HR Tips: Performance Management vs. Performance Appraisal

The terms "performance management" and "performance appraisal" are often treated as synonyms. The truth is that there is a big difference between the two concepts. Some organizations rely on performance appraisals to track employee performance. Others use appraisals as part of their broader performance management strategy.  

This article discusses some of the relationship between performance management and performance appraisal. 

Performance Management and Appraisal in HRM

In the realm of Human Resource Management (HRM), performance management and appraisal serve as critical functions that ensure an organization’s workforce remains effective and efficient. Though these terms are often used interchangeably, they represent distinct concepts within HRM.

What is Performance Management?

Performance management refers to the continuous process of setting objectives, assessing progress, and providing ongoing coaching and feedback to ensure that employees are meeting their performance objectives. This approach aims to align individual performance with the organization’s goals and objectives, fostering an environment of continuous improvement. Key elements of a performance management system include:

What is Performance Appraisal?

Performance appraisal, on the other hand, is a structured and formalized process where employees’ performance is evaluated at regular intervals. Unlike the continuous nature of performance management, performance appraisals are periodic events—typically conducted annually or semi-annually. The key objectives of performance appraisals are:

Common Appraisal Methods:

• 360-Degree Feedback: Gathering feedback from various sources including peers, subordinates, and supervisors for a comprehensive view of performance.
• Management by Objectives (MBO): Evaluating employees based on the achievement of specific organizational goals.
• Self-Evaluation: Allowing employees to assess their own performance, encouraging self-reflection and personal growth.
• Rating Scales: Using predefined scales to rate various aspects of job performance for straightforward comparison and analysis.

Integration of Performance Management and Appraisal

An effective HR strategy often involves integrating performance management and appraisal. While performance appraisals provide valuable data on past performance, performance management focuses on future goals and continuous improvement. When used together, these processes can offer a more holistic approach to managing and developing an organization’s human capital.

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Definition of Performance Management

Performance management is how an organization assesses and improves employee performance. The goal is to improve organizational performance by developing employees’ individual capabilities. Performance management is a continuous process. It helps employees set goals, identify training and development needs, and provide feedback. 

Performance management systems comprise five main parts: 

• Planning – First, the organization identifies goals and key performance indicators (KPIs). These are the tools that let the organization measure employee performance.
• Monitoring – The next step is monitoring employee performance through a series of evaluations. Monitoring can take the form of periodic reviews or continuous feedback. 
• Developing – Managers help employees improve performance as opportunities for improvement become clear. Managers can use retraining and upskilling to turn adequate employees into high performers. 
• Rating – Performance appraisals provide ratings to measure employee performance and progress. These ratings let you measure your performance management strategy with numbers.
• Rewarding – Performance management systems offer a way to reward high-performing individuals. Compensation and recognition help organizations can motivate employees. 

Definition of Performance Appraisal

Performance appraisal is not performance management. It does play an essential role in the performance management process. Dessler says performance appraisal is "the systematic evaluation of the performance of employees and to identify areas in which they need improvement."

A performance appraisal is a periodic event (every year, twice per year, quarterly). During this event, employees receive a formal review and rating of their performance. 

Performance appraisals offer essential data on performance over time. The appraisal is part of a comprehensive performance management strategy.

The appraisal may come after the company defines performance goals and communicates them to employees. Performance appraisals  provide valuable insights into past behaviors and productivity levels. Performance appraisals also highlight areas for improvement. Likewise, the appraisal informs discussions about how to improve employee performance over time.  

It will be up to your organization to determine the best appraisal strategy based on your organizational structure. These are four popular performance appraisal tools in use today: 

360s Reviews

Peer reviews mean both managers and employees give and receive feedback. This style offers a more comprehensive assessment of employee performance.

A 360 review solicits input from the whole team. That includes the employee, coworkers, and supervisors. With this approach, organizations can better negate the impacts of bias and achieve a more balanced assessment.

Management by Objectives

Management by objectives is exactly what it sounds like. Evaluations measure employee performance in the context of organizational goals and objectives.

Note that this approach has limitations. It will not measure anything that is not among the organization's stated goals. Employees won’t get recognition for reliability if it is not an explicit organizational goal. 

Self-evaluation

Self-evaluations are somewhat flawed. They ask employees to rate their performance without bias. This isn't only a problem of inflated ratings; some employees will rate themselves too low.

Rating Scale

Some organizations use a matrix of behaviors and performance indicators. This approach saves time when measuring employee productivity. A rating system lets managers score employees on metrics like time management or KPIs. 

Performance Appraisals Tend to Look Backward

One of the challenges with performance appraisals is that they tend to look backward. That is, they focus on what has already happened rather than on what could happen in the future.

Performance appraisals offer valuable insights and a historical context for employee development. That said, they can still be problematic.

They focus on past mistakes rather than future potential. A negative appraisal (or worse, two or more in a row) can also cause an employee to feel "stuck." They can be stuck in a particular role or level of performance. This stifles motivation and creativity.

Performance Management Tends to Look Forward

Many businesses are now using performance management systems to get the most out of employees.

Performance management systems help businesses keep tabs on employee progress. Organizations can also use them to motivate workers to do their best. After all, everyone wants recognition for a job well done.

A performance management system is a good idea if you want to get the most out of your employees. Setting and tracking goals ensures your employees have a clear pathway to success. 

Many organizations feel that they don't have enough time or resources to support a performance management system. In fact, according to a study by Gartner, managers spend 210 hours per year on performance management activities. With the proper performance management system, you can streamline the process to reduce the burden on managers. 

PerformYard helps companies run full-cycle performance management systems. The platform provides a centralized system. You can define organizational goals, establish employee performance benchmarks, and track employee reviews.

PerformYard automates the review process. It sends notifications and reminders to ensure that reviews get completed on time, without ongoing follow-up. 

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Should you use Performance Appraisals or Performance Management?

Wondering if you should use performance management or performance appraisals in your organization? Start by thinking about what you are trying to do. 

Performance appraisals are a good choice if you want to use annual reviews to measure performance over time. They also let you identify poor performers in your organization so you can take corrective action. 

Performance management systems support a culture of continuous improvement and professional development. They’re perfect for companies that want to develop talent within their organization. Performance appraisals focus on past achievements or deficiencies. Performance management systems offer a modern approach to talent development and retention. 

Managing employee performance can also prepare your business for an uncertain future. Organizations continue to face challenges from the pandemic and supply chain disruptions. Many are looking for ways to improve their performance management systems.

There is no one-size-fits-all solution. Organizations should consider a few factors that can future-proof their performance management systems.

First, your performance management system must align performance management objectives with organizational goals. This alignment provides a framework. It can hold employees accountable for their contributions to your organization's success. 

You should also consider using data to drive decision-making around performance management. Data from periodic performance appraisals help you identify areas where employees need improvement. It can also help you target potential areas of opportunity.

FAQs

Is performance appraisal a part of performance management?

Yes. Performance appraisal is a part of performance management. Performance management also includes setting goals, providing feedback, and coaching employees. 

Is performance management synonymous with performance appraisal?

Organizations use performance management to ensure employees are meeting performance goals. Performance appraisal is one part of performance management. Performance management also includes goals, feedback, and improvement plans.