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Performance management: definition, steps, and best practices

Updated 04 July 2022 • 9 min read

Assessing and optimising employee performance is essential for business success.

However, the traditional method of gauging staff performance just doesn’t work anymore. Consider the following:

  • 95% of managers are unhappy with their current employee review process

  • 51% of employees believe that annual reviews are inaccurate — with 53% saying reviews don’t play a factor in motivation and engagement

  • only 8% of managers say annual employee appraisals add business value.

Today, many teams are adopting a more modern approach to tracking and improving employee performance.

Let’s take a look at how organisations are handling performance management today.

What is performance management?

Performance management is a systematic and strategic process used by organisations to assess and improve employee performance, making it an important function of modern human resources and workforce management.

You may hear ‘performance management’ being used to refer to disciplinary actions undertaken by an organisation to improve employee productivity or behaviour. But in a modern business setting, this definition has expanded to include all the activities an organisation undertakes to meet its objectives.

In practising performance management, teams work together to develop a set of goals, standards and performance requirements for each employee to live up to. From there, managers assess performance regularly and proactively over time to keep operations moving in the right direction.

Today, employee assessment and guidance has become a routine part of team meetings and one-on-one conversations, building on the more periodic appraisals or reviews that were once considered the norm. Managers will also proactively look for opportunities to assess and provide guidance to team members.

This ongoing assessment and guidance leads to continuous employee and team development — which ultimately leads to continuous growth for your business.

Why is performance management important?

Improves communication and alignment

Open and ongoing communication is a cornerstone of performance management.

The more your employees engage with their managers, the easier it'll be to do so. They’ll feel more comfortable reaching out for assistance and guidance whenever necessary. And, your employees will inevitably become more receptive and trusting of the feedback they receive.

Overall, it leads to better alignment and higher levels of engagement throughout your team.

Increase employee accountability

With performance management practices in place, your employees will take better ownership of their growth and success.

They’ll have played a major role in actually creating their performance goals. This ownership will go a long way toward keeping employees engaged and productive.

Also, while managers should be careful not to micromanage their employees, their ability to remain in close contact will keep employees focused and on track over time.

Boost employee retention

The increased engagement brought about by effective performance management will, in turn, boost employee retention.

In fact, according to research from the US, highly-engaged organisations see significantly less employee turnover than their average counterpart. These companies also see reduced absenteeism of 41% — equating to a 17% increase in productivity.

Highlight training needs and gaps

Effective performance management makes it easy to identify your employees’ skills and knowledge gaps — and to fill them as effectively as possible.

The ability to use performance management to develop skillsets can be seen as a key benefit shared by both organisations and their employees alike.

Provides opportunities for professional development

Performance management aims to make a “teachable moment” out of every engagement managers have with their employees.

With ongoing engagements come opportunities for managers to offer guidance, lend some words of wisdom or point the employee to additional resources. Without this ongoing contact, though, employees may struggle to stay on track.

Supports workforce planning

With a more comprehensive understanding of your employees' strengths and weaknesses — and your team’s skills gaps — you’ll be better able to position your team for success.

This may mean:

  • repositioning your current employees based on their strengths

  • facilitating new relationships and mentorships between teammates

  • bringing aboard new talent that fits your organisation’s needs.

In any case, it means better use of your human capital.

Generates business-relevant outcomes

The goal of performance management is to communicate, track and achieve specific business goals at every level of your organisation.

Performance management starts with you reviewing your goals, then evaluating your team’s ability to achieve them. With a very intentional approach, managers can develop their employees in the key areas that matter most.

Typical steps in the performance management process

The performance management process consists of four stages, How regularly they occur will depend on what makes sense for the size, structure and complexity of your business.

1. Planning

During the planning stage of the performance management cycle, team leads and employees work together to develop a plan for future growth.

First, they’ll develop SMART goals for the individual employee. These goals will relate to:

  • employee professional and career growth paths

  • current and future needs

  • the needs of the business.

The manager and employee will then create an action plan for achieving these SMART goals. This action plan will define:

  • what the employee will do to meet their goals

  • what the manager will do to make sure the employee meets their goals

  • how they’ll measure the employee’s efforts, performance and growth.

2. Implementation

Once a plan is in place, the next step is to put it into action.

