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In a survey directed by the Workhuman Analytics & Research Institute in 2019, 55% of workers said that run-of-the-mill annual reviews do not improve their employee performance. 

Also, according to the same survey, more than half of workers (53%) say performance reviews don't reflect the work they do.

Many companies are using this data to reevaluate their performance management systems.

Without performance information, team leaders can't help their teams improve their performance or align their goals with the company's goals.

To create an effective performance management system, HR professionals need to establish a continuous performance management cycle focused on talent management and organizational goals.

What Is A Performance Management System?

A performance management system (PMS) is a method for consistently tracking the performance of individuals, teams, or even an entire company. The right performance management system boosts productivity, employee engagement and retention, innovation, company culture and, ultimately, the bottom line.

A performance management system should act as a north star, aligning your company objectives with individual goals, and support and motivate employees. 

Elements of a PMS

An effective PMS typically incorporates three key elements: goal setting, performance review, and performance improvement.

Goal Setting

Goal setting is setting team, and team members, objectives that align with your company values and organizational goals. 

These will become the performance criteria that you'll use to perform individual and team evaluations.

Types of goals include the following:

  • Purpose-oriented. Set based on what success means for each role and what are the key performance indicators. They are used continuously over time. Example: Keeping customer satisfaction above 95%.
  • Project-oriented. Set based on what precisely the outcome of a project needs to be. Example: Deliver a refactored website for the new company identity after two months.
  • Professional-growth. Set based on what an individual team member needs to outgrow itself in its role and learn new abilities and skills. Example: Take part in at least two technical training courses per year.

Golden rule! Always use SMART goals when setting goals…

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What are SMART goals?

SMART is an acronym that stands for Specific, Measurable, Achievable, Realistic, and Timely. To be considered SMART, a goal needs to meet all these requirements.

Integrating SMART goals is vital for any successful PMS because it helps focus efforts and increases the chances of teams and members achieving their performance goals.

SMART goals are:

1. Specific: Well set, clear, and unambiguous

2. Measurable: Provides meaningful data that the performance appraisal process can use to track the performance of a team or team member

3. Achievable: Attainable and not impossible to reach

4. Realistic: Accessible, practical, and relevant to the team or team member

5. Timely: Must have a defined timeline, including a starting date and a target date. 

Performance Review

A performance review is how you choose to evaluate a team or team member's progress on achieving its goals. 

It's the perfect time for you to note wins and improvement opportunities that you can use to make strategic decisions and provide valuable feedback (or, even better, the feedforward method I’ll outline below). 

The performance review is the most sensitive element of a performance management solution. I recommend you spend as much time as necessary to plan, check and act to perfect it.

There's a natural tendency for bias and blame to get built-in to the process. Still, you want to avoid anyone getting into this mindset.

To reduce the risk of bias, I recommend using the feedforward method instead of the traditional feedback method during 1:1 (one-on-ones).

Credits: Innerdrive Free Resources

Some must-haves for performing an effective performance review:

  • A feedforward process that motivates, focused on continuous professional improvement.
  • An open discussion to analyze performance measured against clear and specific goals and expectations.
  • A mindset of positivity and coaching attitude from who is leading the process.
  • A two-way 1:1 (one-on-one) conversation between the team leader and every team member at least once every two weeks.
  • A focus on learning from errors and zero tolerance for blaming others or feeling sorry for yourself.
  • Keep an open mind. Remember that a team member that isn't performing well in a role may be in the wrong team.

Learn more on how to conduct more effective performance reviews here.

Performance Improvement Plan

Everyone should have a performance improvement plan, including team members falling short of meeting their goals and your best performers.

The idea is not to fill up forms, that no one will take seriously, but to create a viable plan in the short term.

Make sure each person understands exactly what is affecting their performance and how to execute the performance improvement plan.

Some must-haves for creating a performance plan:

  • Use simple actions that anyone can quickly implement.
  • Resist the idea of justifying past mistakes.
  • Be crystal clear in what needs to be improved and why.
  • Practice active listening when gathering input to create a more meaningful plan.

Types of Performance Management Systems

The most beneficial methods I recommend you dig into are the following:

type of performance management system infographic

You also have to study the C-level political structures of power and their perspective on employee performance management to create a strategy to obtain their support.

Letting People Know About It

When switching to a new PMS, make your intentions clear, explaining what will change, when, and how this will add to everyone working for the company.

I recommend a simple three steps process:

  1. First, announce the change focusing on improvement opportunities you found in the current system. Your goal is to create interest and prepare people for change. 

The best timing would be after finishing assessing the old system and before choosing the new one.

  1. Secondly, it's time to present how the new performance management strategy will work and when it will become effective. Don't forget to bring in some examples to illustrate.
  2. Finally, you can send a heads-up message to the team a couple of days before it becomes effective.

If you intend to use PMS software, don't forget to offer training to all future users, including human resources (HR) and team leaders before the new PMS becomes effective.

Elements To Consider In Choosing A Performance Management System

The most crucial aspect of choosing a PMS is that an optimal solution will evaluate both qualitative and quantitative aspects of performance.

