What is Performance Management?
Introduction to Performance Management
Employee Performance Management is about aligning the organisational objectives with the employees’ agreed measures, skills, competency requirements, development plans and the delivery of results.
The History of Employee Performance Management
Performance Management began around 60 years ago as a source of income justification and was used to determine an employee’s wage based on performance.
Organisations used this new method to drive behaviours from the employees to get specific outcomes. In practice this worked well for certain employees who were solely driven by financial rewards. However, where employees were driven by learning and development of their skills, it failed miserably.
The gap between justification of pay and the development of skills and knowledge became a huge problem in the use of Performance Management. This became evident in the late 1980s; the realisation that a more comprehensive approach to manage and reward performance was needed. This approach of managing performance was developed in the United Kingdom and the United States much earlier than it was developed in Australia.
In recent decades, however, the process of managing people has become more formalised and specialised. Many of the old performance appraisal methods have been absorbed into the concept of Performance Management, which aims to be a more extensive and comprehensive process of management. Some of the developments that have shaped Performance Management in recent years are the differentiation of employees or talent management, management by objectives and constant monitoring and review.
Its development was accelerated by the following factors:
- The introduction of human resource management as a strategic driver and integrated approach to the management and development of employees; and
- The understanding that the process of Performance Management is something that’s completed by line managers throughout the year – it is not a once off annual event coordinated by the personnel department.
How Annual Appraisals are Different But Part of Performance Management
Most organisations have some type of employee appraisal system, and many are experiencing the shortcomings of manual staff evaluation systems. When discussing workforce performance the most commonly asked question is “How does Performance Management differ from performance appraisals or staff reviews”?
Performance Management is used to ensure that employees’ activities and outcomes are congruent with the organisation’s objectives and entails specifying those activities and outcomes that will result in the firm successfully implementing the strategy (Noe et al. 2000, p.55).
An effective Performance Management process establishes the groundwork for excellence by:
- Linking individual employee objectives with the organisation’s mission and strategic plans. The employee has a clear concept on how they contribute to the achievement the overall business objective,
- Focusing on setting clear performance objectives and expectations through the use of results, actions and behaviours,
- Defining clear development plans as part of the process, and
- Conducting regular discussions throughout the performance cycle which include such things as coaching, mentoring, feedback and assessment.
Performance Appraisal properly describes a process of judging past performance and not measuring that performance against clear and agreed objectives. Performance Management shifts the focus away from just an annual event to an ongoing process. Figure 2.1 is a process diagram that provides a graphical view of the major differences between the two processes.
Figure 2.1 – Graphical view of the difference between Performance Appraisal and Management
Typical Outcomes from Annual Appraisals
Most recent research suggests that annual staff reviews are generally perceived as a difficult and painful process by both managers and employees. As there are typically no objectives which are set in appraisal systems, there is no link to strategic or operational outcomes. If the CEO’s objective was to increase margins by 3%, employees may be aware of the CEO’s intent but they are usually not measured on this objective in their individual appraisal. Therefore, there is no linkage in the appraisal review and no linkage at a team or department level.
Misdirected Employee Bonuses
This situation has been illustrated many times where employees and managers have received favorable reviews and bonuses and yet the organisation has not achieved its goals.
The organisation may be losing millions of dollars and yet still paying out bonuses to its managers and employees.
Too Painful, Emotionally Charged
High stress levels for both managers and employees also become a factor. They both know they will be judged on the outcome of the appraisal and the fallout is often destructive rather than constructive. The reasoning behind this is that there are rarely any pre-defined measures or objectives and the employee review is not based on any considered evaluation criteria. The employees’ remuneration and future are at stake and the goodwill of the managers future resources are also at stake. This leads to high stress in the case of both individuals and this is a poor emotional state in which to have a thorough discussion about employee performance.
Poor Understanding of Expectations
Where the appraisal system is poorly communicated, both the employee and manager enter these discussions with low confidence levels. This is due to a lack of “rules” as to how to go about the appraisal process and a lack of understanding of the expected outcomes. As this process is infrequent, it is viewed by the employee as an opportunity to discuss remuneration, promotion prospects and other issues related to the employee. This means the discussion is dominated by employee content rather than what the manager needs the employee to do for the next year. This leads to vague definition of performance goals and perpetuates the system of poorly defined and executed appraisals.
