What is Performance Management? A Full Guide

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Performance management is essential for managing people. This is done explicitly (“Bill, can you please clean up your desk?”) or implicitly (“I need to make a planning with Jane because she keeps prioritizing less important tasks”). When done well, performance management is an essential tool that helps employees to realize their full potential, while helping management and HR to get the most out of the workforce.

Table of contents
What is performance management
What is the goal of performance management?
How to do performance management
Relevant resources
FAQ


What is performance management

Performance management is a set of processes and systems aimed at developing an employee so they perform their job to the best of their ability.

Performance management is not aimed at improving all skills. In fact, good performance management focuses on improving the skills that help an employee do their job better. This means that it is about the strategic alignment of one’s work to the group and organizational goals.

Because performance management is a process that aims to align individual goals with group and organizational goals, it is a strategic and formal process. This means that key individual career decisions, like bonuses, promotions, and dismissals are all linked to this process

Performance management can further be described as a periodic, systematic, and objective process.

Interesting to note is the difference between performance appraisal and performance management. Where performance appraisal focuses on the individual, in performance management the strategic goals of the organization are included.

In this 3-minute Learning Bite, we explain what performance management is, why it is important, and how to apply it to your organization. 

Example

Let’s look at an example of an organization that went through a period of intense change and was able to leverage performance management to come up ahead of its competition. I changed the characteristics and details for anonymization purposes but the example remains, in essence, the same.

This company, Xylon, is a mid-sized consultancy firm and has long been a well-respected name within their industry. Customers frequently approached the firm and consultancy projects were usually long-term engagements that were very profitable for the company. However, after the most recent financial crisis, customers became a lot less willing to work on long-term consultancy projects, opting for cheaper, short-term projects with well-defined KPIs instead.

To survive, Xylon’s strategy had to change. After extensive research and interviews with customers, the board of directors defined three new key drivers for better business results.

  • The position of the consultant had changed. They were no longer seen as experts who know best. Instead, the customer was looking for a trusted colleague who would work alongside their employees and was able to integrate their knowledge into new business processes and transfer know-how to employees. 
  • Consultants had to develop commercial skills to see tangible opportunities for ‘upsells’. This required them to constantly be on the lookout for opportunities where Xylon could add further value for the client.
  • Consultants had to learn to productize services. When leaving the client organization, this digital product would stay in place, creating stable and predictable revenue for Xylon.

These key drivers required a tremendous shift in the way consultants work and the skill they needed to do their work. The attitude of the consultant had to change, the consultant had to develop a more commercial mindset, and the consultant had to learn about digital productization of services – something they hadn’t worked with before.

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The board of directors clearly understood that the key to this change would be changing the people who ran the organization. By translating these new requirements into skills for consultants, Xylon was able to implement a new performance management policy that focused on three elements.

  1. New HR approach. Traditionally well-defined internal roles changed based on the new skills required to be a successful consultant. A successful consultant at Xylon was a trusted advisor, was commercially savvy, and was able to conceptualize a vision for value-adding digital products.
  2. Individual training & coaching. Employees were assessed, trained, and coached on their commercial and digital skills. Individuals who excelled were promoted quicker, clear benchmarks for individual performance were set, and suboptimal performance would result in either a demotion or an exit. 
  3. Changing hierarchy. Because of these shifts, the traditional hierarchy at Xylon also changed. People who were more commercially and digitally savvy were promoted faster and more frequent, while people who weren’t able to develop these skills quickly were let go of. This fundamentally changed the company’s values and identity into something that represented the type of consultant the company needed much more closely.

Despite the fact that this big change in company culture led to a lot of initial tension and people quitting, it resulted in Xylon being regarded as one of the most innovative firms in the market within a few years after implementing this new policy and creating a much more stable stream of revenue, ensuring its competitiveness for the future.

What is the goal of performance management?

The One Employee Performance Review Template to Rule Them All

The example of Xylon clearly shows that performance management has several goals.

In essence, performance management is about measuring and improving the contribution of the employee to the organization. A famous quote attributed to Peter Drucker is “if you can’t measure it, you can’t improve it”. Or alternatively, “if you can’t measure it, you can’t manage it”. 

