Performance Management

A corporate management strategy that assists managers in monitoring and evaluating the performance of their personnel.

Author: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Reviewed By: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Last Updated:November 9, 2023

What Is Performance Management?

Performance management is a corporate management strategy that assists managers in monitoring and evaluating the performance of their personnel. The goal is to create an atmosphere where individuals can most effectively perform high-quality work. 

A systematic performance-management program ensures that managers and workers' representatives are in total agreement regarding objectives, goals, career progression, and how an individual's work fits into the firm's overall vision.

Regarding performance management, individuals are regarded in the context of the broader workplace system. In theory, you want to obtain the most significant possible performance level, considered unachievable.

Defining and assessing objectives, targets, and successes are standard procedures for the board's implementation. They're also working to define successful performance and develop evaluation techniques.

Instead of the conventional paradigm of year-end assessments, the performance management or strategic management system (SMS) considers every encounter with an employee as a chance for them to learn.

Managers may use performance management systems to alter workflow, recommend new tasks, and make other options to help individuals achieve their objectives. Consequently, the company will be able to meet its goals and perform at its best.

For example, a sales manager may give revenue objectives to the sales teams that must be reached within a specific time range. In addition to the numbers, the manager would provide recommendations to help the salespeople succeed in a strategic management system.

In a nutshell, top executives and task owners coordinate and build performance management standards. Defining work responsibilities and results, offering feedback, and mentoring are all part of this strategy.

That, however, does not include comparing actual performance and behavior with desired performance and behavior, establishment rewards, and so on.

To guarantee that the board presentation is successful, it is critical to characterize each individual's competencies and duties.     

Benefits Of Performance Management

The effective achievement of strategic and operational goals is facilitated by managing personnel or system performance and harmonizing their objectives.

Some proponents say there is a direct link between employing performance software or programs and improved company and organizational outcomes. 

The effects of this management system in the public sector have ranged from positive to negative, implying that differences in the characteristics of performance systems and the contexts in which they are implemented play a significant role in a performance company's success or failure.

Using integrated software instead of a spreadsheet-based recording system for employee performance may provide a return on investment through a variety of direct and indirect sales benefits, operational efficiency benefits, and unleashing the latent potential in every employee workday. 

The following are examples of possible advantages:

1. Direct financial gain

  • Increase sales
  • We are reducing the organization's costs. 
  • Stop project delays
  • Aligns the entire organization with the CEO's objectives.
  • Communicating the changes through a new set of goals reduces the time it takes to make strategic or operational adjustments.

2. Motivated workforce

  • Not only business as usual but optimizes incentive plans to specific targets for over-achievement.
  • Because everyone is aware of their role in achieving the organization's lofty objectives, employee engagement rises.
  • Ensure that goals are met transparently.
  • The bonus payout method has a high level of confidence.
  • Professional development programs are more closely linked to accomplishing organizational objectives.

3. Improved management control

  • Flexible and adaptable to management requirements
  • Helps audit / comply with legislation requirements by displaying data linkages
  • Communication of strategic objectives and scenario preparation is made more accessible.
  • Process documentation is written and communicated.

Types Of Organizational Performance Management Systems

Organizational strategic management system (also known as corporate performance management) refers to the strategies and processes that aid in defining, measuring, and implementing a plan.

A management system is described as a function that combines carefully established processes and procedures to ensure that a company achieves its goals successfully (Anderson 2005).

According to the definition, a management system is a strategic process of an organization that is built on a framework of instructions, followed by a well-designed set of guiding principles, for carrying out organizational activities to achieve corporate aims successfully.

The set of directives associated with the management systems presented in the study pertains to the following areas, emphasizing how the job should be done. 

First, what will be the critical components or functions for achieving corporate aims and goals?

Such critical functions are a source of efficiency that improves an organization's capacity to lead effectively and achieve its goals.

A management system assists an organization in continually improving its operational procedures, which is critical to its efficacy and long-term viability.

There are three types of organizational performance systems that are regularly used:

The Balanced Scorecard

The Balanced Scorecard (BSC) is one of the best-performing systems. With good reason: 88 percent of BSC users feel the framework has been excellent or very helpful in achieving their objectives.

The BSC is unusual in that it integrates four distinct business perspectives—financial, customer, internal processes, and people—to assist businesses in understanding and achieving their goals.

The following are some significant points regarding the BSC:

  • Its main components:
    • Objectives are high-level organizational goals that define your company's strategic plan, split into four viewpoints.
    • Measures are key performance indicators (KPIs) that let you know if you're on track to meet your strategic goals.
    • Initiatives are major action programs established to help you attain your goals, also known as projects.
  • Because departmental objectives can be linked to the larger company objectives, it improves alignment across divisions and departments. You may also observe how measurements and projects are related to metrics at the organizational level.
  • It necessitates a well-organized reporting system. Creating a BSC requires you to examine your strategy frequently, which you can only accomplish if it is organized.

