The Ultimate Guide to Performance Management

 “A strong performance management system not only helps in getting everyone aligned on the over-organization mission and goals but also goes a long way in building a culture of trust and meritocracy.”

Saurabh Nigam, Vice President-Human Capital, Omidyar Network

Renowned Management Writer John Lockett defines Performance Management as – ‘The development of individuals with competence and commitment, working towards the achievement of shared meaningful objectives within an organisation which supports and encourages their achievement’

Organisations of all sizes and across all industries need to develop, implement and improve their performance management processes, from small start-ups to large multinationals, and from non-profit or government organisations to blue-chip companies. Whatever sector or industry you’re operating in, as business becomes more competitive and the market transcends borders and other limits, performance becomes the real differentiator between the success achieved by 2 companies of equal stature on other parameters.

Performance drives results, and no company can afford to ignore performance management. A well-designed and implemented performance management system will initiate and propagate a culture of excellence where every employee strives to work harder and deliver better results. On the other hand, performance management thrives in a culture of achievement and competitiveness. When employees understand what they are expected to do, how they can do it, what impact they can create on the organisation’s success, and how they will be rewarded for making such an impact it leads to a highly motivated workforce tuned in to its organisational goals. 

Significance of Performance Management

Performance management is one of the most important aspects of Human Resource Management in an organisation – irrespective of its size or domain of operation. From a start-up to a small business and from a medium-sized enterprise to a multinational conglomerate, without performance management, it is not possible to evaluate, rethink or improve even the organisation’s own success among other things. Let’s understand the significance of performance management in further detail:

1. Tracking, evaluating and improving employee performance

The most basic objective of Performance Management is to track, review and help improve employee performance in relation to the goals they are expected to achieve for the organisation.

How do you know your people are doing a good job unless you have a perspective on how they’re doing it individually and in comparison to each other?

Goals acquire meaning only when they are measurable. This measurability can only be achieved in organisational and employee-level goals through a systematic framework or evaluation – an objective Performance Management fulfils.

The results of this evaluation will then provide a basis for determining improvement opportunities and the steps the organisation must take to realise them.

2. Motivating employees to harness their full potential

One of the key factors of a full-fledged Performance Management is that when an employee demonstrates skill, commitment, and capability, Performance Management enables it to be rewarded. This creates a strong motivation for employees to put their best foot forward and strive to achieve the goals set by the organisation. 

3. Attract and retain high-level talent  

An organisation is only as successful as the calibre of its people can enable it to. Every organisation aspires to attract high-performing resources and enable them to continue making exceptional contributions to the organisation. A well-designed and implemented Performance Management that motivates and rewards performance adequately, becomes a ‘talent magnet’ for achievers and high-value human resources.

4. Succession planning

Finding and retaining quality resources is as important as building the right team with the right hierarchical levels to fully harness their talent and capability. At the same time, growth potential is a key motivator for new and existing employees driving loyalty and extracting performance. Performance Management helps identify the right resources to promote as well as train for the next level within the organisation.

5. Identify gaps in the organisation’s own work culture and leadership

A key takeaway of Performance Management is identification of training needs. It may also highlight gaps in hiring criteria or team management practises. Performance Management results throw light on the room for improvement in the organisation’s culture and leadership direction.

6. Determine learning and development needs of employees

While identification of training needs may highlight gaps in hiring, a large part of the results can be addressed with appropriate learning and development solutions customised to individual employee needs. When an organisation invests in accurately upskilling its employees, it not only helps bridge the gap in talent but also makes the employees feel valued by the organisation.

7. Raise the overall level of organisational performance through high-performing individuals

An organisation’s success is determined by the quality of its human resources. The Performance Management journey helps raise the talent level of the organisation, which in turn improves the success factor of the entire organisation.  

No organisation aspiring to employ achievers and benefit from their contribution to building a great company, can ignore setting up the Performance Management framework. Laying down the Performance Management Cycle itself is a complex function and requires well-planned execution with executive sponsorship.  The Cycle typically involves the following 4 distinct stages: 

1. Plan Performance

This stage is the first stage of the cycle and forms the foundation of the PMC. It is typically conducted at the start of the business year. It revolves around setting performance expectations for the employee. These are often planned and are also included in the job descriptions. Managers create an overall strategic business plan for the year and then determine the role to be played by the employee individually. They then set performance goals for individual employees aligned to the business goals. These consist of targets, actions, and behaviours. The plan may also contain certain skills / learning elements for the employee.

This process is conducted collaboratively between the managers and employees through a formal goal setting activity. It involves a direct communication between them where the managers help the employee understand the organisational goals for the year and then explain how the employee’s goals are aligned to them. This communication provides a clear direction to the employee on what they will do, why they need to do it and how they are expected to do it. Every individual goal is aligned to an organisational goal ensuring each effort made by the employee contributes to the achievement of an organisational goal as well. This motivates the employee to perform better and increases their commitment to their responsibilities as well as the organisation. 

