Performance Management Process: HR’s Ultimate Guide

As an HR professional, being tasked with setting up or optimizing your Performance Management Process can be daunting. It seems like a huge task! 

How frequently will you have reviews? Who will review whom? Where does goal setting feature? Where does personal development factor in? Where can I store all of this anyway? 

Take a deep breath. It’ll be ok. 

We know that the performance management process can be overwhelming. That’s why we created this guide. We will explain why performance management processes are important. We will also discuss the benefits they offer. Additionally, we will show you how to implement a great performance management process. 

Ready to learn? Let’s dive in. 

What is a performance management process? 

A performance management process helps track your employees' growth and impact on your organization. 

Employees can use the performance management process to set goals, consult with their manager, receive feedback, and grow. 

Your company can track employee growth by using a performance management process that aligns with company goals.

Why is it important to have a performance management process? 

Without a performance management process, your employees are on their own. They’re fostering their development – and may choose to focus their growth in areas that are not what the company wants to prioritize. While it is great if your sales lead wants to develop their French on company time, it’s not very valuable if they’re only conducting business in Brazil. 

So here are the key benefits of a performance management process: ‍

Improves employee performance 

This is the big one When you have a process in place, you have a way to guide the growth of your employee’s performance. 

Managers can use a performance management process to improve performance. They can reward positive performance and address negative performance promptly. This will help employees get on the right track and succeed. 

Directs growth

As I mentioned earlier, a performance management process can help HR and managers set priorities. For example, a Marketing Manager may need their direct reports to learn new marketing software. The manager in this case can set a department-wide goal: take six lessons on this software before the end of the month. 

This way, the entire team will grow the same skill at the same rate. 

Reduces employee turnover

The performance management process encompasses many elements – like goal setting. Setting these goals gives employees something to work toward. Achieving these goals brings about a sense of accomplishment. Employees grow and they feel valued. Valued employees are far less likely to leave an organization. By investing in a great performance management process, you invest in your workforce.

Challenges poor performance 

With an effective performance management process, poor performance isn’t ignored. Instead, it is brought up (respectfully) early on. Managers then can provide resources and coaching to help employees improve poor performance. If the performance doesn’t improve, then it is noted in a performance review. If performance still doesn’t improve, then an employee can be placed on a PIP as a last resort. 

Builds trust 

An effective and transparent performance management process builds trust. When managers help employees grow and reach goals, it strengthens the employee-manager relationship. Employees trust that management is committed to improving company performance because the performance review cycle is frequent and standardized. Employees trust that their hard work will be rewarded when they achieve stellar performance and receive appropriate compensation. 

Reduces company liability 

No one likes dealing with a termination. But, the unfortunate reality for HR is that they come with the territory. If companies don't have a good performance management process, they can face wrongful termination suits. Companies can demonstrate their efforts to improve poor performance by implementing a strong performance management process. The termination was, unfortunately, the only remaining option. 

How can I design a performance management process? 

We’ve come to the meat and potatoes of the piece: the best way to design a performance management process. 

Follow these steps and you’ll be goal-setting and performance-reviewing in no time! 

Establish a timeline

You need to decide how often you will review your employees - and whether each of these reviews will have the same importance. For example, one company might have quarterly reviews, each with equal weight. Another company might have monthly reviews and one annual review, which decides future compensation. 

Breaking up longer reviews with smaller, informal ones (like check-ins and 1:1s) can be helpful. These smaller reviews measure performance and provide mentorship. These smaller reviews can help reinforce great performance and modify poor performance before it becomes a problem. 

Choose your framework

Once you have your cadence down, you need to determine which framework you’ll use for your performance management process. Each framework allows you to look at performance from a different lens. OKRs help measure employee goal achievement, while the balanced scorecard provides a holistic performance view. 

Take a look at the major performance management frameworks below to see which one would work best for you.

• OKRS
• 360s
• Annual reviews
• Balanced scorecards

Decide who reviews whom

At first glance, this may look simple: the manager reviews the direct report. 

But, many organizations these days are coming around to different review styles. The 360 review, for example, has an employee reviewed by peers, managers, and other employees at an organization. This can help HR get a “360 view” of a candidate’s performance. 

Furthermore, certain organizations are also using "upward reviews." In these reviews, employees give feedback on their managers. This can help managers learn to manage more effectively. 

Determine what you’re measuring

This is similar to choosing your framework. You need to decide what you are measuring in your performance management process. Are you measuring how effectively employees complete goals? Or, are you measuring how well they exhibit specific behaviors expected of them in their roles? While the OKR method is great for measuring goals, it comes up short for measuring behaviors. 

If you have a role (such as customer service) where OKRs may be less effective, you may want to focus on using BOS or BARS to measure 

Choose your questions

No performance management process is complete without the performance review. You need to decide the questions for the performance reviews. Are these questions standardized? Will they vary by role or department? Will managers have different questions than their peers? 

Determining your framework as well as what you are measuring will naturally help guide you to appropriate questions. Make sure to figure those out first! 

Set your goals

You’ve figured out your questions, and you’ve decided your framework – now it’s time to have your employees set their goals. 

Goal setting is a critical component of the performance management process. Not only is it very easy to quantify performance (an employee met their goals or did not), but it also helps guide employee growth and development. While performance management may be tied to concepts such as compensation, at the end of the day, it ultimately is about employee growth. To create a strong performance management process, use SMART goals. These goals should be specific, measurable, achievable, relevant, and time-based. 

