Everything you need to know about Performance Management
Table of Contents
Human resources and enterprises are treated as one of the most important resources for creating value and competitive advantage for modern enterprises. Outstanding human resources are derived from other intellectual resources of the enterprise, and the needs of material resources depend on them. Employees create and implement ideas by exchanging them with gardeners, consumers, and other constituents. Also, they create and patent inventions, brands, processes, databases, information systems, training programs, and organizational culture. All of this contributes to increasing the value of the company.
These “creators of value” – people and their intellect, today economy of knowledge and information society are becoming a strategic resource of the company. Therefore, with their new, competitive words, the biggest challenge is to advance and develop human potential, in order to make better use of this resource and build other resources of the company. Achieving that, from the crucial importance of the quality of management of human resources, that is, adequate management of their performance.
What is Performance Management?
Performance management is a natural management process that contributes to the effective management of individuals and teams in order to achieve a high level of organizational performance. As such, performance management establishes a common understanding of what needs to be achieved in terms of work goals but is also an approach in leading people and developing employee competencies that ensure that defined goals are achieved. Performance management is a year-round communication process between a manager/supervisor and an employee. At the heart of performance management is a communication process that includes clarifying expectations, setting goals, identifying goals, providing feedback, and evaluating results.
Performance management is not just a tool in human resource management but is used in a much broader organizational context. It is, by its nature, a normal management process.
What is an Effective Performance Management?
Effective performance measurement systems inevitably become a condition for the survival of companies in today’s dynamic and highly turbulent environment. An effective performance measurement system allows a company to measure and control performance in accordance with a defined strategy. When designing a performance measurement system in a modern environment, both financial and non-financial indicators are taken into account, reflecting the effects of key activities that add value to a company. The introduction of a variety of strategically aligned performance indicators should improve organizational outcomes by increasing the amount of decision-relevant information available to managers, facilitating strategically consistent decision-making.
Because it clearly defines the goals in terms of the level of competencies and performance of employees, the performance management system affects the improvement of employee performance, as well as the performance of teams and the entire organization. Because it clearly defines the necessary steps for the promotion of employees and provides objective feedback on their development as well as the opportunity to express their opinions, the performance management system also serves as a tool for motivating and developing employees.
Types of Performance Management
Management by Objectives
Is it worth the effort?
The success of companies that are sincerely committed to the introduction of the MBO system has shown that the efforts made can be repaid many times over. Specifically, they returned with a 56% increase in production. This is the conclusion, as far back as the early ’90s, after reviewing the results of a thirty-year study of the impact of MBOs on business. Companies that could thank this system for their success are greats like Xerox, Intel, and others.
What about those companies that are not sincerely committed? Well, they could boast of “increasing” production by only 6%! Serious commitment is needed, and that tells us that the introduction and maintenance of a management system with the help of goals is demanding, but profitable!
What does it look like in practice and what are the “hidden traps” of management with goals?
The system involves setting a goal at the organizational level and then cascading it down to the individuals. It is recommended to include individuals in setting their own goals. The results are then monitored, evaluated, and finally awarded prizes.
The benefits of using the system should be obvious; individuals and teams have a clearer focus on their work, they can relate their work to the company’s goals and thus they can understand their own contribution and importance.
However, despite these advantages, over time, some “by-products” of management through goals began to appear in the work. Namely, individuals faced with the goal began to shift the focus from the quality of work and to focus on “achieving numbers”. This was stated in a witty way by one of the executives in a conversation with his manager: “Boss, just say which numbers need to be moved, and my people will do it.”
What about the model in modern times?
The model became its own victim after many years of application; it has become commonplace, something that is taken for granted (although, that does not mean that it is really implemented!). The model gained new energy by evolving into several concepts. One of the most important is “The Balanced Scorecard”.
The Balanced Scorecard
What problems did this system try to solve and how did it do it?
“What you measure, you will get.” This is a saying that is often heard in business. And many times, it has proven to be right because if you set goals and reward employees for achieving them, they will do everything in their power to achieve them. Is this completely true? To a certain extent. It happens in practice that people, as well as companies, will do everything in their power to achieve the reward (not the goal).
Where did it come from? The psychological theory of goal setting shows us that people increase their efforts with increasing goal weight. This is good for the goal, but it also means that “everything else” falls out of focus. Bearing in mind that financial indicators are the easiest to measure and that they are very important to companies (and individuals), it happens that the focus falls entirely on them.
This is a problem that the balanced scorecard model has tried to solve by focusing on the whole organization, monitoring indicators, and improving performance in an integrated way.
