Performance management: how to make it work in your company

Performance Management systems are undergoing radical changes. Leading companies around the world are in the process of scrutinising and restructuring underlying processes and, in particular, performance appraisals (Cappelli & Tavis, 2016).

This is because future professionals will need a completely different skillset than previous generations. Dynamic skills, a willingness to adapt and the methodical handling of complex work realities will take centre stage. An old-fashioned performance management process based on rigid hierarchies and a single round of feedback per year will no longer do justice to this complexity.

In the following article, we take a closer look at the topic so that your company can start taking the necessary steps for efficient performance management now. It will serve as a starting point on your journey, although we will also link you to more in-depth knowledge articles on the various topics. By the end, you will be a performance management expert and will be able to get to grips with the subject yourself!

What is Performance Management?

Explanation of terms

Performance Management is the process of measuring, managing, and controlling performance within teams or organisations (Hilgers, 2008).

The goal of Performance Management systems

Performance Management is used by organisations to enhance the performance and growth potential of employees (and managers). The direct aim is to create greater efficiency in achieving the company's goals.

However, performance management can and should also be seen as a tool for targeted employee development. This can strengthen the satisfaction and loyalty of skilled employees to a company – which in turn has a positive impact on the company's success (Personalwissen, 2019).

This last point will become even more important in the current and increasing shortage of skilled workers: the new and future generations of skilled workers have entirely different demands for employers. For Generation Y, for example, “career development and opportunities for further development” are the most important criteria for choosing a job (Mercer & Acca, 2010). And since at least 75% of the workforce will belong to Generation Y from 2025 onwards (Wyman, 2016), we believe it makes sense to adapt performance management systems to these requirements as quickly as possible.

The 3 elements of Performance Management

The classic Performance Management process can be divided into the following three elements (Qualtrics):

  • Goal definition and agreement
  • Performance assessment, recording, and measurement
  • Link to the incentive system (performance-related remuneration)

Even today, the performance management process can be roughly divided into these areas. What modern companies are working on, however, is the way in which these three elements of the performance management process are defined, exercised and weighted.

Performance management methods of yesterday: Inefficient & outdated

In a survey conducted in 2015 (Mercer), 75% of the (German) companies surveyed stated that they wanted to work on their performance management system. However, although there seems to be a consensus that performance management is important and necessary, this belief is implemented in very few companies:

According to a 2020 study, “most companies in the German-speaking region [...] do not engage in regular, structured performance management” (FBM GmbH, 2020).

The difficulty is therefore not necessarily in convincing companies of the benefits of performance management, but in arming them for the challenges and potential pitfalls that arise. And that is exactly what we are doing now.

8 critical mistakes made in performance management

In her eye-opening book “How Performance Management Is Killing Performance - and What to Do About It”, Tamra Chandler diagnoses and dissects 8 serious mistakes that companies make in traditional performance management (2016).

1. A theory without evidence is just a (bad) theory
There is no solid evidence that traditional performance management leads to improved performance. The German Association of Human Resource Managers states: “Performance appraisals and evaluations are an administrative hurdle for the majority of managers without delivering the promised benefits” (Mercer, 2017). Deloitte also came to this conclusion after taking a closer look and realising that their performance management was taking up around 2 million hours a year – without any satisfactory results (Ewenstein et al., 2016).

Key take-away: Do a cost-effectiveness analysis for your current performance management and look at solid data instead of just trusting your feeling!

2. Nobody really opens up to the person that can decide everything
Traditional performance management hinders the taking of feedback and limits honest dialogue. Let's face it, when the person in front of you is making judgements about your salary, promotions, and other life-changing issues, you can't be expected to spill the beans completely uninhibited.

Key take-away: Establish performance reviews that take this challenge into account and favor as much transparency, openness and eye-to-eye conversations as possible.

3. Nobody will remember a good job
Unfortunately, in human nature, it's the bad moments that stand out like beacons. According to Tamra Chandler (2016), performance reviews therefore often place too much emphasis on areas for improvement and too little on an individual's strengths, contributions, and potential. In fact, an EY job study (2019) found that ultimately only 60% of employees feel sufficiently valued in the workplace.

Key take-away: Integrate discussing good performance or positive feedback as an integral part of your performance reviews.

4. Nobody is an island
In traditional performance management, the focus is on the individual, although systemic or organisational challenges often have a significant impact on our performance. It is quite often impossible to separate the performance of individual employees from the performance of the group, team, or organisation as a whole.

Key take-away: Pay more attention to common goals, company processes and corporate culture.

5. We are not machines
Fairness and standardisation in evaluations and the assessment of performance simply cannot be achieved. We are all human and therefore biased.