As an annual staff review is so infrequent, both managers and employees find it difficult to remember what actually happened during the year. Both typically come to the meeting ill prepared with little meaningful content to discuss. This makes the appraisal more difficult and frustrates both the employee and manager.
More often than not, the annual appraisal is executed on the employees’ anniversary which does not coincide with any particular performance period. If appraisals are conducted annually on the anniversary date, it is only possible to align at best only 50% of your staff with future objectives, assuming there is an even distribution of start dates across the employee workforce. Given that most appraisal systems are not automated, there is poor reporting and therefore low visibility as to who did or did not achieve their objectives.
Subjective Manager Opinion
This means that an employees’ future is wholly dependent on their manager’s highly subjective opinion. The CEO or other executive management does not have clear vision as to who achieved their objectives and who did not. The outcome for the CEO is that they do not have the ability to see failure as it is occurring. Instead, they see failure after the fact and radical adjustments are then required to repair the situation. By using standalone appraisal systems, the outcome for the line manager is that they have additional pressure applied to them, to fix a problem which has become a major issue and which could have been otherwise identified and fixed in a very timely fashion.
Employee Performance Not Aligned to Promotions
Given that annual appraisals are only conducted once yearly, most line managers only seriously think and plan once a year. The consequences are poor resource management, put-out-the-fire management and costly and reactive problem fixing on the fly. Given that most appraisal systems are manual and on paper, the data arising from an excellent performance typically does not find its way into the succession planning process. Employees are therefore often disillusioned to find that they have been passed over for further development or a promotion when they have performed strongly for several years.
Poor Development Opportunities
This is a primary cause for employees leaving the organisation. Most appraisal systems do not feature a competency assessment or an active development plan that both the employee and manager have mutually agreed to. Staff often get disillusioned and leave the organisation if they can see no personal development prospects or if personal development has not occurred in practice for the last several years, despite numerous promises.
No Consequence For Non-Participation
Given that most appraisal systems are manual, reporting is weak and therefore compliance reporting is not visible. This inevitably means that managers learn that they do not have to perform reviews and therefore they don’t because there is no negative consequence for them. Equally, employees learn that there is no consequence to not being reviewed, they lose faith in management and invariably look for somewhere else to work. Most manual appraisal systems suffer from sub 30% compliance and can get to this point after only 18 months of operation i.e. roughly one to one and a half performance terms.
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Typical Outcomes from Performance Management
If Performance Management is implemented correctly with specific objectives tied to the strategic and operational plan, organisational performance outcomes will likely increase very quickly. For example, if the CEO asked for a 3% increase in gross margin, this objective would be cascaded down to every department, team and individual who can influence the increase in gross margin.
Those who are successful at achieving this objective will get a favorable review, those that could not, will get an unfavourable performance evaluation in the absence of extenuating circumstances. The process of Performance Management therefore drives organisational performance outcomes. Employees that achieve the organisational goals are rewarded with favourable reviews and bonuses in line with their performance and contribution to the organisation.
The employee and manager communicate more frequently and agree on changed objectives to suit continuing changes in conditions and priorities. This is an inclusive and collaborative process, which ensures that the employee has input and does not feel they have wasted the year. The employee works towards specific objectives that are relevant. If the organisation is using a Performance Management product that has a performance diary, both the manager and employee attend the review meeting with copies of their performance diary notes. This contains content from the performance period to be reviewed. Given that both have content, they feel much better prepared and stress is lower than if they were attending a meeting not aware of the subject matter.
Everyone Knows the Rules
Where there is a well structured Performance Management system that is effectively communicated, both the employee and manager enter the process with better levels of confidence as there are “rules” that clearly stipulate what is being assessed and how. Employees are assessed on achievement of objectives that have been clearly identified and agreed to. Managers have a better framework to assess an employees’ performance as they are familiar with the criteria to assess the employee. The outcome is that both individuals have an informed discussion and focus on achievement of both personal and business objectives, not on issues that are irrelevant.
Better Recording Opens Up Communication
If the organisation has a system with a performance diary, then both parties are prepared with relevant content to discuss. They have diary notes that relate to performance during the entire performance period. This raises confidence and reduces stress levels. Both parties feel more comfortable and they can have a content rich and factual discussion about performance.
