Organizations that use performance management systems that set goals, continually clarify priorities, help employees develop, and reward performance outperform those that do not. In volatile times organizations are pressured to digitize, continually improve, innovate, and respond to dramatic political and social changes. Today’s successful performance management systems help their employees focus and succeed despite the volatility around them.
McKinsey reported in 2024 that companies that focus on their people’s performance are 4.2 times more likely to outperform their peers, realizing an average of 30 percent higher revenue growth and improvements in culture, collaboration, and innovation.
Despite the strong improvement in company success from performance management, many companies seem to have doubts about it. Gallup reported in 2024 that only 20 percent of Chief Human Resources Officers (CHROs) from Fortune 500 companies believe that their performance management systems inspire employees to improve performance.
But there’s worse news yet. Only two percent of CHROs believe that their systems work.
Performance management systems do improve employee performance. HR executives ought to be leading the way in helping executives implement performance management systems that drive profitable growth and create work cultures employees want to join.
Talent management software armed with Artificial Intelligence (AI) is available to improve performance management. AI performance management software can read a manager’s first review drafts and offer prompts for how to change the tone of the writing from very critical to more inspiring. It can also check for biases and use analytics to gather metrics and data. However, these systems can only go so far in improving performance management systems and inspiring better performance.
Managers, not digital platforms, hold the key to inspiring performance. But underlying it all is trust. Managers hold the key to building trust with employees.
To engender trust, managers need to continually provide candid feedback and coaching to employees and allow an open dialogue for questions. Additionally, managers need to work with employees to secure resources and access to experts.
I recommend that managers and employees set aside time to speak weekly. In addition, managers and employees should meet quarterly to update and revise goals. I don’t recommend that employees be given ratings and certainly not forced rankings – as such items reduce trust, require too much time, and are detrimental to morale. In many cases, forced ranking is too subjective.
You will know when you have built trust with your employees. They will no longer dread performance management meetings because you have already discussed their performance, strengths, and development areas. No surprises. They will confide in you because your employees know that you understand their unique skills and abilities, the type of work they like to do, their contributions to the team, and their career aspirations.
Seven performance management essentials that drive success and build trust
Let’s review seven performance management essentials one by one. With each, I will provide the salient point and a link for you to learn more in-depth information.
1 – Set goals and check progress. Managers who want to dramatically increase their employees’ success should implement Objectives with Key Results (OKRs). Research shows that managers who set such goals can significantly improve the performance of their organizations over those who simply tell employees to just do their best. Moreover, OKRs allow organizations to change measures and tactics to adjust to today’s digital pace of business. For a long time, managers have used SMART goals. (A format for setting goals that calls for Specificity, Measures that are Action-orientated, Achievable and Relevant — as viewed by employees — and that have Timelines.) Using SMART goals improves performance in an incremental fashion. OKRs push the innovation door wide-open. Like SMART goals, OKRs have objectives, measures, and timelines, but they are more ambitious and allow for the writing of tactics as part of an objective “cluster.” The OKR process also allows for goals and milestones to be changed quickly, depending on the results. Like SMART goals, OKRs are deployed down into the organization, but the OKR process challenges managers and their teams to write their own OKRs.
2 – Provide ongoing feedback, coaching and develop careers. The once-a-year performance discussion is not sufficient in a business world of constant change. Are you the type of leader who loves to provide positive feedback? Or, are you the type who prefers to tell people what they did wrong? Long-standing research shows that the leaders who provide ongoing, positive feedback more often than negative, at a 5:1 ratio, have teams that perform better, are more innovative, and generate more profit. However, both positive and negative feedback is essential, and employees overwhelmingly believe they are not getting enough of either feedback. New research shows that when an organization has “positive energizers,” the organization improves its performance, innovation, team cohesion, and financial performance.
Employees want to improve, be better employees, and to develop their careers. They expect their managers to provide feedback and coaching, especially in a helpful way. These managers build trust. The problem for managers is that they are too busy with the constant change and pressures of their organizations to be good coaches. And, for the managers who are coaching, too few of them are good at it. Learn these five steps for managers to improve their coaching success.
3 – Offer recognition. Recognition of employees by managers provides a great return. A whitepaper commissioned by Fortune 100 Best Company to Work For and Great Place to Work-Certified company, O.C. Tanner, investigated the root cause of great employee performance and how managers can tailor their workplaces to promote it. They asked, “What is the most important thing that your manager or company currently does that would cause you to produce great work?” The leading response by nearly a factor of three was more personal recognition. This beat out other more often-acknowledged drivers, such as “pay me more” or “give me autonomy.” Giving immediate recognition and feedback is easy to do!
