What Is Performance Management? A Comprehensive Guide

Effectively managing employee performance is essential for business success. Performance management is a continuous process that aims to improve individual employee performance—benefitting the organization.

Research shows employees who regularly receive meaningful feedback from their managers are four times more likely to feel engaged with their work.

Regular and meaningful feedback is crucial in engaging employees and fostering trust. Performance management provides a structured approach for managers to offer employees feedback, coaching, and development.

In this guide, we’ll explore what performance management is, including its benefits and challenges, the stages of the performance management cycle, the types of effective performance management systems, and some performance management best practices.

Meaning of performance management

Performance management is the process of identifying, measuring, managing, and developing the performance of employees to meet organizational goals. It’s an ongoing process that includes goal setting, performance monitoring, feedback, coaching, and development.

Performance management aims to align employee performance with organizational goals, improve employee engagement and job satisfaction, and support employee development.

Scientific basis of performance management

To maximize the efficiencies of a performance management program, you can understand it as an applied form of behavior modification. If you already offer your employees incentives—such as bonuses, pay raises, or promotions—then you’re already engaged in performance management. But if you aren’t breaking your process down to its fundamentals, you may not be realizing the results you expected.

Dr. Aubrey C. Daniels was among the first to understand performance management as a form of the behavior modification therapies that have proven successful in clinical settings. Daniels notes three fundamental components of performance management:

• Measurement. The first step in developing a successful performance management program is to establish a baseline of employee performance.
• Feedback. After the initial metrics are established, continual measurements should be taken and privately communicated. This lets the person know where they stand in terms of meeting their goals, and what they need to continue to do to be successful.
• Positive reinforcement. As performance improves—or the behaviors that lead to improved performance are followed—frequent rewards are meted out.

The reinforcement can take many forms, from a simple public congratulations to financial bonuses. But as much as possible, the rewards should align with the values of the employee. Not everyone will feel comfortable with large public displays of congratulations, for example.

Employees should be given a voice in what kinds of rewards will motivate them. This will both earn their buy-in with the program, and help improve their performance.

Benefits of continuous performance management

Continuous performance management has several benefits for employees and organizations. These include:

• Better employee development. Regular feedback and coaching can help employees identify their strengths and areas for improvement, supporting their development and career growth. Plus, companies offering employee development opportunities have a 34% higher retention rate.‍
• Improved organizational performance. Continuous performance management can help align individual employee goals with organizational goals, improving organizational performance. Research shows that companies and organizations with higher levels of employee engagement are more profitable and productive than those with lower levels of engagement. ‍
• Enhanced employee engagement. Regular communication and feedback can increase employee engagement and job satisfaction. As discussed in the introduction, regular feedback can result in employees being four times more engaged. Organizations with continuous performance processes are also 39% better at attracting top talent than those without.‍
• Identify training and development needs. In a survey of 250 companies, three-quarters of human resources (HR) managers agree mentorship culture is crucial for high-performing workplaces. Continuous performance management can identify employee training and development needs, promoting learning and engagement.‍
• Better employee retention. Organizations that prioritize giving feedback on their workers’ strengths experience a 14.9% lower turnover rate than those that don’t. When employees feel undervalued and poorly managed, they’re more likely to seek new opportunities that provide greater challenge and recognition. Providing frequent positive feedback can help employees feel acknowledged and supported, leading to greater engagement and a stronger commitment to the organization.

Challenges of continuous performance management

While there are many benefits to continuous performance management, there are also several challenges to consider. These include:

• Resistance to change. Some employees and managers may resist adopting new performance management initiatives and prefer annual performance reviews instead of regular check-ins.‍
• Subjectivity and biases. Performance evaluations can be influenced by opinions and biases, leading to unfair evaluations. You should have clear goals, metrics, and performance standards to help minimize them.‍
• Inadequate performance metrics. Organizations might implement measures that don’t provide a complete picture of an employee’s performance. For example, sales figures or productivity metrics can be misleading if they don’t consider other important factors, like customer satisfaction or quality of work. ‍
• Wrong rewards and recognition. Incentives and rewards may not align with employee performance, leading to demotivation and disengagement. For example, the Burger King employee who never missed a day in 27 years and received a goodie bag made headlines nationwide.‍
• Lack of manager training. Managers may lack the training to provide effective feedback and coaching to their employees, leading to ineffective performance management.‍
• Time constraints. Implementing a continuous performance management system can be time-consuming for managers and employees. Managers must dedicate time for regular check-ins and feedback sessions, and employees may feel overwhelmed by the added workload.‍
• Alignment with strategic goals. If the performance management system doesn’t align with the organization’s strategic goals, it may not drive employee performance and engagement.‍
• Over-reliance on technology. While technology can streamline performance management processes, relying too heavily on it can lead to a lack of personal interaction and communication between managers and employees.