A PMS that only evaluates quantitative metrics will most likely create a culture where a lot of low-quality work gets done, with less opportunity to learn and improve processes.

For example, a customer service dedicated PMS can evaluate team performance by only measuring responsiveness and leaving out customer satisfaction and employee wellness indicators.

This scenario could lead to a high volume of conversations between the CS team and clients but low effectiveness in solving issues and fulfilling requests, leaving customers angry and, eventually, hurting team motivation. 

On the other hand, a PMS that neglects quantitative metrics will result in low efficiency.

An example would be a marketing team PMS where new leads and conversions wouldn't be part of the performance evaluation.

Despite being effective, this approach will make it harder for the team and its members to reach some important goals that would impact on company-wide metrics.

How Can You Evaluate A Performance Management System?

When evaluating a PMS, the easy way is to focus on teams.

Understand the team's goal and what team members need to achieve it.

I suggest you use the following questions:

What outcome does a team need to deliver to be considered successful?

What does a team member need to focus on to add to this outcome and remain a happy and productive team member?

Analyze each role to understand the type of work performed and what kinds of input the person could benefit from a PMS.

For example, Tech Performance Appraisal (TPA) is a good option for technical roles with repetitive tasks (Customer Support, Sales).

Project Evaluation Review (PER) goes very well when evaluating the work of project managers and other roles that have most tasks linked to a project.

If you want to provide more diverse input, you can combine TPA or PER with a 360-degree appraisal.

After implementing a new PMS, I recommend you run it for a trial period (three months is enough.

Schedule monthly debriefing sessions with PMS project stakeholders to discuss what worked well and what needs to be improved. 

Guide To Performance Management System Software

You don't necessarily need software to implement a PMS and employee development. 

I've seen some simple but very effective systems running on small businesses using simple tools, like a spreadsheet, for example.

But in large organizations, PM software will make your life much easier.

A PMS software can help you track, analyze, and evaluate the performance of a single individual, a team, or an entire company.

Team leaders can use this data in many ways, such as creating mutual purpose alignment, rewarding quality work, and providing feedforward. 

It's important to understand that choosing a performance management software should only be started after defining and documenting the new performance management process.

Many employee management software already have features designed to encourage employee engagement, monitor satisfaction, and measure performance.

As a good place to start, I recommend checking out our selection of the best employee management systems.

Evaluating Performance Management Software

The best way to evaluate whether your PM software is effective is by gathering specific data before and after adopting the software solution.

You can start by looking at the following data:

Profit per employee: A carefully crafted performance management program, plus the right performance management tools, should increase your profit per employee after 12 months. 

As I mentioned before, a performance management system (PMS) has three essential elements: goal setting, performance review, and performance improvement.

Performance improvement is the process of implementing a plan to directly increase employee productivity. 

Productivity is the main driver when it comes to profit per employee results.

Related Read: 10 Performance Management Tools Every HR Pro Should Know

productivity is the main driver infographic

Therefore, PMS (and a PM software) is an effective way to indirectly improve profit per employee by improving employee productivity.

Profit per employee helps companies focus on the hard to perceive value created by high-performance employees — those who, with some investment, can produce valuable intangibles. 

profit per employee infographic
The graph shows the effect of profit per employee on the total profit of big corporations. Source: The new metrics of corporate performance: Profit per employee

Organizational Climate Survey: Using performance management tools means fine-tuning performance evaluations to become more transparent and honest, which will show up on the next OCS survey.

The Oxford Handbook of Organizational Climate and Culture (Oxford Library of Psychology), by Karen M. Barbera and Benjamin Schneider, has an entire chapter dedicated to discussing this topic.

According to the authors "performance management reflects and shapes the values and norms of work groups and organizations and employees' attitudes and behaviors."

Performance Results: Adopting effective performance management tools increases employee engagement and trust. 

A study published in the Human Resource Management Review recommends using a performance management system to promote employee engagement as an effective method to boost performance.

human resource management review graphic
Source: Human Resource Management Review. The Engagement Management Model.

Note: Arrows around the circumference of the model represent the engagement management process. Dotted lines represent the drivers of employee engagement.

Both variables can be measured during the performance evaluation process and applying organizational climate surveys.

Need expert help selecting the right Performance & Appraisal Software?

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Final Thoughts

With so many resources available to use, and with the benefits there for all to see, there’s no excuse for poor performance management in modern organizations.

Remember, a good place to begin is by focusing on teams, what they need to deliver to be successful, and then how individual team members can contribute while being more engaged and motivated.

Once your performance management system is performing, organizational success will follow. Find out how having an HRMS Analyst in your team can help improve your processes.

To keep up to date on performance management systems and other topics in people and culture, with generous advice from industry leaders, subscribe to the People Managing People newsletter. 

More resources you can gain helpful insights from:

By Sergio Tschá

Leader, mentor, writer and coach with a background in computer science. Advocate of inclusion, diversity, and cultural awareness in the workplace and the humane tech movement.