Performance Management


June 18, 2012 by Chris Nöthling


As your business grows you will inevitably get to the point where you employ your first member of staff. Suddenly you will be exposed to an entirely new dynamic. Managing staff can be one of the most confusing and frustrating processes you will experience as a business owner, and the approach you adopt to managing the performance of your employees will be critical to the success of your business. I am assuming that most financial planning business owners are not primarily professional people managers: Most are talented financial advisers who have energy and drive and who worked hard. As their business grew they needed to get people in to help them. In the piece below I want to share some insights I developed over 15 years as a human resources practitioner. I hope they offer you some guidance on growing your business through managing people.

The Objectives of Performance Management

Performance appraisals may last for two hours a year. The average employee probably works for some 1800 hours per year (assuming 40 hours per week X 45 weeks). Clearly a system that operates for only two hours can have limited impact on the working life of people. By itself a performance appraisal has limited use and effect on improving organisational performance. If performance appraisal is regarded as an annual “event”, it will be an essentially backward looking exercise, focusing almost exclusively on the past.

Performance appraisal is best thought of as one step of a process that operates throughout all 1800 hours of the year. The process involves planning for performance, ongoing monitoring, and finally reviewing performance. The process of managing performance is something that has to be carried out by line managers throughout the year – it is not an annual event orchestrated by the personnel department.

The process consists of three phases, which are cyclical. They are:

  1. Planning Performance: This includes identifying performance goals for the year and discussing them with subordinates so that everyone has a clear understanding of them. Involves documentation of goals in a performance agreement document.
  2. Ongoing Monitoring and Controlling of Performance: This involves monitoring the performance of subordinates on a day-to-day basis and giving feedback on both positive and negative performance in terms of expectations set during the planning phase. This phase also includes renegotiating (and documenting) performance goals as conditions change.
  3. Reviewing performance: This is the last stage and includes preparing for a review and actually conducting the review with the subordinate.

For many people the purpose of a performance management system is viewed narrowly from a performance appraisal perspective as to come up with a rating so that a salary increase can be decided. In fact, most enlightened organisations introduce performance management systems because employees who know what they should be doing, how well they should be doing it, and why it is important will produce better results. And if these employees know that they will be evaluated only on what they know they can and should be doing, they will be better disposed to trying to achieve challenging goals. So the results of these efforts will be improved performance, growth, and development. The main purpose of introducing a performance management system is to improve organisation performance.

Performance management results in improved organisation, team, and individual performance when employees:

  • Understand what the purpose of their function is;
  • Understand what is expected of them on a day-to-day basis;
  • Are given guidance on how to do their jobs;
  • Have insight into how well they are performing their jobs;
  • Develop insight into which skills, behaviours, and knowledge they need to develop;
  • Are given guidance on how to improve their performance;
  • Feel motivated towards improving their performance; and
  • Understand how their function assists in the attainment of the organisation’s goals.

Performance management enables people to develop their abilities, increase their job satisfaction and meet their full potential.

A high level of activity with no reflection results in nothing changing. This is the curse of the modern corporation – everybody running around at high-speed in a busy fashion with no time for reflection on how successful they are. Busy people have no time for curiosity. They have no time for thinking. Their immediate reaction to a problem is to attack it with the tools nearest to hand. Energy conquers all, they believe, and if at first it doesn’t work,  try again. Often it does work. The trouble is they don’t know why. Learning requires time out to think about ones actions and to develop alternative behaviors.

In essence the performance review is an opportunity for reflection. In order to offer a valuable learning exercise the review must take place away from the normal hustle and bustle of organisational life and it must occur within a context that promotes exploration and contemplation in an open-minded fashion. Only under these conditions will an environment be created for subordinates to genuinely reflect about past performance and attempt to really grasp the reasons for success and failure.

Performance management is primarily concerned with looking constructively towards the future. The performance management process provides a vehicle for discussing and formulating a shared understanding about the desired future. As such, performance management has more to do with developing clarity about the desired future and developing action plans to get there than it has to do with a backward looking process of appraising past performance. Of course one of the steps in the process of managing performance is the performance review, but this event is firmly rooted in the goals that were set at the beginning of the cycle. As such the review event is less an appraisal of performance than a review of progress made towards pre-determined goals.

