Performance management optimizes employee productivity through goal-setting, work evaluation, and rewards to achieve organizational success. This article explains the meaning of performance management and its objectives and discusses why it is so essential for organizations.
As organizations strive for continuous success, it is vital to maximize the value of your most important asset: i.e., your talent. Employees perform best when they feel valued, motivated, and supported, which is what the performance management function aims to achieve. It has three main cogs – measuring and improving outcomes, developing talent, and incentivizing performance – all of which taken together can take your organization to new heights. At a time when 82% of employees want to feel more valued as individuals, performance management can also play a role in engagement.
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What Is Performance Management?
Every business organization has a founding vision and sets its goals, objectives, roadmaps, and milestones in line with what the business hopes to achieve.
Among the key contributors that help meet these objectives is the company’s actual human cap: the employees or the workforce. Despite several structures being put in place, there remains a growing need to smooth performance, harmonize every member of the organization, and to bridge the wide gap between expectations and results.
This is because it takes a well-defined performance management system to ensure that every arm of the business works together to achieve the overall aim of yielding maximum results.
Have you ever wondered about the scope and benefits of performance management? We aim to define and demystify every key element of performance management here.
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Understanding performance management
Performance management, quite simply, refers to the process of monitoring an organization’s activities to ensure that employees meet set goals and objectives.
It encompasses priority setting, employee training, continuous supervision, offering consistent, yet constructive feedback, performance reviews, and suggesting remedial measures. Oftentimes, our view of performance management has been restricted to the end-of-the-year appraisal and feedback process. However, it has become apparent that each human resources (HR) team must understand that the scope of performance management goes beyond this.
One primary challenge to providing an all-inclusive performance management definition is that it covers multiple activities for an even greater variety of organizations, their models, and structures. To answer the question, ‘what is performance management’, Michael Armstrong and Angela Baron (1998) offer a very concise definition, which states that it is the: “systematic process for improving organizational performance by developing the performance of individuals and teams. It is a means of getting better results from the organization, teams, and individuals by understanding and managing performance within an agreed framework of planned goals, standards, and competence requirements.”
At the heart of this definition lies the crucial link connecting the ability of an organization to achieve its goals and the performance of the human capital. This holds true irrespective of the type, structure, or size of an organization.
Finally, performance management can be described as the system through which organizations set work goals, determine performance standards, assign, and evaluate work, provide performance feedback, determine training, and development needs, and distribute rewards. (Briscoe and Claus, 2008)
Learn More: The Ultimate Guide to Human Resources
What Is the Importance of Performance Management?
In the past, there was hardly any emphasis placed on performance management in human resource management. Fortunately, this narrative is changing rapidly as a culture of employee-centricity evolves. Let us delve deeper to understand the importance of performance management.
Why is performance management important?
Here are eight reasons why organizations must be intentional about it.
1. Drives financial gain
Without pretense, the primary aim of any organization providing goods and services is to make a profit. At the end of the day, employees must be paid, shareholders rewarded for their investment, and opportunities for expansion realized. If the company’s human capital is at maximal functional capacity (not overworked or underutilized), it will have a direct implication on raising levels of profit.
For example, when a salesperson hits their target, or the advertising team comes up with a campaign with good conversion rates, there is no doubt that this will increase income flow and improve the bottom line.
2. Encourages and motivates employees via recognition and rewards
A key benefit of performance management is that it arouses the employees’ desire to do more. From C-level executives, through middle management, individual contributors, and support staff, everybody has a need to be recognized for their value. When this is done, employees are spurred on to do more.
3. Prevents overlapping roles
Most people function best in a defined and safe environment. A company's human resource performance management must enable this. It should be clear to every worker what his or her objectives are, how they fit into the big picture, and why things must be done in a particular way.
When more than one employee is assigned to a task, they must be equally informed so that they are equipped to work together, achieving the set target while avoiding interpersonal conflicts. On the other hand, smaller goals and objectives should be assigned to individual members of the team. This provides a deep sense of purpose and responsibility, allowing him or her to work comfortably in their niche.
