Leading business is not easy and 50% of companies fail within the first five years (as reported by Fundera). One of the most complicated parts - people management - is often underrated while an engaged & motivated team is a key factor of business growth. Thatâs why a mature HR system is unthinkable without performance management.Â
According to Willis Towers, 98% of businesses believe performance management is important, but only 64% say they have an effective approach to it. Letâs look into the Performance Management System to make you familiar with this concept and prepare your company and employees to grow in the right way.
Every company has a goal and a strategy and must be efficient, i.e., able to achieve the goal and implement the strategy optimally. The company itself determines optimality: it may refer to resources and reputation, long- or short-term results, customersâ and employeesâ loyalty, social contribution and sustainable development, a balance between profit and purpose.â
The Performance Management System (PMS) Â is the process of planning and appraisal/monitoring of the performance against established criteria. It is aimed at increasing the companyâs efficiency in line with its strategy, mission, and vision.
The PMS involves two major processes:
- Activity/performance planningâdefining goals and other performance criteria based on the vision, mission, and strategy.
- Performance appraisalâactual benchmarking of the achieved result against the target one.
The PMS has two focuses:
- A company from the point of view of its processes, projects, structure, and systems.
- People from the point of view of their behavior and performance.
The main PMS idea: the companyâs efficiency is the âsum totalâ of all company employeesâ performance results; every individual employee contributes, through their activities, to the overall company performance, to the achievement of its strategic objectives. That is why the PMS has to do with personnel management in the first place. However, the Performance Management System is broader and relates to the overall company management.
For example, in the National Bank of Ukraine I had worked for in 2014-2020, the PMS envisaged cascading down the bankâs strategic objectives to the level of annual operational objectives and individual goals of department directors, and then to the level of each employeeâs goals. At that, strategic objectives were in line with the bankâs five-year strategic plan reflecting the strategic idea of ââthe entire organization (the NBUâs Vision, Mission, and Core Values). Every goal had an indicator to measure its achievement: for strategic objectivesâstrategic metrics; for operational objectives and employeesâ individual goalsâKey Performance Indicators (KPIs). An employeeâs performance âconsistedâ of the behavior (competencies based on the bankâs core values) and the achievement of goals and KPIs.
During the annual planning process, a strategic team outlined the bank's annual operational objectives (priorities) and the goals of department directors. They then cascaded them down to the employee level (partly through an automated system). It allowed us to see the way to achieve each strategic objective at the operational level and the involvement of people. During the annual performance appraisals, we evaluated goals at each level (the bank level and the employee level) and tracked each employeeâs performance and its effect on the overall bankâs performance.
At the organizational level, the Balanced Scorecard (BSC) model enables us to look at any company from four perspectives:
- Customers
- Processes
- Finances
- People
Some BSC versions add one more important dimensionâEnvironment (in which the company is/operates).
The BSC allows determining targets for each of the above groups. It gives an idea of the current level of manageability, maturity, and efficiency of the company as a whole.
This modelâs metrics have to tie up with the strategy. In fact, it goes about the Key Performance Indicators (KPIs) of the company as a system. These strategic or organizational KPIs break down into:
- Customer Service KPIsâindicators of the effectiveness of interaction with the customer/customersâ needs satisfaction
- Financial KPIsâfinancial indicators of the companyâs performance, profitability, etc.
- Process-related KPIsâindicators of the effectiveness of the companyâs internal processesÂ
- HR KPIsâindicators of the companyâs human capital efficiencyÂ
The PMS logic suggests that at the organizational level, the BSC serves as a management tool and envisages cascading down its metrics to the employee level. First, it allows planning the companyâs activities by defining objectives/indicators in terms of customers, processes, finances, and people for a certain period (e.g., a year) to fit the strategy. Then, it enables us to evaluate the companyâs performance against the said indicators (what is/is not achieved and why).
Performance management at the employee level also includes planning and evaluating the activities. However, it focuses not on the entire organization but the people who work in it. Planning here means defining performance criteria for an employee/a group of employees for a certain period based on the companyâs objectives. And evaluating means the actual appraisal of an employee/a group of employees against the criteria/indicators defined at the planning stage.
There is a legend of how the PMS as a concept appeared. One of the researchers in people's corporate behavior paid attention to the fact that in any company, there are those who achieve better results. And it is their âmore efficientâ behavior that helps these people perform better. This led to deducing the HOW + WHAT performance formula. It shows that you can improve the performance through an appraisal and subsequent adjustment (including training and motivation).
HOW + WHAT = PERFORMANCE
HOW in this case is BEHAVIOR, everything that has to do with skills, interpersonal communication, patterns of interaction, etc. Most often, these are competencies. Sometimes, they refer to such a concept as âbehaviorsâ. 6 to 7 years ago, they began to use the term âvaluesâ or rather the âvalues-based behaviorâ.Â
Competencies are behavioral models. An employee forms them over a lifetime/by the work. They relate to experience, knowledge, skills, abilities, motives, and personal characteristics. An employee demonstrates them when performing functional duties and interacting.
Values are ethical beliefs and principles of interaction between employees. Most employees follow them unconditionally at the organizational level, and they guide their behaviors.
WHAT in this case is EFFICIENCY, everything relating to the result we achieve/fail to achieve. Most often, efficiency means meeting certain goals or KPIs. In recent years, the new concept of OKRs (Objectives and Key Results)Â come into active use in personnel management.
Goalâdescription/image of the expected/target result of an activity/a process
KPIsâindicators of achieving the target result/effectiveness of a particular activity/process/project
OKRsâindicators of achieving the key results within the set priority objectives
The logic here is as follows: performance includes doing their work by an employee in a certain way and applying specific behavioral patterns. They ensure the alignment of the result achieved with the expected one.
So, performance management system helps business get the helicopter view on company's processes and people competencies, behaviors and eventually - company's performance overall. That's why PMS is not only core function of HRÂ but it also a key for business growth.
Check out a tool Peoplelogic that allows you to set and manage your performance management process effectively.
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