What Is Performance Management? A Guide to Implementation

For decades, performance management went like this: Once a year, “good performers” were rewarded, and “underperformers” were penalized or let go. 

Modern performance management is far more empowering and agile than its predecessor. With a systematic focus on goal setting, growth, and recognition, it ensures that employees are encouraged — and not ordered — to perform well. Below, we’ll define performance management and discuss the elements needed to make it work at your organization.

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What is performance management?

Performance management is a strategic HR function aimed at driving organizational success. It involves designing structures, systems, and cyclical processes to help employees thrive. This includes nurturing talent, aligning individual and organizational goals, and recognizing success. When employees are happy and perform better, the company succeeds, too. 

Importance of Performance Management

Effective performance management promotes an engaged workforce, better manager-employee relations, and a healthy feedback culture. These improvements directly impact the bottom line.

In fact, 2024 research from McKinsey on performance shows that companies that home in on their people’s performance are 4.2 times likelier to outperform their peers and average a 30% higher revenue growth.

On the flip side, a flawed performance measurement and management system can change the behavior of employees for the worse, according to a literature review in the Proceedings of the 24th European Conference on Knowledge Management.

Key Components of Effective Performance Management

The Ability, Motivation, and Opportunity (AMO) model posits that an employee’s performance is a reflection of their ability, motivation, and access to the opportunities needed to do their best work. 

These three factors can be met with a continuous, data-driven, and people-centered performance management system (PMS) that cycles goal setting, continuous feedback, performance reviews, employee development, and recognition and rewards. 

Goal Setting

It’s easier to motivate employees to do well when they can appreciate how their work fits into the organization’s larger strategic objectives. Goal setting clarifies this relationship and provides an actionable, objective, and transparent framework within which to measure their performance.

An effective goal is specific, measurable, achievable, relevant, and time-bound (SMART). 

Objectives and key results (OKRs) also popular: an objective sets the target and timeframe, while key results are the measurable outcomes that lead to meeting the objectives. 

Continuous Feedback

Performance reviews evaluate how well an employee measures up to predetermined metrics within a given time period, but continuous feedback is given more regularly. With a continuous feedback model, managers and employees share feedback in close to real time as accomplishments or missteps occur.

As today’s business environment changes at a dizzying rate, so do organizational objectives, targets, and project timelines. Timely feedback allows managers to respond to employee performance and progress in the moment, grounding them in their goals while also helping employees develop their competencies.

Constructive feedback can be verbal or written and shared privately or publicly. Lattice makes it easy to share and request feedback over several platforms, such as Slack or Microsoft Teams. 

When the situation warrants a longer face-to-face check-in, managers can organize one-on-ones to provide personalized feedback.

Performance Reviews

A performance review is a formal assessment in which a manager evaluates an employee's performance over a particular time period. Together, they discuss their goals, needs, and areas for improvement. Compensation and promotion decisions may also be part of the discussion.

Types of Performance Reviews

Performance reviews can vary in frequency and format. According to a 2021 study by Lattice, direct reports’ engagement levels are strongly correlated to the frequency of their performance reviews. The study found that quarterly reviews yield higher engagement scores than semi-annual reviews, which lead to higher scores than annual reviews do.

Here is an overview of different types of reviews and their uses.

• ‍Traditional Review: The manager measures their direct report’s performance by comparing it to past assessments. Best for gaining an objective picture of the employee’s growth over time.

• Peer Review: Employees evaluate the performance, skills, and contributions of their colleagues. Best for identifying performance indicators that managers might miss, such as teamwork, problem-solving, and informal leadership.

• 360-Degree Review: Stakeholders — including the employee's peers, subordinates, and supervisors — provide anonymous feedback. Best for developing a well-rounded view of an employee's performance and identifying areas for holistic growth.

• Self-Assessment: Employees reflect upon and evaluate their own performance. Best for complementing other review methods; promoting employee self-awareness and development.

Employee Development 

Employee development is about providing the coaching, mentorship, upskilling, and other opportunities individual employees need to overcome their weaknesses and build upon their strengths.

Some ways you can do this are through:

• Financial support: Subsidize massive open online courses (MOOCs) or part-time degrees on sites like Coursera or LinkedIn Learning.
• Increasing responsibilities: Gradually add responsibilities to high-performing employees who show potential in handling weightier initiatives.
• Internal mobility: Offer job rotation opportunities to help reports build new skills and assess their interest in new roles.

As employees grow in their abilities and experience, they make better candidates for leadership positions and help raise the organization’s overall standard of performance. 

Unfortunately, it is common to lose sight of this in the rush of time-sensitive priorities. Lattice simplifies employee development by providing managers with easy-to-use conversation guides and templates for short-term and long-term career plans.

