Performance management: How to do it successfully
Performance Management systems are undergoing radical changes. Leading companies around the world are questioning and restructuring underlying processes and especially performance appraisals (Cappelli & Tavis, 2016). This upheaval was first felt in the Anglo-Saxon world. But European companies are now also taking a cue from Microsoft, Google and Co. and increasingly distancing themselves from classic Performance Management systems.
And for good reason: technology, entrepreneurship and consumer behaviour are changing so fast that it’s almost impossible to predict which skills will be required for future jobs. 65 % of children currently attending primary school are likely to be in a job that does not exist today (World Economic Forum, 2016).
Future professionals will therefore need a different skill set than previous generations. Dynamic skills, willingness to adapt and methodical handling of complex work realities will come to the fore. A classic Performance Management system based on rigid hierarchies and a single feedback round per year will no longer represent this complexity.
So that your company can already start taking the necessary steps for efficient Performance Management, we take a closer look at the topic in the following article.
The following questions will be answered: What does Performance Management include? What should it (no longer) look like today? And how can a target-oriented Performance Management system successfully be implemented in a company?
Table of contents
- What is Performance Management?
- The 3 elements of Performance Management
- Yesterday's Performance Management: why it no longer works
- Tomorrow’s Performance Management: today’s success
- Create successful Performance Management systems
- Simple and targeted performance management with "Peer Feedback"
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.
But Performance Management can and should also be understood 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 effect 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
- Linkage to an incentive system (performance-related pay)
However, this understanding of Performance Management is only valid with certain limitations. First, these aspects are designed and weighted differently by each company. Secondly, such classic Performance Management systems are increasingly being replaced by newer processes, as you’ll learn in the next sections.
The core: Performance appraisal
Feedback and performance appraisals are still considered an essential tool in Performance Management. And, we can hardly imagine that’ll ever change! After all, performance appraisals provide the opportunity to record, assess and discuss the way employees and managers work and perform. They provide information on whether certain goals have been achieved and which behaviours contributed to achieving those goals (Crisand & Rahn 2011).
Depending on the assessor’s choice, a distinction is made between 3 types of performance appraisals (Qualtrics):
- Top-down: performance appraisal is carried out by superiors
- Sideways: colleagues assess each other
- 360 degrees: individuals’ feedback 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. Modern and agile organisations are, for example, increasingly distancing themselves from top-down performance appraisals. In contrast, open and mutual feedback within teams are clearly gaining in popularity.
Yesterday's Performance Management: why it no longer works
A survey from 2015 (Mercer) already showed that 75 % of the (German) companies surveyed said they wanted to work on their Performance Management systems. However, although there appears to be a consensus about the importance and necessity of Performance Management, this belief is implemented in very few companies:
According to a 2020 study, "most companies in the DACH region [...] don’t operate a regular, structured Performance Management system" (FBM GmbH, 2020).
And the German Association of Human Resources Managers states: "Performance reviews and ratings represent an administrative hurdle for a large proportion of managers without yielding the promised benefits" (Mercer, 2017).
Inefficient processes and performance appraisals that don’t have clear objectives seem to be the main drivers of corporate inertia with Performance Management. But, why and for what purpose were the classic models of Performance Management established in the first place?
Even the origins of Performance Management aren’t particularly encouraging. These types of performance monitoring and appraisal were first used by the military during the First World War to pinpoint individuals who were inferiorly performing (Mercer, 2017). Then, Performance Management was increasingly used by companies in the 1950s. Here too, the focus was on operational efficiency in the context of extremely rigid hierarchies, especially in the beginning (Cappelli & Tavis, 2016).
The classic approach: Management by Objectives
Management by Objectives is a leadership technique developed by Peter Drucker in the 1950s and perfectly suited the philosophy of Performance Management systems at that time (Maier et al., 2018). Specifically, Management by Objectives (MbO) is an employee management system in which employers and employees agree on specific goals to be achieved within a certain time frame.
In this Performance Management technique, individual decisions are made without monitoring each decision made. Instead, it checks whether tasks have been fully completed according to the agreement. The focus is less on how work is done and something is achieved, but on what has been achieved or should be achieved.
When George T. Doran developed the SMART goals in the 1980s, these became inseparable criteria of the MbO model. In other words, the agreed Performance Management objectives should meet the SMART criteria. SMART stands for Specific, Measurable, Achievable, Realistic and Time-bound and specifies how goals must be communicated and set to be achievable and verifiable (Business Dictionary):
- Specific: the goal must be precisely described and easy to understand
- Measurable: the defined goal must be measurable so that performance can be assessed in Performance Management. This means that quantitative criteria such as time units, number of customers acquired, amount of profit etc. are defined or at least soft indicators such as "successful project completion" are used
- Attractive: the reason why a person is being supervised for a task must be clear, and motivating
- Realistic: ensure that the set goals can actually be achieved
- Time-bound: the goal should have a clear deadline
In this model of Performance Management, the individual goals are directly oriented towards the strategic corporate goals and somewhat disregard the employees' personal development. Thus, the approach of Management by Objectives corresponds to a transactional understanding of leadership.
