A motivated workforce is an essential component of a successful business. Employees who know their role and what’s expected of them, and whose vision is aligned with that of the company, can take the organization to new heights. And organizations spend a lot of resources to bring their workforce to their most productive selves.
According to a 2021 report, companies in the US spent a total of US$ 92.3 billion in 2021 for training their employees, a 12% increase from the previous year. This accounts for around US$ 1071 per employee. This is on top of other investments into employees through other HR programs and initiatives.
But how do you know if these programs are helping the employees grow? How do you measure employee performance? Globally, only 20% of employees are engaged at their workplace. According to a Deloitte survey, only 8% of companies are happy with their employee evaluation process and say that it is driving value. Other studies suggest that only 50% of employees understood their expectations from them.
This is where an effective performance management system may come in handy.
What is a performance management system?
A performance management system is a continuous process by which organizations ensure that the different teams, departments, managers, and employees are contributing to the growth of the organization. It’s used to make sure that the work the individual employees and departments are doing is aligned with the company’s vision, and that it is helping the organization achieve its goals and objectives.
In its most basic or simple way, it may look like performance management is just conducting reviews and appraisals of employees. But the process is more collaborative and involves continuous communication with employees. It’s about setting expectations, targets, and objectives in line with the organization’s own goals and objectives, and measuring how close the employee is to achieving them.
A performance management system usually sets the goal with a top-down approach. The stakeholders and the executives set the overall goals for the organization and what they seek to achieve. These goals will be translated into measurable KPIs and other metrics. Of course, stakeholders and executives alone won’t be able to achieve these goals, so they’re further translated to objectives and KPIs for departments and managers, which will be further translated into goals and KPIs for individual employees.
For the review, this usually goes the other way. The individual performances add up to the manager and department performance, which further adds up to the performance of the executive team and the organization as a whole.
As the organization grows, the goals and objectives may evolve and the individual performance metrics may be redefined. Effective performance management is usually a continuous process with constant feedback between employees and their managers.
Organizations use various performance management tools available in today's tech stack to streamline this process; collect data, analyze and review employee performance, give feedback, and initiate corrective measures. These tools bring a certain level of objectivity to employee performance evaluation and simplify the process both for the employee and the manager.
Of course, the above-described process is more or less a skeleton structure; different organizations often have their own philosophies on how performance is measured and rewarded. Over the years, various performance management philosophies have evolved, and companies often tailor them to their company’s values, culture, as well as objectives.
What are the different performance management philosophies?
When you consider performance management philosophies, two broad categories come into view:
- those that manage the performance of the organization as a whole,
- and those that focus on the individual employee.
Here are a few of them.
Balanced scorecard
The concept of a balanced scorecard first came up in a 1992 paper published by Robert S. Kaplan and David P. Norton, and is commonly used to measure organizational performance. Before that, organizations mostly focused on financial metrics to measure performance. The balanced scorecard introduced other non-financial metrics to gauge how the organization performed.
The balanced scorecard sets targets for a small number of different metrics and measures identified by the organization in both financial and non-financial segments. The first generation of the balanced scorecard proposed by Kaplan and Norton suggested four different perspectives for organizations to look into:
- Financial perspective
- Customer-related perspective
- Internal business processes perspective
- Learning and growth perspective
The financial perspective considered measures like income, profits, sales, etc., while the customer perspective considered measures like customer satisfaction, quality of after-sales support, delivery times, etc. Internal business processes looked at factors like the efficiency of manufacturing processes, production time, etc., and learning and growth looked at how the organization can grow and develop, for example maybe how fast new initiatives were implemented or new products were developed.
There are other variants of the balanced scorecard concept. They offer different perspectives, but the general idea is to create a small number of measures that actually matter for the organization, set a target for them, and evaluate how the organization achieved that.
Vitality curve, "yank and rank," or forced ranking
This was one of the common employee performance management systems in the 90s to the early 2000s, but has recently fallen out of favor. The philosophy was pushed by former General Electric CEO Jack Welch, and was also referred to as the 20-70-10 principle.
The idea is that for every organization, 20% of them would be exceptional performers who always exceed expectations, 70% who weren’t the best but did their job pretty well, and 10% who weren’t good at their jobs. The program was used in many global companies like IBM, Microsoft, Amazon, and more.
The goal of the vitality curve was to make employees compete against each other since they were assessed on a curve. So, even if you performed well, you may be in the bottom 10% if your colleagues performed better.
