What Is Performance Management? Process, Tips, & Tools

Employee performance management describes how you manage your employees’ work performance, with the process and tools you use to do this making up your performance management system. The goal of an effective performance management process is to engage employees and enable them to thrive and produce high-quality work.

There are ways to best achieve this result. A simplified approach is to set overall company goals, narrow these to department-level goals, and then further into individual contributor goals. You’ll then evaluate your employees’ progress toward hitting those goals and provide feedback and tools to improve that progress.

Key Takeaways

Set goals, review, and improve performance
Clearly communicate expectations to employees
Train employees and managers to increase performance

How Performance Management Works

Performance management is the process of improving performance through the use of tools, evaluation, coaching, counseling, and providing essential feedback. To fully understand what performance management is, you must look into the key components involved—setting goals, reviewing performance, and improving the performance.

A graphic showing the three components of performance management.

Set Goals

To ensure your team performs at optimal levels, setting precise goals at the beginning is crucial. Without goals at every level, effective performance management fails. We recommend using a specific method to create these goals, known as the SMART approach:

Specific
Measurable
Attainable
Relevant
Time-bound

This strategy will not only help focus your team members on strategic objectives for your business but will also help make your goals clear and attainable. For a more detailed guide on how to create these, check our SMART goals guide.

Before you start setting individual performance goals, you must first establish your corporate goals—your long-term vision for your business. Your corporate goals set the foundation for your strategic planning, priorities, and resource allocation.

Corporate goals may include objectives like:

Increasing market share by 10%
Retaining customer loyalty
Growing company by 25% over five years
Increasing employee retention rate to 90%

It’s alright that these goals seem overly broad, but only if you ask (and answer) the next logical question about each goal: How do we achieve them?

EXAMPLE: How can you increase your employee retention rate?

Add benefits, including additional paid time off (PTO) or retention bonuses
Optimize your onboarding process
Invest in employee development
Create a culture of recognition and constructive feedback

The last bullet point from the example above is a key element of your performance management process. If you have a culture of open communication, you can effectively guide your employees to the results you want while simultaneously keeping them engaged. By setting clear corporate goals, you can align your employees’ work with those goals, giving your employees insight into how their daily tasks contribute to the overall success of the business.

Once you have your corporate goals and determine how you achieve each of those goals, then you can then reduce the broad goals down to each department. It’s important to take intermediary steps before getting to individual goals, as it helps you determine what each employee can handle and which employee should do each task.

Sticking with the corporate goal of increasing employee retention, you would first determine which department should be responsible for this goal. In some cases, it might make sense to have several departments involved in corporate goals but, for this specific objective, it seems logical that your HR or people management department handles this goal.

EXAMPLE: Using the answers to the ‘how question’ above, we can be more specific about what the HR department needs to do to see success:

Review the existing benefits package for utilization rates
- Determine if any benefits should be removed
- Determine what benefits should be added
Review the existing onboarding process
- Get feedback from recent hires about their experience
- Make necessary changes
Create an employee development program

Each of these projects will take time to develop and implement, but these will also be worthwhile. By getting a bit more specific about each corporate goal, we’re also one step closer to the individual goals used to hold employees accountable.

With corporate and department goals established, you should now set goals for individual employees; these are the goals they will be measured against.

EXAMPLE: Using SMART goals to create the objective for a benefits administrator in the HR department tasked with implementing new benefits may look like this:

Specific — Determine which benefits should be added to the existing package
Measurable — Do not exceed three additional benefits
Attainable — One benefit must be a retirement plan
Relevant — To help increase employee retention
Time-bound — Completed by the end of the second quarter

Putting it all together, here’s what this employee’s goal might look like:

“To help increase employee retention rates, up to three additional benefits should be added to the company benefits package, one of which must be a retirement plan. This goal must be met by the end of the second quarter.”

Using the SMART goal method, you ensure you hit all the key elements of an individual employee’s goals. You can use this principle for every employee and every goal. Making sure that you provide specific direction allows for a smoother performance management process.

Review Performance

A performance review is the process of assessing an employee’s progress toward a stated goal and their successful completion of the goal. Only after you have created the goals for each employee can you review their performance.

Check out our performance review guide and download a free evaluation template if you’re not using performance management software.

Performance reviews generally occur at regular intervals throughout the year and often play a part in whether an employee gets promoted or receives a raise. To ensure that your performance reviews have structure and provide benefits to everyone involved, here are some suggestions for different types of systems to use. These systems are not mutually exclusive and can be combined to create an even more effective performance review system.

Nearly all performance reviews include a self-assessment portion. Getting an employee’s insight into their performance, achievements, and setbacks helps them objectively evaluate their work. When an employee recognizes that they have areas that require improvement, it can make the conversation less stressful and allow you to encourage growth and development.

Part of your review process should include an assessment of the entire department. Because individual employees do not live in a vacuum, they may rely on a colleague to complete a task before they can start their own. If their colleague failed to complete their task on time, the employee you’re reviewing should not be entirely responsible if they then also did not meet their deadline. Going through a department assessment can help you view the whole picture.

Along with a department assessment, you should also evaluate any managers or leaders of departments and teams. Their job is to ensure their department completes all assigned tasks. If they don’t, the manager needs to be held accountable, and the behavior corrected.

This is a more objective approach to performance reviews because you’re simply looking at data about whether an employee has completed their tasks and projects on time. If the employee completed their goals on time, then they should receive a positive mark.

Results-oriented performance reviews can help you score an employee’s performance objectively—but using this method alone can have negative consequences, as employees could feel that you’re not looking at the big picture.