4. Increases employee engagement and productivity
The importance of a performance management system lies in that it enhances engagement and productivity in employees. What does this mean? Engagement in this context refers to how much the employee interacts with the company and its structures. Productivity defines itself in terms of increased outcomes and Return On Investment (ROI).
Consider a scenario where the HR manager shows interest in what the social media manager does only at the end of the year. Compare it with how much more of a concerted effort the social media manager would put in when promoting the company under a modern performance management system. The company's vision, aims, and goals will be evident in each piece of content posted online in the second scenario.
Employee engagement should cut across every aspect of work, even down to whether people contribute to team meetings or not. In fact, employees whose managers are actively involved in performance management are three times more engaged than others.
5. Makes room for idea generation
In a fast-tracked world, we can’t underestimate the importance of generating new ideas. A company’s sole aim might be to provide affordable housing. However, if there is no steady and inspiring stream of ideas to sell to the public, there will be a plateau and eventual decline in sales.
Now, with a functional performance management system, the burden of idea generation no longer rests solely on the owner or product management team. Ideas can flow more easily, and in the right direction, because every worker knows that their inputs are welcome. Amazingly, this is not just limited to consumer products. Idea generation could also benefit the company, such as suggestions for a better working system, etc.
6. Creates a platform for employee development
A consistent performance management system invariably results in an active form of employee development. Discussing each employee’s role, past performance, current efforts, strengths, and weaknesses gives you an accurate understanding of what each employee can do. When combined with a agile HR technology, it creates opportunities to steer employees in a direction best suited to their abilities and the company’s goals.
Performance management makes training targeted rather than generalized, and most importantly, employee potential is optimally utilized to the advantage of everyone involved.
7. Enables proper documentation and record-keeping
We are witnessing a rapid shift from paper and filing cabinets documentation systems to faster, easier, and less burdensome digital ones. There are several digital performance management solutions that help track every aspect of HR.
These HR management tools provide a clear documentation process that can be stored and revisited when needed. It means you have a record of each employee's past performance at your fingertips. Promotions are scheduled and timely rewards given, and even a history of errors with administrative action is documented.
Learn More: Top 10 Employee Engagement Trends For 2022
What Is the Scope of Performance Management?
The scope of performance management is almost as broad as its root, human resource management. A performance management system has to conform to the overall organizational structure. It should not be viewed in isolation, but rather as underlying the entire organization. This ensures the fundamental aim of performance management systems, to ensure good work from every department in the organization.
The scope of a performance management system encompasses everything people do at work – from the vision and goals of the organization to the employees, their personal interest, the tasks assigned to them, how they are executed as against the set standard, the employer's intent, interests, and the company’s goals.
This covers such a broad framework that, to understand it effectively, we must look at it as two halves of a whole.
- Corporate performance management (CPM)
- People performance management (PPM)
Corporate performance management (CPM) or enterprise performance management considers the overall performance of the organization. It is a series of managerial strategies that a business must apply to define its goals, design a working strategy, execute it, periodically analyze its result, and utilize the information to make better decisions for growth. The tools used in corporate performance management range from budgeting and product vision to business models, etc.
On the other hand, people performance management (PPM) focusses on the employees within the organization. It is the most challenging aspect of performance management as it involves a larger number of people and a greater number of objectives. It deals with ensuring that all factors align to perfectly fit into the overall aim of an organization.
Learn More: Performance Management Approaches, Models, & Frameworks: The Ultimate Guide for HR
Scope of performance management
The PPM system is one that will:
- Validate the employee selection process
- Identify employee training needs
- Give performance feedback and constructive criticism when necessary
- Determine employee reward and benefit
- Decide on the time and nature of promotion or demotion
All these are adequately represented in the performance management cycle, which has evolved from the traditional, static form that ran as long as a year to a more continuous model with broadly defined goals that can be reviewed. It has four phases:
1. Planning
In the planning phase, both CPM and PPM are involved. The management team initially meets to determine the overall goals of the organization, and then the yearly or quarterly goals. This is then shaped to the level of the employees, defining their roles and objectives. It also considers the personal development goals of each employee. The planning phase is a goal-setting phase. Getting the most out of this phase is easy by using the SMART guide. Simply put, goals must be Specific, Measurable, Achievable, Relevant, and Time-bound.
