One of the most common and widely used human resources processes involves the performance evaluation or appraisal. In one form or another, it is (arguably) conducted at least annually for almost every employee in every company, and is less frequent an event than perhaps only the weekly or bi-weekly pay cycle. With the roots of the modern version of performance management dating back to the 1800’s industrial revolution, it is a staple of the employee experience and HR process ecosystem. Despite its prevalence and embeddedness in organizational practices and culture, it remains a common challenge to design and operate an optimized performance management cycle that drives continuously improving individual and organizational achievement. That requires constant vigilance and a periodic examination and redesign of its core processes and outcomes.

Creating a business-aligned and high-impact performance management cycle

The purpose of establishing and executing an enterprise-wide performance management cycle is to focus on and motivate individual and team performance toward achieving the organization’s mission, strategic objectives, and financial and operational goals. It is designed to communicate plans, establish expectations, set standards, and guide employee efforts and contributions in alignment with the business direction. At its best, the cycle activities are based on a formally stated philosophy and strategy that create a shared understanding about what it is focused on creating and sustaining from cultural, behavioral, and outcomes perspectives. 

A performance management cycle is a set of related and interlocking processes that, by virtue of its name, constitutes a continuous, ongoing stream of activities that cross otherwise restrictive and limiting time frames (e.g., annual) and seminal events (e.g., merit increase decisions). The cycle should be designed with certain outcomes in mind, including:

Business outcomes

• Meeting or exceeding market, financial, and operational objectives
• Enhanced productivity and labor cost-effectiveness
• Operational improvements and innovations
• Cross-functional alignment and collaboration efficacy
  
  

Talent outcomes

• High individual and team performance
• Long-term relationships (i.e., employee tenure)
• Performance and productivity improvement (i.e., development)
• Growth (i.e., advancement)
  
  

Those outcomes are achieved by designing an integrated set of practices and processes that provide clear guidance to each role holder on what they are expected to do, how they are to accomplish it, and the motivation to achieve, or (ideally) exceed, the goals and standards. The purpose of these are to 1) align employee efforts with the mission and goals of the enterprise, function, business unit, and team in which they perform their jobs, 2) establish awareness of expectations and create accountability for meeting those, 3) provide feedback and development guidance for best achieving those, and 4) evaluate the performance against standards and similarly-situated peers.

With such lofty goals and many elements, improving the performance management cycle remains a priority for many organizations, though it is nonetheless difficult to optimize.

Challenges and perceptions with performance management

The issues with the performance management cycle are surprisingly common, despite some significant improvements identified and subsequently popularized through research and insights over the past 10 years. Nonetheless, issues persist due to a series of problems created by non-responsive design and suboptimal execution.

Accuracy and time consumption

Given that the most typical performance appraisal is written at the end of a year by managers with 8-20 direct reports, with human memory capacities that require substantial daily note-taking to augment, the accuracy of these is reasonable to question. In fact, one study found that 62% of the variance in performance ratings was attributable to manager/rater biases and misperceptions, while actual job performance accounted for only 21% of the ratings assigned to those individuals. Furthermore, they reported that managers in one large organization were spending an average of over 30 hours per year per employee to conduct the process end-to-end. The time, effort, and attention managers devote to this during a typical 30-45 day window contribute to task fatigue and an increased likelihood of poorly considered and constructed reviews.

Trust in the process

There is low confidence among leaders, managers, and employees that their performance management cycle is fair, reliably differentiates actual performance levels, and motivates employees to exceed their goals or improve their contributions. For example, Deloitte’s research found that 61% of managers and 72% of employees did not trust their organization’s processes. Furthermore, only 32% reported that it supported timely, quality talent decisions about high and low performers. A full 75% of companies said that their process generated poor or very poor accuracy in assessing individual employees’ contributions. This lack of faith severely damages the reputation and trust in a performance management cycle.

Effectiveness

Multiple industry studies have found low ratings for how well performance management processes fulfill their primary purpose and deliver on their value proposition. One such study by Gallup found that only 2% of Fortune 500 CHROs said their performance management cycle “works” to drive goal achievement. Similarly, McKinsey research found that 54% of corporate leaders feel that it does not create a “positive impact on performance.”

Employees respond the same way, with only 14% agreeing that their performance reviews “inspire improvement”, and over 30% say their performance got worse after receiving a review. Furthermore, Harvard Business Review reported that 66% of employees were strongly dissatisfied with their performance evaluations, only 22% felt that the process was “fair and transparent”, and 65% of those surveyed felt the appraisals were irrelevant to the work they performed and the contributions they made.

Compliance and execution

Managerial behavior is a critical factor in the effectiveness of many aspects of the performance management cycle, and its level of contribution should be a major point of concern. Research suggests that as few as 15% of employees have regular weekly performance check-ins that are among the most basic and popular of leading performance management practices. Others have found that 76% of employees meet with their managers once per month or less. This issue looms large as a retention risk for younger workers, as 73% of Gen Z employees said their likelihood of retention is driven by the frequency of managerial feedback and communication.

