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Updated Oct 23, 2023

What Is Performance Management?

Learn why tracking employee performance as it relates to your company's goals is paramount.

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Written By: Andrew MartinsBusiness Operations Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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When it comes to running a business of any size, information is key. From sales numbers and social media engagement to marketing lead conversion rates and operating costs, knowing how your company is faring compared to its overarching goals is paramount.

While it’s always a good idea to keep an eye on your company at the macro level, you should apply that same attention to detail to individual employees. With a carefully considered performance management process, managers and employees can refocus their efforts and set expectations that line up with the company’s goals.

What is performance management?

Performance management is a tool aimed at maintaining and improving employee performance. Through consistent communication and appropriate systems and processes, performance management helps ensure employees are performing to the best of their ability and meeting important goals.

Performance management consists of planning, monitoring, developing, rating and rewarding. Each step is important, but to be effective, performance management must be implemented strategically, integrated into your company culture, and align with overall organizational goals.

How do you create a performance management plan?

Establishing a strong performance management plan takes effort. Thinking about your company’s needs and ensuring that your managers and other employees understand those goals through consistent communication is a lot to start with, but it can really be a boon to overall productivity and enthusiasm. [Check out BambooHR, our top pick for the best employee monitoring system for performance management.]

To kick-start the process, here are a few ways you can make sure you and your employees get the most out of performance management efforts.

1. Create measurable performance-based objectives and expectations.

Employees should understand and give input on how each objective’s success is to be measured. Expectations generally fall into two categories:

  • Results: These are the goods and services an employee produces, often measured by objectives or standards.
  • Actions and behaviors: These are the methods used to make a product or perform a service, and the behaviors and values demonstrated during the process. They can be measured through performance dimensions.

2. Define professional development plans.

Supervisors and employees should work together to create development plans. The plan can focus on skills aimed at mastering the job or on professional development skills beyond the scope of the employee’s job description. Employees should have a say in what new things they learn and how they can use those skills to the company’s benefit.

3. Meet regularly to discuss overall progress and identify potential roadblocks.

Rather than waiting until an annual review, managers and employees should be actively engaged throughout the year to determine overall goal progress.

Key TakeawayKey takeaway
Performance management plans should include clearly defined, measurable objectives, and employees should be actively engaged in their own performance management.

A major tenet of a good performance management plan is consistent focus on strategic goals and progress. Without that, employees are generally in the dark as to whether they made any solid improvements that contribute to the company.

Since employees need a clear understanding of what’s expected of them and how their goals fit into the company’s overarching success, it’s important to set company goals to define what success even looks like. To that end, Gary Cokins, an expert with decades of experience in enterprise and corporate performance management, said it’s up to the people at the top to establish what the company wants to achieve.

“If managers and employees don’t understand the executive’s strategy, how do we expect them to understand what they do each day, each week and in each decision?” he said. “Without that understanding, it’s hard to make sure everything aligns with the [performance management plan]. It’s the executive’s job to ask, ‘Where do we want to go?,’ but it’s the managers’ and employees’ job to find out ‘what we will do to get there.’” [Read related article: 6 Tips for Writing an Effective Performance Review]

Performance expectations should go beyond the job description to cover a range of expected outcomes. Here are some examples:

  • What goods and services should the job produce?
  • What effect should the work have on the company?
  • How should employees act with clients, colleagues and supervisors?
  • What organizational values should the employee demonstrate?
  • What processes or methods should the employee use?

Why is performance management important?

Regardless of how big or small your company may be, performance management is an important thing to consider. In fact, business owners “should be thinking about [performance management] from day one,” according to Christine Tao, co-founder of Sounding Board.

“Performance management is really about understanding and motivating employees to perform effectively to support the broader goals of the organization,” she said. “It’s also about aligning the individual goals of employees to the broader goals of the organization – because if you can do so, you can help the company achieve peak performance in congruence with employees achieving individual peak performance.”

Tao says performance management can help companies of all sizes “really take off and see success that is driven from its teams.” If done correctly, performance management begins with an aligned set of measurable objectives for each employee and engenders a culture of learning and development for higher workplace performance. Armed with the knowledge of what’s expected of them, each staff member should be motivated to improve their skills, competencies, development and delivery of results. 

What are the benefits of performance management plans?

In most companies, the only evaluation employees receive from their supervisor or the human resource department is an annual performance review. In those conversations, employees are generally asked how they felt the past year went and what they can do to improve for the following year before receiving feedback. This boilerplate is potentially useful but predictable.

While that kind of appraisal helps illuminate the existing strengths and weaknesses of an individual staff member, a performance management process focuses on ongoing communication and accountability.

Experts believe that companies with an ongoing performance management process get better results than those that just have check-ins with management or human resources each year, since they can more easily root out what’s not working and double down on what is.

With periodic meetings with management, employees benefit from a continual push to progress, rather than a sudden rush to meet objectives once their review rolls around. Removing that scramble can yield drastically more positive outcomes for employees, managers and organizations.

Did You Know?Did you know
According to Gallup, when a manager offers their employees daily feedback, workers are three times more likely to be engaged than those who receive feedback once a year or less.

Once implemented, an effective performance management plan has these benefits for employees, managers and organizations:

  • Improved communication: With regular check-ins from managers, employees are encouraged to communicate more freely about the company’s objectives and their performance goals.
  • Well-defined rules: With a better understanding of how they will be evaluated moving forward, employees and their managers can gauge how they’re doing without waiting for the next review.
  • Reduced stress: Everyone wants to be a good employee. Without feeling like they must try to impress a higher-up all the time, employees can focus on the task at hand. Meanwhile, managers are less likely to worry about offending underperforming employees.

How do performance management plans benefit everyone?

Performance management is a must for any company — regardless of size or industry. When employees receive clear expectations and honest feedback, they can continue to grow in their role, develop new skills and help meet larger company goals. 

Casey Conway and Nicole Fallon contributed to the writing and reporting in this article. Some source interviews were conducted for a previous version of this article.

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Written By: Andrew MartinsBusiness Operations Insider and Senior Writer
Andrew Martins is an award-winning business and economics expert who has spent years studying trends and profiling small businesses. Based on his on-the-ground reporting and hands-on experience, Martins has developed guides on small business technology and finance-related operations. In recent years, he focused on the small business impacts of the 2020 presidential election and the COVID-19 pandemic. Martins, who has a bachelor's degree in communication, has been published on trusted financial sites like Investopedia, The Balance and LowerMyBills, on technology outlet Lifewire and in the New York Daily News.
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