What is Performance Management? The Ultimate Guide for Building a Strategic Approach

What is Performance Management? The Ultimate Guide for Building a Strategic Approach

Unlocking business success hinges on building an effective performance management strategy. Shifting from annual reviews to real-time discussions is a start, but to truly excel, companies need the right approach, processes, and tools.

An optimal performance management program goes beyond evaluation––it humanizes employee contribution, transforms managers into coaches, and integrates employee engagement into daily operations to drive growth.

This guide will clarify performance management by outlining its significance for your business and providing a blueprint for developing a robust strategy. Together we’ll realize the full potential of your team.



What is performance management?

Performance management is the systematic approach to defining goals, appraising progress, and offering consistent coaching and feedback. Effective performance management ensures employees at all levels within a company achieve individual targets and contribute effectively to their company's goals.


Who does performance management affect?

Performance management plays a crucial role across all levels of a company, influencing every employee, team, and even the organization's success as a whole. It's the tool that helps individuals improve their work, encourages teams to collaborate effectively, and guides the entire organization towards achieving its ambitions. 

In the following sections, we’ll explore the impact of performance management in three key areas: 1) the performance of individual employees, 2) the efficiency of teams working together, and 3) the overarching progress of the organization.


How performance management impacts employee performance

Your employees have unique responsibilities, strengths, contributions, and experiences that help (and sometimes hinder) performance. How they go about achieving their goals might look a little different.

Performance management impacts employee performance by ensuring employees have clear goals and priorities, an understanding of where their performance falls, and frequent feedback and coaching from their managers.


How performance management impacts team performance

Many businesses have shifted from rigid organizational hierarchies to more effective and agile team-based models and cultures. Team performance increases accountability and ownership of individual performance through transparent, aligned, and shared goals.

Performance management impacts team performance by helping people leaders build positive relationships between team members and create a culture of feedback that motivates employees to work better together.


How performance management impacts organizational performance

Workplaces need to bring people, processes, and systems together to get work done. When individuals and teams understand how and why their contributions impact organizational outcomes, they’ll be more likely to continue contributing to business success.

Performance management impacts organizational performance by helping businesses promote transparency, alignment, and collaboration so that all employees and teams are working together to reach a common goal.


How does performance management differ from performance appraisal?

Performance management and performance appraisal are distinct concepts in the workplace. Performance appraisal is an annual evaluation focusing on past behaviors and outcomes, often feeling static and retrospective.

Conversely, performance management is a continuous, dynamic process. Rather than a once-a-year event, it involves regular dialogue between employees and managers, facilitating real-time feedback and ongoing development from both people. 

This approach is interactive, with one-on-one conversations and frequent reviews to align personal goals with company objectives. Managers can excel in these regular conversations by individualizing their approach for each employee and being open to continuous feedback on how they manage.

The tools and resources that support this modern approach are varied and interactive. One-on-one conversations are a staple, allowing for personalized, direct communication about progress and areas for improvement. Collaborative reviews can take place semi-annually or quarterly, providing a more frequent check-in that helps to align individual goals with the company’s objectives. 

Digital tools can facilitate this continuous feedback loop by offering in-platform goal tracking, documentation of an employee's growth and development, transcripts of past one-on-one conversations, and more. 

The right system will allow for a more engaging and interactive process that empowers employees to take charge of their own performance while giving managers the resources to support their team effectively.


Why is performance management important?

A study by Harvard Business Review Analytic Services found that more than half of business leaders chose productivity as a primary business goal for their organization's investments in performance management, employee engagement, and development. Yet only 31% say they’ve actually improved productivity as a direct result. This is where performance management comes in.

Performance management is crucial for several reasons, including:

  • Employee Engagement: Regular feedback and clear expectations increase employee involvement and commitment.
  • Productivity: Continuous performance dialogue helps individuals align their efforts with company goals, leading to higher productivity.
  • Professional Development: Employees have clear pathways for growth and development, improving their skills and career prospects.
  • Trust: Ongoing communication builds trust and understanding between staff and management.
  • Organizational Success: A well-implemented performance management system aligns individual performance with company objectives, contributing to overall success.
  • Training Needs Focus: Consistent assessments can reveal gaps in skills, guiding where to focus training efforts.
  • Retention: A culture that fosters growth and values contributions can help retain top performers.

Compensation and Promotions: Performance management provides a basis for making informed decisions about pay raises and advancement.