Performance management is about measuring, managing, and improving the contribution of the individual to the organization.

In a classical study by Cleveland, Murphy & Williams (1989) that’s still relevant today, HR managers were asked what their goals were for their performance management. Based on this data, the researchers ran a factor-analysis and identified four factors, or goals, for performance management in these organizations.

  1. Between-person applications. This includes evaluating the performance of employees, determining compensation, promotions, raises, mutations, job rotations, and firing.
  2. Within-person applications. This includes feedback on individual performance, assessment of weak and strong points and further identification of training needs. These points of feedback enable the employee to develop the specific skills required for the job and career advancement. 
  3. Consolidate the global HR approach. Performance management is also used to identify a company-wide HR approach, including strategic workforce planning, identification of company-wide training needs, and the identification of a productive organizational climate.
  4. Research purposes. Performance management can finally be used to validate selection choices and evaluate training programs. An example is the quality of hire metric, which measures to what degree new employees perform satisfactorily after joining the company. This is a key success metric for HR’s recruitment activities.

According to the researches, especially the first two factors were popular. They were used by up to 77% of organizations.

How to do performance management 

There are many ways to conduct performance management. In literature, there are two approaches when it comes to performance evaluation.

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  • Behavioral approach: Employees are evaluated based on their behaviors and effort made. Behaviors are identified and evaluated. This approach is suitable for giving detailed feedback on behaviors and by mapping desirable future behaviors. This approach is suitable when individual results are hard to measure. Examples include individual players in a team, support staff, and (oftentimes) HR professionals. 
  • Result-oriented approach: In this approach, employees are evaluated based on objective criteria. The focus is not on input but output, both in terms of quality and quantity. This approach is suitable when there are multiple ways to do the job. The end-result is key, not how it has been done. Examples include call center employees who have specific success metrics, as well as sales professionals. The evaluation of lawyers and accountants is also highly result-oriented, as they keep track of their billable hours.

A second element to focus on is extra-role behavior. These are the behaviors that go beyond the job description. For more information about these, check our employee performance review template article.

 Performance Appraisal Infographic

Relevant resources

Here at AIHR Digital, we’ve published a lot about performance management already. Below we’ve listed the most relevant articles for you to review.

5 Tips to Ace your Performance Management Process. This article gives five science-based tips on how to ace your performance management. Tips include involving employees, creating a learning culture, performance management systems, and tips for customization.

The Talent Management System in a Nutshell. This article focuses on the performance management system, also referred to as a talent management system. It describes what a talent management system is, why to use one, and how to choose one.

A Guide to the Performance Management Cycle. Performance management has different phases, starting with planning, monitoring, developing, and rating & rewarding. This cycle is key to the performance management process. The article describes this cycle in detail and gives key pointers for continuous performance management. 

How to Master the Shift from Performance to Development Management. In line with the previous article, performance management is shifting more and more to development management. This article gives several pointers on how digital HR can be leveraged to move towards this more continuous way of developing employees.

The Ultimate Guide to the Performance Appraisal. The performance appraisal is the formal, planned sit-down between the manager and the employee (see below). This article describes the performance appraisal and lists best practices on key success factors to do such an appraisal right. 

The one employee performance review template to rule them all. This article dives into standardized ways to measure performance, including a job performance scale, a job behavior scale, and a competency framework.

Frequently Asked Questions

What is performance management?

Performance management is a set of processes and systems aimed at developing an employee so they perform their job to the best of their ability.

What is the difference between performance management and performance appraisals?

Performance appraisal is the individual session between the employee and the manager. This often happens (bi-)annually. Performance management a periodic, systematic, and objective process of developing an employee to perform their job to the best of their ability. The performance appraisal is thus part of performance management.

What is the disadvantage of results-oriented performance management?

The disadvantage of results-oriented performance management is that input is not sufficiently taken into account. Someone who is working hard to learn the job may not have the right results yet but may have them in the future. This information may be lost when we purely focus on results-oriented performance management.

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