Performance Management

Performance management is the activity and set of processes that aim to maintain and improve employee performance in line with an organisation’s objectives. It’s strategic as well as operational, as its aim is to ensure that employees contribute positively to business objectives. Ideally, performance should be managed holistically, throughout the range of HR activities and processes.

This factsheet explores critical aspects to get right in performance management, as well as recent changes in thinking. It summarises some of the main tools used in performance management, including objective setting, performance ratings, performance appraisals and feedback, learning and development, and performance-related pay.

Key takeaways

  • Performance management requires a multifaceted approach linked to organisational strategy.
  • ‘SMART’ objectives work well in many contexts, but there are better alternatives for complex jobs.

Regular performance feedback is crucial for monitoring progress. 

Employees’ voice and perceived fairness are critical elements in performance feedback. 

There are many biases to watch out for in performance ratings.


What is performance management?

For professions involved in ensuring organisational performance, such as HR, a big challenge is to lever the relationship between the people engaged in the enterprise and the value they deliver. Performance management is the attempt to maximise this value creation and ensure that employees contribute to business objectives.

At its best, performance management is a holistic set of processes. It brings together many principles that enable good people management practice, including learning and development, performance measurement and organisational development. For this very reason, it’s complex and often misunderstood.

There’s no definitive definition of performance management. Those that exist usually state that it comprises a range of distinct tools and activities. Broadly, performance management is an activity that:

  • establishes objectives through which individuals and teams can see their part in the organisation’s mission and strategy
  • improves performance among employees, teams and, ultimately, organisations
  • holds people to account for their performance by linking it to reward, career progression and termination of contracts.

Performance management should be:

  • strategically aligned with broad issues and long-term goals
  • integrated with various aspects of the business and how people are managed.

Effective performance management relies on both formal and informal processes. It’s about planning; for example, defining and reviewing objectives, linking ways of achieving those objectives to business plans, and setting measures of success. These are often discussed in meetings between the line manager and employees, known as performance reviews or appraisals. But performance management is also about establishing a culture in which individuals and groups take responsibility for the continuous improvement of business processes and their own skills, behaviours and contributions. As part of this, employees will need to talk to their managers about the support and resources they need to do their jobs well. 


How does performance management work?

Changing trends in performance management

In this video, Jonny Gifford, Senior Adviser for Organisational Behaviour at the CIPD, explores the changing trends in performance management over recent years.


Challenges to traditional performance management practices?

CIPD’s research finds goal setting is rather like prescriptive medication, in that it certainly works, but can be easy to misapply or get the wrong ‘dosage’. In particular, specific and challenging goals are generally a powerful motivator, but can detract from what needs to be focused on in ‘complex tasks’ that involve navigating interrelated steps or stages, adapting to unfamiliar cues, developing new skills or making decisions based on data analysis. In such circumstances, ‘do-your-best’ directives and goals focused on learning and behaviour will do more to help employees focus and perform well.

Goal setting

Goal setting is intrinsically linked to appraisals, in that its power to improve performance rests on monitoring progress and feedback. This confirms that performance management should be seen as a continuous chain of connected activities, not as a discrete process that is occasionally revisited. Some of the best quality research on performance appraisal demonstrates that feedback generally contributes to performance, but there is a great deal of variation: in many cases it has no effect or even worsens performance. Getting it right is thus crucial, but the research also clearly shows that this is not a simple task. There is certainly no universal template to follow – contextual factors such as job type should always be taken into account – and the overall number of issues in making performance appraisal an effective process is considerable.

One course of action we would recommend to employers is to ‘appraise the appraisal’. It is not the processes per se that are important, so much as employees’ reactions to them, and these are particularly influenced by how fair and useful they experience performance appraisal to be. The research shows that a number of aspects of appraisal in turn influence its perceived fairness, but given how straightforward it is to consult employees, it would seem sensible both to ask them their views of appraisal processes in general, and to check in with them following appraisal meetings. If an employee feels unfairly treated, unsupported or demotivated the day after an appraisal, performance management could unravel at that point and it’s clear more conversation or action is needed.