Purpose of performance management

It’s clear that performance management is an essential part of business success. There are many reasons for performance management. When designed and implemented correctly, your performance management cycle has the power to:

  • Clarify and reinforce expectations and accountabilities
  • Align goals under the organization’s vision and mission
  • Engage and retain top performers
  • Develop and grow employees, personally and professionally
  • Encourage critical thinking, agility, and creativity
  • Motivate employees toward success

In understanding the power of performance management, it’s first important to recognize how this strategy came to be. Let’s take a look at its historical value and context.


History of performance management

Performance management has taken many shapes over the years and eventually went on to shape what we now categorize as the “traditional performance appraisal approach”. This looked at an employee’s individual performance by:

  • Setting goals at the beginning of the year
  • Working on those goals throughout the year
  • Reviewing performance against those goals at the end of the year
  • Determining compensation and bonuses based on the review of these goals

Historically, employees were categorized as high, middle, or low performance workers, and contributions were measured by output versus outcomes.


Historical trends that inform modern day performance management

Given that the original performance management systems were built to suit workplaces at the turn of the 20th century when work environments were much different, they’ve received an upgrade over the years. 

As theories on employee motivation and satisfaction have been more widely understood, more participative and developmental forms of assessment have been introduced. The rise of technology and data analytics drove this shift, enabling more frequent, detailed, and personalized feedback throughout the year


The shift to continuous performance management

As businesses have evolved over time, so has performance management. Today, organizations are leveraging their talent as a competitive advantage and prioritizing innovation and critical thinking over execution.

This evolution has inspired a shift from annual appraisals and goal management to continuous performance conversations and feedback. Our research shows that 36% of employees prefer to have weekly one-on-ones and just 3% want to only have these conversations annually.

A continuous performance management approach allows leaders to capture real-time data and coach toward ongoing progress.

transformation of performance management

Peter Cappelli, Director of the Center for Human Resources at The Wharton School of Business at the University of Pennsylvania, outlines three reasons for adopting a continuous performance management approach.


Employees want ownership over their development.

As millennials continue to monopolize the workforce, businesses have been forced to create cultures that encourage employees to design their own paths to success. Continuous performance management gives managers the opportunity to coach employees in real-time and reflect on current work to help determine where they should focus going forward.

This focus is even more pronounced with generation Z’s entrance into the workforce. This digitally native group values transparency and clear pathways for advancement. They are not content with the status quo; instead, they seek active participation in building their career trajectory. They prioritize work-life balance, seeing it as a fundamental necessity for success rather than a company perk. 

Performance management systems that empower millennial and gen Z employees with tools to set goals, track progress, and receive continuous feedback resonate with their desire for autonomy and personal development, while also meeting their expectations for a supportive work environment that acknowledges the importance of life outside the office.


Managers want teams with a unified purpose.

High performing teams are made of talented employees who feel supported by their managers, peers, and senior leadership. While individual goals are important, team goals help businesses grow and drive ongoing performance for the long-term.

Our research shows that managers play a fundamental role in team success and unified goal setting. We’ve found that managers can be more effective in team management by prioritizing three things:

  1. Growth and development: Quantum Workplace’s employee development research uncovered that 79% of employees who were introduced to a formal development program were considered more engaged versus the 58% who said their organization didn’t have a program.
  2. Recognition and appreciation: Our research shows that 52% of employees want regular recognition from their manager, and 22.1% never or rarely receive comments expressing appreciation. This can go a long way.
  3. Feedback and strong communication: By having regular one-on-one meetings, you will have a more engaged workforce. Our findings show that 71% of employees who have a weekly one-on-one with their manager are more highly motivated and engaged in their work. This number is almost 20% higher than those that just have a one-on-one annually, showing how much value regular communication has.

When put into practice, these priorities have the power to foster a team with a unified purpose where every member is aligned and working toward a common goal. Having a unified team reduces confusion, focuses efforts, and creates an atmosphere where individuals are motivated not just by their personal successes, but also by the success of the team as a whole.


Businesses need to be agile and tech-savvy.

The future of work is unpredictable. To stay the course, organizations need access to technology and systems that help their:

  • Leaders quickly review, adjust, and adapt their strategies as needed
  • Teams set, align, and track progress on goals
  • Employees understand their impact with clearly defined and transparent goals


What does a continuous performance management approach look like?

To sum up everything we’ve discussed above, continuous performance management is about having regular talks between bosses and workers instead of just a yearly review. This process prioritizes giving feedback often, setting goals together, and using the right tools to track results consistently. 

These regular check-ins help workers know where they stand and help leaders guide their teams effectively, making sure everyone is working towards the same goals and objectives that boost company results.


How organizational performance impacts business success

Better performance across the organization means a better chance at hitting organizational goals and achieving key business outcomes. When performance is measured and discussed continuously, it builds engagement and vice versa. 

