- IMD Business School

What is performance management, and why is it important?

Achieving and sustaining organizational excellence takes more than routine task management. It requires a strategic approach that aligns employee goals with those of the business and engages employees to work towards them. 

That’s where performance management comes in. Beyond routine check-ins, this transformative process empowers employees, enhances their contributions, and propels organizations toward greater success. 
In this guide, we’ll explore every aspect of performance management, from setting meaningful goals and nurturing talent to cultivating ongoing feedback and fostering employee engagement. Learn how to unlock the full potential of your team and set your business up for sustainable success.

  1. What is performance management?
  2. What are the benefits of performance management?
  3. The key elements of performance management
  4. How to implement a successful performance management strategy
  5. Common challenges in performance management and their solutions
  6. Empower your team’s potential for organizational success

What is performance management?

Performance management involves consistent check-ins between managers and employees, encompassing goal-setting and progress evaluation through tracking performance indicators and metrics, such as sales data or growth in consumer engagement. 

The main function of performance management is to provide ongoing feedback to employees to drive performance goals. This helps you set clear expectations for employees, so if they’re underperforming, they aren’t caught off guard by unexpected negative feedback during an annual review.

At an executive level, because performance standards are directly tied to the strategic goals of the organization, successful performance management informs executive leadership where they should focus efforts during strategic planning.

What does impactful performance management look like in action? Let’s detail a few more ways effective performance management is good for business.

What are the benefits of performance management?

Performance management’s success extends beyond productivity enhancement. By fostering intentional talent management, ongoing feedback, and employee engagement, performance management motivates employees and boosts employee retention. This helps managers ensure team members don’t underperform and helps employees through raises, recognition, and development opportunities. 

After the pandemic, many employees are more concerned with the impact of their careers, which is a pivotal focus of performance management. As contextualized in this I by IMD article, a study by Gartner assessed changing employee sentiments post-COVID-19. Nearly two-thirds (65%) of participants reported they’ve reconsidered their work-life balance, 56% had a higher awareness of their social contributions, and 52% had assessed the meaning of their work.

When you work employee recognition into your business operations, team members feel valued. They understand what they’re doing well and how to continue their high performance. The resulting workplace satisfaction boosts your overall company culture and employee engagement.

The key elements of performance management

An effective performance management system lays out how leadership and team members will collaborate to reach organizational goals. These are the primary components of a good performance management plan:

  • Human resources. These professionals are invaluable for collaborating with managers and employees to communicate company initiatives, coordinate training, and offer career development opportunities, such as workshops. 
  • Goal setting. This brings together your company’s strategic goals with employees’ individual goals to ensure everyone’s efforts are working together. Setting goals also gives employees clear targets to work towards, fostering individual employee development. If your goal is to increase brand reach, each individual should understand their specific role in that initiative.
  • Clear performance standards. Employees need to understand the metrics used to gauge their performance so they can meet management’s expectations. Performance standards should be quantifiable, such as a goal of creating 100 new client accounts.
  • Timely feedback. Performance-related feedback needs to be communicated to employees promptly. If an in-person meeting isn’t possible to quickly schedule, a virtual meeting can suffice. That way, they can address any issues or areas for improvement as soon as possible and while they are still fresh in their minds, leading to more effective learning and growth. 
  • Periodic performance reviews. Ongoing feedback is an important part of the performance management cycle since it helps employees adjust their work as needed according to their progress. Quarterly performance appraisals and reviews can give them regular insights into their progress while allowing them sufficient time for improvements in between.  
  • Regular check-ins. Smaller, more casual check-ins, such as bi-weekly lunch meetings or daily progress updates via email, provides employees with ongoing feedback. 
  • Employee development. Boost engagement and help employees enhance their skills with opportunities like cross-functional projects, brainstorming sessions, and company-wide events. This can help employees grow with your company and make them feel valued.
  • Employee engagement. Creating actionable ways for employees to get involved with company initiatives increases their engagement with your company culture. For example, you could offer volunteer activities or community service projects aligned with your company’s mission that employees can participate in as a team. This can help them connect with each other and their community. 
  • Metrics. Employee performance metrics are objective, quantifiable measures of progress that enable informed decision-making, goal tracking, and continuous improvement. Examples of performance indicators might include sales figures, error frequency, and number of products made.
  • Employee recognition. High performance deserves to be celebrated. Employee recognition, like celebrating individual achievements during meetings, is important because it boosts morale, enhances job satisfaction, and fosters a positive workplace culture. Beyond a simple pat on the back, recognition should contextualize how individual efforts have helped to achieve company goals.

How to implement a successful performance management strategy

The performance management process involves a structured approach starting with clear goal creation and communicating expectations. Then, it focuses on individual employee growth through tracking metrics that align with your overarching company goals and communicating progress in performance reviews. Finally, it includes employee development resources to ensure alignment between their career growth and your organization’s broader success.