Systematically assessing employee performance requires managers to apply standardised measures or ratings. Unfortunately, there are a number of potential sources of bias in this, especially from the raters or managers themselves, and many of these may not be conscious. Training raters and making them more accountable for their evaluations both help reduce bias and make appraisals more accurate.

However, a more fundamental question relates to the purpose of appraisal. Managers go about assessments in cognitively different ways, with different results, when they are used for administrative purposes (such as to inform pay decisions) than when they are used for developmental purposes. Therefore, we recommend that any single process or meeting focuses on one or the other of these, but not both. Introducing some clear water between assessments that inform pay and promotions and those that help employees improve should make performance management a far smoother, more productive and less fraught process.

Critical factors in goal setting

A number of practical factors influence whether goal setting is effective in improving performance. Based on the best available evidence, key recommendations we make for employers include: • Set outcome goals that are clear, specific and challenging (yet achievable) for jobs or tasks that are relatively straightforward and predictable.

• Set outcome goals that are not specific (encouraging employees to do their best) or that focus on employee behaviour (how they do a task or job) or personal learning outcomes in the case of jobs centred on ‘complex’ tasks (for example, responding to unpredictable stimuli or combining data analysis and decision-making).

• Allow managers to set targets and focus employee involvement on how they go about their work.

• Recruit employees with a learning orientation, rather than a performance orientation, and encourage employees to develop this mindset.

• Support employees to form ‘implementation goals’, stating how, where and when they will act and to develop strategies to deal with potential setbacks.

Critical factors in performance appraisals

Equally, numerous factors influence how performance appraisal contributes to work performance. Based on these, our main recommendations for employers are:

• Rely on managers’ evaluations rather than self-assessments, as they are more powerful motivators. When monitoring progress towards goals, feedback can be given in person or through technology equally effectively.

• Avoid using forced or guided distribution to rate performance, as it generates negative employee reactions, and opt for more (five) rather than fewer (three) categories.

• Use strengths-based feedback that focuses on positive aspects of performance and future development.

• Ensure managers involve employees in the appraisal discussions so that their voice can be fully heard, even if it doesn’t influence the evaluation.

• Check in with employees following appraisal to see how they are responding, in particular whether they feel it was fair and useful.

Critical factors to ensure robust ratings

We recommend that employers pay attention to causes of bias in the accuracy and fairness of performance ratings. We identify three types. First, particular biases in how managers assess employees (rater-centric errors) include:

• managers’ belief that employee ability is essentially fixed, which leads to inaccurate ratings

• managers having a greater level of power or self-perceived power in the organisation, which leads to lower ratings

• whether managers have been rated highly themselves, which leads to higher ratings

• the fact that an employee was hired or recommended by the manager who is rating their performance, which leads to higher ratings

• introverted managers will tend to underrate extroverted and/or disagreeable employees.

Second, sources of ratings bias due to employee actions (ratee-centric error) include:

• employee demonstrating organisational citizenship behaviour, which leads to higher ratings for their core work

• ingratiation, self-promotion or other tactics to influence managers, supported by their political skills, which lead to higher ratings. Finally, employers can reduce bias due to the ratings systems used (system-centric error) in various ways, including by:

• being clear on whether the purpose of the appraisal is for administrative or developmental purposes

• using composite scores and combining the assessments of different raters

• holding managers accountable for their evaluations (for example, by having a relevant specialist review them) and train them in performance appraisal and using ratings.


Objectives and performance standards

Setting performance objectives for individuals, departments and the organisation is an important aspect of managing performance. These objectives can be expressed as targets to be met (such as sales levels), ad hoc tasks to be completed by specified dates, or ongoing standards to be met. They may be directly related to team or organisational key performance indicators or personal; for example, taking the form of developmental objectives for individuals.