4 – Eliminate biases. Many employees face biases based on their age, race, gender, appearance, sexual orientation and other issues. Research published in the Harvard Business Review found that many biases can be minimized by some simple practices managers can adopt as they are preparing their performance reviews. The authors suggest the following:
- Create a rubric for evaluations: Managers often report that they start writing their evaluations without first reviewing their employees’ original goals or establishing a methodology to ensure the assessments are fair. An effective rubric first defines the criteria against which the employee’s performance will be assessed. Then, it requires taking evidence from the employee’s outcomes to assess whether they did or did not meet expectations. By first creating a rubric, then filling in the open box with your assessment and feedback, you will be less prone to be influenced by your gut reactions. Research shows that when you first agree to the criteria used in the assessment and then you make the evaluation, you are less likely to rely on stereotypes and your assessments are less biased.
- Create better prompts. When writing reviews, managers often vary what they cover, how much they write, and even how specific or vague the comments are. It might be tempting to think this variation reflects the employee’s actual performance (“He’s great! Of course I have a lot to say about him.”), when, in fact, it might be implicit bias in action. Better prompts can help you approach each review in a similar manner, ensuring everyone is evaluated and considered in a consistent and equal way. Take the query: “Describe the ways the employee’s performance met your expectations.” To be fairer and more consistent, you might prompt yourself to identify three specific, measurable outcomes for each of your employees.
- Run a consistency check. Get in the habit of re-reading all reviews for consistency. Even if you have clarified the criteria and created checklists to guide your assessments, you may still fall into patterns that are more favorable to some employees. By looking for uniformity – or patterns of variation — you may find additional ways to remove bias.
- Hold calibration meetings. I recommend calibration meetings be held by functions in large organizations (such as engineering, marketing, finance and so on) to determine that every manager in the function is using the same criteria to rate employees by their job level. The calibration meeting will check for consistency and help ensure that biases are minimized.
5 – Consider whether AI could help streamline performance reviews. The thought of Artificial Intelligence sifting through emails, Slack texts, and other correspondence to gather accomplishments and make performance recommendations to managers frightens me. How will this be calibrated in a fair, impartial, and relevant way?
According to an article in the Society of Human Resources, my fears may be misguided. The article describes how some performance management experts believe the most valuable use of ChatGPT is its ability to summarize multiple sources of both formal and informal employee performance data. The tool can collect data constantly, not just at certain points throughout the year, which helps avoid problems like recency bias (which means the last thing heard is considered the most important).
Kenneth Matos, global director of people science for Culture Amp, a performance management, engagement and development technology platform based in Melbourne, Australia, is quoted in the article reporting that generative AI can save managers time and lead to more well-rounded performance evaluations by collecting things like peer- or customer-generated performance data.
“That might include the kudos people receive in Slack channels or email conversations about their work performance as well as comments about skill areas where they need to improve that’s been captured in digitized text,” Matos said. “GenAI can scrape your internal data and put together good performance summaries for managers to review.”
Maybe this is promising and certainly worth staying on top of, but I would weigh the findings of independent empirical evidence before using it.
6 – Avoid forced ranking. One of the most contentious practices used in performance management is forced ranking. Thankfully, most organizations have abandoned this practice. Forced rankings are based on the premise that it is vital to have immediate supervisors rigorously evaluate and rank employees from top-to-bottom based on agreed-upon abilities, skills, and attitudes. The top performers in the rank get the highest merit pay increase, the most stock, and accelerated career development. The lowest performers often get no merit increase or stock and are terminated from the company if they don’t improve. Then, they are replaced by more skilled employees. Based on academic research, performance at first increases, then it stalls. The problem is that when forced ranking is used more than about two years in a row, it creates a negative culture. One common criticism is that it pits employees against each other, instead of fostering a collaborative work environment. On those occasions when managers lead truly high-performing teams, someone still must be ranked low, despite meeting performance plan goals. Learn more.
7– Remove performance ratings. When we removed performance rankings from our performance review process at Medtronic’s Coronary and Peripheral business in 2012, some executive leaders and managers warned that employees would lose the competitive edge to perform. They didn’t. Our changes led to holding weekly or biweekly meetings between managers and employees as well as formal quarterly updates to goals and a year-end performance review. We also implemented an online performance management system that enabled goal setting, feedback, note-taking, and employee reviews. In our experience, employees were more open to feedback when we removed performance rankings. It eliminated arguments over the ratings. Empirical research supported our experience. But before you eliminate ratings, train your managers to provide excellent feedback or you will have a mess. Learn more.
Hopefully, the next time Gallup surveys CROS about the performance management systems, at least 75 percent of them will say their systems inspire performance. Performance management is no longer only about holding an annual performance review and determining who gets the highest percentage of merit pay. It requires providing ongoing feedback and coaching, building relationships, and offering recognition. Ultimately, performance management needs to engender trust and build relationships between managers and employees.
About Victor
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and Managing Partner of InnovationOne, LLC. He works with organizations to transform HR and recruiting, implement remote work, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: The Best of Empirical Research, Method and Process, and Digitization. He is quoted in business journals such as The Wall Street Journal, Workforce Management, and CEO Magazine. Victor has partnered with The Conference Board on innovation research. Subscribe to his weekly blogs at http://www.VictorHRConsultant.com