Setting Targets and Planning Performance

By setting objectives managers make sure that their staff knows what role they need to play and what results they need to meet. It enables employees to know what is required of them and on what basis their performance and contribution will be assessed. As such setting performance expectations is the first task in the performance management process.

In addition to agreeing performance expectations a further element can be added – that of challenge. Nobody finds excitement in meeting goals that are too easy and which do not stretch somewhat. Negotiated goals therefore need to be sufficiently challenging. By setting goals that are large and challenging, not only do you direct behaviour in terms of what is required but you also create conditions for motivation to emerge. Challenging goals therefore align behaviour and activate motivation.

Performance management, and particularly performance planning, plays an important role in accessing the energy of employees. Performance management focuses on improving performance, developing competence, and releasing potential. By allowing employees to contribute to the formulation of their own and the organisation’s objectives one is better able to gain their full commitment to the achievement of corporate goals as they have a sense of ownership of corporate objectives. The ideal model of performance management is a shared process operated by high-involvement organisations.  In this model, objective-setting is not simply a top-down process which cascades corporate objectives down through the organisation. Instead, there is an emphasis on participation in goal-setting to obtain commitment to corporate and team as well as individual objectives and provision is made for an upward flow of contributions to the formulation of departmental and corporate objectives.

Monitoring Performance and Giving Feedback

Continually monitoring or tracking performance involves constant day-to-day awareness of what and how the subordinate is performing against the pre-set objectives. It requires a frame of mind which continually seeks examples of performance from subordinates. Sources of information may include personal observation, reports, feedback from others (seniors, colleagues, subordinates, and clients), as well as statistical information. Managing performance on a day-to-day basis involves constant vigilance to identify early indicators of success or failure to reinforce or take corrective action as early as possible.

Feedback falls into two main sections:

  1. Recognition for acceptable and exceptional performance – positive reinforcement which should be provided when the manager recognises behaviour which leads to improved performance
  2. Feedback for substandard performance – reporting where employees have not delivered at the required level in terms of the performance goals.

The principles remain the same for both. They are:

  • Feedback and recognition must be prompt
  • Feedback and recognition must be honest and sincere
  • Feedback and recognition must focus on what is really important
  • Feedback and recognition must be specific about what performance was acceptable or substandard
  • Feedback and recognition must explain what the impact of the behaviour has on performance
  • Feedback should allow for exploration of better ways of performing.

The Performance Review

Performance reviews play three main roles:

  1. Reviewing earlier performance to gain insight into what aspects of performance can be improved;
  2. Motivating and encouraging employees to improve their performance; and
  3. Providing a vehicle for two-way communication about job and career related issues.

The purpose of a performance review is to help an employee understand the nature and quality of their performance over the last year and what they must do to improve it, and to motivate them to improve it. That is an effective performance review generates both understanding about their performance and commitment to improving performance. It answers the two fundamental questions of ‘Where have we got to?’ and ‘Where are we going?’ It gives managers with their teams and members of their staff the opportunity to pause after the hurdy-gurdy of everyday life and reflect on the key issues of personal development and performance improvement. Performance reviews could be viewed as productive conversations, with the main emphasis being on opening communication and improving performance in the future.

The performance review is not a “one-time” event. You observe, assess, and give feedback on performance every day. The formal performance review completes a cycle in which you first worked with the employee to identify and gain commitment to performance expectations. Then, on a daily and periodic basis, you monitored performance to recognise achievements, provided feedback, and developed strategies for solving performance problems. The performance review is most effective when viewed by both parties as a two-way discussion and an opportunity to develop action plans for the next review cycle.

The overall performance management system may contain formal elements such as specific documents and deadlines when various activities need to be completed by. On the other hand the day-to-day workings of the system are about the relationship between manager and subordinate. This element must of necessity be informal. When a manager displays an interest in his/her staff as people, a strong informal bond is created wherein the employee may be more inclined to give strong personal support for the leader.

The overall objective of performance management is to improve performance. In implementing a performance management system one must make sure that the design facilitates improving performance. Avoid complicating matters. The system should stay as simple as possible whilst ensuring that the overall objectives are met.