While the system improved performance, it affected employee morale. And sometimes it created unhealthy employee behaviors. For example, employees involved in hiring their colleagues may not hire the best candidates so that their ratings won’t be affected. In Amazon, managers are sometimes known to hire people just to fire them and meet the quotas. A similar situation existed in Microsoft as well. And as of 2013, Microsoft changed its ‘stacked ranking’ system.
The vitality curve has seen a fall in popularity in recent years.
Performance management at Google
While there are no specific names for performance management at Google, their strategy is highly discussed in many circles. Google has invested a lot into building its work culture and serious resources (including a dedicated wing for people management) have gone into developing its performance management philosophy.
The company places emphasis on three performance management principles:
- Hire only the best talent
- Create a meritocratic environment
- Bring their employees to their peak potential through coaching and career development
Their hiring process is adjusted towards losing a good candidate rather than hiring a bad one.
The company conducts annual performance reviews, but employees also get a midpoint review. The idea is to make sure employees are on track to reach their goals and make sure that the feedback is not too late (though recent changes may make this just once a year). They also have monthly one-to-one check-ins with their managers.
The 360-degree feedback and calibration are two interesting aspects of how employees are evaluated.
During the 360-degree feedback, every employee will have a set of reviewers, and they will all review the employee on their strengths, weaknesses, and their contribution to specific projects.
Now based on these reviews, their managers will come up with a draft rating. Google doesn’t use numerical ratings, instead goes with "Needs improvement," "Consistently meets expectations," "Exceeds expectations," "Strongly exceeds expectations," and is "Superb."
The next step is calibration, wherein managers have to justify their ratings to a group of five to ten managers. Following this, the managers make their reviews public.
Another interesting aspect of Google’s performance management is that they keep the performance reviews and appraisals at least a month apart. The idea is to make sure that employees actually listen to the feedback - if someone gets way more hike or way less than what they were expecting, they may not be interested in listening much.
Why do IT leaders need performance management systems?
More than simply evaluating the employees, performance management is a way of manager-employee communication. An effective performance management system establishes a standard for managers to bring the whole organization aligned to its goals and objectives.
A performance management system creates a system of clear communication and sets expectations within the organization. Employees get a clear picture of what they’re expected to do and how they’re expected to do it. They understand how close they are to achieving their targets and how they need to course correct. They also understand how their contributions help the organization reach its goals.
For managers and executives, a performance management system provides a platform to convey the goals they have for the organization and how the individual employee can contribute to it.
And a performance management software can help organizations make this process more efficient. A 2015 report from Deloitte showed highlighted that 82% of companies found their performance management systems to be not worth the time.
With a dedicated performance management solution, companies can reduce the time they spend on employee evaluations and make them more meaningful. Managers can easily collect objective performance data and get custom reports for the entire workforce with little resources.
What are the elements of a performance management system?
A performance management system should fairly assess the employees and implement steps to prevent bias. The system should continuously assess the performance of individual employees and deliver timely feedback. The information should also reach the relevant parties and decision-makers on time and empower managers and executives to make decisions.
The system should also not rely on input from one source of data, but rather from many sources — including the employee’s peers and objective performance data from their digital workplace. The system should also take inputs from the employee on how they can do their job better, the obstacles they’re facing, and the guidance they need.
For the system to be effective, it should find the right balance between the number of feedback and the resources spent on it. Ideally, the employee should get real-time feedback on their performance without any extra resources spent on it.
For example, in a gamified service desk, you can give employees their performance metrics such as FCR rate, the number of queries they’ve resolved, the customer satisfaction rate, etc. But in others, you may have to stick to daily standups, monthly and yearly reviews, etc.
What are the potential drawbacks of a performance management system?
Simply put: most people don’t like having someone watching over their shoulders when they’re working. And a performance management system can feel like one. Particularly if the employees know that a system is constantly collecting data on their performance and reviewing them. This can take a hit on employee morale.
Another issue is that if the system is not designed well, employees may feel demotivated, or even incentivized to just do the work that enhances their metrics. If the system is not designed to measure tasks that reflects the work that drives the organization, you may end up with great performance metrics and poor performance.
The opposite of this can also happen. Numbers and metrics may not reflect the contributions made to the organization. Employees may be building a better team or helping their colleagues perform well at their jobs. And a poorly designed system can lose out on this context and have employee contributions go unrecognized.
Frequently asked questions
What are the benefits of a performance management system?
A performance management system ensures that the efforts of individual employees, as well as the organization, are taking them towards achieving the company’s goals and vision. It ensures that the employees are performing at their peak potential, and that they are clear about what is expected of them. A performance management system helps a company achieve its goals easily and efficiently.
