The Modern Guide to Performance Management (+ Best Practices & FAQ) | NuSmart HRMS

Peter Ducker once described customers as the most important stakeholders of the company. While this may be true, your customers are dependable on one thing – your employees. As Richard Branson (Founder of the Virgin Group) said, “take care of your employees and they’ll take care of your business.” 

In today’s tense competitive economic environment, companies are busy reassessing the way they take care of their employees. Much has been written and argued by HR practitioners about how employers can take care of their employees such as creating a great place to work where employees are appreciated, engaged, productive and highly motivated.

However, creating a great place to work for the employees will not ensure employees will take care of the customers and business. Their performance, mindset and attitude are equally important to ensure the company’s business growth. To achieve this, employers must ensure employees are meeting expectations and improving their weaknesses.

Hence, performance management is critical to an organization and aims to bring the best possible out of the employees so that they can help the organization thrive in the future.

What is Performance Management? The term performance management gained its popularity in the early 1980’s when total quality management programs received utmost importance for the achievement of superior standards and quality performance.

According to Armstrong and Baron (1998), performance management is both a strategic and an integrated approach to delivering successful results in organizations by improving  performance and developing the capabilities of teams and individuals.

The purpose of performance management is to track and improve the competencies of employees needed to perform their jobs to support the business.

However, performance management is not an easy field to navigate. It has constantly been evolving and new performance management systems or approaches are emerging every few years. Some companies have implemented and adopted these new approaches well, while many others have failed. Those who failed were due to a lack of understanding of the approaches and getting them completely wrong.

This leads to employees left feeling deflated, unmotivated, and unengaged. Managers become frustrated at the poor levels of the employees’ and team’s performance. Hence, the first step is to understand effective performance management and its process.

A key point about effective performance management is that it is a continuous process and not a once-a-year or twice-a-year “one-off” activity. With the business environment becoming increasingly volatile, companies are now adopting processes that are agile and ever-changing.

Leading organizations such as Deloitte, Adobe and General Electric have ditched the traditional once-a-year performance review in favor of regular check-ins and frequent real-time feedback.

Let’s now examine the Performance Management cycle or process.

The performance management process consists of four-step stages and aligns with the organization’s mission, values, and goals. The stages are integrated and do not flow one after the other. Note that there are no arrows after each stage and the connection is continuous. Planning can take place several times during the year and may be re-visited as the needs of the company change, act and track should be continuous throughout the year, and reviews may take place at any point.

In the planning stage, the activities involved are:
• Develop and agree on SMART goals – the goals must align with the department and organization’s goals.
• Establish a personal development plan for the employee – to improve weaknesses and/or prepare to take on new challenges.
• Develop and agree on an action plan – actions or tasks to complete in the next few months.
• Review of job responsibilities and requirements – update job roles in job description where necessary.

The act stage is one of the most important stages in the performance management process, and it is where employees deliver their performance and achieve results. The activities involved in this stage are:

• Execute the action plan – perform and complete the tasks or work assigned.
• Achieve the goals – achieve the goals set within the schedule.
• Complete the development plan – attend to and complete the individual’s learning and development.
• Take on new challenges – readily take on new roles and challenges.

The track stage is also another important stage in the process or cycle where managers check in on their employees regularly. Managers must frequently provide their employees with effective feedback and use coaching skills to guide the employees to overcome challenges or obstacles and identify learning opportunities and improve their performance. If this is left until the end-of-year review, it may be too late as employees may already fail in the attainment or completion of their goals of development plans. The activities for this stage are:

• Track progress of action – must be frequent and consistent.
• Provide regular feedback – tracking without feedback or guidance will not help in improving performance.
• Mitigate obstacles – allow employees to highlight challenges and obstacles that are hindering their performance during the regular feedback sessions.
• Provide coaching – guide and train employees to overcome their challenges and obstacles will help them to learn and improve.

The final stage is the review stage, and this is the stage where employers place a lot of emphasis because it is linked to rewards. As mentioned above, if there are frequent or regular feedback sessions during the tracking stage, the review should not be taken as another feedback meeting or session. Instead, the activities involved in the review stages are:

• Review achievements – review goals attainment as well as competencies in work performance.
• Identify learnings – establish what competencies need to be improved and look at learning opportunities.
• Discuss career goals – exchange expectations and agree on a career development plan.
• Agree on assessment – both parties must agree on the final assessment and action plan.

Besides the various stages mentioned in the performance management process or cycle, one critical element that causes many organizations to fail in their performance management system is Communication.