Frequent Communication Reduces Stress
Given that these performance reviews happen more frequently, the discussion centers on performance of objectives rather than being dominated by the employees’ needs. The needs of the business are discussed more frequently to achieve specific performance outcomes. This means both the employee and manager communicate more effectively and achieve better outcomes. Emotionally charged discussions tend to be displaced by business focused discussions on achievement of objective outcomes.
As expectations are modified when a Performance Management system is introduced, most organisations switch to defined performance periods. This means that strategic and operational objectives are set at the beginning of the performance period. Formal performance reviews are then conducted quarterly or half yearly and enable management to direct and fine tune effort in relation to the objectives.
Appraisals Become Relevant for Everyone
By conducting more frequent reviews, objectives can be adjusted and modified to suit changing business conditions. This dramatically increases the probability that the objectives are relevant and are able to be acted upon during the performance period.
By performing frequent performance reviews, visibility is increased dramatically. Areas of non performance receive much more focus and attention and problems can be acted upon much quicker. Most Performance Management systems provide reporting as to who has or has not achieved their objectives (departments and individuals). Adjustments to objectives or strategy can then be made to ensure expectations can be met. Alternately, expectations can be modified as appropriate. By reviewing more frequently, all managers and employees start to plan and execute to clearly thought out objectives. This results in better resource management and enables managers to work on the business, not in the business.
Employee Learning and Development Starts to Happen
Given that most Performance Management systems require managers and employees to commit to a development plan, employees experience real personal development and become more engaged with the organisation. They feel part of the organisation and start to understand that they and the organisation are interdependent. The organisation is developing the employee and the employee is working towards developing the organisation by achieving its goals. The majority of Performance Management systems are able to provide graphical compliance reports. Therefore, the setting of objectives and development plans for employees can no longer be ignored. Employees see real planning, are involved in setting meaningful objectives and have input into personal development plans which benefit both themselves and the organisation. In all, this results in an engaged workforce who are extremely committed to achieving real outcomes for the organisation.
Performance Management Research
Several studies have been conducted in Australia that indicates the predominant method of assessing employees in Australia is appraisal. During 2004, Associate Professor Alan Nankervis of Royal Melbourne Institute of Technology conducted a study of 992 Australian organisations. One of the outcomes was that only 2.4% of organisations reviewed their employees against objectives, the remaining 97.5% were a combination of some type of appraisal.
Furthermore, The Performance Management Institute of Australia conducted a survey of Australian employees’ attitudes towards Performance Management in the workplace . Approximately 450 employees responded from a wide variety of businesses and enterprises. The research found that, over 59% of employees received performance reviews once per year or less. This implies that the majority of Australian managers are failing to properly engage their employees. Effective management requires a continual goal setting and review process which gives employees regular feedback of management expectations and frequent praise for achievement of desired goals.
Australian Managers Still Doing Standalone Appraisals
What the survey results imply is that Australian managers are performing appraisals, not performance reviews and objective setting. The results may also mean that managers are not targeting their teams to achieving strategic goals which are at all time-bound. Usually, employees who are not formally reviewed for a year or more are expending work effort in a manner or direction which is not readily visible to their manager. This lack of employee engagement is leading to disaffection from the employees who can make and want to make a difference to the organisation. In our view, appraisals add very little value to the performance of an organisation and in some circumstances may actually be detrimental to organisations who wish to move towards Performance Management. A contributing factor may be that line managers who have been conducting appraisals have also seen little, if any, impact on departmental or team performance as a consequence of conducting these appraisals.
Ascender conducted several research studies in focus groups over the last four years and during seminars on Performance Management. To summarise the findings, 87% of organisations have some type of appraisal system. However, this is usually referred to as the Performance Management system. Of the 87% that have these systems, 95% were manual systems without performance objectives or development plans. It was clear from the research that many organisations incorrectly view manual annual appraisal systems as Performance Management systems. Organisations are increasingly adopting Performance Management systems. However, organisations in both Australia and the USA are experiencing 100% to 300% yearly increases in organisations acquiring Performance Management systems exceeding the existing forecast rate.
In contrasting Performance Appraisal with Performance Management, it suggests that performance appraisals are indeed an evaluation of an employee’s work. However, Performance Management reflects the continuous nature of performance improvement and employee development, recognising the importance of effective management, work systems and team contributions.