Performance Management System: Definition, Goals & Structure

1. What is a Performance Management System?
2. What goals does a performance management system pursue?
3. What requirements are there for the performance management system?
4. How is a performance management system implemented?
5. When is a Performance Management System useful?
6. What does a performance management system look like?
7. Best Practices for Performance Management
8. Example of good performance management systems
9. Which performance management system tools are there?
10. Why is performance management so important

The performance management system is a tool that visualizes the performance of individual employees. Objective data is extremely important for performance management and serves to answer fundamental questions: How effectively does the company work? Are employees delivering the desired performance? How can productivity be increased?

Especially when it comes to performance development, a good performance management system can be worth its weight in gold: Based on the evaluated data, the performance delivered can be assessed impartially. This performance data then forms the basis for feedback, further training and other measures to increase productivity.

In this article, our guest author Thomas Kohler explains to you

• what a performance management system is
• how it is structured and
• why it is important for companies

What is a Performance Management System?

The performance management system serves to monitor performance within a company. The performance of employees is measured and evaluated. The system makes a comparison between the desired and actual performance and the company's goals. The assessment is not only for the purpose of recording performance data for the company; it also gives employees a chance to keep an eye on their own performance.

While performance data in the past was often still collected in paper form, today there are naturally fully digitized solutions. A digital personnel file is already the standard in many companies, so it makes sense to link the personnel file with the performance.

What goals does a performance management system pursue?

A performance management system enables management and employees to measure & improve the performance and behavior of teams. It is particularly important to create awareness about strengths and weaknesses and to reflect on which potential developments to work on and which strengths should be further developed.

What requirements are there for the performance management system?

In the first step, there must be the possibility to map an organizational logic in order to be able to map different feedback perspectives process technically, such as a manager, peer, team review, the possibility for self-reflection & external feedback such as customers. In addition, creating and designing questionnaires and reporting are among the core functions of a performance management system.

How is a performance management system implemented?

Before a performance management system is implemented, there should be an open feedback culture as a basis. It is also important to have clear company, departmental goals and values ​​on which you can base your feedback & implementation.

The implementation of a performance management system is ideally derived from the goals and values ​​of a company. The management & employees should be trained, usually by HR business partners, to give constructive feedback and structure, reflect and implement received feedback. More advanced organizations can link the performance management system with the salary management system.

When is a Performance Management System useful?

A performance management system primarily serves to evaluate performance. Based on the evaluated data, it is possible to transparently display the productivity of all employees. KPIs and other benchmarks are a common model to define the performance of the professionals and make success measurable.

The collected performance data is not only used to assess current performance, but can also be used as a blueprint for the future. For example, processes can be optimized and thus the output can be increased based on the insights gained. The feedback in turn can be passed on directly to the employees.

Therefore, a performance management system makes sense in (almost) all companies. Whether crafts, industry or tech startups: Measuring your own performance is a must in order to get an overview of your own efficiency.

What types of performance management systems are there?

The way performance management systems work has changed massively in recent years. Whereas in the past performance reports were created and archived in paper form, today digital solutions have clearly taken over. Key performance indicators (KPIs) can be used to accurately capture the performance achieved. A combination of different factors, such as productivity (which can be calculated with the labor productivity formula), or working hours, provides a clear picture of the performance of employees.

While many companies still rely on Excel sheets for performance recording, today there are many specialized programs for recording and evaluating performance. In addition to software, there are also cloud and SaaS solutions that enable performance management. An overview of some of the best performance management tools can be found further down in the text.

Automation is just one of the aspects that a good performance management tool should offer. Many HR trends 2022 suggest that processes will become even more automatic in the future than before. Especially e-learning is more relevant than ever in times of remote or hybrid work. The opportunity to continue training professionals almost anywhere and anytime should not be underestimated. Many performance management systems offer the opportunity to train employees - based on the performance data collected through the system.

What does a performance management system look like?

Now that we have found out what a performance management system actually is, we move on to practice: How does a performance management system work? Regardless of whether it is a software or cloud solution, the process usually remains the same. The performance management process consists of several steps: goal setting, performance evaluation and incentive system. We will show you these three points in more detail.

1. Goal setting

The goal setting is used to record the results requested by the employees in relation to the company goals. In this step, it is precisely formulated what is expected of the individual employees. You can further divide these into behavior-related, task-related and development-related goal setting.

• Behavior-related goal setting: How do employees behave in stressful situations? Do you want more commitment or more leadership from the employees? This goal setting focuses on the behavior of employees in certain situations.
• Task-related goal setting: Each position comes with its own job profile. Therefore, it should always be checked whether the employees achieve the defined goals.
• Development-related goal setting: What personal development do you want to see in employees? Stagnation is a risk factor for any business, so development is always desirable - also for employees. This focuses on both the value that the professional brings to the company and the personal development of the employees.

2. Performance evaluation

The original purpose of a performance management system is performance evaluation. To make performance indicators such as productivity or efficiency measurable, the services provided are analyzed. Various methods are available for measuring the performance of employees.

