What is Performance Management?

Performance management is the process corporations use to ensure productive employee activities and results. The usual goal is to incentivize actions that align with the company objectives in an effective and efficient manner.

Performance management systems can focus on the company as a whole, a specific department, or individual employee performance.

Here’s a detailed performance management definition for readers who wonder what performance management is. If you’re interested in a learning video, you can watch it below. Otherwise, skip ahead.

What is Performance Management?

According to Berkley, UC, “Performance management is an ongoing process of communication between a supervisor and an employee that occurs throughout the year, in support of accomplishing the strategic objectives of the organization. The communication process includes clarifying expectations, setting objectives, identifying goals, providing feedback, and reviewing results.”

Every performance management process has clear performance targets—to increase efficiency for both the employee and senior management.

Let’s pick apart the quote and get a better understanding of why performance management programs are essential.

Performance Management System at a Glance

Performance management tools give managers and supervisors the means to monitor and evaluate the work of their staff. But for an effective performance management system, it’s not enough to keep tabs.

Remember, it’s about “accomplishing the organization’s strategic objectives.” And since employees play a large part in that, this tool is used to help achieve that goal.

Since “clarifying expectations” is necessary, managers must ensure their teams understand what the management expects from them. If they don’t, job performance issues are the leader’s fault, not the employee’s.

Performance reviews aren’t here to pinpoint weakest links and dispose, but to create training and development opportunities where both employees and managers benefit.

Performance management benefits

Expectations must be clear during the performance management cycle. It is the leader’s job to ensure they are also fully understood and agreed upon.

There should be a clear plan for “setting objectives” and a tracking system for “identifying goals.” They could be short or long-term goals, but there should be no question about the expected or desired outcome.

For efficient tracking and measuring, managers use performance management software. Furthermore, managers and employees can be part of different performance reviews, depending on company goals. The most common types are organizational performance and individual performance.

5 Stages of Performance Management

The performance management process consists of 5 stages:

  • Performance Planning – In the first stage, managers and employees discuss current performance, goals, work environment, and means to achieve them
  • Employee Development – Through training opportunities, managers want to ensure that employees get the required skills and mindset
  • Tracking – In the tracking stage, managers monitor employees to pinpoint improvements and any possible issues
  • Performance Appraisal – In the performance appraisal stage, managers and employees review employee improvement using 360-feedback, self-assessment, interviews, etc.
  • Reward – If performance management processes result in desired outcomes, managers reward employees

By assessing the 5-stage process, it is clear that continuous performance management is a two-way process.

Employee feedback is critical to the employee performance management process. Without it, employees can only guess how they’re doing. Is their work helping the company reach its goals or not?

Real-time feedback needs to be specific, timely, and given in a manner that will help and not hinder their performance. This means constant criticism isn’t the way to go. Managers use performance conversations to reinforce whatever an employee is doing right before outlining anything they may be doing wrong when “reviewing results.”

What is Performance Management? It’s a tool that:

  • Helps accomplish strategic organizational objectives
  • Clarifies expectations
  • Sets objectives
  • Identifies goals
  • Provides feedback
  • Reviews results

Performance Management Systems Importance

Since having a performance management system in place helps keep your employees on track for organizational goals, it matters. Ultimately, it matters in employee engagement, recruitment, retention, and productivity.

Let’s talk about a few key areas that prove beneficial.

Performance management:

  • Encourages employees through employee incentive programs
  • Boosts employee productivity and engagement
  • Helps in the creation of development strategies
  • Promotes an environment for feedback
  • Encourages team building

Let’s take each of those and expand on why they matter.

1. Encourage Employee Reward and Recognition

The better you reward and recognize your employees, the higher the retention is. Remember that the cost of a disengaged employee can be quite high.

American Express found that of the 300 small and medium-sized enterprises (SMEs) and 500 employees surveyed, 51% of the employers said they reward employees for increasing motivation.

Here are some other key findings of that survey:

  • 94% of the employers who responded said they reward their staff with gifts
  • 34% of the above say those gifts improve retention rates
  • 38% reward employees who are high performers
  • 23% reward all staff
  • 21% have an employee recognition process for long-term employees
  • 37% of the employers who don’t have an employee recognition system do think their employees would work harder if they did offer them
  • 89% of the employees received some reward from their employers in the past
  • 33% of the employees felt that receiving rewards made them work harder
  • 46% felt more valued due to the reward
  • 44% feel that their employers reward them for their dedication and hard work

So rewards and recognition work, but how can a leader reward an excellent job if they fail to measure it? There is a definitive process to identifying an activity that merits a reward or recognition with every effective performance management.