Today, many employers do not solely rely on measurements of employees’ outputs. Rather, they balance these with learning and development objectives and assessments of employees’ behaviour, such as how supportive they are of colleagues. These can be of longer-term importance to the organisation. For example, there’s good evidence that social cohesion is an important factor driving performance in knowledge organisations, so it’s important for such employers to promote collegiate and collaborative behaviour. Performance management is one way of doing this.

It’s often said that objectives should be SMART – typically, Specific, Measurable, Achievable (yet stretching), Relevant, and Time-bound. As we argue in our Could do better? report, the best evidence supports this in some contexts but not others. In straightforward tasks, goals that are specific and stretching do increase performance, but in ‘complex’ jobs (such as those which involve making analysis-based decisions or adapting to unfamiliar cues), they do not. Here, vaguer outcome objectives focused on ‘doing one’s best’ work better, and best of all are objectives focused on learning or behaviour.

Whatever their nature, objectives should be clearly relevant to the overall purpose of the job, team and organisation. Our research found that employees do need to be committed to them, but they do not need to set their own objectives – indeed, targets tend to be more powerful when they are set by one’s manager.

Employers can also opt for objectives on team-level performance rather than individual level. Both types can work well; the important thing is to match objectives to the nature of the work. In one job, good performance may purely be a factor of individual application; in another job it may rely much more on teamwork. If striking a balance between individual and team objectives, employers should be careful that they do not undermine each other.


Learning and development

Performance management often focuses almost purely on assessing employees’ past performance and linking it to administrative decisions (for example, on pay). This is a mistake. If the ultimate aim is to improve performance, there should also be a strong focus on how employees need to develop. Performance conversations should thus help employees to learn from their experiences and identify other relevant learning and development opportunities.

A number of organisations use personal development plans (PDPs) to set out actions they propose to take in this regard. Sometimes, a review of employees’ potential and development needs is grouped with the performance appraisal and called a performance development review (PDR).

Read more on Learning and Development.


Performance appraisals

Performance appraisals, sometimes called performance reviews, are one of a number of performance management tools that aim to ensure employees’ performance contributes to business objectives, and should be used as part of a holistic approach to managing performance. The value of annual performance appraisals has increasingly been challenged in recent years in favour of more regular ‘performance conversations’. However, performance feedback or appraisal remains a crucial aspect of the performance management cycle.

Essentially, performance appraisal is a means for managers and their employees to review and discuss the latter’s performance. Its purpose can be to identify areas for growth and improvement and inform suitable development plans. Alternatively, it can inform administrative decisions on contractual aspects of employment, such as pay, bonuses, promotions or termination. Both are valid uses of appraisal, but it can help to keep them separate.

How is performance appraisal changing?

There’s been much debate in recent years around deficiencies in traditional appraisal approaches and whether they are ‘past their sell-by date’. Some have suggested performance appraisal should be abandoned wholesale, but the more persuasive criticisms are more specific. In particular, they include that:

  • Appraisals are traditionally not frequent enough
  • They focus on past performance with little attention paid to future performance improvement, learning and development
  • Feedback often comes from a single source (the line manager) which many not account for the experiences of peers, customers, and the individuals themselves
  • The amount of effort associated with paperwork and overseeing process of appraisals is excessive.

Some evidence affirms current thinking. For example, there’s strong evidence that performance benefits when employees regularly monitoring their progress towards goals, so more immediate feedback and an ongoing focus on improvement is indeed important.

However, the research also uncovered aspects of performance appraisal that often get overlooked and arguably need more attention. For example, the two uses of appraisal – for learning and development purposes and for administrative purposes of informing decisions on pay and promotion – involve different cognitive processes, so it seems best to separate these as far as possible by focusing on them in different meetings.

Further, there’s strong evidence that employees’ reactions to feedback, more than how feedback is given per se, are a critical influence on whether future performance is likely to improve. As such, it’s very important that employees perceive appraisals as fair as well as useful, which means they need to feel they have a voice in the process.


Assessing and measuring performances

Performance can be assessed in different ways, including objective metrics and more subjective views of managers and colleagues.