Key take-away: Everyone involved should have the opportunity to share their perceptions. Solutions and potential should take center stage. A one-dimensional top-down assessment of this year's performance is simply not fair. A feedback meeting should therefore be just that – a conversation.

6. We are not machines, part 2
Given our biases, how can we rely on the results of performance appraisals to make decisions about key business functions such as compensation management, succession planning and development goals?

Key take-away: Stay in the conversation and consider different opinions and perceptions to make important decisions regarding performance.

7. This is the competition: Be nice to each other!
Comparing people to each other undermines efforts to create a collaborative culture. If we want agile organisations where people with different skills, backgrounds, and perspectives work together, then we need to dismantle the competitive constructs that undermine these ideals.

Key take-away: Consider corporate culture and team spirit in performance management: they are extremely important levers!

8. We are not the Pavlovian dog
Tamra Chandler (2016) emphasises that performance payments do not lead to improved performance. Traditional performance management is based on the assumption that extrinsic motivators are the best way to get employees to work harder and better. But Tamra Chandler is not the only one to doubt the effectiveness of these methods. Behavioral experts such as Alfie Kohn (1993) and Uri Gneezy (2023), among others, support the assumption that while performance payments can motivate employees for short-term goals and simple tasks, they may actually reduce motivation for larger tasks in complex social contexts.

And it has long been clear that people are much more motivated by activities that they personally find rewarding. Take a look at the existing models that we describe in our article on employee satisfaction.

Key take-away: Find out what motivates the individuals in your company and utilise this.

In sum: Above all, inefficient processes, outdated top-down performance appraisals, misguided incentive systems and a lack of prioritising team spirit and corporate culture seem to be the drivers of corporate inertia when it comes to performance management.

But if the traditional performance management process is going so disastrously wrong, why and for what purpose have the traditional performance management models become established in the first place?

Origin

The origins of performance management are not particularly encouraging. This type of performance monitoring and assessment was first used in the military during the First World War to weed out people who performed inferiorly (Mercer, 2017). In the 1950s, performance management was then increasingly used by companies. Here, too, the focus was initially on operational efficiency in the context of extremely rigid hierarchies (Cappelli & Tavis, 2016).

The classic approach: Management by Objectives

Management by objectives is a management technique from the 1950s that ideally reflected the philosophy of performance management systems at the time (Maier et al., 2018). Specifically, management by objectives (MbO) is a system of employee management in which employers and employees agree on specific goals to be achieved within a certain time frame.

7 steps tp management by objectives

The focus is on whether, and not how, the tasks have been fulfilled. In this model of performance management, the individual objectives are directly aligned with the strategic corporate objective and take less account of the personal development of employees. The management by objectives approach therefore corresponds to a transactional understanding of leadership.

In our article on performance management methods, which we will be publishing shortly, you will find out what transactional and transformational leadership techniques are. Also, why the balanced scorecard is a more modern, but still unsuccessful model for your performance management.

Tomorrow's Performance Management methods : already a success today

When Robert S. Kaplan and David P. Norton developed the Balanced Scorecard in the 1990s, it quickly gained popularity. Although this model is also designed for top-down performance management, when compared to the MbO, the development and potential of individual employees were considered for the first time. Furthermore, the customer, process, and development levels were also included in the target setting and performance appraisals (adapted from Fleig, 2021):

Performance management orientation

Now, even this model is outdated. The working world is becoming more complex, the role of managers is more comprehensive, and the needs of new generations of professionals have significantly changed (Mercer, 2017).

Hence, we generally need to develop more purposeful systems for performance appraisals and Performance Management that can cope with the unsteady, complex and complicated conditions of the current working world. What can this look like? Read on to find out!

Agile Performance Management

The idea of agile performance management is to improve both the quantity and quality of an organisation with the help of target-oriented management of performance and results (Wolf, 2021). The focus is therefore on improving both quantitative metrics such as profits and qualitative aspects such as employee satisfaction.

The following aspects illustrate how agile performance management differs from traditional models in order to meet the requirements of today's working world:

  • Open feedback instead of top-down performance evaluation
  • Team responsibility instead of control by the manager
  • OKR instead of MbO
  • Shared values instead of monetary incentives
  • Training managers instead of blaming them

Open feedback instead of top-down performance evaluation

Feedback and performance appraisals are still considered an extremely important tool in performance management. And we can hardly imagine that this will change one day! This is because performance appraisals offer you the opportunity to record, appreciate and discuss the working methods and performance of employees and managers. They provide information on whether certain goals have been achieved and which behaviors have contributed to the success in achieving these goals (Crisand & Rahn 2011).