With employee performance management in place, you can first identify good employees and reward them. Statistics say that 83% of employees who work for a company with a good reward and recognition strategy are content to stay.

That matters.

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2. Boost Employee Engagement

First, what is employee engagement?

It’s not about how happy employees are about work or even the extent of their satisfaction with their jobs.

It means how emotionally committed they are to the organization they work for and its goals. How much they care about their work and the company they work for.

It’s not about the paycheck. It’s about what they can do to help advance the organization. When they care—when they’re engaged—they will use discretionary effort.

Discretionary effort means employees go the extra mile without being asked. They are proactive and do it because they feel it’s necessary. They are willing to expend more effort and thus increase individual performance.

Engaged employees:

  • Stay with the company longer and have individual goals
  • Involve themselves to a greater degree in the workplace
  • Produce better results

The above can lead to:

  • A boost in productivity
  • A better ROI

Since these are the kind of employees you want—not to mention the type of outcome you want—how can you turn your employees into engaged employees?

By using a continuous performance management process.

Managing employee performance creates an environment where employees feel at ease regarding open and timely feedback—a workplace with an air of support and encouragement, which fosters trust.

Employees who believe their managers or supervisors—not to mention the company—have their best interests at heart will reciprocate. Knowing they have an employer with a performance management system in place will help them improve their work and career development.

Implement an employee performance management system with clear objectives that provide consistent engagement. A system where they are encouraged to grow and have clear goals. Doing so can significantly increase the likelihood of expending a bit more discretionary effort.

But this also means that there’s a difference between an ineffective and effective performance management system. There’s no point to employee performance appraisal if the performance management cycle creates stress for employees.

Remember, performance management needs to lead to:

  • A boost in productivity
  • A better ROI

3. Create Development Strategies

Best performance management systems enable employees to track without putting a dent in invaluable resources such as money and time. Creating the right strategy means that the company is taking a proactive approach to the development needs of its employees.

A leader constantly communicates with employees, taking allotted time to discuss the possible development needs and planning for them.

An effective performance management cycle isn’t a once-per-year or quarter type of deal.

Since you are measuring and collecting information about both past and current performance issues, you have the perfect opportunity to develop strategies that develop your employees. Thanks to the open communication you are fostering, you and your employee can start development planning that will help their natural talents grow and evolve and work in line with your overall company goals.

That is a win-win proposition.

When you have an employee performance management system in place that focuses on new and existing areas of development, you keep both employees, and the business focused on setting and meeting goals.

Ultimately, managing performance can help your employees meet—and perhaps exceed—their potential.

Developing a performance management strategy may include:

  • Analyzing the needs of your employee
  • Identifying gaps in their skillset
  • Prioritizing which skills need addressing
  • Development planning and delivering any necessary training

4. Promotes an Environment for Feedback

Without real-time feedback, performance management collapses. Clear communication is critical to the process and how employees perform.

It isn’t about you as a leader offering feedback to your employees. It’s also about giving them a forum where they can share their feedback on the company and its goals and performance in general.

Let employees express their opinions.

But be quick to share with them all the positive things about their performance before pointing out where they can improve.

And then devising one of the strategies mentioned above to help them do so.

This feedback interchange is imperative if you want your company and its processes to evolve into something even better than it is today.

Feedback should include:

  • Unstructured Feedback  As the name implies, this is the feedback that occurs at every opportunity that presents itself
  • Structured Feedback – This is planned and systematic, perhaps using the actual performance review

Employee Performance Management Programs

Every company should create a custom program for evaluating performance. Employee development is an IT company isn’t the same as in a grocery store chain. Although the end goal is improving performance and meeting performance standards, not every company will have the same journey.

Nevertheless, there are some primary elements and goals that every performance management program should include.

  • Sync employee development with company objectives
  • Achieve specific outcomes on a day-to-day basis
  • Create measurable and strategic goals
  • Provide regular feedback in both employee and manager’s direction
  • Instead of an annual review, create a year-round engagement


An effective performance management cycle is a system every company should have in place. A tool that’s optimized to offer continuous growth to your employees.

Implementing clear-cut performance management systems will help your employees grow and flourish. And help your company reach its goals while increasing your bottom line.

If you are new to Human Resources and are looking to break into an HR role, we recommend taking our HR Certification Courses, where you will learn how to build your skillset in human resources, build your human resources network, craft a great HR resume, and create a successful job search strategy.