The How-To: Establishing A Performance Management System For Your Enterprise

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All companies differ wildly in their business goals and requirements, and in their definitions and measures of success, so, isn't it a little odd that most still use the same conventional approach to plan and monitor the performance of their employees and the company as a whole? The seemingly ubiquitous annual ratings-based staff appraisals and quarterly company performance analyses are often relied upon simply because they are the methods most familiar to employers and feel easiest to implement by HR and Managers. But ease does not always equate to effectiveness.

The overall goal of a performance management system is to set targets that are derived from and linked to the corporate objectives and monitor performance levels and development activities in a structured way, so that issues are addressed in good time and with a clear purpose. When implemented well, it drives employee engagement in the company's overall goals, which leads to improved performance of both employees and company.

Contrary to popular belief, employers have many choices when it comes to designing the best performance management system for their organization- reflective annual versus continuous real-time practical appraisal; backward focus on past performance versus forward looking focus on potential; ratings-based versus rating-less; individual-centred versus team-centred; and so on. But with so many options to choose from, how can a company determine which is best for its purposes? Taking a close look at staff preferences alongside the goals, priorities and resources of a business can bring the answers needed to create a tailored system that meets the unique goals and requirements of an organisation.

Defining the best performance management system for your company

An analysis of research into performance management systems, published in the journal Management Accounting Research, suggests that four key areas should be explored by companies looking to develop a truly effective and company-specific performance management system.

  • Identify the objectives of the organization- what are the corporate goals and strategic priorities and needs of the business?
  • Consider how easily and effectively any system developed can be implemented- what resources do you have within HR? What level of skills and training do existing managers have in performance evaluation? How capable are managers and HR of adopting new systems that require new skills?
  • Determine how you wish to set performance targets- is the focus on individual or team performance, or on the company as a whole? Do these targets cross over several functions or geographies?
  • Look closely at the company's performance reward system- how is the workforce competitively rewarded, best motivated and engaged? Are their needs focused on feedback or on recognition for work done?

Consider these questions carefully as the answers they elicit will help to provide clarity about the type of performance management system that will work best for your company, and reveal if the current approach being taken is truly achieving its aim.

Why strategic implementation is vital for success

While tailoring a performance management system's design to address the exact needs and objectives of a company is the first vital step in transforming the performance of a business, it's a move that's essentially futile unless the system is communicated and implemented effectively.

As employees are the life force of a company, implementation must begin with clarifying the link between employee performance and the overall desired business outcomes. Indeed, research published in Applied Psychology: An International Review highlights that in order to manage individual performance, employees need to understand the organisational context of their role, tasks and performance. As such, a well implemented performance management system must be clearly communicated to employees, with business priorities highlighted and the relationship between individual employee goals and the company's larger goals identified.

Companies can also significantly improve the efficiency of their performance management approach by scrutinizing the existing system and eliminating or redesigning processes that are repetitive, achieve no real goal, or require a disproportionately large amount of time and/or manpower. This is something that is best achieved with input gathered from HR, managers and employees. Ask them which processes they struggle to execute, which they feel serve no real goal and which they feel are excessively time-consuming or are not given enough attention. It's also important to ask them how they think these shortcomings can be improved.

How to drive employee engagement

Many companies suffer with staff who are disinterested when it comes to performance management and view activities like appraisals as little more than box-ticking exercises. There are a number of ways to change this attitude:

1. Identify what motivates the workforce: In most companies worldwide, employee performance is rewarded via an annual pay rise, with top performing employees given a larger increase than poor performers. Yet, very often the pay rise has little real world meaning and is not truly motivating. Findings from Willis Towers Watson's 2016 Global Talent Management and Rewards and Global Workforce Studies show that 99% of employers use annual pay increases to incentivise staff, yet only 40% believe this approach truly drives their employees to perform better. Employers can avoid falling into this trap by asking their employees how they wish to be rewarded for work well done. You may find that better benefits, career advancement opportunities, or external rewards are a more potent incentive.

2. Reward employees fairly: Any reward quickly loses its shine if it is found to be less generous than those given elsewhere. Employers should, therefore, stay aware of market rates for the different employment sectors relevant to their company and make sure their performance management philosophy rewards performance at a level that is fair across the industry. Feeling fairly rewarded for your efforts is a key driver of employee motivation and retention, yet it is something that figures from the aforementioned Willis Towers Watson study show is lacking. Just 51% of workers worldwide feel they are fairly paid compared to others- a figure that drops to 38% in the UAE.

Ensuring your reward system clearly differentiates between the different levels of performance is another way of increasing feelings of fairness among employees, particularly as the figures show that only 55% of employers feel that merit increases effectively differentiate pay based on individual performance. Noticeable differentiation in rewards can also help with motivating employees to improve their performance.

3. Focus on clear communication and collaboration: Employees tend to be more engaged and perform better when they understand the wider significance of their tasks and are given responsibility over assessing their performance. So, improving communication between employees and managers and giving employees a degree of ownership in the performance management process can help to boost engagement. This can be achieved by ensuring managers sit down with employees to discuss and clarify key objectives when they are set- objectives that must be SMART (specific, measureable, achievable, relevant and time-specific). Employees should also have input into what their key objectives are, what they need (skills or resources) to achieve these objectives, how their success is measured and how often their performance will be assessed.

Exactly how performance is rewarded should be spelt out too, including a clear definition of how the levels of performance are differentiated. Making a performance management system a two-way process, in which employees can request meetings and give suggestions about how to improve the way they carry out their tasks and are assessed, is also vital because an employee is more likely to remain engaged in a collaborative process.

4. Challenging convention: Other strategies worth considering for improving employee engagement include rating-less systems and spot performance reviews, rather than formal annual appraisals. When correctly executed, a rating-less system allows time to be reinvested into better and more effective ongoing communication between employees and managers, because both are no longer focused on quantifying past performance and completing forms. Instead, they are focused on discussing what the employee has done well and how to build on that. In short, the elimination of ratings turns the appraisal process into one that is forward-looking and motivating. However, it is important to bear in mind that for a company to effectively adopt a rating-less system, managers will need training on how to objectively and consistently appraise staff in this manner.

5. Championing career development: A literature review published in the European Journal of Business and Management has shown that continuous staff training develops employees and improves organizational performance by maximizing the abilities and engagement of the workforce. Employers looking to improve employee and company performance should, therefore, prioritize the provision of skill development opportunities for staff. Giving employees realistic opportunities for career advancement can also help to boost their performance by creating achievable goals that serve employees' ambitions and unleash their potential.

Time to take action

While all of the points discussed in this article are important in the development of a system that truly engages staff, monitors performance and ultimately drives improved organizational performance, a system will only achieve results if it is executed in an employee-centred way that follows the spirit, rather than the process or letter, of the law.

At a time when companies worldwide are eager to maintain a competitive edge, focusing resources on creating a clearly defined and effective performance management system, may seem relatively unimportant, especially if past performance management approaches have fallen short of expectations. However, past failure does not mean that performance management systems don't work, it simply signals failure of proper implementation and a need to do things differently. And where management systems are concerned, this means placing more emphasis on being collaborative, easy to understand, fair, continuously motivating to employees, and focused on the future.

Related: Ditch Annual Appraisals: Continuous Performance Management Is The Way Forward