Stages of the performance management cycle

The performance management cycle includes several stages:

• Planning. During the planning stage, establish clear and specific performance and strategic goals that align the organization’s objectives with appropriate motivations for the employee. This involves getting the employee’s feedback and buy-in, as well as setting realistic and measurable targets you can use to track progress and identify areas for improvement.
• Monitoring. This involves collecting and analyzing performance data, providing employee feedback, and adjusting goals and expectations.
• Developing. Development includes on-the-job training, mentorship programs, and continuing education courses. By investing in employee development, organizations can improve the skills and competencies of their workforce, leading to increased innovation, productivity, and overall organizational success.
• Rating. This step is the performance review or review process. Traditionally, this results in an annual review where you identify areas for improvement, competencies, and strategic goals for the upcoming year. Increasingly, the annual review is being replaced or supplemented by more frequent review processes.
• Delivering reinforcement. This involves taking appropriate action based on employee performance, including rewards, recognition, and promotions for high-performing employees. Consequences for poor performance may include performance improvement plans, demotions, or even termination in extreme cases.

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6 types of effective performance management systems

Performance management systems are typically implemented during the performance appraisal or review process—a critical component of the performance management cycle.

Different performance management systems have their strengths and weaknesses.

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1. Traditional feedback

Traditional feedback is a common approach involving communication between employees and their managers about their annual performance. Performance management tools, such as performance review software and online performance review templates, can facilitate feedback.

These tools allow for a more efficient and organized approach to feedback, enabling managers to provide timely and constructive feedback to employees.

However, this feedback can be limited to a one-time annual review, making it difficult for managers to provide feedback or address emerging issues in a timely manner. It can also lead to a lack of communication and support for employees throughout the year, leading to disengagement and decreased overall productivity.

As a result, many organizations are shifting toward more continuous feedback approaches that enable ongoing communication and support between managers and employees. This approach provides more opportunities for coaching, skill development, and feedback.

2. 360-degree feedback

360-degree feedback is a more comprehensive approach to performance management, involving feedback from an employee’s manager and their team members, peers, and other stakeholders.

This feedback provides a complete picture of the employee’s performance, helping identify blind spots or areas for improvement that may not be apparent to the employee or their manager.

While 360-degree feedback can be beneficial, it can also be time-consuming and potentially create a culture of blame and negativity if not implemented and monitored correctly.

3. Employee self-assessment

Employee self-assessment is a performance management approach where employees grade their performance based on predetermined criteria and performance expectations. This approach can encourage accountability and motivation, improving performance and organizational success.

However, clear guidelines, criteria, and metrics are essential to mitigate biases. If the assessment’s criteria are vague or seem judgmental—such as “Is friendly with customers”—the employee may feel frustrated trying to rate their subjective “friendliness.” Instead, the focus in this example should be on achieving a certain customer satisfaction rating.

Also, managers should still provide feedback and give an honest evaluation. The employee self-assessment isn’t the official review, but is a tool that can be used to discuss how the employee and manager each see the employee’s development.

Incorporating this approach into the overall performance management process can promote a collaborative and engaged work environment.

4. Behavioral-based feedback

Behavioral-based feedback is a performance management approach focusing on specific behaviors rather than general traits or characteristics. This approach identifies specific behaviors that lead to success in a given role, and then provides feedback on how employees can improve their performance in those areas.

To implement this approach, managers should identify specific behaviors critical to success in the employee’s role and provide regular feedback on how employees can improve their performance in those areas.

This approach provides a more objective and actionable approach to feedback, enabling employees to understand what they need to do to improve their performance.

However, a weakness of this approach is that it can be time-consuming for managers to identify and monitor specific behaviors, and it may require specialized training or expertise both in the tasks and in behavior-based assessment. Additionally, it may not consider external factors impacting performance, such as organizational culture or resource constraints.

5. Results-based management

Results-based management focuses on achieving specific outcomes or results. This approach involves setting clear, measurable goals and providing employees with the autonomy and resources needed to achieve those goals.

Leadership should also work with talent to ensure the goals align with the organization’s objectives. And while the workers are given a good deal of latitude to work independently, regular check-ins are needed to ensure they have the  support and resources they need.

One of the main benefits of results-based management is that it encourages employees to take ownership of their work and be accountable for achieving specific outcomes. However, measuring and evaluating employee performance can be difficult, especially if the outcomes measured are complex or difficult to quantify.