Depending on the choice of evaluators, a distinction can be made between 3 types of performance appraisal (Qualtrics):

  • Top-down: The performance appraisal is carried out by superiors.
  • Sideways: Colleagues assess each other
  • 360-degree feedback: feedback on a person is obtained from several people at different levels

However, although performance appraisals continue to play an important role in performance management, a radical change is also noticeable here. Modern and agile organisations, for example, are increasingly distancing themselves from top-down performance appraisals that take place once or twice a year.

We have already explained the reasons for this above, but the whole thing can also be well documented in figures. For example, a study by Bildungsspiegel (2016) found that as many as 58% of the employees surveyed found traditional performance appraisals to be a “negative experience”. And only 39% of managers believe that performance appraisals as they are currently conducted help to improve business results.

Meanwhile, open, two-way forms of feedback within teams are clearly gaining in popularity. Companies such as General Electric and Adobe have completely eliminated annual reviews, ratings, and rankings and replaced them with continuous and forward-looking feedback (Ewenstein et al., 2016).

You will soon find out how the performance management tool “performance appraisal” is changing and which methods are particularly effective in our article: "Performance management: performance appraisals".

Team responsibility instead of managerial control

In the traditional way of thinking, line managers are responsible for managing employees. They develop employees' potential, manage their performance and assign tasks according to their competences, among others. In agile performance management, however, the responsibility lies with the individual employees. Interaction with the team serves to support them. This approach corresponds to the first value of the “Agile Manifesto” (Agile Compass, 2017):

We value individuals and interactions more than processes and tools

(Agile Compass, 2017)

OKR instead of MbO

Agile performance management is no longer just about quantitative metrics, but increasingly about qualitative indicators such as employee satisfaction, the working atmosphere, etc. Accordingly, the previously used MbO model is increasingly being replaced by the “Objectives & Key Results” (OKR) model (Wolf, 2021):

Objectives & Key Results example

MbO is based on quantitative annual targets for individuals, which are often uninspiring. In contrast, the OKR approach first defines a higher level of qualitative goals (objectives), from which certain criteria (key results) are then derived (Krapf, 2018). These objectives are set for the entire team and can only be achieved through good cooperation. The focus is also on the “how” (i.e. the collaboration and the entire work process) (ibid.).

As you can probably already see, the model is a helpful tool for eliminating many of the serious mistakes in performance management described above. It goes even further:

OKRs are not only more timely than MbO because objectives are formulated in a more qualitative and team-oriented way. There is another important difference: the OKR model is less linked to a monetary incentive system (Wolf, 2021).

Shared values instead of monetary incentive systems

The current development towards corporate management, in which the vision or goal of joint work takes center stage, means that monetary incentive systems are also currently the subject of much debate. This is because the conventional “mechanistic link” (Mercer, 2017) between performance appraisal and remuneration contradicts the idea of striving for common goals.

Rather, it is recognised that employees also strive for the fulfillment of higher (company) goals. Models of employee satisfaction such as Maslow's pyramid or Herzberg's two-factor theory underpin the realisation that employee needs are complex and cannot be satisfied by salary alone. As a result, many companies are increasingly focusing on opportunities for personal development and self-realisation as motivating factors (ibid.).

Performance management in leaderships

We have now shown you that there are performance management methods and models that do justice to a modern, agile company. But how do you move from theory to practice? Where can, and should you start implementing more modern performance management models and methods? Our opinion is: Where there is inspiration and leadership. In management, that is.

How exactly this should be done and which different management techniques need to be considered in order to establish good performance management in your company is a topic in itself. We have therefore written a complete article on performance management and leadership, in which you can find out everything you need to know.

But one thing can be said in advance: if you want to introduce and implement modern performance management methods in your company, managers not only need to know the relevant values, models and methods, they need to be convinced of them and internalise them. In our opinion, it is not enough to send a PDF to the mailing list. Instead, there needs to be room for discussion, constant feedback and training to raise awareness of the importance and effectiveness of such performance management methods.

How to establish a modern performance management process in your company

To ensure that your Performance Management system adds value to the company and its employees (and isn’t just an end in itself), you can take the following steps (adapted from: ibid.):

Preparation

A well-thought-out plan is only half the battle when it comes to Performance Management. We therefore recommend that companies take sufficient time to prepare.

Guiding questions:

  • Where does the company currently stand, what are the needs and bottlenecks (that make Performance Management necessary)?
  • What has to be achieved with Performance Management? How can the Performance Management system contribute to the overall corporate strategy?

Tip: It’s best to define a unified performance culture. And do it in such a way that both managers and employees understand this definition!

