Types Of Performance Management Systems And How To Use Them
A performance management system is used by an organization to assess, manage, and improve employee performance and create a high-performance culture.
No two organizations approach performance management in quite the same way, but they share common elements.
Use this guide to help you understand the different types of performance management systems and create the right one for your organization.
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Types Of Performance Management Systems
Performance management systems can be separated into two categories: organizational and personnel.
Organizational performance management focuses on achieving strategic business goals, while personnel performance management centers on developing and evaluating individual employee contributions.
Understandably, there’s crossover between the two (and there should be).
Organizational performance management examples
Balanced scorecard
A balanced scorecard is designed to measure performance across four key perspectives: financial, customer, internal processes, and learning & growth.
For example, a company might track customer satisfaction scores, employee engagement, profit margins, and innovation rates to assess overall health and strategic progress.
Key performance indicators (KPIs):
High-level KPIs like revenue growth, market share, or customer retention rate are used to measure how well the company is achieving its strategic goals.
For instance, an organization aiming to expand market share may set a KPI of increasing it by 5% within the fiscal year.
OKRs (objectives and key results)
This is a goal-setting framework that helps organizations and individuals set ambitious goals (objectives) and track measurable outcomes (key results) to achieve them.
Objectives: These are high-level, qualitative goals that describe what you want to accomplish. Objectives should be inspiring and motivating, like “Expand our market reach” or “Deliver an exceptional customer experience”.
Key Results: These are specific, quantitative outcomes that indicate progress toward the Objective. Each Objective typically has 2-5 Key Results, which are measurable milestones, like “Increase customer base by 20%” or “Achieve a 90% customer satisfaction score.”
OKRs start at the organizational level and cascade down to the individual. The best example I’ve seen—credit to 15 Five here—uses NASA as an example:
“Organizational objective: Put a man on the moon.
Individual objective: Ensure space center facilities are clean and safe for employees.
Key result: Keep the floors swept daily.”
Management by objectives (MBO)
Similar to OKRs, MBO aims to connect organizational and individual goals.
Managers and employees define clear, achievable objectives that align with the organization’s goals, both parties agree on the steps required to achieve these objectives, and progress toward goals is tracked through check-ins or reviews, allowing for adjustments if needed.
Performance is evaluated based on goal achievement, and feedback is provided to support further growth and development.
Benchmarking
Comparing the organization’s performance with industry standards or competitors to identify strengths and areas for improvement.
For example, a retail company might benchmark its e-commerce growth rate against competitors to gauge its competitive position.
Financial performance analysis
Regularly analyzing metrics like profit margins, cost of goods sold, and return on investment (ROI) to understand the financial health of the organization.
For instance, an organization might aim for a 15% increase in ROI by the end of the fiscal year.
Personnel (individual) performance management examples
Performance appraisals
Annual or bi-annual employee evaluations where managers assess an employee’s job performance based on specific goals or job competencies.
For example, a sales associate may be evaluated on metrics such as monthly sales targets, customer satisfaction ratings, and teamwork. These are made much easier using employee evaluation software.
360-degree feedback
The aim of 360-degree feedback is to provide a holistic view of performance by combining feedback from an employee's managers, peers, and subordinates
For instance, a project manager might receive feedback from team members, cross-functional departments, and clients to assess leadership and communication skills.
Tools such as 360-degree feedback software can assist here.
Goal-setting and personal development plans
Employees set specific goals with their managers and create professional development plans for achieving them.
An example could be an IT specialist setting a goal to become proficient in a new programming language, with periodic check-ins to track progress and address skill gaps.
Individual KPIs
KPIs but specific to an employee’s role. For instance, a customer service representative might be measured on performance metrics such as average response time, resolution rate, and customer satisfaction score.
Competency assessments
Evaluates employee competencies such as problem-solving, communication, or technical skills against defined job requirements.
For example, a marketing analyst might be assessed on data analysis and presentation skills to ensure they meet the requirements for a promotion.
Recognition and reward programs
An important but often overlooked aspect of performance management, employee recognition programs reward and celebrate achievements to boost morale and motivation.
For example, a company may recognize a top-performing sales representative with an "Employee of the Month" award based on individual sales achievements (that was a basic example, check out these employee recognition ideas for more).
Common Performance Management System Mistakes
Performance management is much maligned. A little less than a third (37%) of respondents in a Betterworks study believe that their company’s performance management process helps them improve their performance.
Here are some common mistakes organizations make when it comes to their performance management cycles and processes.
Lack of clear goals
Effective goal setting really is the foundation of effective performance management. Many organizations fail to align company, team, and individual; goals, making prioritization difficult and resulting in worker disengagement.
For advice on this, I recommend Liz Lockhart Lance’s excellent article on the cascading goals methodology.
Infrequent feedback
People crave feedback and it’s important for their overall performance and development.
Relying solely on formal reviews to provide feedback limits opportunities for real-time course correction and development.
Bias in evaluations
Allowing personal biases, favoritism, or halo/horn effects (overemphasizing one aspect of performance) to influence ratings can undermine fairness and objectivity.
