organizational goals? What processes can be improved?
Technically, the performance management cycle can loop through planning, monitoring, and reviewing. However, employees are people who work best when positively incentivized. Thus, they have to be rewarded according to their performance.
Rewarding motivates employees to work better and stay in the company, which is why rewarding is an essential component in effective performance management. However, it is important that rewards be based on competencies evaluated through performance appraisals.
When rewarding is done without basis, other employees can potentially lose the motivation for performance improvement.
A common reward would be a simple salary raise. However, other rewards can include a bonus, extra vacation time, a promotion, or an acknowledgment of some sort. Even being assigned to a special project with development opportunities can be considered a perk.
Benefits of Performance Management
There are several reasons why companies participate in performance management.
First, performance management sets clear expectations and objectives. Organizations often use the SMART criteria when setting goals. These criteria guide goals to be Specific, Measurable, Attainable, Relevant, and Time-based. It is of utmost importance that employees understand what is expected of them.
As work ensues, the use of performance management allows managers to quickly determine which employees are on the right track and which employees might require further training. Monitoring and reviewing are also formal ways of accountability when it comes to deciding who is rewarded and who might be dismissed.
Another major benefit for performance management is the morale boost. While some people do not like being told what they're doing wrong, most people enjoy being told they're doing a good job. Rewarding people for achieving organizational goals is a great way to boost morale — a catalyst that will lead to other great things.
Happy employees are typically more productive, a reason why more and more companies are working towards improving the work environment. Boosting morale also increases employee retention. Increasing retention, and thereby lowering employee turnover, is a great asset for any company.
Overall, performance management leads to better business performance.
Pitfalls of Performance Management
Since there are different ways to approach performance management, there are some common pitfalls that companies have to be familiar with.
The first pitfall in performance management is the annual appraisals. For the longest time, companies have operated with annual performance reviews. However, it has been found that a continuous review process throughout the year is more effective than annual performance reviews.
Performance varies over time, and it cannot be effectively reviewed in a single meeting at the end of the year.
Another pitfall that should be avoided is only giving positive reviews. No one will argue that getting positive reviews feels good. However, if the goal is for employees to improve, then managers and supervisors should also provide constructive feedback. Constructive feedback informs employees where they can improve.
Lack of Training
Every skill that is necessary for the company's performance has to be trained. Thus, individuals who are tasked to evaluate employee performance have to be trained specifically for it. Training should include being able to provide an effective and accurate review.
Lack of Direction
This should be prioritized in an organization, because another common pitfall in performance management is that employees are left to improve by themselves. If a company wants better employee engagement, then managers have to be actively involved in the development of their employees.
Types of Performance Management Systems
There isn't a single way of doing performance management that would work for every company, because the people involved can be very different. Thus, it is important to be familiar with the different performance management systems in order to find out which works best. These are some systems used by various industries:
The Balanced Scoreboard (BSC)
One commonly used performance management system is the balanced scoreboard, a system composed of a combination of both financial and non-financial measures. These include the financial perspective, internal business perspective, innovation and learning perspective, and customer perspective.
The balanced scoreboard has been found to be a highly effective system that meets several managerial needs as it includes necessary data and guards against sub-optimization.
Management by Objectives (MBO)
Management by Objectives is a straightforward approach where managers and employees essentially set goals and periodically review whether those goals have been met. Success is qualified by the goals set, and rewards are given accordingly.
This type of performance management system has been found to be highly effective in numerous companies. It owes its efficacy to its simplicity. Since success revolves around the goals set in the planning phase, it is important that the individual goals set are truly in line with corporate goals.
Instead of the usual systems where employees are reviewed by their managers, the 360-degree feedback system is a multidimensional system wherein feedback is collected from an employee's circle. These forms of feedback can come from managers, peers, clients, and more.
An excellent tool for providing performance reviews is Leapsome. With a wide array of customizations on performance reviews, Leapsome is a great platform for performing 360-degree appraisals.
The 360-degree feedback system is appropriate for organizations where employee performance has a great impact on several stakeholders. It also serves as a relatively lenient form of appraisal since feedback from peers is usually more lenient. However, leniency can be a common pitfall for this type of system.
The 360-degree feedback system also suffers from possibly inaccurate reports since employees are evaluated by different people, possibly without proper training in providing sufficient evaluations.
Although many view performance management as a segmented process, it should really be a continuous one. It is a highly beneficial tool that helps guide employees towards the mission of the company while seeing to their own career development.