At every stage of the performance management cycle, managers and employees must communicate effectively with one other. To communicate effectively, each party must display the followings:

• Respect one another – look at the work or issue instead of the person.
• Maintain self-esteem – encourage and be positive with one another.
• Listen with empathy – practice effective listening and encourage feedback and suggestions or ideas.
• Ask for help – encourage solutions from employees as part of the learning process.
• Seek win-win instead of win-lose – never seek to win but always try to help each other to win together.

Performance management has been around for years and there have been constant evolutions in the performance management system from Management by Objectives (MBO) to 360  Feedback, Competencies Assessment, Balanced Scorecard to lately, Objectives and Key Results (OKRs). Thankfully for that, there is no need to reinvent the wheel. However, many organizations make big mistakes when selecting their performance management system. Many organizations want to adopt the latest when they are not ready.

Having the latest performance management system does not mean that the company is better off in providing a better workplace for the employees where they are valued, engaged and are high performers. Some systems are complex and complicated that stakeholders find it difficult to understand and frustrated to implement/adopt, and eventually, many managers and employees do not put much effort into it.

Sometimes, a simple system may be better off if it is done well, that is, all stages of performance management are closely followed by every stakeholder in the organization.

As a business partner, HR professionals must review their own organization’s readiness when adopting a performance management system. Do not be too ambitious and try to bite more than one can chew. It is the end in mind that is important and not the system itself.

So, one of the best practices is to select the right performance management system that works the best for your organization. There is to need to implement the latest if the simplest system is fulfilling your requirements and meeting your end in mind, that is, driving high performers, engaging, developing, and motivating your employees.

Performance management should not wait till the end of the year and be discussed during the one-a-year “one-off” activity. It must be done frequently and regularly throughout the entire year.

Performance review should not be a “one-off” activity but must be incorporated into the daily work life of the managers and employees. A few minutes between 30 minutes to 1 hour is sufficient for the regular performance reviews to discuss the stages – Act and Track.

It will be best that the company adopts standardization and automation through the use of technology to ease the paperwork of the many stakeholders of the performance management system.

Implementing a performance management system software will also enable the employees to record their goals and action as well as allow managers to track the employee’s progress and performance. It also allows management to have visibility of the whole performance management process.

Do not allow managers and employees to go through the motion and/or simply pay lip service to the process. Similarly, HR should not just present numbers and metrics to the management about employees’ performance results or ensure that there is a nice “bell” curve at the end of the performance management exercise.

There is no point showing the management that there is a nice “bell” curve, and that performance rating year-over-year has improved when the company’s performance is deteriorating, and business is failing.

Instead, HR should ensure that managers and employees are frequently and regularly engaged with each other on the employee’s performance and development as well as observe if there is improvement in the employee’s performance, behavior, and attitude.

It has been evident that technology has affected communication in the organisation as well as in our daily life. People are talking or communicating less and less with one  another. People are using mobile phones and computers or laptops to communicate with one another through messages and this has a profound impact on employee engagement.

Yes, companies should use technology to help with the automation of the process, but it should not remove the communication part. Managers and employees must still have meetings (either face-to-face or virtual) to discuss about the employee’s action and improvement or development plan to be engaging. At the same time, it is through these meetings that managers can guide and coach their employees to improve their performance.

Therefore, it will be good if such meetings are recorded and audited to ensure that managers and employees are not going through the motion but are serious about the performance of the employees.

Much has been said about goal setting, that is, they must be SMART – Specific, Measurable, Actionable or Attainable, Relevant and Time-bound. It is also added that goals must be set by the employees and not the managers so that there is ownership.

What I would like to add is that goals set must be an improvement of one’s work or a new development that improves the work process. This will enable the employee to be creative and constantly seek continuous improvements.

Performance management is about reviewing an employee’s performance and helping the employee to improve his/her performance. To help employees to improve their performance, organizations must be prepared to invest in the development of the employees. Such investments include resources, money, and time.

There are many ways to develop employees and help them to improve their work performance. Some of the methods are:

• Attend training courses either in-house or external
• Attend on-the-job training
• Coach or mentor by manager or senior staff
• Attend e-learning
• Watch free online training video
• Perform job rotation
• Read a book
• Combination of the above methods

Before the Review

Just as in any meeting, it is important that both parties (manager and employee) are well-prepared. There are a few tips to note:

• Advance notice – do not call for a performance review session or meeting without advance notice to the other party. Always give at least 3 to 5 days advance notice so that the other party can prepare.
• Complete assessment – ensure that the assessment and all documents have been completed.
• Rate performance, not character – rate the employee’s work performance and not his/her character or personality.
• Action and development plan – ensure that the action and development plans are in place and ready for discussion.
• Venue and time – ensure that the review is conducted in a room or quiet place as such meeting is confidential and not subject to disturbance. Also, ensure that sufficient time is given for the review and discussion.