Put simply, when employers prioritize collaborative, transparent, and supportive performance management practices, employees are more engaged and ultimately more successful.

According to Business Leadership Today, companies that score in the top 25% of organizations for good employee experience have the potential to outpace sales of lower scoring organizations by two times. 

The business case is clear––engaged employees do lead to better organizational performance and business success. 


Recognizing when you need to reevaluate your performance management approach

Knowing when to reevaluate your performance management approach is crucial to maintaining a productive and engaged workforce. If your current system isn’t yielding the desired results or if employee morale is on the decline, it might be time for a change. 

This section will highlight key indicators that signal the need for a fresh look at how you manage performance. From lackluster results to a disengaged team, we'll guide you through the signs that your performance management system requires a strategic overhaul to realign with your organizational goals and employee expectations.


Signs your performance management process needs improvement

A few key signs can point to the need for changes in your performance management process. These are the red flags to look out for:

  • Stagnant Employee Growth: If you're noticing that employees are not developing their skills or advancing in their roles, your performance management process may lack the necessary support for their growth.
  • Low Morale and Engagement: A drop in team morale or a lack of enthusiasm for work can indicate that your performance strategy isn't providing the motivation or recognition that employees need.
  • Inadequate Feedback Mechanisms: When feedback is infrequent, not constructive, or one-sided, employees miss out on valuable insights that could drive their performance.
  • Unclear Objectives: If employees are unclear about what is expected of them, it's a sign that goals and benchmarks are not effectively communicated within your current system.
  • High Turnover Rates: An increase in staff turnover might suggest that your performance management is not meeting employee needs for career development and satisfaction.
  • Lack of Alignment with Business Goals: Performance management should be tightly aligned with the overarching goals of your business. A disconnect here could mean your approach needs realignment.
  • Insufficient Training for Managers: As we highlighted earlier, managers play a key role in performance management, and if they aren't properly trained to coach and provide feedback, the whole system suffers.

If any of these signs resonate with your current situation, it's time to take a closer look at your performance management approach. A successful revamp can create a more dynamic and supportive environment that empowers employees with frequent coaching, feedback, and opportunities to develop their knowledge and skills. 

This will help them reach their full potential for individual, team, and business success.


3 steps to improve your performance management process

If you are recognizing the need to revamp your performance management process based on what you read above, three steps can help get you started. Begin by:


1. Conducting an audit of your current performance management process.

In order to design a successful performance management program for the future, you need to assess your past and current experience. Yet only 22% of organizations have updated their performance management approach within the past year. HR leaders must review and update these practices frequently to keep up with industry, marketplace, and workplace trends.

Ask yourself:

  • Do our processes and systems align with the pace of our business?
  • How does our current process help us achieve our org-wide goals?
  • What gaps or blindspots do we have with our current process or system?


2. Making sure employees are a key element of the process.

Rather than performance management happening to employees, they should be a critical part of the process through shared goal setting, multidirectional feedback, and continuous conversations.

In a survey, 81% of respondents strongly agree that highly engaged employees perform better. And organizations have been capitalizing on improving employee engagement for years. 

Ask yourself:

  • Do our employees have what they need to perform at their highest level?
  • How are we helping coach employees to leverage their strengths?
  • What other support or training do they need to own their performance?


3. Creating an agile approach.

Annual goals can become quickly dated if organizational changes occur. Keep your biggest business objectives and key results top of mind and updated on a regular basis. Build a process that gives you a detailed view of real-time employee performance so managers can take action and actively retain and develop their team.

Ask yourself:

  • Do our managers have what they need to be successful performance coaches?
  • Are we using the right tools to help us adapt and adjust organization-wide goals?
  • Do employees understand how their goals align with business outcomes?



How Fossil Transformed Their Performance Management Process

Fossil Group saw immediate progress when it evolved its company-wide performance approach—however upon further analysis it found that 35% of individual goals were misaligned or lacked impact on strategic priorities.

Here’s how they adapted for business success:

> They moved to continuous performance conversations and feedback by implementing informal “check-ins” that could be launched and customized by any employee, at any time.

> They built intuitive goal conversation templates to organically include opportunities to discuss and collaborate on setting clear, aligned, and motivating goals.

> They brought performance conversations full circle by building recognition toolkits for managers and launching an online peer-to-peer recognition program to keep the conversation going.


Making Time for Performance Management


How to build an effective and thriving performance management program

After you’ve evaluated the current state of your performance management process, it’s time to start building your new program. You’ll want to start by setting goals.