Recognition and Rewards

A study by Workhuman and Gallup found that recognition is one of the most affordable and effective ways to improve employee wellbeing, ultimately leading to better workplace performance.

Apart from bonuses and pay hikes, you can reward performance improvement with:

• Office Perks: Access to better office equipment, reserved parking spots, or prime office locations.
• Public Recognition: Shoutouts on company social media channels or internal networks.
• Team Celebrations: Team lunches, happy hours, or office parties for achieving team goals.
• Paid Time Off: Additional vacation days or personal days as a reward for exceptional performance.

Top Benefits of Performance Management

When employees perform well, it’s easy to see how the bottom line benefits. But there’s more in store for everyone.

Benefits for an Organization

• Improved strategic alignment: Collaborative goal setting allows employees to spend time and energy on things that matter to them, benefiting the organization.
• Enhanced decision-making: Data from performance management software allows human resources teams to make agile, evidence-based decisions.
• Increased productivity: Good performance management that helps employees grow through professional development makes for ever-improving output.
• Increased employee engagement: Continuous feedback is closely correlated with employee engagement. Gallup research on feedback shows that 80% of employees who report receiving meaningful feedback in the past week are fully engaged. 
• Cost savings: Well-designed performance management tools optimize workflows and automate manual tasks, saving time and money. 
• Compliance and risk management: Transparent, well-documented standards and processes ensure legal compliance, avoiding potential disputes.

Benefits for Employees

• Clear career progression: In a 2023 survey by Lattice and YouGov, only 15% of surveyed UK employees said they had regular career development conversations at work. That leaves a lot of room for improvement, considering a 2023 survey by Gallagher found that sound career development pathways are the top driver of employee retention. 
• Skill development: A healthy feedback culture and opportunities for growth enable employees to develop their skills.
• Open communication: An effective performance management strategy facilitates transparency and trust between employees and managers.
• Recognition and rewards: When employees feel that their hard work and achievements are valued, it boosts their morale and motivation. And, according to research published in Humanities and Social Sciences Communications, work motivation positively influences job performance.
• Work-life balance: According to Microsoft’s Work Trend Index, 53% of managers report being burned out at work. AI-powered performance management systems relieve managers of draining busywork, opening up their schedules and reducing overwhelm.

Challenges With Implementing Performance Management Systems

As a provider of HR tech software to over 5,000 companies, we’ve observed some recurring pitfalls for companies implementing a PMS.

Common Pitfalls

• Resistance to change: If employees have had bad experiences with performance management, they may be critical and pessimistic or simply ignore the new ways of working.
• Siloed target setting: Some companies tend to hold only a few individuals or teams accountable for hitting targets, although organizational success is an interdependent effort. This siloed approach leads to a stressful and rivalrous dynamic, according to a 2022 Harvard Business Review article. When some teams achieve their goals at the expense of others, they may cancel out each other’s efforts, compromising the organization’s overall performance.

• Unclear goals: In a 2023 survey by Lattice and YouGov, just 22% of surveyed UK employees said their employer gave them clear performance expectations and metrics for their role. Without transparency, performance evaluations become muddled and inconsistent, susceptible to biases and irrational decision-making. 

Solutions and Best Practices

Systemic overhauls can be tough on people. To ease your employees’ transition to a new performance management program, take a strategic, data-driven approach that prioritizes their user experience. Consider the following best practice tips.

Bear the context in mind.

Organizational psychologist Dieter Veldsman, PhD, chief HR scientist at the Academy to Innovate HR (AIHR), observed that leading companies acknowledge that a one-size-fits-all approach is not always the best. 

“They don't jump onto the bandwagon of every new fad, but rather ask the question, ‘How will performance management in our context drive the desired outcomes? What will work when we think about optimizing performance in our culture?’ They consider who their employees are, what type of work they do, and which performance approach will be best.”

Veldsman explained that performance management “can help clarify and set direction, but it has to be linked to a solid and sound business strategy process.” He underscored, “Performance management cannot compensate for a poor strategy.”

Centralize data access.

Mandy Kutschied, vice president of talent and culture at the fully remote IT consulting firm Exponent Partners, is a very busy one-person HR team. Using Lattice as a single source of truth helps her keep things organized.

Managers can quickly access data on employees’ biannual formal assessments, quarterly goals, and also their own notes from ongoing one-on-ones on the Lattice platform. “They don't have to be looking through Google documents and trying to remember where everything is,” Kutschied said. “It makes my job easier and scales my one-person team up.”

Let the data do the talking.

When pitching a performance management system, HR teams must justify their expenditures. Julia Fong Yip, senior vice president of talent management at baby furniture distributor Million Dollar Baby Co., accomplished this with Lattice’s benchmarking capabilities.

“Being able to present the comparison to other companies to leadership is much more impactful than just telling them how great we are doing,” Yip enthused. “I can show my CEO we have a 90% completion rate when 5,000 other customers are at 82%, so the data speaks for itself.” 

