Effective performance management should be a priority for all businesses that employ people, regardless of your size, HR budget, tech capabilities or the industry you're in.
All parties - employees, managers, directors and the organization as a whole - have something to gain from good performance management, but the process is sometimes hindered by obstacles like outdated or negative perceptions of what it actually involves.
Performance management is often equated to annual reviews and appraisals, but you can expect to see much better results when you take a continuous, agile approach that balances the company's goals with the interests and wellbeing of your staff.
Why performance management is vital
You can’t succeed without an engaged and productive workforce, which is why it's important to invest the time and resources required to create a performance management system that works.
As far as the company is concerned, on a purely financial and pragmatic level you want to know that the money you're investing in your people is generating benefits and returns. Once you've found an approach to performance management that works, you'll be in a stronger position to collect the workforce data and insights you need to draw accurate conclusions.
Much like the marketing department is expected to demonstrate the results of its campaigns and the sales team has to show how it's generating revenue for the company, HR must take on the responsibility of maximizing and proving the value of the workforce.
Moreover, performance management is essential because, when it's done well, it's just as beneficial for individual workers as it is for the company as a whole.
Agile performance management that responds to changing trends in employee attitudes, goals and challenges drives engagement and strengthens the firm's relationships with its staff. It puts you in a better position to deliver certain benefits which, according to Eleanor Estes, chief executive of IT and engineering recruitment firm TPI Inc, are among the most important things people want from their employers, namely:
- Proper recognition for good work
- Flexibility - particularly in terms of measuring achievement, rather than simply tracking hours worked
- A clear path for career growth and professional development
This final point is a particularly important one. Performance management shouldn't be seen as simply a data gathering exercise that helps the company pinpoint areas where employees are falling below the expected standard. It should attach just as much importance to helping workers identify and work towards their own goals as to yielding useful data and insights for the business.
Why appraisals don't always drive better performance
For many workers and businesses, annual appraisals are a familiar part of the employer/employee relationship, but there’s sufficient evidence to suggest there’s relatively little to be gained from taking this time-worn approach to performance management. In fact, yearly reviews could do more harm than good.
Robert Sutton, professor of management science and engineering at Stanford University, teamed up with Gallup to draw some conclusions about performance management based on decades of collective fieldwork and analytics.
In approximately one third of cases, traditional appraisals and feedback methods are so poor they actually make performance worse. There are various possible reasons for this, such as:
- If employees only get feedback from their managers once a year, there's a good chance it’ll be outdated or irrelevant. Praise for good performance will feel like it's coming too late, while referring back to past failures might seem petty and unnecessary if the issue was dealt with long ago
- Managers who haven't been trained in performance evaluation and providing feedback might struggle to do it in a natural and constructive way
- Annual appraisals often try to cram too much in a single conversation, leading to information overload and the employee feeling overwhelmed
These will be familiar problems to many businesses and individuals, with research showing that nearly half of employees receive feedback from their manager only a few times a year or less.
Furthermore, the data shows that an organization with 10,000 employees could face costs of up to $35 million a year in lost working hours to conduct performance evaluations. That's a big financial loss, especially if you have relatively little to show for it.
Many companies have stuck with the traditional appraisal system out of habit, but Professor Sutton pointed out that this is starting to change:
Many business leaders have started asking themselves, 'Why do we do this in the first place? Are our performance reviews really helping us get the most out of our people and engage them?' When organizations put their performance management system under a microscope, the answer is a resounding 'NO'. It does not equip, inspire and improve performance. It is not the best system for determining pay and promotion.
So for those businesses that are determined to move away from outmoded and possibly counterproductive performance reviews, what alternatives are available?
Is continuous performance management the solution?
Given the drawbacks of infrequent performance reviews and the advantages that can be gained from regular, responsive engagement between managers and their team members, many businesses could benefit from moving from annual appraisals to continuous performance management.
Continuous performance management involves managers staying in frequent contact with employees and giving them real-time guidance and support. This makes it easier to provide feedback that relates directly to people's everyday work and results, as opposed to looking back on events that happened months ago.
Recent trends show that, while a significant proportion of businesses continue to rely on annual appraisals, many are moving away from this model in favor of a system that helps them keep their staff engaged and motivated with regular feedback.
It has been predicted that, by 2022, more than 30% of organizations will abandon a 'one-size-fits-all' approach to performance management and adopt methods that can be tailored to meet particular business functions and needs.
Continuous performance management - advantages and challenges
It's clear there are some compelling benefits to gain from a continuous approach to performance management. Research by software provider Clear Review explores how this strategy can help businesses achieve the five principles of effective performance management:
- Near-term individual objectives that are aligned with those of the team or the organization
- Frequent feedback
- Regular managerial support
- Employee recognition
- Personal and career development
In the report co-produced with Gallup, Professor Sutton of Stanford University pointed out there’s no "silver bullet" for optimizing performance management across all organizations, since different methods will have varying effects for different people, based on factors like the nature of their job and the industry they’re in.
However, he also noted that certain changes are likely to deliver positive results for everyone:
Simplifying performance reviews and making them more flexible and relevant to the work being done has been popular with both managers and employees. Early evidence indicates that teaching managers and employees to have more frequent, meaningful conversations about work expectations, progress and development improves engagement and performance.
Making a large-scale transition from one performance management method to another is likely to come with certain challenges, such as preparing the entire organization for change and reassuring people who have concerns about it.
Clear Review said HR professionals often question how easy it’ll be to encourage managers to have frequent check-ins with their staff, if it's already difficult to get them to conduct appraisals just once a year. In response, the firm said a continuous approach can address some of the things managers dislike the most about annual reviews, such as the amount of time they take to prepare and the requirement to rate their employees.
It's certainly true that moving away from annual appraisals and introducing continuous performance management will be a big change for most organizations, but with proper planning, communication and understanding of the process, the benefits could be huge.