2. Monitoring
This phase falls under the scope of performance management and is much more effective when done regularly. Studies have shown that 63% of Gen Z employees want to receive frequent feedback from their managers rather than just an end-of-the-year review. The management checks in to understand the progress, roadblocks, existing and surmounted problems, ideas, etc. In the monitoring phase, there is also room for redefining goals set during the planning phase.
3. Reviewing
At the end of the cycle, management must evaluate performance. Were goals met? Was there a waste of the company's resources? How efficiently did employees achieve this goal? How can this process be modified for better results? Did employees deliver an outstanding performance or show leadership qualities? The reviewing phase is easier when proper monitoring takes place.
4. Rewarding
Without mincing words, this is a phase that must not be relegated to the backburner. It is crucial not just to the employee but also to the employer in the long run. A reward system is a strong motivator of better performance.
Learn More: Performance Management Cycle: A Comprehensive Guide
What Are the Objectives of Performance Management?
Performance management is a strategy used in human resource management. There are several objectives of performance management systems. When these are met, it creates a successful strategy, which results in benefits for all involved. The objectives of performance management include:
1. Defining the organization’s goals and objectives
Goal setting has proven to be a highly rewarding methodology in organizations. The importance of goal setting goes beyond its impact on the employee, but also affects management and the organization at large. In setting goals, an effective performance management system must ensure that realistic, achievable, and cost-effective goals are set. It takes into consideration the strengths and weaknesses of the people involved.
From the employees’ perspective, goal setting:
- Keeps them focused on the major objective/s
- Maximizes individual performance and abilities
- Merges employee and organization goals
- Identifies priority tasks
For the organization, goal setting is essential for:
- Identifying flaws and weaknesses when goals are not met
- Budgeting
- Conducting performance appraisal
- Reviewing general performance
2. Clarifying expectations for employees and managers
It is imperative that every organization makes its expectations known to all involved. For example, expectations of monthly pay, working hours, benefits, days off, etc., should be clearly defined. Beyond this, setting expectations far above an employee's performance ability will only lead to disappointment and burnout. However, there should be room for growth and consistency. This clearly demonstrates the importance of a performance management system.
When setting expectations:
- Define what is expected of the employee. There should be no confusion or ambiguity.
- Document these expectations for easy reference.
- Explain how beneficial it will be to both the employee and the organization if those expectations are met. This may be learning a new skill, undergoing training, improving workflows, increasing sales, etc.
3. Setting performance standards
One of the objectives of a performance management system is to set performance standards. This can be done on a rolling basis, based on previous employee performance, or based on the company's expectations. Performance standards are necessary for proper work evaluation. It's the backdrop against which employee work output can be compared fairly. Without it, human resource performance management might overlook suboptimal input, or may not recognize exceptional performance, simply because there was nothing to compare it with.
4. Facilitating worker training and development of new job skills
A good performance management system highlights the abilities and weaknesses of each employee and provides targeted training aimed at benefiting both the employee and the organization.
A good way to go about this involves employees in the process from start to finish. Ask them what skills they lack to perform their jobs optimally. Figure out how these fit into the budget and training programs. Discuss the benefit and application of these new skills and redefine set goals to accommodate these skills.
5. Identifying barriers to achieving organization goals
An effective system shows the weakness of existing structures in the business. With constant monitoring, this can be detected early enough, and intervention plans can be created.
For example, in an organization where the delivery of products is outsourced, there is likely going to be a some delays, mix-ups, and damaged goods. Overall, daily delivery goals may not be met. Over a month, and with proper monitoring, this discrepancy can be reported, the transportation barrier identified, and practical solutions offered.
6. Creating an administrative framework for decision-making
Without an adequate, well-documented performance management system, organizational heads will keep running in circles in the dark. However, when an effective system is put in place, there is a better ability to make informed decisions, set strategic goals, and implement effective policies for the good of all.
7. Boosting employee performance through an effective reward mechanism
A primary objective of a performance management system is to achieve growth and to ensure that employees are encouraged and motivated. This can easily be accomplished by establishing an effective reward system. Logically, monthly remuneration should be enough motivation. However, when exceptional performance is especially rewarded, it drives the entire team to try to exceed such standards.
8. Increasing job satisfaction and employee retention
Few things come close to the frustration of having to hire new employees every three months for the same tasks. It results in constant sub-optimal output because of all the time wasted in getting new hires up to speed. Sound performance management will result in increased job satisfaction, and the best employees will stay on. This means that you will have a fine-tuned selection of capable, skilled, and loyal employees in your organization.
9. Inspiring new ideas and suggestions
Oftentimes, the best ideas come from unexpected sources. Of course, there may be employees, product managers, marketing teams, and others responsible for idea generation. Sometimes, an employee in a different department, such as the sales team or UI/UX developers, might have a revolutionary idea for the organization.
Performance management sets the stage for this. A worker who knows that his contributions, no matter how small, are valued, will be unlikely to hoard ideas or be hesitant to express them. Effective human resource performance management results in idea generation.
10. Encouraging friendly competition
In a world where everyone receives the same treatment irrespective of effort, there will be a massive decline in productivity. One of the objectives of performance management is to encourage friendly competition among teams and individuals. It all boils down to a reward and recognition system. No one wants to be left out, or constantly reprimanded, and while some people may shy away from the spotlight, everyone enjoys recognition. Implement all the elements of a good performance management system to instill healthy competition amongst co-workers.
Learn More: The 5 Best Job Evaluation Methods in 2022
What Are the Elements of Performance Management?
The essential elements of performance management are the features that every performance management system must display. We will look at the key elements of a performance management system. Having at least five of these is a good indicator of a successful outcome.
1. Longevity and consistency
Before making your performance management strategies public, some vital questions must be answered.
- Can this system be sustained over the next five years?
- Will this apply to every employee without being partial?
- Is it within the yearly allocated budget?
Consistency is a primary element of performance management. An employee should know what to expect annually. There should be no sudden changes or discontinuity in the strategies applied. In addition, the importance of treating each employee equally cannot be over-emphasized. Why should one team be reprimanded more harshly than the other? Or another be rewarded more for similar output? Nothing demoralizes your staff more than a biased system.
2. Outcome management
Your human resources performance management system must be equipped to manage outcomes. Tasks will not always be accomplished, and goals will remain unmet. Depending on the expertise/learning garnered across the process, these results may serve as stepping stones to improved performance.
3. Planning and goal setting
Goal setting is an essential element in performance management. Goal setting begins with company leadership, then moves downward to annual and quarterly objectives, then to the department and team goals, and eventually to individual tasks. These tasks must be in line with the employees’ job description and abilities, and yet make room for creativity, learning, and growth.
4. Communication
Communication, feedback, and regular reviews are a key aspect of performance management. It also includes communication of goals and strategies. It is necessary for a proper understanding of organizational objectives, which will determine if personal objectives are aligned to achieve the desired result.
5. Employee reviews
Feedback and reviews go hand-in-hand in performance management. One is coming from the bottom to the top, the other from top to bottom; however, both are assessing performance and giving ideas on a better management strategy. Teams should be able to anonymously send in reviews of their supervisors, etc. This way, there can be improved leadership and a smoother relationship between co-workers. A system where employees’ ideas are implemented is one where everyone wants to contribute something useful.
6. Development and training
Another element of performance management is the training and development of employees. This covers job skills such as software management, providing courses, sending them for conferences and training programs, etc. As trained and experienced workers climb up the leadership ladder, they need to be replaced with newer employees. This might create a period of reduced outcomes. A good way to minimize the effect felt in the overall organization is the role of mentorship and one-on-one training. Most of all, a well-documented workflow should be made available to each employee coming into a new role in the organization.
7. Employee recognition and rewards
Your employees are like your primary customers. The same logic behind bonuses, discounts, freebies, and other attractive packages offered to customers works perfectly inside the organization.
