In this article the authors present the five issues that any organisation must tackle in order to design a performance management process that will prove effective for their organisation.
Performance management is a very hot topic. Unusually for an HR topic, coverage of developments in performance management has moved beyond academic publications and the business press to attract mainstream media attention in recent times. During 2015 alone, over 50 major US employers including Netflix, Microsoft, Accenture and Deloitte and GE announced that they were undertaking a radical overhaul of their performance management (PM) processes that included discarding the traditional annual performance “rating”. There have been a number of drivers of these changes including the significant time involved in the process (Deloitte estimated that up to two million person hours were involved in their performance management programme annually), to frustration with the process from employees and leaders alike, to concerns over the effectiveness of the process. Additionally, expectations for more frequent and real time feedback amongst employees accentuated the shift.
Given that performance management practices had evolved incrementally over the past 50 fifty years or more,1 these rather sudden and relatively radical developments present a challenge to senior organisational leaders. Indeed, practitioners continue to struggle with designing a consistently effective PM process. A 2014 study by the Chartered Institute of Personnel and Development in the UK found that almost a third of employees (30%) believed their current PM process was unfair. Recent findings from professional services firm Towers Watson showed that nearly half of companies say their managers don’t see the value in performance management. But what evidence are organisation’s basing their decision making on in revaluating their approach to performance management? We urge some caution in this regard and encourage some reflection before jumping on the bandwagon and ditching performance management.
Drawing on an extensive review of empirical research on performance management combined with recent research that we conducted on PM practice, we offer five fundamentals that should inform and guide any organisation’s review of PM in light of the current hype around changes to traditional approaches to PM. We suggest that by following these fundamentals, organisations reduce the risk of throwing the baby out with the bathwater.
The Five Fundamentals of Performance Management
Fundamental #1: Clear Shared Understanding of the Purpose of PM Among the Key Stakeholders in the Process
The first requirement for any organisation wishing to optimise the return on their investment in performance management is to develop a clear and shared understanding of the purpose of PM among the key stakeholders in the process. Our research identified fit with organisational culture, strategy and adaptability to a changing context as core considerations in this regard.
In our experience organisations that report the highest levels of effectiveness of their PM process, and satisfaction with it, have a clear sense of the purpose of the PM process and this clarity is shared by line management, the HR function and the employees. While not exhaustive the following were the key drivers of PM processes for the organisations in our study:
Purpose #1: Align behaviour with strategy
The first key purpose which drove PM in organisations was strategy alignment and implementation. This is illustrated in the following quote from an executive: “The main purpose of performance management in our organisation is to align the work of the employees with the objectives of the company”.
Purpose # 2: PM as Productivity Enhancement
Driving productivity was identified as the primary focus of PM in a second group of organisations. In these organisations the direct link to organisational strategic priorities was sometimes less evident. However there was a strong focus on driving individual performance in a high performance culture. This quote from an executive is illustrative: “To increase productivity is the bottom line. To get more from our people, for them to produce at a higher level, not just volume, but at a stronger level.”
Purpose # 3: PM as the Development of Talent/ Potential/Values
A third grouping of companies emphasised the development of talent as well as supporting employees to reach their full potential as the key driver of PM, as exemplified in the following quote: “It is the cornerstone of our entire HR strategy. What we call vitality. Do we have the talent we need to support the growth of the business, where the company, the Chairman and the board want the business in 5 years’ time.”
While executives report quite diverse perceptions about the purpose of performance management in their organisations, the key starting point was a clear sense of the aim of PM. While PM can and does serve more than one of these purposes, in reality multiple purposes cannot all have equal priority. It is also important to note that not all organisations appeared to have the same level of clarity about what the organisation was trying to achieve via performance management. It would appear that, for some organisations, the performance management process is built on a shaky foundation of ambiguous purpose and inconsistent implementation. Those with the greatest clarity of purpose and priorities are also those who say their process is most effective. The opposite is also true, with those organisations reporting ambiguity of purpose also reporting low levels of effectiveness for PM and dissatisfaction with the process. This is a key challenge to the effective implementation of PM.