For the employee, this means making the proper adjustments to their workflows and efforts as needed. Employees also may need to take certain training courses or development sessions as defined in their plan.

Managers and team leaders are then responsible for supporting their employees and making sure they have the resources they need to reach their goals.

3. Tracking

As employees put their plan into action, both they and their managers can begin to track performance and growth.

Here, your employees keep leaders informed of their progress on development-related tasks. Ideally, they would track their own performance data over time and make improvements to their efforts as they go.

Tracking activity should result in a regular reporting schedule so managers at any level can analyse the information, assess performance and provide guidance as needed.

4. Review

Performance reviews can take multiple forms, and should occur on a regular, timely basis.

Both managers and employees can share their views on how work is progressing and performing, before working together to discuss what productive changes can be made. To achieve this, performance reviews should ideally be informal in tone, but with clearly stated outcomes.

Pillars of an effective performance management process

Performance is assessed fairly and consistently

Performance management cannot be erratic if it’s going to deliver results for individuals, teams and the business as a whole.

It must be consistent to the point of becoming routine. If you fall behind on performance management efforts, it’ll be easy to fall back into old, ineffective way of measuring employee performance.

Performance is tied to larger business objectives

Tying employee development to business success helps your team members understand the crucial role they play within the company.

This, in turn, leads them to take ownership of their duties to your team — and of their professional development within your organisation.

Performance expectations are clearly communicated

For the employee to take effective action on their performance objectives, their objectives must be clearly stated.

This goes back to the concept of developing SMART goals with a game plan for the employee to achieve success.

Performance should be easily trackable

Your performance management system should include a means for both employee and manager to keep track of individual progress.

Ideally, this data can be sent automatically to your single source of truth, where it'll be accessible to all stakeholders as needed.

Performance should be recognised and rewarded

Rewards for employee growth are a must for any performance management process. With a closer understanding of your employee’s progress and preferences, you’ll be much better able to reward them appropriately.

Performance management best practices

The following best practices can be considered suggestions in how to develop your performance management processes according to the above pillars.

Set meaningful goals for each employee

Performance management should enable all employees to reach their true individual potential.

Tailoring employee performance management objectives to their knowledge, skills and expectations should be a primary consideration, as well as how to include the employee in the goal-setting process.

Employee goals should also be dynamic, growing and evolving as the situation calls. In creating an ongoing feedback loop around goals, your employees can see how their efforts lead to better outcomes for themselves as professionals and the business.

Align employee activities with the company mission

As we’ve said, it’s important to show how your employees’ growth helps improve your business.

To plan your employee growth track around your overall business goals, you need to make sure your employee’s efforts lead to better business outcomes.

When this is achieved, you will also find there are opportunities to demonstrate how achieving goals delivers on your organisation’s values. This, again, requires individualised performance management — it can’t be achieved with a cookie-cutter approach.

Share objective performance-based expectations

The key to individualising employee assessments is to be objective and comprehensive.

With a comprehensive view of the employee, managers can easily:

  • avoid unintentional biases regarding their team members

  • uncover hidden insights about their employees

  • provide objective, yet personalised feedback and guidance to each of their employees.

Be transparent with employees

Managers need to be transparent with their employees regarding the team’s shift to strategic performance management.

On a larger scale, this will involve implementing change management initiatives to make sure your employees are on board with these more progressive efforts. This can include:

  • collaboratively developing staff performance management performance goals

  • maintaining constant contact with employees

  • providing focused assessments and explanations.

Provide regular feedback and resources for growth

For performance management to be effective, leaders need to:

  • continually provide practical feedback to the employee

  • proactively offer resources for further professional development.

While employees are responsible for getting their work done, it’s the manager’s duty to equip them with everything they need to get there.

Give employees recognition and rewards

Effective performance management allows you to truly understand the value your employees bring to your organisation.

From there, you can — and should — provide rewards that are commensurate with this value.

As performance management becomes a more integral part of your operations, you might even consider building performance-based rewards into your employee contracts.

Simplify payroll and workforce management with MYOB

Performance management is an involved, resource-consuming endeavour — but effectively implementing it'll lead to major growth for your employees and for your business.

Thankfully, MYOB can help you streamline many of your backend processes, giving you more time to focus on your performance management initiatives.

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