Management By Objectives

The idea of management by objectives was popularized by a well-known management expert (MBO), Peter Drucker

It mainly focuses on developing a portion (between two and six) of the company objectives, which would subsequently be utilized as a guide for developing individual employee objectives.

Some of its essential characteristics are:

  • Objectives are only sometimes linked to one another. (This differs from the BSC approach, which aligns goals with a larger plan.)
  • Goals can be established through collaboration between managers and employees. By the theory, employee engagement boosts buy-in and clarifies the strategy for achieving goals.
  • The main focus of MBO is on goals; less emphasis is placed on how those goals will be met. As a result, organizations frequently rely on either measures or initiatives to achieve their goals (but rarely both). You must provide a structure that distinguishes projects from metrics for MBO's function. Since they function differently when combined, it will need to be clarified.

Management by Objectives is a term that has been around for a while, but it is only sometimes seen in strategy documents. One way to recognize this strategy is to look at the strategic plan, which may have a set of goals and objectives.

After that, you'll see a list of activities or actions the business is grouping together to improve those goals and objectives.

Budget-driven Business Plans

Occasionally, rather than strategy, the budget drives the management process. In this situation, "work plans" are tied to the organization's total budget, and funds are allocated to initiatives and programs that produce outcomes. 

Although it is a less widely utilized performance approach, it has proven effective in some firms. 

Some of its essential characteristics are:

  • Leaders can quickly identify areas that need to be downsized or possible investment possibilities by grouping sources of income and expenses (line items) into categories.
  • It could include a mix of ongoing and new projects.
  • Finance is the driving force behind it, as opposed to alternative techniques coordinated by a strategy department.
  • Typically, the development process begins with the finance team giving a department last year's spending and requesting the department to specify the activities they plan to complete within the next year without affecting the budget.

What is the Process Of Performance Management?

Through a strategic management system, managers and employees interact with planning, monitoring, and analyzing an employee's job objectives and contribute to the firm.

They provide ongoing constructive feedback to ensure that staff is meeting their objectives and advancing their careers. So it's more than just a yearly assessment.

The yearly performance review meeting is only part of a strategic management system. The strategic management system is the process of planning, mentoring, and reviewing work performance.

1. Planning

‍ Employees must understand what is expected of them to assess their performance and receive actionable feedback.

  • ‍ Establishing: It all starts with establishing and communicating their goals to them. Not only should this be included in the job description, but it's also important to reiterate expectations whenever a new employee joins the team.
  • Create SMART goals: To do so effectively, use the SMART acronym, which stands for specified, measurable, attainable, relevant, and time-based goals.
  • ‍ Set Success Standards: With these SMART goals, you can decide how their performance will be judged.
  • ‍Feedback: as previously stated, it is a two-way street. Once you've articulated what you are held accountable for and measured on, get input from employees. It's necessary since they might have questions, make changes, or affirm that they're ready to take on the job. a
  • ‍ Approval: After the feedback stage, managers and staff can sign off on this step, indicating that the process has begun collectively. Employees will feel more invested in their work as a result of this.

2. Coaching

The coaching stage, which comprises ongoing meetings, begins after the goals have been set.

  • Regular check-ins and discussions should be scheduled so management and staff can communicate how things are progressing.
  • When employees have difficulty, they want to know they can get assistance. This stage will be more revolutionary if you set up the connection as one in which you train employees and allow them to share their problems.
  • Feedback: It should be easy for both sides to give and receive feedback.
  • Management may ensure the job is completed and up to the standards set by staying connected to the initial purposes defined in step 1. Not only will this ensure that the job is being done correctly, but it will also contain a reward stage to recognize when an employee has exceeded expectations!

3. Review 

An organization's formal reviews typically happen once a year. Automation solutions can be incredibly helpful in maintaining historical data so you can track an employee's growth over time.

Supports achieving the organization's strategic goals.

Employee's performance throughout a specific period. Since the strategic management method entails regular check-ins throughout the year (weekly, monthly, or quarterly), this yearly check-in will also be used to prepare upcoming objectives.

  • Review Process

Both managers and staff members should pay attention to other factors as well. 

Additionally, this is a great moment to assess the entire procedure and consider issues such as "Did the employee achieve goals? Were there issues that remained unresolved? 

How did management's criticism affect their performance, if at all? "and "Can this procedure be improved?"

Examine both minor and significant goals to see if they can be accomplished. Then, you could work together to identify solutions if you encounter issues in these areas.

For instance, several employees who have a lot of work to complete in a short amount of time could make avoidable human errors. Inaccurate data input from employees could result in financial loss for the company.

Instead, a solution might be to develop a data automation program that gathers data automatically and feeds it accurately into a centralized location.

  • Constructive criticism 

Once more, all sides should be free to express their helpful suggestions.

  • Action 

Within business, it takes action to make changes! ‍An essential component of motivating employees is rewarding and praising them for a job well done.

Even if it doesn't have to be money, it will likely entail compensation of some kind.

It might also take the form of paid time off, a chance to lead, or interesting new responsibilities for the worker.

Looking forward, the last step is to think about the future and work together to plan how this process will proceed the following year.  