We all want to feel appreciated, especially for stellar performance. There is no single approach to a rewards and recognition system in performance management. It could be in various forms, such as:
- Recognition in front of peers and leadership
- Leaderboards
- Bonus pay
- Gift items
- Increased holiday length
- Better insurance package
- Better working environment
- Gift cards
- Shares in the company
- Promotions
8. Regular monitoring and feedback
Traditional human resource management involves an annual performance assessment. In contrast, regular monitoring at weekly, monthly, or quarterly intervals ensures that no aspect of employee performance is overlooked. It provides both a holistic understanding of an employee’s abilities and an in-depth appreciation of their performance. Regular monitoring goes hand-in-hand with feedback.
Learn More: The 30 Best Employee Feedback examples in 2022
What Is the Role of Performance Management in an Organization?
The role of performance management in human resources is intrinsic to the success of an organization. In fact, a study shows a strong positive correlation between performance management and high-performance organizations. There are several roles of performance management in an organization:
1. Improving employee performance
Without performance management, there will be a progressive reduction in effort on the side of employees. An effective system plays the role of spurring employees to greater performance heights.
In every mix of individuals, one or two will always shine more brightly than others. One of the roles of performance management in human resources is to recognize, identify, and cultivate high-quality performance/employees. When this is done, these employees can be assigned more detailed tasks that have a direct effect on the company’s growth.
2. Developing strong leaders
Leadership is a quality that is both inbuilt and acquired. Where there is a well-developed performance management process, leadership qualities such as team management, goal setting, accomplishment, harmonizing work efforts, etc., will be brought to light. This way, an organization can be a self-sufficient system that empowers its employees to become leaders and places responsibility on them with a guarantee of high performance.
3. Removing weak links
Another unpleasant yet necessary role performance management aims to accomplish is the removal of the weak links in an organization. According to Billy Graham, “A chain is only as strong as its weakest link." This applies equally to a team or an organization.
Performance management helps to identify the one employee that keeps pulling the rest of the team down. Once identified, they can then be provided constructive feedback, and training and development of necessary skills can be provided, among other corrective measures. If these measures prove futile, the performance management system in use provides an objective indicator of that fact. At that time, human resource management is responsible for lawfully terminating the contract of such an employee. Failure to do so puts organizations at greater risk.
4. Ensuring employee engagement and satisfaction
Performance management systems are as much about the employee as the employer. Employee engagement is a buzzword in human resource performance management because of its proven benefits. Keeping your workers actively engaged brings about productivity. Also, employees should be kept as satisfied as possible. This includes job and remuneration satisfaction and better working conditions.
5. Providing employees with a defined career path
Most high-performance employees will not remain comfortable at the same career level for years. Career progression is becoming more important now than ever. Defining career plans, and how they can be achieved, falls under the scope of performance management and must not be overlooked. Remember that if a high-performing employee is not provided with opportunities for career growth, they will be tempted by greener pastures.
6. Motivating and coaching employees
Performance management in human resource management must make sure employees are motivated and coached. This is the role of departmental managers and team leaders. However, the only way to know if the head of a department has a significant impact on the motivation of his members is through reviews and appraisals.
This is part of the role the performance management system is meant to accomplish. A good performance management system guides how to give feedback, encouragement, and criticism, and motivate different types of employees.
7. Improving the organization’s bottom line
Lastly, performance management plays the role of improving the company’s balance sheets by encouraging and ensuring better performance. As ideas flow and productivity rises, as non-performers are coached or exited from the company, the overall system starts to function better, which has a direct impact on revenues.
Learn More: The Evolution of Performance Management System
Further Reading
This is the first of a series of articles on performance management. If you are looking for more information on performance management, here are three rich resources you can read:
- The Principles and Purpose of Performance Management: A Primer for HR
- Performance Management: Benefits, Challenges, Advantages and Future
- Performance Management System: Definition, Importance, Types, Components & Examples
Find out how Darwinbox can help you achieve your organization goals with better performance management; book a demo today!
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