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Performance Management: How to Start and What to Measure

The past several years have seen an increasingly vocal opposition to the traditional performance appraisal process. Detractors call annual reviews “pointless,” “insulting,” and “dead.” Much of the corporate world agrees that employee performance assessment is antiquated and inefficient.

But what are the alternatives?

Performance management is an option that many industries are adopting. "Managing performance" might sound like what you’ve been doing all along. But it’s actually a specific process that includes steps not usually found in the traditional performance appraisal process.

In the interest of understanding performance management, let’s start by outlining a better definition.

What Performance Management Is (And Is Not)

Some companies use “performance management” to describe their employee appraisal and review system. But that’s not what performance management is.

It’s not another word for annual reviews. It’s not a tool for managing reviews or employee performance.

It’s an entire framework for managing employees and helping them perform at their best. But it also seeks to give employees the best experience possible, because happier employees are more productive, more creative, and less likely to miss work.

Effective performance management starts before hiring an employee and continues through the exit interview. Every step of the way is carefully planned and optimized for both the company and the employee.

An Ongoing Process

Performance management differs from standard reviews in that it’s an ongoing process. It doesn’t happen at regular intervals throughout the year. (Though performance reviews are a part of the process).

Instead, performance management is a way of encouraging employees to excel on a day-to-day basis. It never stops. The process guides managers to better support their employees.

Because it’s not a specific tool, performance management processes are unique to companies. You’ll have to create your own version of performance management before putting it into place.

However, there are a few things that all effective performance management programs do well.

1. Start the Process Early

If you want your employees to perform at their best, you need an effective plan. And that starts before you hire a new employee. Proper hiring practices help you determine who’s likely to be a success in your company.

Before you start the hiring process, you need clear expectations and responsibilities set out for new employees. That means writing a clear, detailed job description. Include the day-to-day responsibilities of the position, expected education and qualifications, pay, and advancement opportunities.

(For more advice on how to craft great job descriptions, check out 10 Tips for Crafting Highly Effective Job Descriptions at CIO.)

After crafting a job description, you still have a lot of work to do. You'll have to choose interview techniques. Decide on assessments.  Evaluate applicants. And, finally, make the hire.Want to make the best hiring decision? Here are four practices that successful organizations use when they hire:

  • Automated resume screening and search
  • Assessments that predict whether candidates are motivated by the factors associated with a particular job or a company's values and ways of doing things
  • Job interviews in which candidates are asked to describe specific examples of their skills
  • Simulations that gauge specific job-related abilities and skills

Not every company will be able to afford to put all these ideas into practice. But you can get at the ideas behind them for free. For example, if you don’t want to run a motivation assessment ask employees about their own values and motivations during an interview.

With this information on hand, you’ll make a better hiring decision. Hiring the right people is the first step in successful performance management.

2. Set Expectations During Onboarding

The best performance managers work with their employees to ensure success. They don’t just set performance goals. Instead, they account for employees’ skills, circumstances, and responsibilities.

Laying the groundwork for performance management is best done during onboarding and training. Instituting these practices in the middle of someone’s tenure at your company is possible, but more difficult.

Make sure that performance management goals are clearly communicated during onboarding. These early goals don’t need to be tied to specific metrics—that will come later. At this stage, it’s important that employees simply understand that they’re expected to take part in this two-way system.

When you’re starting to put your performance management program into place, it might be difficult to communicate expectations. That’s okay. At this point, your goal is to let employees know that this system, which may be unfamiliar to them, will improve both the performance of the company and the lives of its employees.

(Side note: it’s easy to lose sight of the fact that performance management isn’t just about getting the most out of employees, but also about helping them be successful and happy. It’s a crucial piece of the process, so don’t lose sight of it.)

3. Encourage Participation in Goal-Setting

Every organization has goals. Within those organizations, groups and departments have their own targets. But performance management encourages managers and employees to set individual goals, as well.

This process is more complicated than setting a goal for an employee based on what’s perceived to be their most important metric. London, Mone, and Scott (2004) point out that many organizations aren’t building their goal-setting programs on the principles of organizational psychology and human resource management.

Research shows that the most successful goal-setting programs share four factors:

  • Employees are involved in goal-setting
  • Goals are challenging and specific
  • Managers explain the reasons behind goals
  • Feedback on goals is provided

This goal-setting process takes longer than a simple “Mary should aim to sell $100,000 of product this quarter.” It asks more of the manager and the employee. But research has shown that these factors contribute to better performance.

In preparation for goal-setting, managers and employees should re-read the company’s mission and values statements, review their job descriptions and departmental goals, and identify significant changes in company goals or direction.

Then the manager and employee work together to set measurable, attainable goals for the next performance period.

This sounds like a lot of work—and it is. But effective, research-based goal-setting has positive effects on employee engagement and performance. Increased employee engagement is also linked to better performance, making this exercise doubly worth the time and effort.

