Performance management is like dancing: most people do it occasionally, few people do it well, and very few people use it to drive financial revenue. But unlike dancing, it is actually relatively easy for people to use performance management in a way that is effective for improving financial performance. The problem is many organizations don’t approach performance management as a method for executing on business strategies. They simply see it as something they have to do in order to adhere to legal policies. Or as one COO described it to me, “the main purpose of our performance management process is to document ratings that will justify compensation and personnel decisions we have already made”.
When done well, performance management creates a shared sense of performance expectations and culture across a company, gives employees meaningful feedback that helps improve their productivity, and provides the organization with insight into the quality and capabilities of the workforce. When done poorly, performance management typically exhibits the strategic value of completing expense reports. It simply documents what people did in the past (often very poorly), and has little impact on improving what they do in the future.
The difference between effective vs. ineffective performance management is largely a matter of focusing on four things:
Accuracy: Have you clearly defined the goals and competencies that people are being evaluated against? Effective performance management starts with accurately defining what you mean by performance.
Relevance: Is performance management data used for anything that is highly important to the managers who are completing the reviews? If managers know their performance ratings will be critically examined by senior leaders in the company and used to make decisions that impact their careers, then they will take them more seriously. For example, are performance management ratings used to influence succession and promotion decisions? Are managers expected to discuss their ratings with their peers, or do performance ratings just go into a file cabinet never to be seen again unless the lawyers show up? Pay decisions are certainly one of the things that make performance management ratings relevant. But in terms of impacting the value managers get from performance data, tying performance to the pay of their direct reports is probably relatively low on the list.
Accessibility: Is it easy for managers to provide and use ratings? Do they have access to the tools, skills, and knowledge needed to make effective ratings and to hold productive employee feedback discussions?
Accountability: Do leaders in the company hold managers accountable for making accurate performance ratings? What happens to a manager if they refuse to complete their performance reviews or provide poor quality data?
Focusing on these four areas will go a long way toward making performance management more impactful on business execution. Conversely, a failure to really think through issues of accuracy, relevance, accessibility, and accountability is almost certain to lead to a performance management process that solely focuses on tracking the past as opposed to influencing the future.