Understand how to build an effective approach to performance management, including the tools that can support it
If people are the greatest creators of value in organisations, then good performance management is critical for an organisation’s success. Employees need to understand what’s expected of them, and to achieve those goals they must be managed so that they’re motivated, have the necessary skills, resources and support, and are accountable. Performance management aims to monitor, maintain and improve employee performance in line with an organisation's objectives. It’s a not a single activity, but rather a group of practices that should be approached holistically.
This factsheet explores critical aspects to get right in performance management, as well as recent changes in thinking. It summarises some of the main tools used in performance management, including objective setting, performance ratings, performance appraisals and feedback, learning and development, and performance-related pay.
For professions involved in ensuring organisational performance, such as HR, a big challenge is to lever the relationship between the people working in the enterprise and the value they deliver. Performance management is the attempt to maximise this value creation and ensure that employees contribute to business objectives. It should align with organisational strategy and suit the type of jobs in question.
There’s no standard definition of performance management but it describes activities that:
Establish objectives through which individuals and teams can see their part in the organisation’s mission and strategy.
Improve performance among employees, teams and, ultimately, organisations.
Hold people to account for their performance by linking it to reward, career progression and termination of contracts.
At its best, performance management is a holistic set of processes and centred on two-way discussion and regular, frank, yet supportive feedback of progress towards objectives. It brings together many principles that enable good people management practice, including learning and development, performance measurement and organisational development. It’s often misunderstood to be synonymous with the ‘traditional’ annual review, or performance improvement plans to deal with underperformance, but it is broader than both these things.
Effective performance management relies on both formal and informal processes. It involves planning – for example, defining and reviewing objectives, linking ways of achieving those objectives to business plans, and setting measures of success. These are often discussed in meetings between the line manager and employees, known as performance review or appraisal.
People managers are thus central to performance management. Ideally, they reinforce the links between organisational and individual objectives, give feedback that motivates employees and helps them improve, and hold them to account. Managers need to be suitably skilled to do this and in turn need to be supported by HR processes that are fit for purpose.
But performance management is not only a manager-led activity – it also involves establishing a climate in which individuals and groups take responsibility for the continuous improvement of business processes and their own skills, behaviours and contributions. Much of how performance is discussed is shaped by behavioural norms or culture, so communications and leadership throughout the organisation will set a precedent and shape how colleagues discuss performance more widely.
Listen to our podcast Strength in numbers: what’s new in performance management.
The elements of performance management may be similar across different organisations, but there’s no single best approach. Each organisation should develop practices that are relevant to their specific context and their actual (or desired) organisational culture. There should also be flexibility within the system to account for the different ways teams or functions operate within a single organisation.
Performance management is a continuous cycle, not an isolated event. Because performance management integrates various HR activities, an overarching structure or framework is needed for the different parts to work together.
An organisation’s strategic goals should be the starting point for departmental goals, followed by agreement on individual performance and development priorities. Individuals and managers can then draw up plans and monitor performance continuously. Feedback and reviewing progress against objectives should be regular, and could be supported through the year by periodic formal performance reviews, as well as by goal setting, project planning and training.
Please scroll to the bottom of the factsheet to view the transcript of this video.
Having remained fairly stable for two or three decades, many employers have adapted their approaches to performance management over the last few years, in particular in response to a number of articles challenging received wisdom. The broad thrust is that ‘traditional’ practices – in particular, the dreaded ‘annual appraisal’ – are outdated, if indeed they ever worked.
But popular changes may just be the latest fads and fashions. What’s the evidence on what’s actually effective in improving performance? Our evidence review Could do better? Assessing what works in performance management, summarises the body of research to help employers make grounded decisions on what’s most likely to be effective in improving performance.
We found that, at a basic level, the established performance management chain still holds, as in Diagram 1 below.
However, there are a number of important factors that employers should be careful not to take for granted, as shown in Diagram 2 below. Based on the best available evidence, a fuller model of target-setting and performance appraisal should consider the following:
Objectives can be specific and challenging (often labelled ‘SMART’) but this may not always be the best approach. Sometimes objectives focused on behaviour or on learning, or even ‘do-your-best’ objectives can be more effetcive, especially for complex tasks.
There are two main reasons for performance ratings and the purpose should always be clear. Using them for administrative purposes (for example, to inform pay decisions) leads to a different approach than if they are being used to support people development and improve performance.
Performance ratings can be biased for various reasons, but there are things we can do to reduce bias. For example, making managers feel more accountable for ratings they give their staff by having an independent person check them can reduce favouritism.
How employees react to feedback is a vital factor in whether it improves performance. Reactions are influenced by an individual’s personality (for example, their self-esteem and openess) and how they perceive the appraisal (for example, whether it is fair and participative.
There's more on these points below.