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4. Track Progress Toward Goals

Assessing whether an employee met a goal after a specific period of time is a crucial part of performance management. But before getting to this stage, managers need to track employee progress toward those goals to help them stay on track.

This is one of the reasons that goals need to be measurable. It’s not just for measuring success at the end.Of course, monitoring progress toward goals is made easiest with the right tools. Use desktop software, web apps, or even an Excel dashboard to track employee progress.

If you don’t have metric-tracking software, schedule regular meetings to review employee progress. Effective goal-setting increases employee motivation and performance, but it’s easy to forget about goals in busy workplaces.

5. Assess and Review Performance

Earlier I said that performance management isn’t just another word for “annual review.” This is true—but regular performance reviews are an important part of performance management.

Unfortunately, performance reviews are more complicated than they seem. In the past, you may have been content with a manager rating each employee on a scale for different characteristics. This isn’t a bad way to do things. But it can be inconsistent.London, Mone, and Scott point out that performance ratings have also been extensively studied. Managers can take advantage of this research to be more accurate and consistent in their ratings.

Appraisal training can address much of the inconsistency and difficulties faced by raters. Online trainings, knowledge-sharing systems, and mentorships can be a great help in improving appraisals. HR departments have plenty of methods for helping managers improve the feedback process.

Effective performance reviews also benefit from accurate record keeping, a clearly defined measurement system, and multiple raters (Boice & Kleiner, 1997).

It’s easy to fall into the trap of having supervisors provide semi-formal reviews for employees that aren’t based in any particular system. It’s easy, it gives HR and higher management a general idea of how employees are performing, and it doesn’t require any training.

Effective review practices, however, are a crucial part of performance management. If you’re serious about getting the best for your company and your employees, you need to invest in training and the development of a strong review system.

It’s also important to remember that performance management systems, and their attendant monitoring and review systems, “were designed to affect individual learning and behaviors that have only indirect and long-term effects on bottom-line outcomes” (London, Mone, & Scott, 2004).

When leaders don’t see a direct link between increased performance and bottom-line measures, they can become discouraged with performance management. But patience is key. It can take months or years to start seeing noticeable improvements in employee performance.

6. Reward Top-Tier Performers

Meritocratic companies tracks employee performance and reward high achievers. This provides extrinsic motivation beyond goal-setting.

Often, the reward for consistently above-average performance is a promotion. Promotions usually come with increases in pay, responsibility, and prestige. This can be a powerful motivator for employees (in some cases, even more powerful than wage increases).

But simpler rewards can be effective as well. In my health promotion days, we used to joke that “people would do anything for a water bottle.” Small incentives, especially if paired with goal-setting, can be remarkably motivating. Prosocial rewards, in which employees give their cash rewards to a charity or coworker, are more motivating than simple cash rewards.

Employee recognition, too, has its place in the reward system. Employees value personalized recognition for a job well done, and this can translate into increased motivation to excel.

Managers can combine all these rewards in different ways to motivate employees. Giving promotions to top performers, rewards to departmental standouts, and personalized recognition to those meeting or exceeding their goals can have a strong effect on employee motivation.

Measuring Performance Management

Putting a new performance management system in place isn’t a small undertaking. Stakeholders from HR to upper management are going to want proof that it was worth it. Which means you need to know how to measure performance management.

Like the process itself, measurements should be tailored to your company. The Department of Health and Human Services’ guide to performance measurement outlines four basic steps in the process:

  1. Evaluate organizational priorities
  2. Choose performance measure
  3. Determine a baseline
  4. Evaluate performance

(There are additional steps based on whether the performance evaluation is satisfactory, but we’ll skip those here).

The first two points are the most difficult. You might be surprised at how many competing priorities your company has. It’s crucial to identify priorities as specifically as possible, especially as they’re related to the performance of a specific group.

For example, let’s say your organization is prioritizing a reduction in purchase costs. A related performance measure might logically be the total purchasing costs in a given month. That’s a relevant performance measure for your purchasing group.

But that priority can also be supported by increased efficiency by your manufacturing group. Total purchasing cost, however, isn’t a relevant metric for that group. Materials used, or amount of production, or some measure of efficiency is more applicable for manufacturing.

Determining a baseline is as simple as taking the measurement before you put your performance management program in place. After that, you’ll take measurements are regular intervals to see if performance has improved.

(Remember, though, what I pointed out earlier; that performance management usually has an indirect effect on the bottom line.)

Making a Cultural Shift

Taking a company from a traditional annual-review model to a more detailed performance management one isn’t easy. It requires buy-in from executives, human resources, management, and employees. And the transition won’t always be smooth. Some managers and employees will push back, saying that they don’t believe in the fairness or objectivity of the new system.

But in the end, everyone benefits from research-backed performance management. Properly motivated and rewarded employees are happier at their jobs. They perform better. And that ultimately leads to a company that improves their standing in the marketplace.

Performance management is more than just a tool—it’s a central facet of organizational culture. Making a shift to this process takes time and effort. But with sound principles of planning, monitoring, assessment, and reward, your company will reap the benefits.

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