During the Review

During the review meeting, both parties must take note of the followings:

• Be positive and active listening – start positively and remain positive throughout the meeting. Listen well and do not comment or criticize. Seek clarification when in doubt.
• Encourage participation – encourage feedback and suggestions or ideas where appropriate. Discuss problem areas and seek employees’ help for solutions.
• Take note – both parties should take notes of what has been discussed during the review meeting and follow-up where needed.
• Respect and seek win-win – do respect and understand one another. Do not fight to win but seek to win-win through compromising and collaboration.
• Discuss action and development plan – exchange expectations and agree on the next course of action and development plan.
• Close on a friendly note – remember to set up a follow-up date and time for the next review meeting.

The primary objective or purpose of performance management is to assess employees’ performance and help them develop their competencies where they are weak. Through improved performance, employees will be able to help the organization thrive and grow.

Besides using performance management to assess the employee’s performance and to analyze the learning or training needs that the employee requires to further develop oneself, what are the other usages of performance management after the performance review

Pay for Performance

One most common use of performance management is linking performance management to compensation. Many companies have a “pay for performance” philosophy or policy where merit increases, and bonus awards are based on employee performance.

In merit increase, the criteria are not solely based on performance but also the compa-ratio (comparative salary ratio) of the employee’s salary.

In merit increase, the criteria are not solely based on performance but also the compa-ratio (comparative salary ratio) of the employee’s salary.

Training Needs Analysis

The performance appraisal will have the learning and development plan for the employee and using the performance management system, HR or the training personnel can develop an annual training plan for all the employees in the company.

The learning and training plan must be related to improving the employee’s competencies or acquiring new competencies for advancement.

Job Analysis

As mentioned in the performance management cycle or process, one of the activities during the “plan” stage is to review and update the employee’s job description by the manager with any new or changed job roles or responsibilities that the employee has undertaken during the year.

This will ensure that the job description for the position or role remains relevant and up to date with the current roles and responsibilities of the employee.

Succession Planning

Another use of the performance management system is to help identify high potential performers for succession purposes. Please note that basing on performance management alone is not sufficient for succession planning. An excellent performer does not necessarily mean that the employee is a good successor to a manager.  He/she may not have the potential because he/she lacks management and leadership skills or does not want to take on additional responsibilities managing and leading a team.

Hence, it is important to combine performance rating with potential rating to identify the potential employees who can be successors.

One common technique of succession planning is to develop the 9-box or block grids that evaluate the employee’s potential against his/her performance.

Employees that are rated as “Star”, “High Potential” and “High Performer” can be considered as a successor to the next higher level or their manager.

Employees that are rated as “Star”, “High Potential” and “High Performer” can be considered as a successor to the next higher level or their manager.

1. Should there be more than one performance management review?

Many companies presently conduct their performance management review once a year while some are doing it twice a year within every 6 months. Very few are doing it quarterly. The reason for having so few performance management reviews is due to the time-consuming exercise where managers must evaluate all their employees and conduct review meeting with each of them to discuss the assessment and agree on the plan.

As mentioned in the guide that performance must be tracked, and frequent discussions must be held regularly and frequently. If these are done, then, the final review will not be time-consuming and frustrating (as the manager needs to think of the performance of the employee over the first part of the year as they do not need to keep a record).

Using a performance management software to record weekly or monthly important tasks and goals and tracking their achievements will help the manager assess the employee’s performance more accurately. At the same time, having short frequent review meetings to discuss the status and performance of the tasks will help employees to improve and make fewer mistakes. It will also help reduce the frustration to do a once-a-year final appraisal of the employee’s performance without any record of their work.

Hence, there should be regular and frequent short performance reviews with the employees instead of just once a year detailed review which is many a time inaccurate of the employee’s annual performance.

2. Should attendance and punctuality be considered as performance factors?

Performance management assessment should evaluate the employee’s competencies rather than conduct. What are competencies? Competencies are defined as knowledge, skills, and abilities that contribute to an individual’s performance. Some people may include behavior into the competencies definition.

