# Performance Management Explained: Key Steps and Benefits for Success

![Performance Management](https://www.investopedia.com/thmb/fQGy_G3rwmUrTwxl5mtSG04059s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Performance-Management-FINAL-ad4e842b85f747c1b4884095a2de0571.jpg)

*— Investopedia / Jiaqi Zhou*

## What Is Performance Management?

Performance management is a set of practices that help managers monitor and evaluate employees' work. It helps align employee performance with organizational goals, and uses ongoing feedback and communication to set and maintain expectations.

The purpose of performance management is to create an environment where people can perform to the best of their abilities and to include them in overall goal-setting. Performance management is widely used in both the private and public sectors.

### Key Takeaways

*   Performance management seeks to align employees' actions with organizational goals and uses ongoing feedback to enhance both individual and company performance, moving beyond traditional annual reviews.  
    
*   Key elements of effective performance management include setting measurable expectations, regular goal-setting meetings, and providing tools for job-development plans to foster employee growth.  
    
*   Emphasizing continuous accountability and transparency within performance management can lead to less stressful workplaces and improved communication between managers and employees.  
    
*   Performance management promotes a coaching culture over a boss culture, which can improve employee engagement, job satisfaction, and retention while reducing surprises during performance reviews.  
    
*   Effective performance management may also result in greater customer satisfaction by ensuring employees are focused and aligned with company objectives.  
    

## Exploring the Mechanisms of Performance Management

A formal performance-management program helps managers and employees agree on expectations, goals, and career progress, including how individual work aligns with the company's vision.

It helps direct the funds allocated as a part of the [company's performance budget](https://www.investopedia.com/terms/p/performance-budget.asp). Generally, performance management views individuals as part of the broader workplace system. Companies aim for the [absolute performance standard](https://www.investopedia.com/terms/a/absolute-performance-standard.asp), though it is seen as unattainable.

Performance-management programs use traditional tools such as setting and measuring goals, objectives, and milestones. They also aim to define what effective individual performance looks like and develop processes to measure it. Managers and employees should engage actively year-round to evaluate progress, instead of waiting for an annual performance appraisal.

Managers can use performance management tools to adjust workflow, recommend new courses of action, and make other decisions that will help employees achieve their objectives. In turn, this helps the company reach its goals and perform optimally.

### 27%

Percentage of workers who very strongly agreed with the statement "My manager includes me in goal setting" in an August 2023 Gallup survey.

For example, the manager of a sales department can give staff members target revenue volumes that they must reach within a set time period. In a performance management system, along with the numbers, the manager would offer guidance gauged to help the salespeople succeed.

Focusing on continuous [accountability](https://www.investopedia.com/terms/a/accountability.asp) creates a healthier, more [transparent](https://www.investopedia.com/terms/t/transparency.asp) work environment, and emphasis on regular meetings can improve overall communications. Because performance management establishes concrete rules, everyone has a clearer understanding of the expectations.

When expectations are clear, the workplace is less stressful. Employees are not trying to impress a manager by doing some random task, and managers aren't worried about how to tell employees that they are not performing well. If the system is working, they probably know it already.

##  Key Elements of an Effective Performance Management System

Although off-the-shelf performance-management software packages exist, templates are generally customized for a specific organization's needs. Typically, effective performance-management programs include certain universal elements, such as:

*   **Aligning employees' activities with the company's mission and goals.** Each employee should understand how their job contributes to the company's overall goals. Supervisors and employees together should define a job's duties.
*   **Developing specific job-performance outcomes.** Through performance management, employees should understand: What goods or services does my job produce? What procedures does my job entail? What effect should my work have on the company? How should I interact with clients, colleagues, and supervisors?
*   **Creating measurable performance-based expectations.** Employees should have the opportunity to give input into how success is measured. The expectations can include results, which are the goods and services an employee produces; actions, which are the processes an employee uses to make a product or perform a service; and behaviors, which are the demeanor and values an employee demonstrates at work.
*   **Defining job-development plans.** Employees should have a say in what types of new things they learn and how they can use that knowledge to the company's benefit.
*   **Meeting regularly.** Instead of waiting for an [annual performance appraisal](https://www.investopedia.com/what-is-a-performance-appraisal-4586834), managers and employees should engage actively year-round to evaluate progress.

## Why Performance Management Matters: Key Benefits

Advocates of performance management maintain that it not only helps organizations attain their goals but also makes work more fulfilling for individual employees, with the bottom-line benefit of improved worker retention.

For example, workers often feel blindsided by negative annual performance reviews. While performance management may also incorporate annual reviews, the ongoing feedback that managers provide throughout the year should result in fewer unpleasant surprises.

As the polling firm Gallup, which conducts worldwide surveys on workplace issues, puts it, effective performance management requires "managers to think of themselves as coaches, not bosses. And when managers have timely, performance-related conversations that reflect this principle, manager-employee interactions feel encouraging, engaging, and rewarding in ways that annual reviews do not."

The benefits can also extend outside the organization, with studies showing that performance management often produces greater customer satisfaction.

## What Is Management by Objectives vs. Performance Management?

Somewhat similar to performance management, [management by objectives (MBO)](https://www.investopedia.com/terms/m/management-by-objectives.asp) is a corporate leadership model that attempts to align employees' goals with those of an organization. It is often broken down into five basic steps: defining objectives, communicating those objectives to employees, monitoring employees' progress, evaluating their performance, and rewarding their achievements.

Like performance management, MBO encourages (in theory at least) employee participation in goal-setting. However, MBO is frequently criticized as being too rigid and so focused on goals that employees and managers are driven to meet them no matter how they do so. According to an article in the January 2003 _Harvard Business Review_, MBO is "an approach to performance appraisal that's gone out of fashion for the most part."

## What Is the Difference Between Performance Management and Performance Appraisal?

In performance management, supervisors provide ongoing feedback to employees. Performance appraisals, on the other hand, tend to provide feedback looking back over a certain period, often a year. Companies that practice performance management can include an annual performance review as part of their process, so the two aren't mutually exclusive.

## What Are SMART Goals?

SMART goals are part of a goal-setting system and philosophy used by many companies and other organizations, as well as by individuals. Following the SMART acronym, it advocates creating goals that are specific, measurable, achievable (or attainable), relevant, and time-bound.

## The Bottom Line

Performance management can have benefits for organizations and their employees alike. The key is employee involvement and regular, productive feedback to ensure that the employee is continuously evolving in a positive direction. Instead of intermittent performance reviews, these practices support a coaching culture with management that ultimately supports long-term organizational goals.

> **Article Sources**
>
> 1.  Gallup. "[Leadership & Management](https://www.gallup.com/404252/indicator-leadership-management.aspx#ite-508463)."
>     
> 2.  U.S. Office of Personnel Management. "[Good Performance Management Aids Retention and Productivity](https://www.opm.gov/policy-data-oversight/performance-management/reference-materials/more-topics/good-performance-management-aids-retention-and-productivity/)."
>     
> 3.  Harvard Business Review. "[Management by Whose Objectives?](https://hbr.org/2003/01/management-by-whose-objectives)"