What Is Performance Management?

The corporate world is going through a dramatic change when it comes to managing employee performance. Companies are recognizing that the annual performance review that’s been used in their organizational system for decades generates a lot of work that then becomes stale in the months that pass between. A change of evaluation and goal setting standards is here. According to Gallup, annual reviews cost organizations a lot of money—as much as $2.4 to $35 million a year in lost working hours for an organization of 10,000 employees to take part in performance evaluations—and many of those organizations and their employees are left with very little to show for it. In fact, 55% of employees believe annual reviews and evaluations don’t improve their performance.

It’s not surprising that the number of companies conducting annual performance reviews has fallen in recent years. In fact, a study by CEB estimated that 12% of U.S. companies had dropped them altogether. Research also shows that yearly reviews are becoming outdated and can even contribute to decreased employee engagement and motivation. HR managers are looking for new ways to define expectations and management is changing their definition of yearly reviews. In light of this, more companies are turning to performance management.

Although many employees and managers equate performance management with performance appraisals, the actual definition of the two aren’t the same. Unlike an appraisal, which evaluates performance annually or biannually, performance management is an ongoing process that involves continuous communication between a manager and employee. It includes setting individual expectations, providing coaching and feedback to help employees improve, and measuring and evaluating performance over time to use in future decision-making. In contrast to annual appraisals, performance management is a much more dynamic and involved process. While appraisals are still preferred by some HR and management teams, performance management is slowly becoming the norm.

Performance management is an essential tool that helps employees to realize their full potential while helping managers and HR to get the most out of their people. It looks at the present and future of the employee and what can be done to help their future performance meet future goals.

A large part of working in a management position is regulating performance. Whether you’re thinking about a career in business management or aspire to be a leader in your organization, it's important to understand the ins and outs of performance management and how to implement it. 

The main objective of performance management is to give managers and employees a clear, consistent system to work within which, in turn, leads to greater productivity. When done effectively, performance management can:

Build company culture.

By aligning an employee’s work efforts with the company’s mission and objectives, both parties understand how the job contributes to the organization.

Empower employees.

By setting clear performance expectations, the employee better understands what needs to be done to be successful in their job. It also gives them ownership of their own development, an essential quality in cultivating a more engaged, empowered employee.

Define and align goals.

Setting clear objectives, standards, and goals gives employees a target to aim for and work toward. In turn, this helps the business get done what needs to be done and provides a solid rationale for eliminating work that’s no longer useful.

Improve communication.

Regular check-ins open the lines of communication for things such as status updates, goal tracking, and constructive feedback. This gives the manager and employee the opportunity to identify problems early and change course, if necessary.

As you can see, performance management is good for businesses from all sides. It isn't just a means to increase profits; it has the potential to benefit a company at all levels.

Performance management is no simple task. It involves every single employee in a business, each with their own specific roles and goals. Performance management systems can help managers track and monitor individual performance, as well as departments and the entire organization.

Because no two companies are alike, there are many ways to approach a performance management system. However, the most effective ones contain some universal elements and actions, which include: 

Defining duties.

Supervisors and employees should outline together a job's responsibilities and how that role contributes to the company's efficiency.

Aligning employee duties with company objectives. 

Employees should understand how their goals contribute to the company's overall achievements.

Developing clear performance goals. 

The employee and manager should negotiate requirements and accomplishment-based performance standards, measures, and outcomes.

Checking in. 

Managers and employees should communicate year-round to evaluate progress. Managers should provide ongoing education and training as needed.

Outlining job-development plans. 

Employees should have an understanding of their potential career path/options and any opportunities for career development including promotions, lateral moves, and transfers.   

Giving recognition.

Compensation and recognition systems should be designed to reward employees for their achievements and contributions.

Performance management is a multistep process that involves continuous communication between a manager and employee. When done right, it can create and sustain improved performance in employees that leads to greater organizational success.

Here’s a look at all the moving parts:

Step #1 Plan

This is where expectations are established, and the employee is given clear goals or objectives to reach. This helps the employee understand how and what to spend their time on and how to allocate their efforts.

Step #2 Monitor

Those goals and objectives are tracked to ensure the employee’s development is on track.

Step #3 Develop

Goals are reviewed, and if necessary, the employee receives further direction and support. This step is extremely important for maintaining a dialogue with employees and leveraging their success.

Step #4 Review

Here, the employee receives feedback on performance and new plans for further development can be outlined. It’s important that this step of the process includes both recognition of the employee’s strengths and discussion about the challenges that require improvement and more support.

Step #5 Reward

Positive incentives, such as bonuses, contests, or reward programs are created to encourage employees to do their best work.

As you can see, all five stages of the process work together and support each other to achieve effective performance management.

The tips below can provide a framework for managers as they develop their performance management process.

Set Clear Goals

It’s much harder for an employee to be successful if they don’t know what’s expected of them. This is why goal setting is so important to effective performance management, providing clear, realistic, and measurable goals that are personalized for an employee to understand the manager’s expectation. Personalization is incredibly important, since the goals need to be relevant to the specific employee in order to ensure employee engagement.  

Measure Performance

While setting clear goals is an essential step for any performance management system, those alone aren’t enough. Measuring and tracking goals is just as important as creating them.

While not everything can be tracked, what matters is that measurements reflect the contributions of the employee. If the employee doesn’t buy into the measurements, they won't inspire them to perform at their best. To get the best performance from employees, managers have to help them feel engaged in the work and committed to the success of the organization.

Substantial benefits can be gained when an organization measures employee performance. Not only does it gauge progress and support continuous learning, but the results can be used to identify achievements and make adjustments along the way. Performance measurement also provides essential feedback to improve decision-making in all levels of an organization.

Communicate Regularly

After employees and managers have set goals and measured them, the conversation doesn’t stop there. To maximize performance, the lines of communication need to remain open. The purpose of this ongoing dialogue is to manage performance continually, so any potential performance problems are caught early.

Successful performance management involves frequent, in-depth conversations that center on how both the employee and manager view the employee’s performance and development. The conversations should focus on past performance as well as future goals.

Give and Get Feedback

Timely feedback is the best way to confirm an employee's performance while also shaping their work effectively. The purpose of these conversations is to inform, enlighten, and suggest improvements where needed. When employees receive regular feedback from managers—rather than just a few to-do items or critiques—it creates a stronger relationship that can produce better results. It’s also an opportunity for both the employee and manager to make observations. Unlike the traditional review process, in a performance management system, feedback goes both ways. Managers should give feedback and ask for it in return. 

Be Flexible

Being flexible allows managers to be more effective when working with diverse employees and responding to a variety of situations. So, to truly excel at performance management, it’s important for managers to understand the needs of the situation and adapt to meet those needs.  

Overall, it’s important to remember that effective performance management is people-driven, not process-driven. To work successfully, there must be ongoing communication between a manager and an employee. 

Whether you’re already a leader in your organization, or you aspire to be one, implementing a performance management process can be key in helping your company and its people thrive. If you’re ready to start or grow your career in management, WGU offers a variety of online degree programs that can prepare you with the tools and skills to succeed in the world of business management.