Benefits of a comprehensive and robust performance management cycle

A well-designed and executed performance management cycle has been demonstrated to drive employee engagement and retention by supporting successful job performance, connection with and trust in one’s manager, and personal growth through development and advancement. 

When thinking about the benefits that a performance management cycle can generate, consider the basic human motivations for working—economic security and stability, membership and belonging, successful and recognized contributions, and development opportunities. In fact, compare those to the elements of performance management that Gallup has found as among the primary drivers of employee engagement (that have also declined the most in recent years): 

• Connection to the mission or purpose of the company.
• Clarity of expectations.
• Opportunities to learn and grow.
• Opportunities to do what employees do best.
• Feeling cared about at work

When well-executed by managers, the process builds trust and a sense of belonging between employees and their supervisors, as well as increasing the likelihood of meeting the expectations and goals of their positions.

Improving the performance management cycle has also been shown to drive enhanced business outcomes. For example, Betterworks reported that companies that adopted continuous performance feedback outperformed their competitors by 24%, were 39% better at attracting top talent, and 44% better at retaining talent. As such, an approach to performance management is designed to increase an organization’s speed, agility, and responsiveness to market conditions. In the current conditions of heightened volatility in the commercial, financial, and labor markets, its potential value cannot be overstated.

What defines a comprehensive and robust performance management cycle

The core elements of a performance management cycle that play out over the course of one or more performance periods include core elements that flow from a formally stated philosophy and are directly aligned with a defined set of business and talent outcomes. Those elements should include:

1. Business-aligned goal-setting process
2. Performance and behavioral (e.g., competencies) standards
3. Performance coaching and guidance
4. Objective and equitable assessment practices
5. Closely integrated processes related to skill and career development, and pay for performance and contribution plans.
6. Outcome metrics and analytics to evaluate effectiveness and impact

Interesting insights for consideration from McKinsey found that the biggest driver of performance excellence and improvement flows from the perceived fairness of the performance management cycle. That fairness is created by linking individual goals to business priorities, effective coaching by managers (reported by fewer than 30% of companies), and differentiating compensation across levels of performance (which fewer than 50% do effectively). Implementing those can be accomplished in the context of creating a more comprehensive and impactful program and cycle.

Steps to build and upgrade a more robust and effective performance management cycle

In many organizations, performance management is considered a process, a series of mandatory steps that support comparative value ratings and pay increase guidance for top vs. average vs. low performers. Others focus on it as a process for identifying, motivating, and rewarding the best and brightest, while pushing others to do better or contribute more. Many managers will share that the focus on documentation, evidence, and examples of performance is used as legal protection against complaints and challenges to reviews, ratings, promotions, transfers, wages and bonuses, and continued employment decisions. And those in more advanced organizations will point to it as a process that directs and motivates employee performance towards defined goals, while identifying and guiding skill development and related advancement opportunities. 

But there is a significant difference between a performance management cycle and a process: the term “cycle” conveys a comprehensive, ongoing flow of integrated processes and steps designed to maximize employee effort and contributions across a longer employment timeframe. It builds trust and belonging by defining the manager-employee relationship as one based on personalized guidance, feedback, and coaching, with regular discussions that bring the employee’s interests, aspirations, and motivations into plans and decisions related to their development and deployment. It looks across a longer time horizon, away from the project, fiscal quarter, or performance year, and towards a career narrative that is not limited by short-term subpar performance or limited contribution, creating space for recovery and reestablished excellence.

The key steps to building or upgrading an impactful performance management cycle include:

1. Secure executive input and support

Any changes to a performance management cycle will affect every employee in a very personal way. As a result, it is essential to start with top executives, with awareness, education, and discussion about the value of improving performance management to their business objectives and pursuits, the alignment of company culture with those objectives, and the range of options and opportunities for improvement. Generating their buy-in, and active governance, oversight, and participation in redesign activities will create a foundation for changes. Once changes are determined, build mechanisms to role-model them and hold their management teams accountable for adoption, action, and results.

2. Define a performance management philosophy and strategy

When updating the performance management cycle, it is essential to clarify the purpose and value expectations that will be derived from the new design. A philosophy should be based on a carefully considered view of how the company wants to lead and manage its people. Consider the management style (e.g., directive, collaborative, or adaptive) that best fits the business or industry, and the company’s size, spread, values, culture, and operating model. The philosophy can be used to determine the process steps and flow, systems, tools & templates, and the guidance and direction provided to managers and employees.

Rely on employee listening and design thinking methods to generate an employee experience perspective on the redesign. Include the perspectives of managers and employees to identify the pain points and common value failure nodes that diminish the effectiveness and efficiencies needed.

3. Execute integrated planning and goal setting

Aligning individual goals with the organizational strategy and the resulting business-unit, functional, and team goals is a primary objective and a critical element of the performance management cycle. The reasons are twofold: 1) synchronizing the individual efforts of dozens, hundreds, or thousands of workers across multiple functions and roles is enormously challenging, and 2) clearly linking employee goals to those of the business creates more meaningful work, which is a driver of significantly higher employee engagement and effort. The process of identifying and setting goals can involve cascading them from top executives down, having teams generate goals that define how they will contribute to higher-level objectives, and formally allowing for goal adjustments during the performance period in response to changing strategies or market shifts.