More than aligning individual goals with departmental and company goals, your performance management plan is the actionable, daily implementation of your overall organizational strategy. It’s how you identify the tangible results of your overall visualization and planning. 

Because communicating these impacts to your team is crucial for introducing new performance management techniques, IMD’s leadership learning experiences can enhance your inclusive leadership and help you get everyone on the same page. 

Here are some key factors to keep in mind while implementing these processes. 

Align employee actions with organizational goals

This means connecting individual employees’ daily tasks and efforts with the broader objectives of the company so every action contributes to your company’s overall success. It also fosters a sense of purpose and direction among employees, enhances employee engagement, and unifies your workforce under common goals. 

Regular check-ins are a great time to do this. Discuss how individual efforts directly contribute to company goals and create a tangible link between the micro and macro levels of work. This promotes transparency, reduces ambiguity, and gives employees a framework to align their decision-making with your strategic vision.

Specify performance outcomes

Define clear, measurable results that you expect employees to achieve, guiding their efforts toward tangible goals. These performance outcomes are often integrated into job descriptions to attract the right talent and provide boundaries, as they’re determined by your overall company strategy. 

To break your big-picture, visionary business goals into tangible, achievable employee goals, use the SMART strategy and make sure that each goal is:

  • Specific: It’s clear and unambiguous, telling you exactly what to achieve.
  • Measurable: It’s quantifiable, so you can track progress. 
  • Achievable: It’s within reach, given an employee’s current skills and resources.
  • Relevant: It’s aligned with company values.
  • Time-bound: It has a specific deadline to keep employees focused and motivated.

Include the key performance indicators (KPIs) you’ll use to measure performance outcomes. Examples might include production numbers, the number of clients signed, and deals landed, depending on your business needs. 

Meet regularly and personally

Continuous performance management and regular check-ins encourage accountability because they connect overall performance with recent actions. This provides the best opportunity for growth and learning. 

Imagine if a manager had to sort through an entire year’s worth of performance reviews and distill it into an actionable employee performance appraisal. The employee might feel blindsided without any recent context for all that feedback.

Creating personalized development plans tailored for each employee helps you identify their competencies, set clear goals, and identify development opportunities uniquely suited to them. 

If you want to enhance your one-on-one employee development, participate in workshops designed to develop self-awareness of your leadership style

Common challenges in performance management and their solutions

Next, we’ll detail some of the challenges that arise when introducing performance management systems and how to avoid common pitfalls. 

Ineffective metrics

To be successful, the performance indicators you set for your team members need to be aligned with the outcomes you want to achieve as a company. For example, Amazon faced a lawsuit for its incredibly strict performance monitoring that didn’t allow employees enough time for bathroom breaks. The company’s elaborate employee tracking was ineffective because it did not take into account the human element of work.

Amazon’s employee tracking system focused on metrics such as the number of items picked or packed per hour. A more effective approach would be to focus on metrics that measure the quality of work, such as the accuracy of orders or the number of customer complaints. 

Adopting new technology

Many organizations use performance management software to automatically track certain performance KPIs, but this can require a steep learning curve for team members. Worse, they might feel it’s unnecessary, time-consuming, or unfair. To prevent digital transformations from becoming digital disruptions, use training days to keep everyone on the same page about why the new technology is being implemented, how to use it, and how it will benefit employees and the company as a whole.

Lack of transparency

Introducing new performance standards can feel like micromanagement if employees don’t understand the reasons behind it. No one wants to feel like their performance is being scrutinized for no good reason. This lack of transparency also makes it harder to motivate employees to meet your performance expectations. 

When you’re rolling out a new performance management process, announce it ahead of time and outline your specific reasons for the change so everyone is on board. Mention if and how the change will affect employees’ workflows, explain their role, and how these changes contribute to company goals.

Empower your team’s potential for organizational success

Performance management distills big-picture organizational goals into actionable strategies that motivate high performance and employee involvement in company initiatives, taking your business to new heights.

Start by setting goals that align with organizational strategies. Communicate individual expectations and track progress through metrics and one-on-one performance reviews. 

As you achieve your goals, don’t forget to recognize employees’ individual impact. To maximize the impact of your organization’s strategies, partner with human resources to offer employee development resources. To go a step further, set an example for individual growth by enrolling in a program designed to enhance your leadership potential.

Learn more about how to integrate performance management into your organization in IMD’s Leading High-Performance Teams learning journey. Past participants have learned how to make their dream team a reality through inclusive leadership and collaboration strategies. Because participants gain an understanding of how creativity ties into workplace purpose, they’ve been able to optimize their teams’ talent and innovative abilities, which gives their organizations a competitive edge. 

This on-campus program is led by experienced industry executives from a diverse range of industries and cultures, centering you within global innovation. You’ll walk away understanding of how to leverage each of your team members’ skill sets so you can achieve more together.