Key points of interest:
Setting performance objectives for individuals, departments and the organisation is an important aspect of managing performance. These objectives can be expressed as targets to be met (such as sales levels), ad hoc tasks to be completed by specified dates, or ongoing standards to be met. They may be directly related to team or organisational key performance indicators or personal; for example, taking the form of developmental objectives for individuals.
Today, many employers do not solely rely on measurements of employees’ outputs. Rather, they balance these with learning and development objectives and assessments of employees’ behaviour, such as how supportive they are of colleagues. These can be of longer-term importance to the organisation. For example, there’s good evidence that social cohesion is an important factor driving performance in knowledge organisations, so it’s important for such employers to promote collegiate and collaborative behaviour. Performance management is one way of doing this.
It’s often said that objectives should be SMART – typically, Specific, Measurable, Achievable (yet stretching), Relevant, and Time-bound. As we argue in our Could do better? report, the best evidence supports this in some contexts but not others. In straightforward tasks, goals that are specific and stretching do increase performance, but in 'complex' jobs (such as those which involve making analysis-based decisions or adapting to unfamiliar cues), they do not. Here, vaguer outcome objectives focused on ‘doing one’s best’ work better, and best of all are objectives focused on learning or behaviour.
Whatever their nature, objectives should be clearly relevant to the overall purpose of the job, team and organisation. Our research found that employees do need to be committed to them, but they do not need to set their own objectives – indeed, targets tend to be more powerful when they are set by one’s manager.
Employers can also opt for objectives on team-level performance rather than individual level. Both types can work well; the important thing is to match objectives to the nature of the work. In one job, good performance may purely be a factor of individual application; in another job it may rely much more on teamwork. If striking a balance between individual and team objectives, employers should be careful that they do not undermine each other.
Performance management often focuses almost purely on assessing employees’ past performance and linking it to administrative decisions (for example, on pay). This is a mistake. If the ultimate aim is to improve performance, there should also be a strong focus on how employees need to develop. Performance conversations should thus help employees to learn from their experiences and identify other relevant learning and development opportunities.
A number of organisations use personal development plans (PDPs) to set out actions they propose to take in this regard. Sometimes, a review of employees’ potential and development needs is grouped with the performance appraisal and called a performance development review (PDR).
You can explore more on how learning supports workplace performance in our learning and development strategy factsheet.
Performance reviews are a process by which managers assess workers’ performance and discuss this with them. Assessing and feeding back on performance is a critical factor in making targets effective, as monitoring our progress towards objectives is strongly motivational. Traditionally, reviewing performance has often been an annual process, but this should not be the case. It should be a regular occurrence; for example, happening at the end of a piece of work or every few months, depending on the nature of a person’s job. Reviews can involve face-to-face conversations between managers and their staff, 360-degree feedback, and assessments against performance targets. They can also benefit from a strengths-based approach.
Linking levels of pay to individual, team and organisational performance is a traditional, and still common, approach. In organisations that have performance-related pay (PRP), performance management is an inseparable aspect of pay reviews. However, the relationship between pay and performance is a widely debated aspect of performance management.
Center for Evidence-Based Management provides a database of evidence summaries on effective management
ACAS. (2018) ‘Improvement required’? A mixed-methods study of employers’ use of performance management systems. London: Acas.
ARMSTRONG, M. (2017) Armstrong's handbook of performance management: an evidence-based guide to delivering high performance. 6th ed. London: Kogan Page.
ASHDOWN, L. (2018) Performance management: a practical introduction. 2nd ed. HR Fundamentals. London: CIPD and Kogan Page.Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
ARMSTRONG, M. (2017) How can we fix performance management?People Management (online). 17 November.
CAPPELLI, P. and TAVIS, A. (2016) The performance management revolution. Harvard Business Review. Vol 94, No 10, October. pp58-67. Reviewed in In a Nutshell, issue 62.
FARAGHER, J. (2018) How to get managers on board with performance management. People Management (online). 24 May.
GROEN, B.A.C., WILDEROM, C.P.M. and WOUTERS, M.J.F. (2017) High job performance through co-developing performance measures with employees. Human Resource Management. Vol 56, No 1, January-February. pp111-132. Reviewed in In a Nutshell, issue 66.
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This factsheet was last updated by Jonny Gifford.
Jonny is the CIPD’s Senior Adviser for Organisational Behaviour. He has had a varied career in researching employment and people management issues, working at the Institute for Employment Studies and Roffey Park Institute before joining the CIPD in 2012. A central focus in his work is applying behavioural science insights to core aspects of people management. Recently he has led programmes of work doing this in the areas of recruitment, reward and performance management.
Jonny is also committed to helping HR practitioners make better use of evidence to make better decisions. He runs the CIPD Applied Research Conference, which exists to strengthen links between academic research and HR practice.
