What Is Performance Management? 3 Key Components

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 many schools of thought on how to best achieve this result. A simplified approach is to set company goals and narrow them first to department-level goals and further to individual contributor goals. You’ll then need to evaluate your employees’ progress toward hitting those goals and provide feedback and tools to improve that progress.

A graphic showing the three components of performance management.

1. 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.

To achieve 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 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 each 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.

2. Review Performance

A performance review is a 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 of 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.

3. 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 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 a 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.

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 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.