Many performance management schemes fail because they rely heavily on forms that need to be filled in by the manager. Often the forms are long and complex and managers dislike them. Because of this the scheme degenerates into an annual exercise in bureaucracy and not a process for improving people’s performance. The focus of performance management should be on the relationship and interaction between people in an environment geared towards improving performance. Forms and procedures offer relatively little value by themselves. The forms should be viewed as a tool – an aid to facilitate and record discussions about performance plans and performance reviews. The elegance with which forms are completed is not important. Their purpose is no more than that of recording views and decisions; they are not ends in themselves. Performance management is not a form-filling exercise, as many traditional merit rating or performance appraisal schemes appeared to be.

Performance Management and Salary Management

There is significant confusion about the distinction between managing performance of people and managing the salary budget of the company. The implicit and unquestioned assumption, shared by most people in organisations is that the performance rating is a salary rating that translates automatically into a certain percentage salary increase. The impact of this is that the annual performance review becomes a haggling negotiation. The subordinate enters the discussion believing that he/she has to fight for dollars. As a result the subordinate is defensive, closed to feedback, adversarial, and unable to learn from the discussion. Likewise the senior believes that the budget must be curtailed and therefore finds reasons to prove a lower increase. The discussion therefore assumes a main focus on money and improving performance and ongoing learning are all but forgotten about.

There needs to be a clear distinction between performance management and salary administration. Performance management compares an person’s achievements against agreed expectations, whereas salary administration involves comparing individual salaries with others at the same level taking many factors into account (comparison of pay with others performing same role, marketability of employee, experience, and availability of skills possessed by individual). Performance management is about managing the performance of people whilst salary administration is about managing expenses. De-link performance rating and salary increase rating – make this explicit and consistently communicate the difference between managing performance of people and managing salary budget.

There is a tendency for some managers to think that people at work do not want to do a good job and must be bribed to increase their efforts through the offer of extra cash. An exclusive focus on money rewards only motivates people to get the rewards. No concern is directed to the intrinsic qualities of the job to be performed. When only rewards are used as trying to gain a sense of ownership you elicit a “mercenary” attitude wherein staff are only interested in pursuing those actions which convert to money. They focus largely on enriching themselves and not on improving performance. Often this results in attempts to manipulate or blatantly abuse the system to achieve greater rewards.

At best one creates a sense of financial ownership by throwing money at the problem. The difference between employees who do well and those who do poorly is not how they are paid but how they are treated. The implications are that one needs to create a sense of emotional as well as financial ownership of a company for employees to really view it as their own. If you allow your employees to share in the rewards but fail to give them an active involvement in the running of the organisation then their commitment will be less than complete.

Skills Required in Performance Management

A primary reason organisations feel that their Performance Management systems are not working effectively is that managers are seldom proficient in the basics of planning performance, managing performance on a day to day basis, and reviewing performance. Most managers spend far more time acquiring technical skills (marketing, budgeting, finance, production) than learning about managing people. Ironically human beings are one of the most expensive resources and one that can be leveraged to get better results from it – yet managers are seldom fully trained on how to manage this expensive resource. In addition there are few consequences for a manager if they fail to effectively use a performance management system.

The skills required of managers in performance management include:

  • Setting performance targets;
  • Monitoring on a day-to-day basis;
  • Giving feedback and recognition;
  • Setting remedial action plans in place;
  • Reviewing performance;
  • Identifying developmental areas; and
  • Coaching subordinates.

Likewise subordinates need to learn new skills about how to get the best out of the performance management process. The skills required of them include:

  • Setting performance expectations;
  • Monitoring their own progress;
  • Soliciting and handling feedback;
  • Developing remedial action plans;
  • Taking responsibility for self-development; and
  • Rating their own performance.

The skills required by managers to carry out a performance management process are often underestimated. They need to know how to set clear, measurable and achievable objectives. They need to know how to define and assess competence requirements. They have to provide helpful feedback and know, not only how to commend staff on their achievements at review meetings (which is not too difficult), but also how to coach them and help them to recognise where their performance has been sub-standard and needs to be improved (which can be much harder). For this reason, a growing number of organisations have found that implementation of performance management has been achieved as part of major management development initiatives.

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