Steps to make a better performance management

To help the business achieve its strategic goals, performance management is an ongoing communication process between a supervisor and an employee throughout the year.

1. Commitment from the top 

A high-quality strategic management system method generates essential data, so it should be inspected in some way so that top management can track progress.

Statistics such as the number of forms completed have limited utility. Still, data such as trends in development needs and employee difficulties can provide the senior team with relevant information and an opportunity to be proactive and demonstrate their commitment to the process.

2. Clear objectives

Rather than describing duties, objectives should explain desired outcomes. Tasks are how you attain the result, and they can change, whereas the results stay the same unless the business priorities change.

Let's take a closer look at this. I'm providing you with a list of jobs if I tell you to sweep the floor, dust the surfaces, and clean the windows in a room.

If, on the other hand, I ask you to clean the room such that all surfaces are free of dirt, I've started an outcome, and you'll need to accomplish the previously described activities to achieve it. The importance of outcome language is that it explains the desired future state.

3. Balanced feedback

Feedback is critical information that tells a performer what they should do more or less to enhance their performance. It should be given as soon as possible or as close to the scenario that necessitates feedback to have the desired impact on performance. 

It should not be kept and offered as proof of a bad performance rating throughout the year. It is more than just demotivating for the employee and represents a list of missed possibilities for performance improvement and reinforcing positive behavior.

4. Reviews

The strategic management system will become a once-a-year paperwork activity without feedback. The objectives written at the beginning of the year will have shifted focus and moved up or down the priority list. Even eliminated a year later. Thus conducting progress assessments is critical.

We've already discussed how an effective strategic management system process must be fair. The only way to accomplish this is for employees to understand what they're being evaluated for. 

How can you deliver an objective performance evaluation if the objectives need to be updated?

At least once a quarter, reviews should be conducted, and they should include the following topics:

  • Objectives are being met
  • - Suggestions (positive and developmental)
  • - Adjustment of goals in response to shifts in business priorities
  • Examining the development strategy
  • To move on, you'll need help. Maybe a consultant or talk to each other. 

5. Development plans

To improve performance, identify the source of the shortage and devise a remedy to close the gap. Furthermore, you may expect staff to take on additional or new responsibilities.

Because their performance reflects on you, it is reasonable that you establish a development plan to ensure they are ready to confront new challenges.

Longer-term development goals boost employee motivation and make good business sense because developing your skills is less expensive than hiring them.

So, in summary, an effective strategic management system should include development plans that address the following: 

  • Performance deficiencies
  • It intends to provide individuals with the skills necessary to achieve their objectives.
  • Long-term development objectives

6. Capable managers 

If managers can conduct successful strategic management system discussions, even the best technique will succeed. Employees will be encouraged and motivated to achieve their goals and more if they feel heard and included in a productive conversation.

Insufficient communication, on the other hand, will demotivate employees and, in the worst-case scenario, persuade them that there is nowhere else for them to go, leading to resignations and high-cost churn.

The abilities necessary for this appear to be pretty similar to other practical communication skills:

  • Active listening
  • Explicit (open questions)
  • Summarizing
  • Encouraging

Furthermore, the following abilities are required:

  • Giving feedback, which includes the capacity to:
  • Respectfully oppose incorrect cognitive processes.
  • Control your expectations.
  • Coaching entails asking the right questions so the employee can come up with solutions.
  • Encourage participation in the establishment of goals and programs without abdicating responsibility.

Managers can enhance these abilities through training, but the best method to refine them is through learning and practicing from their line managers.

Failed Performance Management

Employees who raise concerns about the fairness of the performance management system will undermine its effectiveness. A high level of internal competitiveness within this management system is an example of this. 

Consequently, individuals who do not receive compensation will be dissatisfied with the procedure. Employees may perceive the procedure as something they must comply with if it needs to be correctly implemented in the strategic management system's planning. 

As a result, an employee's performance will be less proactive and more inaccurately represented. Managers are expected to take strategic management systems seriously because the program's overall functionality will suffer without them.

Companies and employees can benefit from a well-managed, well-constructed plan, but the system could be better.

1. Communication Gaps

Performance monitoring programs thrive when there is open, honest communication. Therefore, companies should have an open-door policy and encourage transparent communication lines throughout the organization.

2. They set inef­fec­tive goals for themselves

The goal-setting process must be fair. Employees will only be satisfied if goals are too easy enough - most prefer a challenge. They desire to be challenged and learn new skills.

Goals that are too difficult, on the other hand, can be demo­ti­va­tion­al. Employees will either burn out trying to meet them or give up altogether, believing them impossible.

3. Your managers are not involved in the process.

Sometimes poor managers emerge from sound performance management systems. But, the truth is there's not a per­for­mance management sys­tem that will be suc­cess­ful unless the people involved invest in it and are willing to see it through.

Employees will mirror their bosses' attitude toward this management system if they sense it. Therefore, managers must take command and set a good example.

Researched and authored by Ilhaam Prayudi | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: