What is Performance Management?

Introduction

Performance management is a vital part of any organisation and is commonly undertaken in all establishments, even if the process is not formally recognised. Broadly speaking, performance management is the process of setting targets and monitoring the way in which those targets are met. From the performance management process, new opportunities and targets are identified and the process is continued in a cyclic manner.

Traditionally, firms have tended to use the appraisal method of managing performance. This method, however, is fundamentally different from the more modern process of performance management. Appraisals are generally focussed on the past and on how the employee or the team has performed in the last period. Due to the nature of the appraisal approach, many employees view the process in trepidation and merely see it as an opportunity for the management team to lay blame for poor results and not as a positive way to manage the future results of the team^[1].

Performance management, on the other, hand is much more forward looking. The aim of this more modern process is to look to the future and to consider longer term targets and how these can be achieved^[2]. There is naturally a degree of analysing the past, but the focus is on learning from the past in the context of improving the future. Strategic goals are set and the targets align the individual’s actions with that of the company as a whole.

Critically, performance management is the overall process of achieving predetermined goals and includes not simply the measurement (which is commonly all that is seen during the appraisal approach), but also the setting of performance goals and the wider issues of planning in terms of having incremental goals on the way to the ultimate aims of the organisation. It also covers performance coaching of individuals to ensure that those goals are met^[3].

Current Practice and Management Efficiency

Naturally, managers are key players in the whole performance management process. Direct line managers have always had some degree of inclusion in traditional appraisal processes as they are often the people to conduct these meetings and to set targets for their staff. Traditionally, however, the top level strategic management has not been involved in the processes, seeing them as something that the team leaders should be dealing with^[4].

Performance management, however, requires that the methods of performance management are both strategically aligned with long term goals and are inclusive of all teams and all levels within the organisation. It is of little use having a sales team that can sell a certain product, if the technical team does not possess the necessary knowledge to support the product after the sale has been completed.

A recent survey on business performance management practices considered the way in which performance management impacts on the performance of an organisation as a whole, in 5,000 top companies from the USA^[5]. The main finding from this survey was that companies with a formal approach to performance management consistently outperformed those that did not have a formal process in place. In this survey, just 46% of the organisations questioned were found to be following formal plans which were laid out by high level managers. When these organisations were asked why they had a formal performance management structure in place, only 19% recognised that it was a valuable tool for managing long term strategies; 7% saw it as a way of motivating and rewarding. The overwhelming majority (91%) of companies used the formal performance management process as a way of improving and working towards better financial performance.

This research indicates that, even in the companies that have implemented a formal performance management process from high level managers, the focus is still very much on financial results and overall control, rather than on the softer, more difficult to ensure factors such as employee engagement and motivation.

Good Performance Management Practices

By implementing a suitable performance management scheme, companies can see real benefits. However, these processes must be carefully managed at all levels of the organisation to ensure that they do not simply become a more complicated form of the traditional appraisal approach.

It is vital to remember that a performance management process is a process that is both strategic and integrated in its approach. This means that it should be focused on broader issues or the longer term goals that the organisation has rather than micro goals that each individual feels they should have. Focus needs to be on overall outcomes and not necessarily on individual outputs. Consider, for example, a sales environment where all staff are measured based on the amount of net sales they make. The overall aim of the company is to be profitable; therefore, an individual who carefully considers the sale and makes just a £1000 sale at a 30% profit would be better serving the company’s overall needs than an individual selling £2000 at 20%, yet under the old output management, the latter employee would be regarded as ‘better’ by the company^[6].

Good performance management should take into account issues such as the interrelation between managers and individuals, as well as the cultural make up of the organisation. Individuals’ desires and motivations should be at least considered, during the planning, to ensure that the absolute best is being achieved of everyone.

Inclusion of all teams and all levels is the cornerstone of performance management. The starting point should be the overall strategy and visions of the company as established and managed by the top level of management. These broad objectives should flow through to the teams and the individuals to establish what they need to do in order to reach these ultimate goals. It is this strategic approach that represents good performance management by the management of an organisation and should be encouraged throughout the company and in every team.

Good Performance Management in Action

An example of where the benefits of good performance management can be seen is in the well known publication, Reader’s Digest. In this case, the performance management goals are established at a strategic level with the individual team metrics being established to suit the goals of the team in question. Individual bonuses are then tied into these metrics^[7].

Critically, these metrics are established based on the overall strategy and goals of the organisation. The administrative manager, Joanna O’Hagan, stated: “It’s good for the company and the employees. It means we’re all working to the same target of hitting our budget, and the company saves money overall”.

By ensuring that all of the teams retain their individuality but are all, nevertheless, striving to reach the common goal, the best of both worlds is achieved. It is simply not practical for all teams to have the same overall goals. Collectively, however, they all pool their skills into the same organisation and, therefore, they must be strategically aligned, even if their goals are not directly aligned. This has been a vital understanding for Reader’s Digest; having the same strategic goal does not mean that every individual team must work to the same metrics. Quite the opposite in fact; every team must be encouraged to complete its piece of the jigsaw as efficiently as is possible, so that the whole puzzle can be pieced together.

Bad Practices in Performance Management

According to John Ingham’s Strategic HCM Management, January 2008, bad appraisals and performance management collectively causes losses of £2.2 billion per year to the British economy. This is clearly a dramatic loss and raises the question what exactly are considered to be bad appraisal techniques?

One of the main criticisms of poor performance management is that of simply following the tradition of carrying out appraisals. In many organisations, an appraisal is an annual event that line managers must complete in order to satisfy human resources. The questionnaire used during the process is often not relevant and no-one is really sure of what the whole process is meant to achieve; it is merely seen as a task that has to be done.

The two main issues that are perceived to lead to a poor performance management approach are that the managers conducting the meetings with the individuals are not completing the process helpfully and that the performance management processes themselves are not integrated with the organisation’s aims, as a whole. In the first case, managers often see the process as an opportunity to criticise employees, resulting in those leaving the appraisal processes feeling attacked and de-motivated. Other managers simply do not care about the process and see it as an administrative burden; therefore, inadequate preparation or feedback is undertaken.

The second issue is down to lack of higher management engagement in the process. Whilst line management must clearly be the dominating influence when it comes to the performance management of teams, it is down to the upper management teams to ensure that these team leaders are suitably targeted with what they aim to achieve and how it fits in with the wider corporate strategy.

Failure at both of these levels of management results in a disjointed and ineffective performance management system. Ultimately, this will lead to an ineffective organisation which consistently fails to meet its strategic objectives.

Bad Performance Management in Action

One of the hardest elements of performance management is identifying that a problem exists. Many companies are simply unaware that there are better ways of managing their employees. Consequently, little or no consideration is given to how performance management can be changed. Drivers for change often come due to a new or innovative manager who has worked elsewhere and seen the benefits that he or she could bring to their new organisation^[8].

One of the interesting examples in perceived poor performance management techniques is that seen in General Electric. The former chief executive of the company, Jack Welch, had a somewhat traditional view of performance management. He asked all middle managers to rank individuals in their team against each other and complete a split of 20% at the top, 70% in the middle and 10% at the bottom. Many of those falling into the 10% were asked to leave the company. Since Mr Welch’s departure from the company, the references to the 20/70/10 split have been removed, but the principle remains the same, with managers being asked to rank their teams.

The real criticism of this process was not necessarily of the draconian way that 10% were automatically culled from the organisation, but more down to the way in which the managers arbitrarily ranked individual. The company has since moved towards requiring the managers to take into account issues such as imagination and their focus on issues external to the company when ranking individuals; both of these factors are key elements of the overall strategy.

This alignment with the corporate strategy as a whole has been seen as a very positive way forward. However, many professionals still criticise this role of the team leader regarding ranking, arguing that the workforce would perform better with a greater coaching or mentoring emphasis^[9].

Measuring Performance Management

Naturally, one of the key factors determining the success of the overall process of performance management is based on whether or not the correct measures are selected. This is the key point of management involvement. Moreover, powerful management skills, at this stage in the process, could make the difference between the success and failure of the performance management process^[10].

Rick Dobbins, a successful business man once stated: “…make it your number one goal to identify your number one goal”. This is the fundamental issue for all managers undertaking a review of their performance management processes. Establishing the number one goal of the organisation is something which must be undertaken by the highest level of management. Without this clear direction from the top of the organisation, there is little or no hope for direction as the strategy filters through the organisational layers.

Management needs to focus on what really matters to the company. In order to do so, questions must be asked such as: what can add value for the customers of the company and for the shareholders of the company? When developing these measurements, there are two key rules that have to be followed. Firstly, the measure must come with the necessary information and communication. Tell the middle managers and the team members what is important to the organisation and why. Many people will perform better if they understand the context in which they are working^[11]. Avoid making the mistake of assuming that a technical team is only interested in technical specifications. Telling them about budgetary concerns and potential new markets may alter the way in which they complete their work so that the role of other divisions becomes more efficient^[12]. This is also an excellent way of preventing duplication of efforts across departments, which is a complete waste of the organisation’s resources^[13].

Secondly, make sure that the measures established give the correct message to those at whom it is aimed. For example, if you ask a warehouse manager to produce as many boxes of goods as possible, the automatic result may be smaller boxes with the same amount of raw output. Whilst the manufacturing team may be delighted with their bonuses, the company gains nothing. A better measure would have been to focus on units of output, as this is much more in line with the organisation’s overall goal to increase production^[14].

Critically, measures need to be simple and understandable so that all team members understand what their managers are measuring them on and can strive to better their performance.

Management Input to Performance Management

As the title suggests, management is central to the whole process of performance management. The ideal approach of a performance management process is a top down process which starts with the wider goals of the organisation, overall, and works backwards through the management chain until each individual has his or her own set of goals. If carried out correctly, each of these goals when achieved will be of direct and substantial value to the organisation in its achievement of its overall strategy^[15].

Traditionally, issues such as performance management have been left to the human resources team, with managers at all levels being keen to avoid the whole process. Getting management involved at all levels and at all stages is vital to the success of the process.

Upper management needs to be clear about what its organisational strategy is, what is its priority and how can each team or division input into this priority. Strong strategies and definite leadership at this stage will give the middle and line managers a framework within which to work^[16]. Without this, clear upper leadership goals set lower down the organisation may be meaningless or ineffective for the company, overall.

Once the goals of the division or team are clearly understood by the line managers, they must then be given the time and if necessary the training to shift their role more from a dictator to a mentor or sponsor of the individual team members. Line managers will need to move away from the old style of appraisal that merely considers past performance to a new style which is more positive and forward looking. Poor performers who have not responded over time may be better passed to human resources so that the line manager can focus on positivity within the team^[17].

Performance management should be regular and consistent and not confined to an administrative task, once a year. Feedback from individuals should be gathered and passed back up the management chain as far as is necessary for their resolution.

Conclusions

Performance management is entering a new era. Managers at all levels are recognising the potential pitfalls and costs that are associated with the traditional critical appraisal method. Top level management needs to become involved. Performance management of individual employees must be inextricably linked and, where possible, based on the overall strategic goals of the company^[18].

Expert managers and individuals who are able to focus the organisation in relation to its strategy are vital. Not only do these managers need to be able to identify the organisation’s strategy, but they also need to be able to formulate and pass this through the organisation with the use of meaningful, clearly understood and simple goals and measures.

Each individual needs to be targeted with goals that are reflective of the wider strategy. Line managers are there to facilitate the achievement of these goals by their team members. Where all team members are meeting goals, the team itself should automatically be forwarding the success of the company.

Communication at all levels of the process is essential. Top managers must communicate their strategies with middle managers who, in turn, must communicate these to their teams. However, communication is a two-way process and team members need to contribute back up the chain with positive ideas and suggestions. These suggestions will be much more readily available if the employees feel valued and understand what the organisation as a whole is trying to achieve.

Managers, at all levels, hold the key to the success of performance management within any organisation, large or small^[19].

Bibliography

Armstrong, Michael, Baron, Angela, Managing Performance: Performance Management in Action, CIPD Publishing, 2005.

Armstrong, Michael, Brown, Duncan, Strategic Reward: How Organizations Add Value Through Reward, NetLibrary, Kogan Page Publishers, 2006.

Bassett, Glenn, The Evolution and Future of High Performance Management Systems, Quorum Books, 1993.

Dopson, Sue, Risk, Anne, Stewart, Rosemary, The Changing Role of the Middle Manager in the United Kingdom, International Studies of Management & Organization, 22, 1992.

Drucker, P., Management Challenges for the 21st Century, HarperCollins, 2000.

Drucker, P., The Practice of Management, Heinemann, 1996.

Griseri, P., Management Knowledge, Palgrave, 2002.

Griseri, P., Managing Values, Macmillan, 1998.

Handy, C., Understanding Organisations, Penguin, 1996.

Houldsworth, Elizabeth, Jirasinghe, Dilum, Managing & Measuring Employee Performance: the evolution of performance management, Hay Group, Kogan Page Publishers, 2006.

Marr, Bernard, Business performance management: current state of the art, a survey report, 2004, available at http://hdl.handle.net/1826/1222

Pettinger, R., Introduction to Management ,4th Edition, Palgrave, 2006.

Pettinger, R., (ed.), The Foundations of Management, UCL/Pearson, 2004.

Porter, M., Competitive Advantage, Free Press, 1985.

Porter, M., Competitive Strategy, Free Press, 1980.

Semler, R., Maverick, Century, 1992.

Senge, P., The Fifth Discipline, Century, 1992.

Schay, Brigitte W., In Search of the Holy Grail: Lessons in Performance Management, Public Personnel Management, 22, 1993.

Taylor, Paul J., Pierce, Jon L., Effects of Introducing A Performance Management System on Employees’ Subsequent Attitudes and Effort, Public Personnel Management, 28, 1999.

Footnotes

^[1] Porter, M., Competitive Advantage, Free Press, 1985.

^[2] Semler, R., Maverick, Century,1992.

^[3] Senge, P.M., The Fifth Discipline, Century 1992.

^[4] Handy. C., Understanding Organisations, Penguin, 1996.

^[5] Marr, Bernard, Business performance management: current state of the art, a survey report, 2004. available at http://hdl.handle.net/1826/1222

^[6] Griseri, P., Management Knowledge, Palgrave, 2002.

^[7] Armstrong, Michael, Brown, Duncan,, Strategic Reward: How Organizations Add Value Through Reward, NetLibrary, Kogan Page Publishers, 2006

^[8] Schay, Brigitte W., In Search of the Holy Grail: Lessons in Performance Management,

Public Personnel Management, 22, 1993.

^[9] Drucker, P., The Practice of Management, Heinemann. 1996.

^[10] Bassett, Glenn, The Evolution and Future of High Performance Management Systems, Quorum Books, 1993.

^[11] Dopson, Sue, Risk, Anne, Stewart, Rosemary, The Changing Role of the Middle Manager in the United Kingdom, International Studies of Management & Organization, 22, 1992.

^[12] Taylor, Paul J., Pierce, Jon L., Effects of Introducing A Performance Management System on Employees’ Subsequent Attitudes and Effort, Public Personnel Management, 28, 1999.

^[13] Griseri, P., Managing Values, Macmillan, 1998.

^[14] Houldsworth, Elizabeth, Jirasinghe, Dilum, Managing & Measuring Employee Performance: the evolution of performance management, Hay Group, Kogan Page Publishers, 2006.

^[15] Drucker, P., Management Challenges for the 21st Century, HarperCollins, 2000.

^[16] Pettinger, R., (ed.), The Foundations of Management, UCL/Pearson, 2004.

^[17] Armstrong, Michael, Baron, Angela, Managing Performance: Performance Management in Action, CIPD Publishing, 2005.

^[18] Pettinger, R., Introduction to Management ,4th Edition, Palgrave, 2006.

^[19] Porter, M., Competitive Strategy Free Press , 1980.