What is an Effective Performance Management System?
Updated: Mar 16
What is performance management?
Performance management refers to tools and processes that support goal-setting, feedback/recognition, and performance reviews. In recent years, there has been a major revolution on the approach to performance management. What was once an annual review process has now shifted toward a more continuous process with a keen focus on developing and motivating employees. (If you are interested to know more on the performance management evolution, you can check out the article we wrote about history of performance management).
“Always treat your employees exactly as you want them to treat your best customers.” - Stephen R. Covey
It is estimated that 70% of businesses have made some sort of shift toward a continuous performance management system with major organizations like Adobe, General Electric, and Microsoft leading this performance management revolution. This shift has been largely driven by (i) changes in the workforce, in which Millennials are the largest generation in the workforce, and (ii) changes in organizational structures which necessitates a more agile performance management system that matches the agile networks of teams.
What is the purpose of performance management?
Performance management systems are critical for organizations, as they help: (i) align goals throughout the organization, (ii) develop employees, and (iii) motivate employees.
Goal alignment - Alignment of goals between organizations and their employees is crucial. It allows employees to see how their individual objectives contribute to overall organizational strategies and it allows them to be rewarded for achieving their goals.
Develop employees - Skill development allows employees do their jobs efficiently, ensures that employees have the skills to support future business growth, and keeps them motivated. For many employees, skill development is the biggest driver of retention.
Motivate employees - Feedback and recognition act as strong motivators for employees. 69% of employees say they would work harder if they were more recognized. Performance management systems that promote meaningful feedback and recognition keep employees motivated and engaged.
What should performance management cover?
Performance management should cover 4 fundamental components: objectives, competencies, values, career progression & compensation.
If you want more detail on these categories, we highly recommend downloading our guidebook on performance management. If you are part of an early stage company, we also recommend checking out our performance management guidebook for startups.
What does effective performance management look like?
The 4 components - objectives, competencies, values, career progression & compensation - should be covered in continuous feedback conversations and check-ins/reviews - the frequency of which may differ depending on type of workforce, size, etc. You might also want to separate your compensation discussions from performance reviews to ensure that feedback is the main priority during these conversations. If you do decide to uncouple compensation discussion from performance reviews, make sure to clearly communicate this to employees on when compensation discussions take place.
Why are frequent feedback conversations so important?
If you cannot remember what you had for lunch last Thursday, how do you expect to remember how your direct reports performed throughout the entire year? Assessing employees once a year only gives rise to subjective performance reviews and unhappy employees. One study found that 95% of managers are dissatisfied with formal performance appraisals, and most HR professionals (90%) think the appraisals are inaccurate.
Some benefits of continuous performance management include:
Decrease in unconscious work biases - these include recency bias, halo effect, and central tendency bias. These biases can significantly affect how employees view the performance review - 45% of HR leaders do not think annual performance reviews are an accurate appraisal for employee’s work and 24% of workers would consider leaving their jobs if they have managers that provide inadequate performance feedback. Meanwhile, 68% of employees who receive accurate and consistent feedback feel fulfilled in their jobs. Objective reviews are extremely important!
Increased employee engagement - one study found that employees who’ve had conversations with their managers about goals and successes in the last six months are 2.8x more likely to be engaged. And employees who get daily feedback from a manager are 3x more likely to be engaged. Engaged employees are productive employees.
Teams that shared feedback had 12.5% greater productivity compared to teams that did not share feedback.
Increased employee retention - companies with regular feedback have 14.9% lower turnover risk. Turnover is extremely costly for an organization, and luckily there is a cost effective way to decrease turnover by increasing feedback conversations (although quality of feedback is also important - see the point below).
Is continuous feedback enough to create a more engaged and productive workforce?
A common misperception is that continuous feedback is enough to develop and motivate employees. While it is a good start, the quality of feedback is also important. “Good job” and “high fives” are not good examples of feedback. The feedback has to be constructive - action-based, effort-based and forward-looking (check out these examples of feedback).
In this regard, managers are critical to the success of organizational performance management program. It is important that they are properly trained to give and receive meaningful feedback. Moreover, having the right processes and technology in place to help support continuous performance management is essential. Giving and receiving feedback should not be hard - it should be seamless in day-to-day operations. Feel free to check Pavestep out - we help employees share meaningful feedback in the easiest way possible!