How To Design An Effective Performance Management System?

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Introduction

^{In traditional setup managing employee performance has always been time-consuming and requires efforts on the part of the managers. As per a leading management exponent, managers spend an average of 210 hours per year on performance management and yet only 14% of organizations report being happy with their current performance management system and the related outcomes.} 

^{The reason for dissatisfaction with the traditional performance management system lies in the fact that most companies considered annual reviews and appraisals as a good idea to evaluate the performance of an employee. However, the year-end reviews always show a rear-view image of an employee’s performance and are often smudged with bias from reviewing managers.} 

^{To become more compliant and thorough in their performance evaluation, organizations over the years have adopted several performance management systems and strategic policies. However, the results have often not been as expected, with employees still feeling disengaged and the process consuming far too much time.} 

^{If your organization is also faced with such consequences, then it’s time to take action and measure the effectiveness of your current performance management system.} 

^{Before measuring how effective your organization’s performance management system is, it is important to understand what is an effective performance management system and why it is needed.} 

^{“Performance management is an ongoing process of communication between a supervisor and an employee that occurs throughout the year, in support of accomplishing the strategic objectives of the organization.” – Berkeley University of California}

^{First of all, we must understand that performance management is a continuous process with a two-way flow of interaction between manager and employee. Rather than year-end reviews and communication, a company should focus on employing a continuous system for interaction throughout the year with a strategic focus on achieving business objectives.} 

^{Secondly, a performance management system is important for any organization because it helps get better insights on the alignment of individual and business goals, setting clear performance expectations,  eliminating redundant work, and saving the organization time, efforts and money. Another reason to implement an effective performance management system is to motivate employees and increase their productivity.} 

^{When a company understands the context of having a performance management system, it will be able to measure the effectiveness of its performance management system more adequately.} 

^{Outlined below are the five steps that will help measure the effectiveness of your performance management system.}

^{1. Research & Set Benchmarks For Performance Management Practices}

^{To understand where your current performance management system is falling short, you need to know what an effective performance management system looks like.} 

^{Thorough research is key in analyzing the elements to include in an effective performance management system. Reading case studies of businesses that have been successful in revamping their performance management strategies can give helpful insights for your system.} 

^{Analyzing prevailing performance management practices in your industry and leading trends in the market can also help you set a benchmark for what an effective performance management system should entail.} 

^{2. Establish Clear Business Goals/Objectives For Performance Management}

^{It is critical to define clear goals and objectives that your organization is trying to achieve through the performance management system. Some of the common goals are:}

• ^{Improve organizational performance}
• ^{Align individual and organizational objectives}
• ^{Develop a performance culture among employees}
• ^{Improve individual performance}
• ^{Align individual behav­iour to organizational values and culture}
• ^{Identify personal development needs}
• ^{Link performance to pay}

^{3. Establish Success Measures For Your Defined Objectives}

^{Once you have decided on what you are planning to achieve through a performance management system, it is important to know what constitutes the achievement of your objectives. In simple words, you need to analyze what measures will be considered to declare that objectives were achieved successfully.}

^{Let us understand this with some examples:}

PERFORMANCE MANAGEMENT GOALS	SUCCESS MEASURES
Improve Team Performance	Clarity of what is expected of employees Alignment of employee performance Increase in the profitability of teams Growth in Customer Satisfaction
Enhance Employee Motivation & Drive Engagement	Results of Employee Engagement Survey Acceptability of Performance Review as a useful tool Better Employee Turnover Rates
Performance Pay Decisions	Ability of management to objectively and accurately measure performance Link pay to performance

^{Additionally, organizations need to agree on measures to understand the effectiveness of the methods and tools employed to conduct performance management such as an automated performance management system. How much time such processes are consuming, whether these are easy-to-use for employees, and if the implementation is as planned or requires improvement?} 

^{4. Evaluate Your Current Performance Management System}

^{Once you have set the benchmarks, the objectives and defined the success measures, it is time to collect data and start evaluating your current performance management system.}

^{To fully comprehend the effectiveness of your performance management system and to understand how to improve it, a combination of both quantitative and qualitative data should be used. It is important to get data about the benchmarks, objectives, and the success measures, to the extent available. To collect this data, some methods that can be used are:} 

• ^{Interview a sample of employees and managers about their experience of performance management}
• ^{Extract reports from online performance management systems}

^{After the collection of data, analyze the results based on the success measures you defined and the benchmarks that you wanted to achieve. Compare these results with industry benchmarks. This will help you understand how effective your current system for performance management is and where it needs to be improved.} 

^{Always remember that with the changing times and market standards, the system of performance management in an organization should also be continuously tracked and modified to meet the ever-changing employee needs.} 

^{5. Time To Take Action On The Results}

^{At this stage, you have evaluated the actual capabilities of your performance management system, compared it to the benchmarks you had set, and found the discrepancies or shortcomings that you need to work on.} 

^{Now, it is time to take action on the results you found and take appropriate measures to improve the current performance management system.} 

^{It is important to include the stakeholders that are directly impacted by it, such as employees, managers, and senior management in this process. Discuss with them what they are looking for in a new-age performance management system and their views on how to improve the performance management system. This will result in greater ownership from those who have to implement the system and be a regular part of it.} 

^{Key Elements of An Effective Performance Management System:}

• ^{Accurate Data from Multiple Sources: A PMS should capture relevant, correct, and accurate data from multiple sources like managers, colleagues, senior management, customers, etc. to be more objective. The focus should be on collecting data that is in sync with the Objectives that are being measured by the organization.} 
• ^{Employee Development: A successful performance management system should be focused on bringing about the overall development of an employee by setting clear goals, providing regular & timely feedback, and identifying the training needs for the employee. A platform with components like Feedback 360, OKR based Goals, Qualitative Snapshots will give the most objective data for effective performance management.}
• ^{Performance & Pay: An ideal performance management system should de-link performance management from compensation. While organizations use the Performance Management platform to arrive at annual appraisals and increments but this is means to an end not the end in itself. The objective of PMS is to measure, evaluate, and improve employee performance. Organizations should be fundamentally clear on this distinction. The performance management system should enable organizations to drive employee performance and employee’s career development. Usually, compensation is a by-product of this process. The performance reviews enable organizations to identify employees who are performing, are aligned with the organization, and have the potential to grow with the organization. A good PMS can also empowers the organization to effectively utilize components of Rewards and recognition to encourage the development of positive behavior in employees.}

• ^{Enable Better Performance: Performance Management System should not only measure the performance but also help in the improvement of employee (and hence the organization’s) performance. For example, an effective system facilitates real-time Manager/Employee conversations leading to timely course correction or support wherever required. Such frequent conversations ensure organizational goals are at the forefront.}
• ^{Coaching: A real-time and continuous feedback system allows breaking down the silos that exist between employee and manager and facilitate frequent conversations. Such frequent conversation ensures reduce friction and over some time these become more developmental and make line managers better people managers and take up the role of a coach for employee development.} 

Conclusion

^{For organizations to drive better performance, employees must be more aligned, engaged, and motivated towards organizational priorities. An effective Performance Management System enables organizations to achieve this. Organizations must deploy an effective and efficient performance management system. Assessing the effectiveness of the current system, identifying what needs improvement, bench-marking with industry, setting goals for improvement, and acting on that improvement is a process that organizations must follow. In this digital age, a technology-driven continuous feedback-based performance management system has many of the components that make a system effective and efficient.}

^{However, we must realize that each organization is different and has its own sets of goals to achieve and challenges to overcome. There is no one-size-fits-all kind of performance management system. Each organization must adopt a system that is customized to its needs and desired performance goals.}