• Downward assessment : Managers usually experience the working methods of their employees first hand. Therefore, it makes sense that they evaluate the performance.
• Horizontal evaluation : In the horizontal evaluation, performance is evaluated by colleagues at the same hierarchy level. Especially in collaborative team projects, this kind of evaluation makes sense.
• External evaluation: For service providers, customers are often the best gauge to assess their own performance. Customer reviews provide a good picture of the performance delivered. Here, factors such as delivery time, communication or quality of work can be evaluated.
• 360-degree evaluation: This form of evaluation includes all of the above types of evaluation. Colleagues, superiors and even customers can be consulted to be able to evaluate performance. This results in a performance picture that covers all possible angles and perspectives.
• Self-assessment: In this case, employees evaluate themselves. Since many professionals cannot (understandably) objectively assess their own performance, self-assessment should never be the only basis for a performance analysis. Instead, it should be made to enable the employees to compare their own perceived performance with the evaluations of other persons.

3. Feedback / Incentive system

As a company, you can resort to various measures to increase the productivity of employees. The feedback is an important tool to show employees their own mistakes. As a supervisor, you can quickly intervene if a team member is not delivering the desired performance. Performance management systems rely heavily on feedback, so this point should not be overlooked.

Incentive systems are optional and serve to motivate employees. By promising incentives (e.g. bonuses, profit sharing or additional wages) for a performance delivered, you arouse the interest of the personnel. Even a simple recognition or praise can be enough motivation for many professionals. It is important that the employees feel appreciated and that success is recognized as such. A well-designed incentive system can undoubtedly lead to employees working significantly more motivated and hence productivity increasing.

Best Practices for Performance Management

We have now worked on the “why” of performance management. However, the “how” is just as important - after all, the aim is to optimize performance. So that you can use the performance management system to the best of your ability, we give you a few tips with which you can effectively use performance evaluation.

• Consistency: Performances should be collected and evaluated over a long-term period. This way, you can better understand the development of employees and find out whether the productivity-enhancing measures are taking effect.
• Constructive feedback: Nobody likes to be put down - therefore feedback should always be an open dialogue. The employees should have the feeling that feedback rounds have a goal: to improve performance. Encouragement and recognition for performance already achieved are just as important as detailing the points of criticism.
• Involvement of employees: This point ties directly to the last one. A conversation with employees often brings new insights to light. Are there maybe reasons for the suboptimal performance? Do the employees themselves see room for development? A clarifying conversation can help to identify the causes of deviating performance - and to find ways to counteract.

Example of good performance management systems

The process of a performance management is based on the original goal setting, the performance provided and the result achieved. Therefore we want to illustrate with a performance management system example how a performance evaluation can look like:

A professional is involved in a project. The end result meets the expectations set before, but the professional missed two internal deadlines. In this case, the result is satisfactory, but the working method does not match the internally agreed goals.

The professionals' superiors then create a performance profile (downward assessment). Not only is the end result assessed, but the working methods and efficiency are also evaluated. There are deductions due to the missed deadlines.

After the performance has been evaluated, the superiors seek direct conversation with the professional. A date for the feedback round is created via the performance management system and the professional is directly informed about it.

This conversation is about showing the professional what was suboptimal - and what should be done better in the future. Constructive feedback is an excellent tool to steer the professional in the right direction, and to be able to design the work more efficiently in the future. The performance data collected from the performance management system can be used to highlight areas where there is room for improvement.

This example shows what performance management can look like in practice. Thanks to the suitable performance management tool, all the necessary functions are available at any time: Performance data, performance comparison and feedback. A date is also made directly via the tool, which serves as a feedback round.

Which performance management system tools are there?

The market today offers a wide range of solutions for recording, processing and visualizing performance reports. These performance management system tools can be used, for example, to create databases in which all employees are listed, including key figures and actual performance provided. While there are specialized tools for managing performance management, many HR software also now offer functions for performance evaluation.

We would like to introduce you to a few performance management systems that convinced in the OMR Reviews evaluation.

• With Kenjo personal administration can practically be combined with performance management. The categories 'motivated employees' and 'simple administration' include many features that cover (almost) all areas of HR management. This also includes the performance review used for performance assessment.
• Leapsome is a software that includes several useful features: Onboardings, meetings and performance recording are just a few of the features that Leapsome offers. Feedback can be given directly to the employees and your own goal setting can be implemented.
• If employee talks and feedback rounds should be in the foreground, easyreview offers an excellent solution. The tool focuses on digital personnel development for small HR teams and comes with functions for collecting, evaluating and presenting performance data.

In addition, there are many other performance management systems and hybrid solutions that combine HR and performance management.

Why is performance management so important

The performance assessment is a fundamental part for achieving the company goals. That's why performance management is absolutely essential for HR, superiors and the overarching management. With a good performance management system, you can analyze and illustrate the performance of employees. Managers thus get an overview of performance, objectives and success.

It is important that the performance management system combines useful functions with easy operation. Because even the best HR tool is not effective if the handling is too complicated. At OMR Reviews you will find numerous reports on performance management systems, HR software and more. With us you will find out which solution fits you and your business.