You also risk focusing too much on short-term results at the expense of long-term organizational goals or employee well-being.

6. A multifaceted approach

When choosing your methodology, consider a multifaceted approach combining different feedback types and coaching. This could include traditional feedback, 360-degree feedback, employee self-assessment, behavioral-based feedback, or results-based management.

The key is to choose an approach that fits your organization’s unique needs and goals. Consider factors like company culture, employee demographics, and overall objectives.

For example, if your organization has a highly collaborative work environment, 360-degree feedback could be an excellent option, as it allows employees to receive feedback from their peers and colleagues. On the other hand, if you’re looking to achieve specific outcomes or results, results-based management could be the right approach for your business. If both are important to you, a combination might be perfect.

Example of effective performance management

Let’s imagine a scenario where a company is going through the performance management process.

Sarah is a marketing manager at a technology startup, and her manager, John, is responsible for managing her performance. John and Sarah met at the beginning of the year to establish specific performance goals that align with the company’s objectives. Throughout the year, John provides regular feedback and coaching to support Sarah’s development, and Sarah feels comfortable bringing up any concerns or questions. Issues that come up for Sarah are resolved in real time.

At the end of the year, John conducts a performance appraisal that summarizes and reviews the year’s feedback, and provides Sarah with constructive feedback on her performance. They discuss areas where Sarah excels and identify areas where she could improve. Together, they modify Sarah’s development plan to include attending a marketing conference and enrolling in a marketing analytics course to broaden her skills.

During their annual meeting, Sarah shares her struggles with managing complex workflows and inefficient processes in her department. John helps her brainstorm solutions for process and performance improvement.

This scenario demonstrates the importance of regular feedback, coaching, and development planning in effective performance management. Organizations can improve employee performance and achieve their objectives by establishing clear goals, providing regular feedback and coaching, and developing a plan to support employee development.

Performance management best practices

To develop a successful performance management program, consider the following best practices.

Have clear and measurable performance metrics

Establishing clear, specific, and measurable performance metrics is crucial to effective performance management. Using goals that are SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) can help employees understand what’s expected of them and how you’ll evaluate their performance.

In addition to SMART goals, establishing key performance indicators (KPIs) can provide a more comprehensive view of an employee’s performance and progress toward organizational objectives.

KPIs are specific, measurable metrics used to evaluate an individual’s or organization’s progress toward goals. By aligning KPIs with organizational objectives, employees can understand how their performance impacts the organization’s overall success.

KPIs can be used across various departments and roles—from sales and marketing to finance and operations. For example, a sales team may use KPIs like sales revenue and customer acquisition rate, while a marketing team may use website traffic and lead conversion rate.

Regularly communicate and provide feedback

Regular communication and feedback are essential components of effective performance management. Managers should regularly check in with their employees—not just during annual reviews—to provide feedback and coaching. Performance management software can provide a more organized and efficient approach to feedback and coaching.

By using performance management software like Lattice, Namely, or PerformYard, managers can schedule regular check-ins with their employees, set goals, and track progress toward achieving them. The software also allows for real-time feedback and coaching, enabling managers to provide timely and constructive feedback to employees.

In addition to using performance management software, managers should establish an open-door policy and encourage employees to bring up feedback and concerns. This approach fosters a culture of trust and transparency, enabling employees to feel comfortable sharing their thoughts and ideas.

Focus on continuous improvement

Performance management is a continual process, and managers should encourage employees to periodically set new goals and identify areas for improvement. The focus should be on employee progress—not just on evaluating performance.

While pushing for high performance and constant improvement is good, make sure you’re recognizing and celebrating your employees’ work achievements. Employee recognition is an essential component of effective performance management, as it encourages a sense of accomplishment and motivation, leading to improved employee engagement and job satisfaction.

Align individual goals with organizational goals

Managers should set goals that allow workers to meet company goals. The idea is to have the individual employee working toward the same objectives as the organization. Managers should align individual goals with strategic objectives to focus on continuous improvement.

By setting goals that align with the organization’s objectives, employees can understand how their work contributes to the organization’s success. This approach fosters a sense of purpose and motivation, leading to improved performance and organizational success.

Develop a good performance management strategy with help from Upwork

A good performance management strategy is essential for organizations, helping improve employee engagement, enhance organizational performance, and identify training and development needs.

If you need help identifying and implementing the best performance management practices, consider working with a performance management specialist. They’ll help you develop and implement performance management strategies to achieve your strategic objectives.

Performance management specialists also provide guidance on employee engagement, coaching, and training to improve individual and team performance.