Collect your data

Come review time, it’s critical that you send out your review forms to the right people, and then collect that data. Now, you could do this with printed forms or email review templates to store in a Google Drive folder. However, it can be overwhelming to keep track of all those files. It puts a lot of pressure on your HR department, it's not efficient, and files can be lost or changed easily. 

That’s why it can be beneficial to use performance management software, like PerformYard. Our software combines all your performance management tasks in one tool. You can store data, access reviews, and analyze performance easily. 

And there you have it! Those are the key steps you need to follow to build out your performance review process! 

…but there’s still more to learn! Continue reading to learn about additional best practices for performance management processes and important considerations. 

How is a high-performance management process different from a traditional one? 

Managing performance traditionally is different from using a high-performance method. 

Traditional processes focus on measuring performance. 

High-performance management processes focus on improving performance. 

The five key elements of a high-performance management process are: 

• Frequent touchpoints
• Team-based reviews
• Goal tracking
• Data-based approach to performance reviews
• Using software to run your integrated performance management system

Curious to learn more? Read our guide to high-performance management here!

What is an agile performance management process? 

The word agile gets thrown about a lot. But what exactly does it mean when it comes to the performance management process? 

Agile, when it comes to business, means being able to adapt quickly. Agile businesses constantly evolve by having a finger on the pulse of the market, customer relations, and workforce. 

The old way of managing performance treats it like one event. First, fill out the review. Then, have a meeting. Finally, wait until next year. The review itself is a static endpoint. 

An agile performance management process focuses on frequently assessing employee progress and performance. This can be done through check-ins, 1-1s, more frequent reviews, or continuous feedback. As performance issues are noted, managers can shift focus and resources to help get performance back on track. If goals suddenly no longer seem feasible, then goals can be adjusted. 

The agile performance management process is, ultimately, about putting people first. It helps employees succeed by teaching managers to be nimble. 

Is there a bad performance management process? 

I don't want to call any performance management process "bad," but some are outdated or not as useful. 

One of these outdated performance management processes I’d like to discuss is “stack ranking.” 

What is stack ranking? 

Stack ranking, also called "rank-and-yank," is a process where managers rank employees based on productivity. The top X percent are promoted or similarly compensated, while the bottom X percent are summarily terminated. 

Where did this “rank-and-yank” performance management process come from? 

It was popularized by GE CEO Jack Welch, who used stack ranking at GE to fire a whopping 10% of his workforce every year. 

So why did Jack Welch use this system? He believed that the worst 10% of employees were nonperformers. They dragged down productivity. So, to Jack, firing those employees would liberate the remaining 90% who were burdened by their poor-performing peers. 

Some businesses, like Amazon, still use stack ranking to increase performance at any cost. 

However, stack ranking has many drawbacks as a performance management process. 

For starters, it ends up costing a company quite a bit of money. In general, it costs a company 2x an employee’s salary to replace them.

Moreover, this can result in perverse consequences, like the practice of "hiring to fire." Managers intentionally hire someone, only to later terminate their employment. This person is hired solely to protect the team of key performers the manager doesn’t want to let go. 

Other negative consequences could be “promote to failure.” For example, an employee who was ranked in the top 10% is automatically promoted. However, in their new role, they are no longer functioning in the top 10% – in fact, they are performing significantly more poorly than their peers. When evaluated at the end of the next cycle, they’re ranked very low – thus risking being terminated. 

Stack ranking is outdated because it doesn’t help direct performance. It simply rewards good performance and punishes poor performance. It doesn’t encourage growth, teamwork, or mentorship. It’s exclusively focused on results, but it doesn’t put in the effort to help employees achieve those results. 

That’s why, to us, it’s an outdated performance management process best left in the past. 

Is a manual performance process feasible? 

Manual performance management processes are very time-consuming and labor-intensive. 

In a manual performance management process, performance reviews are completed without a dedicated system. Instead, reviews are conducted with paper forms, over email, or through software like google docs. 

The process is slow because HR has to send files to reviewers, track them down, and organize them manually. Lost or forgotten reviews are endemic. 

A manual performance review system doesn’t scale. It may be ok for a small, boutique company that has four or five employees, but it becomes unwieldy as more people are brought on board. 

That’s why having a dedicated performance management system like PerformYard is so beneficial. Reviews are sent out with the click of a button. Completed reviews are stored instantly. It’s easy to access, easy to modify, and easy to analyze. 

What is the cost of a poor performance management process? 

Here’s the deal – a poor performance management process can do real harm to your workforce. 

If you don’t invest in your employees, you risk a higher turnover. Employee turnover is expensive, costing up to 2x an employee’s annual salary. 

But, the upside is that a great performance management process can increase your company’s bottom line. According to McKinsey, organizations with good talent management outperformed competing companies by 22%! Watson and Wyatt found that having good employee processes, like performance management, could boost company value by 30%. 

So what’s the cost of a poor performance management process? It’s stagnation and falling behind as smarter businesses race ahead. 

How can I use software to implement a great performance management process? 

To create a successful performance management process, use a specialized tool such as PerformYard. 

Employees can use PerformYard to see their tasks, like reviews, goal setting, and providing feedback. 

HR can easily create customizable performance review templates and processes – and send them out to the workforce at a click of a button. 

Retrieving those performance reviews? It couldn’t be simpler. Employees fill out reviews, which are then stored. HR can easily analyze performance by department and over time. 

A performance management tool, like PerformYard, reduces inefficiency and eases the burden on HR and the workforce. Instead of chasing after the performance review, they can focus on improving performance.