This is something 360-feedback can help overcome.
Lack of manager training
Most people become managers with little or no formal training. Managers, especially newly promoted ones, need training on how to give constructive feedback, set objectives, and conduct evaluations effectively. Our list of performance review questions can help with this process.
Ignoring employee input
Excluding employees from goal-setting or self-assessment can result in disengagement and a lack of ownership in the process. Collaborative goal setting is one of the benefits of the MBO and OKR systems.
Poor documentation
Inadequate record-keeping of performance-related discussions, feedback, or evaluations can lead to inconsistencies and legal risks.
Not tying performance to rewards
If employees do not see a clear link between their performance and rewards (e.g., salary increases, promotions), the system may lack motivation power.
Ignoring the power of recognition
A study from Deloitte found that employee engagement, productivity, and performance are 14% higher in organizations that properly recognize employees. This is something employee recognition software can assist with.
Complex or cumbersome process
A performance management system that is too complicated or time-consuming can discourage participation and adherence. This is why many organizations are switching to more frequent but shorter quarterly reviews.
Failure to adapt to changes
Using a rigid system that doesn’t account for changing business environments or evolving employee roles can make performance management outdated and irrelevant.
Successful Performance Management System Strategies
Now you know some common mistakes, how to correct them?
Regular check-ins
Ensure managers are organizing weekly or bi-weekly check-ins with their reports to provide regular performance feedback and identify issues that might.
Culture of feedback
Creating a feedback culture in which everyone is comfortable giving and receiving feedback promotes continuous improvement, real-time course correction, and engagement, fostering a growth-oriented environment where employees can excel.
Customize the approach
Tailor performance management practices to suit different roles, departments, or teams, recognizing that a one-size-fits-all approach may not work for all employees.
Team performance assessments performed in conjunction with individual reviews ensure that leaders see performance from a variety of perspectives and are in a good position to maintain alignment with company goals or values.
Employee involvement in goal-setting
Engage employees in setting their own goals and developing action plans. This increases their sense of ownership, commitment, and motivation.
Linking performance to rewards
Connect performance outcomes to rewards such as bonuses, salary increases, promotions, or recognition programs to incentivize high performance. Alex Link’s article on performance-based compensation is a useful resource here.
Focusing on development
Emphasize employee growth by creating individualized development plans, offering training programs, and providing coaching to address skill gaps.
Using a balanced scorecard approach
Incorporate multiple performance metrics, including financial, customer, internal processes, and learning measures, to provide a holistic view of employee contributions.
Training managers on performance management
Equip managers with the skills to deliver constructive feedback, conduct effective evaluations, and support employees' development.
Encouraging self-assessment
Allow employees to evaluate their own performance, which can help identify areas for improvement and promote a sense of responsibility.
Use 360-degree feedback
Implement measures like 360-degree feedback to reduce bias in evaluations, such as standardized criteria, diverse review panels, or calibration meetings to ensure fair and consistent assessments.
Leveraging technology
Still managing performance in spreadsheets and Google or Word Docs? Use performance management software to set and track goals and carry out performance reviews. Many will help generate data-driven insights for decision-making around performance.
10 Best performance management tools shortlist
Shortlist of some of the top performance management tools on the market today.
Adapting to changing needs
Continuously update the system to reflect evolving business goals, employee roles, or market conditions, making it flexible and relevant.
Create a culture of recognition
Similar to creating a culture of feedback, encourage all team members to celebrate successes to foster a culture of appreciation.
This can be as simple as having a dedicated channel in Slack for team members to appreciate each other.
Performance Management System Examples
Here’s how some of the world’s top organizations approach performance management:
Google pioneered OKRs (Objectives and Key Results)
Google famously pioneered OKR use to align employees' individual goals with company-wide objectives. Each employee sets measurable goals with specific outcomes, reviewed quarterly to allow for adjustments and maintain alignment with Google’s fast-paced environment.
This framework encourages transparency and collaboration as goals are visible throughout the organization.
Microsoft’s growth mindset and continuous feedback
Microsoft moved away from traditional annual reviews to a continuous performance management system, emphasizing a "growth mindset."
Managers regularly check in with employees, providing ongoing feedback to help them develop skills, adapt to changes, and achieve their goals, creating an environment focused on learning and growth.
Adobe’s check-in model
Adobe replaced annual performance reviews with a "check-in" model, where managers and employees engage in regular, informal feedback conversations.
This approach emphasizes real-time feedback and development, with no formal ratings, which reduces review-related stress and keeps employees engaged in their development.
Deloitte simplified and forward-looking assessments
Deloitte revamped its performance management process to focus on real-time feedback, frequent check-ins, and "performance snapshots," which assess employees based on potential future actions, such as promotions or pay increases. This forward-looking approach centers on growth and reduces the need for backward-looking evaluations.
General Electric's agile performance development
GE transitioned from annual appraisals to a more agile, continuous feedback model called "Performance Development."
Using the custom built PD@GE app, employees receive real-time feedback and can update their goals frequently, enabling the company to stay responsive and keep up with industry changes.
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