The model appeared in practice during the ’80s, and in the early 90s, authors Kaplan and Norton presented it in the Harvard Business Review. The article attracted a lot of attention, so after a few years, a very influential book “Balanced Scoreboard” by the same authors was published.
What does a Balanced Scorecard look like in practice? What is the main drawback?
This system works “from top to bottom”. As with the previous model, the first step involves defining the company’s goals and strategy. The key difference is that in this model there are predefined performance areas for which critical success factors, goals, and measurement methods are defined. These goals and methods of measurement are then “lowered” down through the organization, plans and initiatives are made, and implementation is monitored.
Thus, predefined performance areas that include intangible perspectives (see footnote) ensure balanced performance and long-term development of the company. This is a key innovation and contribution of the system.
The biggest drawback can be seen even from this very short description – the system is complex, requires a lot of time, work, and dedication. Finally, it can happen that companies develop so many goals, indicators, and measurement methods that the system starts to “swallow itself”.
Well, is all that effort worth it?
Yes! The biggest benefit of implementing this system is that employees have clear goals and indicators of success, a clear connection with the strategy and purpose of the company, and activities are focused on “balanced” areas. In the long run, this leads to well-motivated employees who contribute to the success and stability of the company by achieving their goals.
Objectives & Key Results (OKR)
Another significant model that emerges from Drucker’s “Goal Management” is the model known by the ’70s OKR. It was created by Andy Grou in the ’70s at Intel, under the name “iMBOs” – “Intel’s Management by Objectives”. Another Intel employee, John Doer, called the model “OKR” and introduced it to a small IT startup in 1999. That startup was Google. And OKR has gone down in history.
The founders of Google attributed numerous merits to OKR and influenced the promotion and popularization of the model. Is it just a new trend, short fashion? Unlikely, especially considering that the model was then taken over and based on its success by Twitter, LinkedIn, DropBox, Uber, and many other companies.
What is the charm of OKR and how does it work in general?
Andy Grou in his book “High Output Management” says: “A successful MBO system should answer only two questions:
– Where do I want to go? (Answer given by Objective)
– How do I catch the right pace to get there? (The answer gives us the Key Results). “
And a new management system was created based on several key concepts: focus, measurability (numbers), transparency, and culture.
The model connects all levels of the organization and ensures the flow between them. OCDs from one level spill over into OCDs at another level; in this way, achieving goals at one level directly leads to achieving goals at the next. Another advantage of using OCD is shorter cycles for goal setting (usually each quarter). This makes the whole organization much more flexible.
The key difference compared to other models? Well, while other models say that “we will get what we measure”, OKR tells us that we need to “measure only what is important”.
SMART (Strategic Measurement and Reporting Technique) – Performance Pyramid
SMART is a model that later became known as the Performance pyramid or just the SMART pyramid. This model divides the company into four levels: mission and vision at the top of the pyramid, market and financial indicators at the second level, customer satisfaction, flexibility and productivity at the third level, and quality, delivery, time, and process costs at the last level of the pyramid.
In the SMART system, performance indicators are cascaded from top to bottom in a four-tier structure: organization ↔ business processes ↔ departments, groups, and work teams ↔ individuals, including both externally and internally oriented performance measures. This cascading structure visualizes the view that indicators at all lower levels reflect the corporate vision, but also participate in its realization.
Another prerequisite for successful performance management is its connection with business process management, which the authors nicely illustrate on the example of the importance of deliveries to customers and connecting it with process performance.
The SMART model, and then the Pyramid of Performance based on it, reflect the attitude of their authors that traditional performance measurement systems focused on financial aspects did not meet the needs of managers in a significantly changing business environment and were developed to address the weaknesses of these systems. strategic goals with different dimensions of performance. The attractiveness of this approach is primarily reflected in the connection of business strategy with everyday business operations.
At the lower level of the pyramid, the goal is to improve the quality and performance of delivery and reduce cycle times and costs. At this level, it will be used through non-financial indicators to measure the efficiency of operations. The four levels of the pyramid fit harmoniously into each other on a unique path to achieving goals. For example, reducing cycle times and/or costs will increase productivity, and thus profitability and cash flow.
The strength of the performance pyramid model lies in the fact that it connects a hierarchical view of measuring business performance with business processes. It also explicitly distinguishes between metrics that are relevant to external participants — such as customer satisfaction, quality, and delivery — and metrics that reflect internal performance, such as productivity, cycle time, and cost.