Knowledge is the information developed or learned through study or experience, and skill is the result of applying the knowledge to action or tasks. Ability is the doing or performing well on our actions or tasks. Behavior is the observable reaction of an individual to a certain situation.

In performance management, we are trying to evaluate or identify the employee’s strengths and weaknesses in his/her work performance and recommend a plan to improve his/her weaknesses through learning and training. To learn new or additional knowledge and train for a new or to improve a skill will be easier and achievable within a short period. However, to change or acquire a new behavior or conduct, will be harder and take a longer time as habits and values are difficult to change or acquire.

Hence, it is advisable to evaluate an employee on his/her competencies related to work performance rather than evaluate his/her conduct and behavior.

3. Should poor performers be given salary increment or increase?

Many companies have implemented “pay for performance” policy and have developed merit increase metrics that clearly shown 0% increase for poor performers regardless of the employee’s compa-ratio.

The message must be clear to all the employees that poor performer will not deserve any rewards, otherwise, every employee will not put in their best in their work performance if they know that poor performers are still given salary increment or increase.

The above is the traditional thinking of many business owners, management teams and HR professionals. Researchers are now arguing that giving merit increases or pay to top performers and not rewarding any increase to poor performers is a disservice to the organization. It sends a message to employees on how they (the employees) are valued as compared to their colleagues and how they are valued relative to the market. In such a situation, team spirit is usually affected and could lead to lower employee productivity as well as the company’s performance.

A researcher from Yale University has mentioned that the level of increase in productivity after the award of merit increase or pay for high performers will not be as high if low or poor performers will receive it. Study shows that gratitude begets results as lower or poor performers are not accustomed to receiving praise whereas higher performers generally are. Hence, lower or poor performers tend to produce higher productivity when rewarded.

One way to resolve this conflicting view is to adopt a deferred incentive for poor performers.  The salary increase for poor performers will only be awarded to them when their performance has improved within the given period for improvement and with all the support from the company. This will motivate them and provide them with a sense that the company does value them.

4. If there is no promotion prospect for consistent high performers, what else can the company do to retain them?

As an employee progresses through his or her career path in the organization, the window of opportunity for promotion becomes slimmer and harder. So, for such employees who have displayed consistent high-performance years after years, what can the company do for them besides awarding high salaries or merit increases to them?

Before jumping about the promotion opportunity for the high performers, the company needs to examine the high performer if he/she is a high performer or high potential or high potential performer. A high performer is someone who consistently exceeds the expectation of the manager and has a track record of getting the job done. On the other hand, high potential are employees who have demonstrated an initial aptitude for their technical abilities and have future potential to make a big impact on the organization.

For high performers who do not have potential, besides financial incentives, they should be provided with more opportunities such as:

• Attend workshops and seminars to keep abreast of the latest and best practices.
• Attend training and learn to become a subject matter expert.
• Train new and junior employees.
• Take on more projects or areas of responsibility

For high performers with good potential, they can be provided with the following opportunities:

• Attend workshops and seminars to keep abreast of the latest and best practices.
• Participate in cross-function training.
• Participate in improvement, transformation or change projects and where possible, lead or manage these projects.
• Understudy a mentor to gain values and confidence.
• Job rotation to other areas or functions to learn and gain experience.

Do bear in mind that it is important to know who the high performers are and who are high potential and award the right incentive to these employees to motivate and retain them. Giving them the wrong incentive may not excite them and/or retain them.

5. Why should a company invest in training for the poor performers?

The purpose of performance management is to assess the performance of the employees and to help them develop and improve their areas of weakness. If low or poor performers are not given the support and training to teach or guide them to improve, how are they going to achieve high performance and contribute to the growth of the company?

However, before the company jumps into providing training opportunities to all the poor performers with the hope to help them improve, it is important to ask the question – “is the poor performance caused by a lack of knowledge, skills, or training?”

An employee’s low or poor performance could be due to various reasons:

• Lack of knowledge, skills, and training.
• Lack of resources and tools.
• Lack of attitude and poor conduct.
• Weak support from manager and colleagues.
• Unforeseen circumstances not within one’s control, e.g. weather, external factors such as economics, government, etc.

Remember that training is not the only solution to low or poor performance, and companies need not have to invest a large amount of money in training the employees. As mentioned in the guide above, some solutions are inexpensive and are just as effective in improving work performance. Some good inexpensive solutions are on-the-job training, coaching, and mentoring, reading a book, or watching free online training videos.

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