Design

This is about describing the Performance Management strategy in a precise, clear and all-encompassing way.

Guiding questions:

  • What philosophy do you want to represent and pursue internally and externally?
  • How can you create common values that employees like to follow and that bring you closer to your corporate goals?
  • How will you conduct performance appraisals? What form of feedback is most appropriate and how often or on what occasions should feedback be given?
  • How should employees be motivated? With monetary incentives, development opportunities, or both?
  • What culture should be implemented and maintained in the company? 69% of companies want to develop towards a high-performance culture (Mercer, 2017). You too?
  • What technology and software do you want to use for Performance Management?

Tip: Clarify who takes on which role or who is responsible for which processes and which structures need to be implemented (by whom).

Implementation

In this step, the elaborated structures, processes, platforms, and the necessary software are implemented.

Guiding questions:

  • How do you calibrate the current processes and keep each other up to date efficiently? This is especially important if different people are responsible for different areas.
  • How do you internally communicate your strategy and processes? In order for Performance Management to really work and be integrated into the corporate culture, all employees should be implicated.

Tip: in our experience, it’s a good idea to offer training and education!

Continuous optimisation

And finally, you mustn’t lose sight of the goals and the process after implementation.

Guiding questions:

  • Is feedback really being given in the way you intended or in the way that is most beneficial for everyone?
  • Are standards being met?
  • Is everything working the way you thought it would?

Tip: in the end, things will probably turn out differently than you’d originally thought. This is where agility is needed! According to the motto of US President Eisenhower: “Plans are worthless, but planning is everything” (Angel et al., 2020). In short: continuous optimisation of processes is a natural part of good performance management.

Simple and targeted performance management with our tool Peer Feedback

Lifelong learning and personal development, the appreciation of individuals and the pursuit of common goals—all this and more is the focus of modern, successful Performance Management. Top-down performance appraisals cannot meet these requirements.

Therefore, in addition to open, frequent feedback between all levels of the company, so-called 360-degree performance appraisals are becoming increasingly important. Both employees and managers can thus quickly receive feedback that’s goal-oriented for them, as individuals. Unfortunately, this type of performance appraisal isn’t the norm in many companies because it’s “too costly” (FBM GmbH, 2020). The problem is quickly apparent: companies seldom use the appropriate tools for such processes. After all, a third of companies in Switzerland, Austria, and Germany still use Microsoft Excel and similar software (FBM GmbH, 2020).

At Pulse Feedback, we’ve actively been working for years to help companies develop a good feedback culture. That is why we’ve now developed Peer Feedback for you. An efficient tool that makes creating, collecting and giving 1:1 feedback a child’s play!

References

Angel F. G., Ceberio M. & Kreinovich V. (2020). Plans are Worthless but Planning Is Everything: A Theoretical Explanation of Eisenhower’s Observation.

Agile Kompass (2017). Das Agile Manifest.

BWL Lexikon.

Fleig, J. (2021). Balanced Scorecard. Business Wissen.

Cappelli, P. & Tavis, A. (2016). The Performance Management Revolution. Harvard Business Review.

Crisand, E. & Rahn, H.-J. (2011). Personalbeurteilungssysteme. Ziele – Instrumente – Gestaltung (4. Auf.). Hamburg: Windmühle.

Fritz, P. (2016). Transaktionale Führung vs. Transformationale Führung. Dr. Fritz Führungskreise.

World Economic Forum (2016). The Future of Jobs. In: Global Challenge Insight Report.

FBM - Frankfurt Business Media Gmbh (2020). HR-Performance-Management: Eine Trendstudie für die DACH-Region. In: F.A.Z.

Gneezy, U. (2023). Mixed Signals: How Incentives Really Work. Yale University Press.

Hilgers, D. (2008). Performance Management.

Kohn, A. (1993). Punished by rewards: The trouble with gold stars, incentive plans, A’s, praise, and other bribes. New York.

Krapf, J. (2018). Wie ein modernes Performance Management die Agilität unterstützt.

Maier, G., Bartscher, T. & Nissen, R. (2018). Management by Objectives. Gabler Wirtschaftslexikon.

Mercer & Acca (2010). Generation Y: Realising the Potential.

Mercer (2015). Performance Management Survey Report.

Mercer (2017). Performance Management im Umbruch.

Personalwissen (2019). Wie unterstützt Performance Management die Mitarbeiterbindung im Betrieb?

Qualtrics. Performance management: Moving beyond annual reviews.

Wyman, O. (2016). What Role will HR Play in 2020-2025. In: 19th Annual Global CEO Survey.

Wolf, G. (2021) Agiles Performance Management. Haufe.