Setting performance management goals

Setting SMART goals is fundamental to a successful performance management process. SMART, an acronym that stands for Specific, Measurable, Achievable, Relevant, and Time-bound, is an established criteria that helps to ensure your goals are clear and reachable. 

  • Specific: Goals should be precise and targeted. For example, "Increase the department's efficiency" is too vague, whereas "Implement a new project management software to reduce task overlap" is a specific goal that addresses efficiency.
  • Measurable: It's important that the progress towards each goal can be quantified. A goal like "Enhance team performance" becomes measurable when framed as "Achieve a 10% increase in team productivity by the end of Q2 as measured by project completion rates."
  • Achievable: Goals must be realistic. Aiming to "completely eliminate all project delays" may not be feasible, but "reduce project delays by 20% over the next six months" is more likely attainable with the right strategies and resources.
  • Relevant: Objectives should align with both the employee's role and the company's strategic goals. For a performance management goal, "Improve employee satisfaction" can be made relevant by stating "Conduct bi-monthly performance check-ins to increase employee engagement scores by 15% this year."
  • Time-bound: Goals require a clear timeline. Instead of simply aiming to "improve report accuracy," a time-bound goal would be "Increase report accuracy to 98% by the end of the third quarter."

Incorporating SMART goals into performance management helps in providing clarity and focus for both managers and employees. It encourages a shared understanding of what constitutes successful performance and defines the path to professional growth and organizational achievement. 


Components to build into your performance management program

Besides the people who make up your organization and the process or system you use to manage performance, an effective program is made up of the following key elements:


Shared ownership

Like other workplace initiatives, performance management is not solely an HR function. Performance management programs require ownership and involvement of all employees in order to be effective. Buy-in should start with senior leadership, but that’s not where it ends. Make sure you explain the unique benefits and components of the program to employees, managers, and leaders.

continuous performance management

Frequent performance conversations

Solely relying on annual employee performance reviews can be subject to bias due to depending on memories and recollection of past performance and behavior. By supplementing with more flexible, two-way conversations (or check-ins) you’ll enable  employees and people managers to shape a shared agenda and discussion.

One-on-one meetings should happen monthly to allow managers and employees to discuss performance and other important topics frequently. These meetings can cover a variety of topics and should always be:

  • Developmental and future-focused
  • Transparent and timely
  • Inclusive of the employee voice
  • Aligned with employee aspirations

Performance conversations should be devoted to performance and occur at least quarterly.


Individualized approach

Employees have different ways they like to be motivated, receive feedback, and be recognized. People leaders should take note of these preferences, individualize their approach to employees' matters, and coach them to better behaviors. When employees feel their individual contributions and strengths are valued and understood, they are more likely to be engaged and perform better.


360 feedback

Whether feedback is positive or corrective, it shouldn’t have to wait until the end of the year. In fact, 71% of employees prefer immediate feedback and 72% said their performance would improve if their managers provided corrective feedback.

Managers don't always have a direct line of sight into their employees’ performance or developmental needs to provide constructive feedback—which can create bias. Manager-employee feedback is key, but adding peer feedback can help paint a bigger, clear picture of performance.

Employees should seek out 360 feedback and participate in self evaluations. This will help shift everyone in the organization to feel more comfortable sharing feedback and motivating performance.


Opportunities for development and training

68% of millennials who feel they’ve had development opportunities at work in the past year plan to stay at their organization for at least another year. Employee development helps managers understand what motivates employees and makes them tick. Not only that, effective development programs can help upskill or reskill employees to become more valuable contributors to team and organizational objectives.

Additionally, you can’t expect employees to jump into a new program and figure it out on their own. Whether you’re adopting a new philosophy, using a new tool, or setting new expectations, you need consistent training programs for employees and managers. When offering these opportunities, you want to focus on the behaviors and skill sets you want them to understand and adopt. These can include:


Recognition and appreciation alongside compensation

Traditional performance management approaches offered compensation (or pay-for-performance) as a way to reward high performers. But today’s workforce isn’t motivated by monetary benefits alone.

While compensation conversations are still important, organizations are separating pay from performance and emphasizing positive feedback and recognition to increase engagement and motivate performance. Recognition should go beyond employees' individual contributions and celebrate the behaviors that support and reinforce your organization's mission, vision, and values.