4. Conduct continuous feedback and coaching

Perhaps the most performance-impacting practice in a modern performance management cycle is the periodic “check-in”, a brief one-on-one manager-employee meeting designed as a regular opportunity to assess progress and provide guidance. They act as early warning signs of issues or misaligned goals and provide timely, specific feedback. They address both the manager’s need for assurance of progress and the employee’s need for guidance and direction. These are typically structured with three topics or questions that can be discussed in a 15-20 minute weekly or bi-weekly session: 1) major accomplishments or task completions, 2) barriers or roadblocks faced, and 3) next steps or goals. Leading practice has the manager ask a final question about how the employee is feeling about their current work and work environment, and what the manager can do to assist, support, or enhance them. The key is to ensure that these meetings are scheduled and not cancelled or delayed, which is an all-to-commonly reported shortcoming.

5. Evaluate performance through structured assessment and reviews

The process of assessing performance against established standards, similarly situated peers, and creating documentation is perhaps the most difficult and certainly the least popular aspect of the performance management cycle. The reason is that it requires the collection of complete, accurate, and representative samples of performance, well-understood, widely accepted, and equitably applied criteria, and efficiently summarized and documented assessments. The use of updated job descriptions and success profiles, access to streamlined performance data, multi-rater feedback collection platforms, and performance evaluation systems offer crucial support to managers. Similarly, the use of talent calibration sessions makes the process of comparing goal difficulty, skills breadth and application, task and goal outcomes, and other contributions by multiple role holders simpler and arguably more equitable.

6. Deliver skill and career development guidance

While leading practice promotes separating learning and development and career progression coaching from the performance appraisal process, they are, nonetheless, critical elements of a broader performance management cycle. The flow from performance assessment and feedback to individual development conversations is natural and should involve some level of skills-gap assessment against current job requirements and those required in future aspirational roles. The joint development of individual development plans (IDPs) documents learning actions to be taken, work assignments that can provide application practice, and coaching, mentoring, or shadowing relationships that can provide exposure and guidance. A shared monitoring can be created as part of the coming performance period’s goals.

7. Assign rewards and recognition

As part of the performance management cycle, the connection of performance and contributions to compensation decisions is often a separate, but related process. Leading practice views compensation levels and bonuses not only as rewards for the previous year, but also as a statement about the employee’s continuing value to the organization relative to the labor market and peers. This highlights the longer-term view of the cycle, bringing in considerations such as growth promotions, career progression, and equity awards into rewards and recognition decisions. As a result, non-monetary recognition strategies related to high potential (HiPo), succession planning, special assignments, and executive mentorship flow from the performance management cycle.

8. Analyze the performance management cycle impact evaluation

Optimizing the cycle requires objective assessments of its overall impact and the impact of its various stages and steps. The use of efficiency, effectiveness, and impact metrics is essential to establishing a robust ecosystem of performance-driving activities that together directly influence the organization’s business, operational, and talent objectives. While the standard process compliance metrics (e.g., check-in frequency, appraisal completions, merit pay submission timeliness) are tempting starting points, they do not address the extent to which the cycle is meeting its purpose—to drive enhanced business results.

A statistically-based evaluation should be conducted to assess how process compliance influences critical talent outcomes (retention, engagement, mobility, performance) at the individual and team levels, and how those outcomes, in turn, influence corporate revenue, profitability, production volumes, customer loyalty, and market capitalization. Such an analysis identifies which inputs and outcomes of the performance management cycle positively influence business, financial, and operational objectives, and the extent to which each contributes to those objectives. With that, a robust business case provides credible proof of its value, and opportunities to further improve or streamline (or eliminate) steps to optimize it over time.

Relevant Practices & Tools

Advanced Performance Management Practices that are Strategy Driven and People-centered. >

Performance Management at this level is both a strategy and a process deliberately designed to drive employee work efforts and behaviors in synch with the strategies and priorities of the larger business... more »

Determining a Performance Management Philosophy and Strategy. >

A philosophy clarifies the purpose and envisioned value of performance management in a given company. It defines how the company wants to lead and manage its people... more »

Rating Employee Performance and Competencies Fairly and Equitably. >

The core aspect of performance management involves the assessment of individual task execution and contributions, and as such requires the creation of criteria, standards, and a process against and for which employee evaluations will be conducted... more »

Calibrating Goals and Performance to Enhance Group Equity and Fairness of Performance Evaluations. >

Key elements to emerging performance management are the group comparison and alignment of employee goals and performance evaluations... more »

The Individual Development Plan (IDP) Tool: Capture Targeted Employee Learning and Development Actions for a Performance Period. >

A plan of action to guide the employee throughout the coming performance period as they continue to develop necessary knowledge, skills, abilities, and competencies for both meeting current and preparing for future job role requirements... more »