A 360 review takes the village approach to performance reviews. Everyone who is involved in an employee’s work would participate—colleagues and managers alike would have input on an employee’s review. As a manager, this is my favorite way to conduct performance reviews because it provides the most comprehensive perspective and feedback on each employee.

Not conducting performance reviews ignores your employees’ desire to do good work. Without performance reviews, employees don’t know if they’re hitting the mark or not. Other problems you should avoid when doing performance reviews include:

Infrequent Reviews: Providing feedback in real time is important, but having regular, structured reviews enables you to collect data for your conversations with employees. If you don’t have regular conversations, your employees don’t know what to expect.
Lack of Honesty: To provide effective feedback to employees, you have to be honest with them, even when that means delivering uncomfortable news. Too many managers simply rate employees the same, resulting in ineffective messaging.

Improve Performance

The only way to improve the performance of an employee is to give them every chance of success. If you haven’t been clear about expectations and haven’t set measurable and achievable goals, reprimanding an employee for not meeting expectations will backfire.

We recommend a measured approach to improve employee performance. You should have a process outlined in your corporate employee handbook so your employees know what to expect, while also giving you a guide to follow.

Make sure to always start it out with a clear discussion. If you notice a problem with an employee, or if they come to you with an issue that may prevent them from meeting a deadline or otherwise completing a project on time, discuss it immediately. You may be able to offer guidance or make adjustments to a project that can help your employee achieve success.

Performance Improvement Plan (PIP)
Performance Management Software

If a performance issue continues, you should consider a performance improvement plan (PIP). A PIP formally documents the steps you have taken so far to help the employee and provides a guide for what the employee must do to improve their work performance.

Just like with goal setting, use a consistent method like SMART in a PIP. When an employee is on a PIP, provide them with extra attention and assistance to help them meet the stated goals. It will ultimately serve the employee, you, and the organization.

One of the best ways to help your employees improve and get the most out of performance management is to use performance management software. It helps you retain confidential and relevant employee information in a centralized location. Best of all, it can help you track an employee’s progress on their goals and improvement, giving you objective data to help you make the best business decisions.

For some options, check out our roundup of the best performance management software for small businesses.

Performance Management Tips

Improving performance management involves encouraging employees, focusing on communication, and measuring successes. You can achieve this by doing the following:

Provide coaching: Your managers may not automatically know how to manage the performance of their team members. By providing coaching and training resources, you can ensure your managers are equipped with the right tools to successfully motivate their employees’ to perform. Check out our guide on how to coach employees, as well as our list of the best personnel training software for some ideas on how to approach this.
Focus on strengths: It’s important to address areas of needed improvement, however, by acknowledging your employees’ strengths you create an atmosphere of respect and motivation.
Clearly communicate: Employees need to understand their expectations and goals in order to perform at their best. When managers clearly communicate with their team members they are better able to offer support when needed.
Measure success: Employees tend to thrive when they have clear objectives. By measuring their success their progress can be tracked allowing them to better achieve their goals.

Performance Management Tools

Performance management is more than just reviewing your employees’ performance with annual reviews. There are tools available to help you keep a pulse on your employees all year long.

Tool	Description
KPIs	Using key performance indicators (KPIs) can help you manage the performance of all your employees with measurable data.
Surveys	You can receive excellent feedback into the performance of your employees through the use of anonymous surveys. Read our guide to creating employee surveys to learn how to do it on your own.
Training	When you keep your employees’ skills updated with learning and development resources, you can gauge their performance based on the skills they are learning.
OKRs	Using objectives and key results (OKRs) can help you determine where your employees’ performance is excelling and where they may need to improve.
Appraisals	A performance appraisal (also known as a review) is a great way to gather feedback from your employees on their perceived performance and discuss ways to correct inconsistencies.

Need an all-in-one solution to approach performance management? Check out our roundup of the best performance management systems—these can help grease the process and ensure nothing slips through the cracks.

How Performance Management Helps Your Business

When done correctly, performance management can help your business thrive by providing your employees with clear goals, addressing issues at the moment, and helping them flourish through effective performance improvement. A structured performance management system provides your company:

Clear corporate, departmental, and individual goals
A defined process to follow for holding employees accountable
The ability to increase employee morale and engagement
Objective views on both individual and team performance

Through a quality performance management system, you can increase employee engagement, which increases employee productivity and ultimately helps boost your company profits. This allows you to provide additional employee benefits, attracting more high-quality employees and further growing your company. It’s a cycle that keeps repeating, with performance management at the center of it all.

Legal Considerations

There are some potential legal issues with performance management systems, but it’s important to note that there is no federal law requiring private companies to provide employees with a review. While that may be the case, not doing so could have negative consequences for employee morale and engagement.

Besides that, it’s important to note that federal, state, and local laws do require you to not discriminate against anyone in the workplace. Title VII of the Civil Rights Act of 1964 prohibits discrimination based on an employee’s:

Race
Color
Religion
Sex
National origin

Given that, your performance management system must adhere to these employment laws. Your performance management process cannot discriminate against any employee or violate any other state and federal employment laws and regulations. Having a structured policy and process can help you avoid legal issues and costly fines.

Bottom Line

A top-notch performance management system proactively involves employees in the process. Starting with your corporate goals, you can track the required work down to the individual team member level, using a structured method that provides your employees with clear objectives showing them exactly how to succeed. Effective employee management is not coming down hard on your employees but rather giving them the tools and the insight they need to succeed.