Growth mindset

Employees perform better when they adopt a growth mindset—a belief that they can always improve and achieve more. When they do, employees:

  • Put in more effort
  • Seek feedback to improve
  • Find role models to learn from
  • Take smarter risks
  • Set better goals


Defined ownership and accountability 

If you’re moving toward a model of continuous conversations, it’s important that both managers and employees are delivering on what’s expected of them. Ownership is only the first step. To create shared accountability:

  • Employees should regularly contribute and collaborate on goals and meetings
  • Managers should provide frequent feedback and coaching
  • Leaders should continuously communicate and advocate for your performance plan


Digital tools

Organizations are employing workers of all types: remote, temp, hourly, and salaried. No matter the makeup of your organization, you need technology that links teams and their performance. With the right digital tools:

  • Employees can set goals, schedule check-ins, provide feedback and recognition, and stay connected between check-ins
  • Managers will have greater visibility and transparency into goal progress and performance, employee recognition, and feedback
  • Organizations won’t be dependent on "seeing" employees to understand their performance and how it does (or doesn’t) impact business


How to identify effective digital performance management tools

Choosing the right digital performance management tool to fit your workplace culture is essential to the success of your strategy. When looking for technology to complement your people and team performance management process, you need a solution that can bring elements of an effective system together.

Look for a provider that isn’t limited to standalone systems or tools. Instead search for one that supports and propels organizational growth.


9 features to look for in a performance management software

Here are 9 performance management software features you should look for:


1. Integrates with your HRIS.

HR is responsible for a lot when it comes to employee performance. Make sure your new performance management system integrates with not only your existing Human Resource Information System (HRIS), but other systems and databases to remove the administrative burden of getting started. 

For example, by integrating your HRIS with your choice of an employee success platform, information flows seamlessly, providing HR professionals, managers, and employees with current and precise data. This integration eradicates isolated data pools and minimizes the need for manual entry, thereby improving operational efficiency.


2. Customized to fit your culture.

For a performance management program to be welcomed and adapted by your employees, it has to feel like a natural part of your organizational culture. That means your performance management software should be customizable to fit the needs of your organization so that it becomes ingrained and integrated with other processes and traditions.


3. In-tool nudges and alerts.

Busy schedules are a big obstacle when it comes to effective and continuous performance management processes. Look for software with in-tool and email notifications that notify and surface important insights and actions to managers.


4. Mobile app or access.

Help employees of every level track and motivate performance no matter where they work (and when). Make sure your performance management software can be accessed from computers, tablets, and mobile devices.


5. Access to integrated performance tools.

The best performance management software allows you to integrate all your performance tools in one place—including goals, 1:1s, recognition, feedback, and talent reviews. Find a software that allows users to access them all with one, simple login to decrease hassle and increase usage.


6. Reliable service and support.

A user-friendly performance management system is great, but if your software partner isn’t accessible, responsive, and friendly when you (or your employees) have questions, then it’s not the system for you. Look for a vendor that includes a dedicated support team, provides resources and templates, and keeps you informed on the latest trends and research.


7. Integrates with engagement tools.

For your performance management software to be truly effective, it should be integrated with engagement tools. This integration allows you to observe the effects of your contemporary performance strategies, pinpoint what drives engagement and retention among your top performers, and identify any high achievers who may be at risk of leaving. By doing so, you gain valuable insights that can inform and enhance your talent management decisions, ensuring that your high-potential employees remain motivated and committed to your organization.


8. Succession planning strategy.

Incorporating performance data into your succession strategy allows you to keep your talent pipeline robust and your succession plans on track. Utilize a performance management system that enables you to set and monitor discreet development goals for high-potential employees. This ensures that you're not only recognizing current performance but also actively preparing your team for future leadership roles. 


9. Retention support.

A performance management system should provide insights into potential turnover drivers by identifying shared characteristics and trends among departing employees. By highlighting high-impact questions and key engagement outcomes, the system should offer actionable information to help organizations proactively address issues and mitigate turnover risks. This capability to pinpoint underlying factors contributes significantly to retention strategies, enabling you to make informed decisions to keep your top talent.


Putting your new performance management knowledge into practice

The state of performance management is always evolving—and will likely be at the top of many business leaders and HR agendas for the foreseeable future. To continuously achieve business success, organizations will need to adapt and adjust their approach to attract and retain high-performing employees.

Changing focus from annual performance reviews to continuous performance conversations and creating a process that drives employee engagement, employee and team performance, and business success will help:

  • Employees understand why their contributions matter and how to make a bigger impact
  • Managers coach successful teams by providing continuous feedback and building aligned goals
  • Leaders tie performance metrics to business outcomes to build a competitive workforce

To learn more about leveraging performance management to drive employee, team, and business success download this new report, The Business Case for Modern Performance Management.


Business Case for Modern Performance Management

Published November 21, 2023 | Written By Jocelyn Stange