The Prism of Performance
This model adopts a view of measuring performance that focuses on stakeholders and clearly distinguishes stakeholder satisfaction from the contribution that the stakeholder makes to the organization. The prism of performance means that measuring performance plays a key role because it allows the manager to indicate which processes are important and which modes of the organization are important and to encourage the organization’s staff to maintain and proactively develop those processes and fashions.
But even the best-designed process requires a staff of appropriate abilities, knowledge, and skills, requires appropriate policies and procedures, physical infrastructure, and appropriate technology. Organizational modes can be understood as a combination of staff, practices, technology, and infrastructure that together represent an organization’s ability to create value to its stakeholders through distinct parts of its functioning, and a significant type of those parts are processes.
At the core of the performance, prism is five distinct but connected performance perspectives. The prism of performance connects the contribution of stakeholders through the processes, strategies, and fashion of the organization with the satisfaction of stakeholders; stakeholder satisfaction is a function of determinants – stakeholder contributions orchestrated through the strategies, processes, and fashion of the organization
Given that companies need to meet the requirements, needs, desires, expectations of stakeholder groups, their satisfaction is at the top of the prism. In contrast, at the bottom (base) of the prism is the contribution of stakeholders, as a dimension (perspective) that reflects the wishes and requirements of the company in relation to stakeholders. The three sides of the prism are: strategies, processes, and fashion (capabilities) of companies in the use of resources, or their transformation in connection with which companies have different relationships with different stakeholder groups. These five interrelated perspectives identify five vital questions that an organization should answer when determining a set of performance measures:
Stakeholder satisfaction – who are our key stakeholders, what do they want and what do they need?
- Strategies – What strategies are appropriate to Satisfy the needs and desires of stakeholders?
- Processes – What are the critical processes for implementing strategies and how to strengthen these processes?
Answering these questions at some organizational level provides a concise overview of the organization’s performance, but with additional details for each of the aspects. Consideration of each aspect of the performance prism allows this model to be used at any organizational level, integrated both through functions and through the hierarchy of the organization
Elements of Performance Management
The basic elements of performance management are agreement, measurement, feedback, positive corrections, and dialogue. Measurement is seen as a process in which results are measured and compared with expected goals. The focus is on goals, standards, and measures or performance indicators.
The process of performance management is based on the set requirements, goals, and performance improvements, as well as the employee development plan.
The process of employee development includes formal education, work experience, interpersonal relationships, and assessment of abilities, all in preparation for future jobs.
Performance Management Process
Planning the performance of human resources includes determining the goals of the individual, describing expectations, planning improving skills (skills), planning staff training, setting performance standards. Performance planning implies the identification of the desired performance of an individual as a member of a team. The performance of an individual represents its characteristics in terms of competence, skills, practical knowledge, and experience, as well as the performance that comes from its city, and the specific effects or contribution to the achieved success.
Performance Management Process is divided into a few phases:
- Planning Phase – goal setting and alignment
- Monitoring Phase – providing informal feedback
- Reviewing Phase – formal performance evaluation
- Performance Improvement Phase – training and development of employees
- Rewarding Phase – linking results to recognitions and awards
In order for the impact assessment to be effective, several conditions need to be met:
· Relevance – This condition implies that there is a clear link between the performance standard and the organization’s objectives, as well as the link between the key elements of the work identified in the job analysis and the dimensions being assessed. The job requirements described in the job analysis are translated into terms of what is acceptable and what is unacceptable work performance, and based on such standards, the performance of individual employees is assessed.
· Sensitivity – It is necessary that the method of assessment used can distinguish between efficient and inefficient employees. If these differences are not included in the assessment, the performance analysis will not meet its goal.
· Reliability – Consistency of assessments of one employee by different assessors is a guarantee of reliability of assessment. Otherwise, it can be assumed that the evaluators did not have access to all the data, or that they did not evaluate them in the same way.
· Acceptance by management – Assessment by management is often done spontaneously and without reliance on data. In such circumstances, it is difficult to provide support for the performance evaluation system, as well as the adequate use of the obtained data.
· Practicality – The tools used in data analysis must be such that managers and employees can understand and use them without problems
The performance improvement phase is a permanent performance improvement and is a necessary phase of the performance management process. The results of the measurements can show that the achieved result does not reach the set plan, standard, but shows a significant deviation from the planned, which implies that the performance is inadequate and that initiatives and actions are necessary.