The focus of performance measurements

Some jobs lend themselves much more readily to performance metrics than others. In some contexts, accurate and even real-time performance data are available on teams or individual employees – an example is a customer contact centre, where data on call length and outcomes can be recorded as the calls take place. In other contexts, what constitutes good performance may be defined more broadly and there may be longer timeframes attached. Examples include: client development roles, in which targets on sales can be set for a longer timeframe and procedures are less fixed; and project work, in which very broad objectives are agreed for a period of months or longer, and there may not be clarity at the outset how they are to be achieved.

However, not all measures focus on performance outcomes. Performance objectives can also relate to employees’ behaviours and attitudes against espoused values, or to their learning and development. Both these areas can be covered by performance assessments.

Methods of assessing performance

In some jobs, performance metrics can be calculated on an ongoing basis through management information systems. If the data is relevant to how individuals perform their jobs, it offers an extremely valuable basis for performance appraisal.

Some employers go further, making this data available through real-time dashboards. An additional benefit of a live dashboard is that people or teams can adjust their effort or the focus of their work in response to changing demands.

Another approach involves the use of 360 degree assessment, where feedback is gathered from a wide range of commentators, typically including the individual’s direct reports, customers and colleagues as well as their line manager. These assessments can include both qualitative comments and compiled scores from colleague ratings.

A lighter touch and more subjective approach to assessment is for managers or their employees to complete a form or a questionnaire that prompts in collecting information on their performance. This can cover different aspects of their work – such as their contribution to the team, role development and effectiveness – and can prompt the collection of evidence or examples.

Many organisations struggle to measure how employees contribute to the organisational performance. Where this is the case, improving human capital metrics should be a priority.

The right measures for the job

A common criticism of performance management is that recording and collating the necessary information can be very time consuming and not always relevant. We advise that assessments and measurements are kept to the minimum that is relevant for short- or long-term performance and useful for employees. It should also help to underline the purpose of the different assessments.

Another key to getting assessment right is to match types of measures to jobs. Specific and stretching objectives increase performance in relatively straightforward jobs, so in this case, prioritising specific metrics is appropriate. But there is good evidence to show that, in complex jobs, less specific outcome goals, behaviour standards and learning objectives are better drivers of performance.

Bias in performance ratings

Performance measures need to be trustworthy as well as relevant if they are to be relied upon. Unfortunately, as CIPD’s Could do better? report points out, there’s a lot of potential for bias in performance ratings.

Firstly, managers or raters may be biased for various reasons. For example, managers tend to give more favourable ratings if they personally like an employee, hired or recommended them, or if they are particularly caring or considerate. Managers tend to give less favourable ratings if they feel powerful in the organisation, receive negative feedback themselves, or are particularly conscientious.

Secondly, employees can unduly affect their performance ratings by self-promotion and ingratiation, and by showing citizenship behaviour (for example, helping colleagues) in other areas of their work. However, they tend to damage their ratings if they make suggestions or challenge the status quo.

Thirdly, how ratings are set up also affects judgements. Managers tend to rate workers more generously and less accurately if it is to inform administrative decisions such as pay and promotion, and stricter and more accurately if it is to inform learning and development.

Ratings accuracy can be increased in various ways, including:

  • training raters (for example, in techniques for comparing employees with set standards)
  • using composite scores instead of a single score (for subjective measures)
  • averaging scores from different raters
  • using an expert to check scores.


Appraisal skills

Performance appraisal is usually carried out by line managers rather than HR professionals, so it‘s important that they understand their role and develop appropriate skills. Particular skills sets to develop include:

  • Asking good questions – when to use open or closed questions, and how to probe in a way that encourages people to expand on their experiences, views or feelings
  • Active listening – to take in what is being said, notice body language, help people clarify and respond in a way that helps the conversation
  • Giving constructive feedback – focusing on evidence and actual examples, not subjective opinion, reinforcing positives and strengths, and knowing when to be directive and when to take a coaching approach.

Appraisals will be more effective when managers have a healthy relationship with their staff in general. 

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