What is Performance Management System?

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. That’s why a mature HR system is unthinkable without performance management. 

According to Willis Towers, 98% of businesses believe performance management is important, but only 64% say they have an effective approach to it. Let’s 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, customers’ and employees’ loyalty, social contribution and sustainable development, a balance between profit and purpose.‍

The Performance Management System (PMS)  is the process of planning and appraisal/monitoring of the performance against established criteria. It is aimed at increasing the company’s efficiency in line with its strategy, mission, and vision.

The PMS involves two major processes:

• Activity/performance planning—defining goals and other performance criteria based on the vision, mission, and strategy.
• Performance appraisal—actual 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 company’s efficiency is the ‘sum total’ of all company employees’ 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 bank’s strategic objectives to the level of annual operational objectives and individual goals of department directors, and then to the level of each employee’s goals. At that, strategic objectives were in line with the bank’s five-year strategic plan reflecting the strategic idea of ​​the entire organization (the NBU’s Vision, Mission, and Core Values). Every goal had an indicator to measure its achievement: for strategic objectives—strategic metrics; for operational objectives and employees’ individual goals—Key Performance Indicators (KPIs). An employee’s performance ‘consisted’ of the behavior (competencies based on the bank’s 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 employee’s performance and its effect on the overall bank’s performance.

At the organizational level, the Balanced Scorecard (BSC) model enables us to look at any company from four perspectives:

1. Customers
2. Processes
3. Finances
4. People

Some BSC versions add one more important dimension—Environment (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 model’s 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 KPIs—indicators of the effectiveness of interaction with the customer/customers’ needs satisfaction
• Financial KPIs—financial indicators of the company’s performance, profitability, etc.
• Process-related KPIs—indicators of the effectiveness of the company’s internal  processes 
• HR KPIs—indicators of the company’s human capital efficiency 

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 company’s 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 company’s 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 company’s 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 ‘more efficient’ 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 ‘behaviors’. 6 to 7 years ago, they began to use the term ‘values’ or rather the ‘values-based behavior’. 

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) come into active use in personnel management.

Goal—description/image of the expected/target result of an activity/a process

KPIs—indicators of achieving the target result/effectiveness of a particular activity/process/project

OKRs—indicators 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 HR but it also a key for business growth.

Check out a tool Plai that allows you to set and manage your performance management process effectively.