It is understood that the plans and standards were realistically set, that the planning premises did not change in the meantime, that the conditions and resources were provided. For an organization that has inadequate performance, it is necessary to design a system for improving performance, to undertake activities that would improve performance, and raise the target level. The performance improvement system must be comprehensive, covering all levels of the organization, all strategic business units, all processes, work teams, and jobs. In order for a performance improvement system to have its purpose, it needs to be implemented effectively and efficiently.
What are the Advantages of a Performance Management?
The purpose of an employee performance management system is to contribute to the high performance of individuals and teams. High performance means achieving and exceeding goals in order to achieve high productivity, quality, customer relationship, profit, and value for owners. Performance management, also as an approach and systematic activity, provides employees who do not achieve the set goals, ways to improve their skills.
We believe that employee development, appropriate knowledge, and professional development are the basis of effective management. Such human resource management encourages dedication and job satisfaction, which enables higher productivity. By constantly developing appropriate skills and competencies, employees can exceed not only their own but also the company’s goals.
These are the top 3 Advantages of Performance Management:
The performance that companies expect from employees depends on their abilities, motivation, and the support they have. Understanding employee motivation factors are very important because motivation is directly related to performance, both personal and organizational. In order to achieve the maximum degree of employee motivation, managers must know the needs and motives of the people they manage and know-how to ensure their satisfaction.
Performance evaluation can have a motivating effect on employees in several ways, such as:
• The employee evaluation process indicates the elements that are most important to the company;
• Since many employees want to achieve work excellence and be recognized as professionals in the company and beyond, this activity, by pointing out weakness and encouraging the development of strengths, helps them to achieve this;
• Evaluation results help hard-working, professional, and ambitious employees to be promoted and move to higher levels in the organization or to be rewarded;
• Companies use performance evaluation to identify talents in the organization and organize programs for their further professional development.
Setting criteria for the advancement of each employee
Without people and their potentials, there is no organization and its success. Although all the resources of the organization are important, human resources are the most important. A high level of different abilities, knowledge, skills, competencies, creativity, innovation, behavior is required. Top management treats human potential as a strategic advantage and the most important value of an organization. Managing people, as the most important resources of a company, is a very complex and multidimensional process.
It is not easy to manage people, their behavior, and their potentials. What a smart head can do, not even a thousand state-of-the-art machines can. Its behavior can be influenced, but it is not always easy to predict. Especially since each person is a story for himself and in many ways unique and unrepeatable. Therefore, managing people and their potential is a more complex, responsible, and sensitive process than managing the technical, financial, and other resources of the organization.
Thanks to Performance Management, it is much easier to manage human resources and thus see which of the employees is the most suitable for promotion. The right choice of people to get a promotion will help the company grow in the market.
Indicates whether there is a need for training
If employees do not know how to do their job properly due to lack of knowledge, managers will know this based on their performance and thus will be able to introduce training.
The goal of training and development of employees is to raise the competencies of employees to such a level that will enable jobs to be performed more efficiently, and employees to be more satisfied. This contributes to the improvement of the company’s competitive position and greater consumer satisfaction. Satisfied employees lead to satisfied consumers, and satisfied consumers lead to satisfied owners.
Practically, training and development refer to the planning and implementation of various educational programs, professional development programs, academic training, skills development, teamwork improvement, knowledge exchange, personal development, work with a mentor, implementation of professional practice, and so on.
What are the Disadvantages of a Performance Management?
Performance appraisal problems arise from mixing several different intentions into one process. The fact is that it is easier to spot a problem when you re-examine history but it is not difficult to see why the performance management process is increasingly seen as outdated and why companies are now turning to new ideas.
When all these elements are added up, it is easy to see where things went wrong. Instead of using performance management to truly “improve performance” through measurement, feedback, and positive reinforcement, it has become just an “evaluation system” that encouraged internal competition for more money, prestige, or power; all motivation comes from fear (of bad judgment).
As managers focused more and more on improving the performance management process (many HR professionals are employed for just that) it became less and less connected to its original purpose, there was less feedback, companies did not measure improvements in employees but progress in relation to a goal (which when used incorrectly encourages various behaviors that are not beneficial to the company).
Instead of teaching managers how to improve the performance of their employees, firms burdened them with what they saw as an administrative task of little business importance while at the same time forcing them to perform performance reviews with large stakes that caused embarrassing situations that could and to question someone’s career.
In short, firms neglected their original purpose, discouraged employees and managers, and created an atmosphere of fear related to the process. Also, a large number of managers you will talk to will tell you that this process is actually used for hiring, firing, promotion, or determining the amount of salary. Because of all this, it is not at all unusual for employees to be intimidated by this process