The Role of Technology in Performance Management

On average, HR leaders spend 19 hours a week on processes, admin, and paperwork, according to research published by Sage. As teams expand in size and cross geographical borders, managers have too much on their plate to be able to manage performance without HR tech. 

Automation and AI

AI can take on tasks such as analyzing performance data, suggesting potential individual development plans, and providing phrasing options for managers writing performance reviews.

Leveraging AI in those ways can help reduce the cognitive load on managers and people leaders, giving them the bandwidth to focus on the more human-centered part of HR that involves connecting with people at a deeper level.

Data-Driven Decision-Making

People are complex, the world is changing at a frenetic pace, and every organization is different. In order to make fair and sharp decisions about compensation and promotion, teams need access to empirical evidence from their own company, and ever-updating performance management systems like Lattice can provide it.

But data should always be used in context, cautioned Veldsman. “It cannot be all about the numbers, but rather about how the numbers spotlight trends, help us identify priorities, and how to move things forward.” 

Lattice's Approach to Performance Management

Performance management lives in a network of HR processes that influence each other, like employee development, engagement, goals, and compensation. So the Lattice People Management platform integrates them all on one dashboard which managers and employees can quickly scan to see what’s on their plate for the day.

Every organization measures performance management differently, so Lattice is designed to be configurable to the unique needs of each.

Overview: Lattice Performance Management Features

Lattice brings all the core components of performance management from goal setting to evaluations to a single platform, including:

• Individual Development Plans
• Performance Reviews
• Feedback
• 1:1s 
• OKRs & Goals

Integrations With Other HR Tools

Lattice integrates smoothly with 22 other platforms and tools, including Slack, Outlook, and Jira.

For the public relations management platform Muck Rack, the Slack integration was a big plus. Because Lattice automatically pushes updates to the company’s Slack whenever a user receives praise, updates a public goal, or is prompted to complete a stage in a review, keeping track of performance is a cakewalk. 

How to Implement a Performance Management System

Here is a detailed guide on the practical steps involved, including the necessary training and support, as well as how to measure success.

Steps to Implementation

1. Evaluate the context. Assess the specific needs, goals, and culture of your organization, and identify areas you want to address.
2. Define clear objectives. Establish objectives and develop a clear framework for how performance will be measured.
3. Pick your tech stack. Research your options and choose a user-friendly, well-designed, scalable, and configurable PMS.
4. Secure leadership approval. Keep an ROI estimate ready and prepare in advance for objections that may arise.
5. Develop an implementation plan. Outline the steps, milestones, deliverables, timelines, responsibilities, and resources required for the implementation. 
6. Provide comprehensive training. Train all employees, managers, and HR personnel to use the system and give them access to a resource for troubleshooting.
7. Integrate existing HR tools. Ensure the new performance management system seamlessly integrates with existing HR tools and processes.
8. Launch the system. Roll out the system in phases at a cadence everyone’s comfortable with, offering plenty of guidance throughout.
9. Gather feedback. Monitor the performance management system’s efficacy and proactively identify any issues or areas for improvement.
10. Optimize continuously. Make necessary adjustments to keep the system running smoothly.

Training and Support

Your employees will be more likely to welcome the change to a new PMS if they are given the opportunity to learn how to use it. Provide them with enough support so that they can fully maximize the performance management system’s capabilities, and maybe even enjoy using it. 

3 Tips for Creating an Effective Training and Support Plan

1. Be thorough: Comprehensively cover every feature of the PMS, why it's important, and how it benefits employees, so they appreciate the value of engaging with the platform.
2. Be consistent: Schedule regular training sessions during the initial rollout phase and offer refresher courses periodically to address any new updates or features.
3. Be helpful: Establish a dedicated support team and offer multiple channels for assistance, such as email, phone, and live chat.

Measuring Success

Here are three ways to use performance management software data to measure success:

1. Clarify understanding: Survey a random sample of employees about their understanding of the organization’s strategy, goals, KPIs, and their role in the bigger picture. Crosscheck this with senior management to unearth disparities in expectations. 
2. Track adoption: With Lattice’s robust people analytics dashboards, you can look up employee participation in performance management processes like one-on-one conversations, performance reviews, and feedback.
3. Monitor goal completion: Ideally, a performance management system should translate into tangible outcomes. With Lattice OKRs & Goals, managers and employees can enter their goals, track progress milestones, and share updates. A quick look can keep you aligned.

Watch your performance soar with Lattice.

When performance management processes succeed, everyone succeeds. Get everyone on the same page with Lattice and open the channels for transparency, communication, and trust across teams and hierarchies.

Want to see Lattice Performance in action? Join Lattice’s upcoming webinar for a 30-minute walkthrough.