The ultimate guide to performance management

What is performance management and what are the benefits?

Simply put, performance management (PM) is a process for helping employees meet organizational goals and perform at their full potential. It goes beyond traditional performance reviews to make accountability, transparency, and ongoing feedback a central tenet of the organization. It sets up an improvement mindset through which all employees feel accountable to themselves, one another, and the organization at large.

Key benefits of performance management include:

• Enhancing employee engagement by giving frequent performance updates and incentivizing performance
• Improving employee retention by providing opportunities for growth and learning
• Fostering a culture of feedback to increase accountability and collaboration throughout the organization
• Driving organizational performance

Key components of the performance management process

The PM process typically breaks down into a five-part process. This continuous cycle includes:

1. Planning: Setting goals and expectations upfront
2. Monitoring: Tracking employee progress and performance
3. Developing: Helping employees improve with training and work assignments
4. Rating: Summarizing performance periodically
5. Rewarding: Recognizing and rewarding positive results

Ultimately, it’s a human capital management strategy that aims to make employees fully invested in their own growth. While the organization’s success is the entire team’s goal, every individual is also working towards their personal growth. As such, performance management directly ties the organization’s performance to each employee’s self-motivation.

Note that performance management isn’t only useful in organizations with a competition framework. There’s a difference between performance-minded and competitive.

While you can use performance management as a way to motivate employees to compete against one another, the primary goal of PM is to motivate individuals to compete with themselves, to raise their own potential — not at the expense of co-workers. As such, PM can contribute to a positive workplace environment while also improving overall organizational effectiveness.

Next, let’s take a look at some common ways companies put this into practice.

Methods of performance management

There are several ways to succeed at employee performance management. Determining the right performance management programs for your organization will depend on factors such as the size of the organization, business goals, and workplace culture. We’ll break down some of the most common methods of performance management.

Management by objectives (MBO)

MBO aims to align employee goals with the organization’s goals. One of the great effects of performance management is that it ties individual and team success together. In an objective-based application, employees and managers work together to set goals for both themselves and the organization as a whole.

The key aspects of MBO include:

• Setting SMART (specific, measurable, achievable, relevant, and time-bound) performance goals
• Clear communication between employee and manager throughout the allocated time period
• Frequently measuring performance quantitatively against objectives
• Rewards, like bonuses, salary increases, or extra vacation days, to serve as incentives

360-degree feedback

360-degree feedback is a type of performance appraisal that uses feedback from multiple sources to provide a comprehensive evaluation of an employee. Using a 360-degree feedback survey, HR professionals can gather feedback from superiors, direct reports, and individuals from different teams to fully assess how an employee measures up against organizational performance standards.

360-degree feedback is designed to be both positive and constructive, helping employees understand strengths, weaknesses, and specific areas for development.

The major aspects of 360-degree feedback include:

• Fully anonymous feedback to encourage truthful responses
• A variety of feedback sources, including managers, peers, direct reports, and external stakeholders
• Self-evaluation on the same survey so employees can compare their own perception to others’
• Using the feedback to create a development plan for the employee, even if it is a wholly positive review

360-degree feedback can improve communication and build trust within an organization. However, it can be derailed by personal disputes and overly subjective reviews, so it’s important to monitor these programs closely.

Continuous performance management

Continuous performance management (CPM) involves regular communication and feedback between managers and employees. CPM can be a somewhat informal process or a more strictly regimented one.

In companies with a strong workplace culture, CPM may simply become a core value that all employees exhibit on a day-to-day basis. Rather than setting up monthly, quarterly, or annual performance reviews, CPM is a modern approach that makes performance management a central part of the company’s day-to-day operations.

When building a CPM program, remember the five stages of cyclical performance management, from planning to rewarding. Employees want regular feedback and opportunities for growth. While you don’t have to dish out daily raises, a good CPM program offers incentives that are achievable within reasonable timeframes.

Now that we better understand some different strategies that are available, let’s see how companies optimize this process.

Best practices for implementing performance management

Creating a good performance management program can be a tough challenge for HR teams. Getting complete organizational buy-in for anything isn’t always a walk in the park. But once you’ve steered your company towards a PM program, these tips will help you make it successful.

Utilizing effective software solutions

Technology is your friend. There are many powerful PM solutions on the market today that allow you to visualize your entire organization’s performance in a single place. Whether you’re running 360-degree feedback surveys, facilitating daily feedback, or building a rewards or recognition program, specialized tools make it easier to support your performance management program.

Aligning goals with organizational vision

The best PM programs benefit both employees and the organization itself. Individual employee goals should be designed to promote organizational success. Of course, that may mean different things for different employees.

For instance, an e-commerce company may be devoted to doubling sales from Q3 to Q4. Salespeople, then, will likely have fairly obvious goals to increase the number of sales, value of sales, number of vendors, or other sales-based metrics.

The design team, however, should still have goals tied to this success. For instance, a good goal may be creating custom imagery for X number of product listings or designing X number of specialized landing pages or social media campaigns.

Equipping managers with necessary tools

While HR professionals will benefit from using PM software, managers should also have the tools they need to support their own goals and those of their direct reports. A sales manager may need a good customer relationship management (another CRM) software or email marketing tool. Designers may need advanced photo editing or design tools, which may further require the company to invest in better hardware.

Embracing technology and AI

Automation is everywhere today and for good reason. It’s hard to manually manage an entire performance management program. Leverage AI tools in your CRM as well as public tools like ChatGPT to automate feedback distribution, summarize performance reviews, and other crucial tasks. Good performance management relies on timeliness, so it’s important to take any time-saving advantage you can get.