To explain: in a transactionally motivated work environment, employees are rational decision-makers. They strive to achieve their goals (homo economicus). Transactional leadership is characterised by clear rules and structures that are established during an exchange between two parties: if employees fulfil their standard working hours or achieve agreed goals, they’re rewarded with monetary incentives (e.g. a salary increase or bonus) (Fritz, 2018).
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):
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? Find out now!
Tomorrow’s Performance Management: today’s success
Agile Performance Management
The idea of agile Performance Management is to improve both the quantity and the quality in an organisation thanks to goal-oriented performance and results control (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 classic models to meet the requirements of today's working world.
Team responsibility instead of managerial control
In the traditional way of thinking, supervisors are responsible for managing employees. They develop the potential and control employees’ performances, they assign tasks according to competencies, and so on. They’re assisted, for example, by the balanced scorecard previously explained and by various incentive programmes (Wolf, 2021).
However, with agile Performance Management the responsibility lies with the individual employees. Interaction with the team serves as support for 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)
Accordingly, performance appraisals are also changing. As already mentioned, people are increasingly saying goodbye to strict top-down feedback. Managers are unable to live up to this change with the constant turmoil in companies and areas of responsibilities.
Instead, there’s an increased reliance on other types of feedback:
Regular Pulse surveys: through a continuous and open exchange about current bottlenecks, strengths, potentials and difficulties, the "company’s pulse" can be constantly reviewed and feedback can be reacted to at an early stage. In addition, communication with employees is done in a way where their opinions as individuals are valued and heard. Sounds good, but you don't know how to implement it? Then take a look at our efficient and easy-to-implement tool for team feedback!
360-degree feedback: whether you’re an employee or a manager, this type of performance assessment allows individuals to get a comprehensive picture of their performance, potential, and strengths at any time. Through 360-degree feedback, feedback can be, if necessary, independently obtained from several people and more responsibility can be taken for one's own further development. Actually, this is a great thing that many companies would like to further promote. However, the effort required for this kind of performance assessment is often too high, so this instrument “is only used sporadically" (FBM GmbH, 2020). Even larger corporations limit feedback "to a circle of a few target persons" despite its advantages (ibid.). The solution? An efficient tool like our Peer Feedback, which allows everyone in the company to quickly and easily gather feedback on topics of their choice.
OKR instead of MbO
Agile Performance Management is no longer only about quantitative measurements, but increasingly about qualitative indicators such as employee satisfaction, working atmosphere, etc.
Accordingly, the previously used MbO model is increasingly being replaced by the "Objectives & Key Results" (OKR) model (Wolf, 2021):
MbO is based on individual's quantitative annual targets, which are often uninspiring. On the other hand, in the OKR approach, a higher level of qualitative goals are defined first (Objectives), from which certain criteria (Key Results) are then derived (Krapf, 2018).
These goals are set for the entire team and can only be achieved through good cooperation. This is also an essential difference to classic Performance Management!
Furthermore, OKR goals are not SMART, but QRBD (ibid.):
- Derived from the company's mission statement (purpose)
The OKR cycle can be repeated several times a year. The four elements of this process represent an open and transparent approach for all team members involved.
Setting goals is done in the OKR every 12-16 weeks and reviewed bi-weekly. After the 4-month plan, the objectives are reflected on based on feedback from the stakeholders. The "how" (i.e., the cooperation and the entire work process) is also in focus (ibid.).
But the OKR isn’t only more modern because goals are formulated in a more qualitative and team-oriented way than in the MbO. 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 Balanced Scorecard of the 1990s already helped companies to somehow distance themselves from the outdated transactional management methods (Mercer, 2017). Nevertheless, only a radical shift to highly transformational leadership methods in Performance Management can do justice to today's and tomorrow's workplace.
To explain: transformational leadership focuses on the vision (or goal) of shared work. This means that workers driven by such an approach aren't just pursuing personal interests through individualised efforts (transactional leadership). So, it’s not about a trade, "I give my time to the company time and in turn get my salary". Instead, employees certainly strive to fulfil higher (company) goals. This Performance Management technique strives for increased performances by changing the values and goals of those being managed (Fritz, 2016).
This development leads to the fact that the monetary incentive systems are currently under scrutiny. The conventional "mechanical link" (Mercer, 2017) between performance appraisal and compensation contradicts the idea of striving for common goals. Instead, many companies are considering motivating factors that increasingly focus on opportunities for personal development and self-fulfilment (ibid.).
Create successful Performance Management systems
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.):
- 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!
- 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).
- 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!
- 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 "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 very rarely use the appropriate tools for such processes. After all, a third of companies in Switzerland, Austria, and Germany still use Excel and similar software (FBM GmbH, 2020).
At Creaholic, 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!
Angel F. G., Ceberio M. & Kreinovich V. (2020). Plans are Worthless but Planning Is Everything: A Theoretical Explanation of Eisenhower’s Observation.
Crisand, E. & Rahn, H.-J. (2011). Personalbeurteilungssysteme. Ziele – Instrumente – Gestaltung (4. Auf.). Hamburg: Windmühle.
Hilgers, D. (2008). Performance Management.
Mercer & Acca (2010). Generation Y: Realising the Potential.
Mercer (2015). Performance Management Survey Report.
Mercer (2017). Performance Management im Umbruch.
Wyman, O. (2016). What Role will HR Play in 2020-2025. In: 19th Annual Global CEO Survey.