Keeping this exercise collaborative in nature also increases the employee’s satisfaction with the performance cycle as it makes the process fair, transparent and useful. An important factor to keep in mind is that goal setting should be flexible and accommodate changing priorities and requirements through the course of the year. The goals should consider the employee’s individual capability and challenge them enough to go beyond their comfort zone without losing faith in the achievability of the goals.

One of the most popular methods of goal setting is the SMART approach, commonly considered as a fair and realistic method to determine employee objectives. 

SMART is an acronym for:

Specific:

Goals should be clear, precise and detailed enough to understand the exact level of performance expected from the employee.

Measurable:

Goals should be easy to quantify or evaluate against a set parameter without prejudice or subjective interpretation. Measurability also ensures that the goals can be tracked for progress before they are achieved.

Achievable:

Goal setting is meant to encourage employees to push the boundaries and challenge their capabilities. However, it is extremely important that the goals are realistic enough to be achievable as well.

Relevant:

Goals should be directly relatable to the organisational goals and the employee’s individual job responsibilities. When the employees can see why they are doing what they are doing and how it is connected to the larger objectives – both the organisation’s and their own. 

Time-bound:

Goals should specify the time period within which they are to be achieved. This ensures discipline and commitment on the employee’s side while keeping their overall progress on track.

Employee Development Plan

Goal setting should also include an action plan to help the employee develop new skills and improve existing capabilities. The plan targets the employee’s strengths while identifying their training needs. Some organisations also provide an opportunity for the employee to share their own aspirations and learning objectives for the year.

2. Monitor Performance

The best planning efforts need to be followed up by active and continuous monitoring of success parameters. Regular reviews and update sessions conducted on a monthly or quarterly basis helps keep track of the employee’s progress on their performance plan along with the set time frame. Regular reviews help determine if the plan is working well and if the employee’s progress is in sync with the plan requirement. At times, plans may need changes, course corrections or modifications. This may be due to external business environments, changing business priorities, strategic business interventions and in some cases individual employee constraints. Regular monitoring through reviews and updates enables the organisation to identify such deviations in time to make the required adjustments. This way corrective actions in goals or employee progress can be taken before it is too late. 

A caveat to the monitoring process is that it is not meant to be used as a tool for micromanagement of employees. It is not always necessary for the manager to monitor how a goal is being achieved. The focus should be on whether it is being achieved and if the employee is still in sync with their plan. This is particularly true for highly qualified, senior-level resources. 

Monitoring also provides an opportunity for managers to get a feel of how the employees are doing and to address any concerns, if required. A mutually agreed periodic calendar should be set up for the quarter or the year to ensure continuity and consistency in review meetings. Each meeting should have a clear agenda with both parties coming prepared with background notes / reports and end with specific actionable as required for both. 

Checklist: What points should be covered in a monitoring meeting agenda

• Tasks completed and targets achieved so far
• mutual evaluation of the employee’s performance
• Status of achievement against goals in terms of timeline
• Evaluation of incomplete tasks or unachieved targets
• Any other concerns, problems, issues to be addressed
• Progress update on development plans – training, etc.
• Support required to improve performance or increase efficiency
• Goals realignment, if required

3. Review Performance

The next stage is a conclusion of the phased monitoring done throughout the year or half year. It is also a collaborative effort where both sides together evaluate the quality of employee performance. The first half of the activity is a self-assessment by the employee where they present their interpretation of their successes and challenges and rate their own performance on the parameters set during the planning stage. The managers then evaluate the employee’s performance as they view it based on the numbers, reports, etc. submitted by the employee. A detailed discussion is recommended at this stage where the employee gets an opportunity to share their views on their journey while the manager can share feedback on areas of improvements or express appreciation for results achieved.

Here too, review meetings should be a two-way communication where a healthy, productive conversation takes place to laud good efforts, address concerns and resolve open items. 

The key items to be discussed in a review meeting are:

• Goal achievement status
• Overall performance – quantitative + qualitative
• Feedback on any aspect of employee performance
• Concerns to be raised by employee
• Increments and any other compensation 
• Promotions or any other growth opportunities

4. Improve / Reward Performance

The first 3 stages of Performance Management culminate into this final stage where employees are acknowledged and rewarded for results achieved and / or contributions they made to the organisational goals. This is done by way of a formal performance appraisal where managers rate the employee’s performance on all the parameters discussed in the earlier stage. 3 possible scenarios at this stage are:

• At par performance

This is where the employee has fulfilled their tasks and achieved their targets. While there has not been any exceptional performance, the employee has not been found deficient on any counts either. In such cases, the managers need to encourage the employee to stretch themselves to take on additional responsibility or upskill themselves.

• Sub-par performance

When an employee is found to be performing below the expected levels, managers need to share feedback on the gaps in performance and determine the next steps which could be a performance improvement plan or termination.

• Superior Performance

Good performance by an employee needs to be acknowledged at various levels – by the manager during review, formally through appropriate rating and financially by way of bonuses / increments. Exceptional performance should be rewarded with a superlative expression such as awards, promotions, etc. Organisations often constitute annual awards with special rewards over and above regular remuneration. These awards are a strong motivator and encourage employees to stretch their efforts beyond expectations.

These 4 steps complete the performance cycle and can have multiple wheels within wheels depending on the organisation’s workforce size and scale of operation.

Performance Management vs Performance Appraisal

Performance Management and performance appraisal are often used interchangeably although they are quite distinct from each other. The confusion occurs because both concepts deal with evaluating employee performance. It is important to understand the difference between the two.

We have defined Performance Management in detail in earlier sections. How do we define Performance Appraisal?

Performance Appraisal

Performance appraisal, is an annual / bi-annual evaluation of an employee’s performance. A set process is followed beginning with the employee assessing themselves first and suggesting their expected rating to the manager. The manager then evaluates the same results against a standardised rating scale and provides feedback / rating to the employee. The manager also provides insights on the softer skills of the employee such as leadership qualities, interpersonal relationships, taking initiative, etc.

Now that we have defined both concepts at a high level, let’s delve deep into their minute differences.

When viewed from a neutral stance, it may still appear that Performance Management has lesser limitations than Performance Appraisal, facilitates richer conversations and has an overall more positive perception than Performance Appraisal. Particularly in the new world, an annual exercise with a lop-sided conversation rating individual success on rigid parameters with little flexibility on even the outcome may prove to be a dated, less efficient process. It is increasingly being considered a flawed process with limited efficacy in terms of driving results. Here we review some of the disadvantages or flaws of the system:

Is the traditional Performance Appraisal system flawed?

• It can be difficult to harmonise individual and organisational performance. The organisation may have had an average year of business performance due to several factors, although the employee may have fulfilled their targets / objectives to the fullest. Yet, the organisation may not be in  position to reward the employee’s performance as per their expectation. 
• Appraisals are often seen as platforms for managers to criticise the employee and are often dreaded by most. Even as managers, it is often considered a cumbersome activity as managers too, find the experience of sharing feedback unpleasant.
• Performance Appraisal essentially compares the performance of one employee with the other. This may lead to unhealthy internal competition and disgruntlement when employees compare their results with each other.
• Performance Appraisals are prone to a biased, unfair evaluation and result. Managers may evaluate employees based more on their likeability than actual performance. It has often been observed that managers tend to give underperforming members a good evaluation simply to avoid souring their rapport / relationship.
• Performance appraisals tend to generalise employees and their capabilities in rigid brackets which may not be adequate to fit everyone’s calibre. 
• Performance Appraisals tend to be focused more on compensation discussions where both sides have very specific numbers on their minds as the outcome of the process – rating and incentive. This may dilute the depth of the discussion.
• Performance Appraisal places undue trust in the manager’s ability to evaluate employee performance and judge it objectively. In reality, managers’ decision making may not be as objective or unbiased as it is prone to being influenced by personal perceptions, individual beliefs and work ethics, and overall work environment in the organisation. As human beings, performance managers are susceptible to rater biases that may affect the ratings they award, opening up the process to debate and contradiction. 

Let’s understand some such biases that often influence the rater’s judgement:

• The Halo Effect, the Horns Effect, and The Central Tendency Bias

The Halo effect is the tendency for a particular positive attribute to cause raters to see an upside on all other parameters while the Horns effect clouds the rater’s judgement against the employee by the presence of a single negative attribute. Another bias sitting between these two extremes is the central leniency bias. It represents the unwillingness of the rater to take any strong view of the employee and rate them close to the middle of the rating scale.

• The Leniency and Strictness Bias

The former makes the rather go easy on the employee’s performance evaluation giving them a positive rating not necessarily reflecting their true worth. The latter, on the other hand, is when the rater tends to be too strict on an employee rating them low on every parameter, thus judging them unfairly.

• Recency Bias

When a rater is influenced by this bias, they tend to take into account only the most recent events relating to the employee – good or bad – to unfairly rate their performance throughout the year.

• Each employee brings their own strengths and capabilities. Performance Appraisal compares an employee’s performance with others to determine how well they did in the year. It may not be a fair method of judging employees and can create frustration breeding a sense of injustice.
• A bi-annual or annual exercise may not provide the most clear or current view of an employee’s performance due to the limited time spent on completing the process.
• Performance Appraisals create a limited number of opportunities to conduct meaningful conversations between employees and managers – only once or twice a year. The two parties may not really feel connected or relate to each other on a 1:1 platform making them both lose interest in the exercise.

In conclusion, the Performance Appraisal system may have proved to be useful in the past but in the modern-day, open world with equality at its core , it may have outlived its relevance. New ideas are therefore being discussed to replace the annual appraisal method to foster more regular communication, stronger managers - employee mutual trust, and generate more efficient results for the employee as well as the organisation.

Continuous performance management is one such idea that has been gaining popularity over recent years. In the subsequent chapters, we will discuss this concept in great detail.