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Most managers know performance management is important, not only for improving how employees perform and for aligning their performance with the company's goals, but also because the effectiveness of an organization's people management programs — including compensation, development and succession — depends on how well it is done. Yet making performance management work is an ongoing challenge for many organizations. Some even seem to wonder if there is such a thing as effective performance management.
To help with this challenge, Sibson Consulting and WorldatWork conducted the 2007 State of Performance Management Study*. More than half of the respondents — primarily senior-level HR professionals — said they view their organization's performance management as "effective." While this revelation may confound many who work for organizations that are constantly wrestling with performance management problems, an analysis of the results reveals some very helpful insights into how to develop and maintain effective performance management.
Moreover, when Sibson examined the total return to shareholders over a three-year period (2003-2005) of publicly traded companies that participated in the State of Performance Management Study, it found that those that do a better job with performance management tend to perform better than those that are less effective. Specifically, 64 percent of the top-performing companies have performance management systems that are rated as effective compared with only 38 percent of the bottom-performing companies.
The State of Performance Management Study and Sibson's experience suggest that effective performance management is achieved through a balanced focus on leadership support, program design and execution by managers (see Figure 1 below). There are steps to take within each area that can significantly improve the effectiveness of performance management.
Leadership Support
Performance management can help drive company results, but it requires a commitment from leadership. Even a very ordinary system can work well if it has strong leadership support. More organizations with highly rated systems report having senior management support and a line champion than do those with less effective performance management.
Leaders in the top-performing companies:
- Set the expectation that performance management will be done and performance ratings will be differentiated,
- Audit to make sure that performance management is tied to the overall performance of the organization,
- Act as a role model for effective performance management, and
- Connect performance management to business goals and people decisions.
The most effective organizations are those with champions at the line leadership level. When line leaders champion the system, a larger percentage of managers complete assessments thoroughly and on time and give regular performance feedback, creating a system that is more valuable to the employees. These organizations tend to differentiate more appropriately between performance ratings and resulting compensation actions. In addition, the connection between performance management and achievement of strategic objectives is clear.
Line leader champions also create significantly greater goal alignment at all levels of the organization than when performance management is led by a staff leader in HR (see Graph 1 below). In addition, more respondents at organizations with line champions report that employees "trust the process."
Some leaders just "get it" and are effective champions of performance management. Others need help. Organizations can take the following steps to educate their leaders in this area:
- Clarify how performance management fits in the overall business management process, especially relative to budget goal setting and accountability,
- Help leaders set the expectations of sound performance management, goal alignment, differentiated ratings and support for employee development, and
- Help leaders manage the performance of their own direct reports. If they do this well, the results are likely to cascade to others in the organization.
Program Design
Although some organizations put too much effort into tweaking the design of their performance management approach and not enough into leadership or execution, there are aspects of program design that are important. Organizations with effective performance management report that their systems have a clear connection between compensation and rewards. Because those organizations base their compensation actions on performance management ratings, employees take the system seriously.
Respondents in organizations with effective performance management report better linkage between departmental and corporate goals than do those in organizations with poorly rated systems. To be effective, a system must be simple and easily accessible. In addition, employees need to see performance management as a year-round process.
While some of the standard "fixes" to performance management programs — such as changing the number of ratings or refining the appraisal form — do not appear to make a significant difference, other steps are more effective. These include:
- Increasing objectivity with defined accountabilities, behavioral competencies and quantifiable metrics that get employees focused on the right things,
- Making the tools convenient to access and easy to use, and
- Picking a rating scale and sticking with it.
Execution by Managers
Although it is sometimes said that managerial fortitude is the weak link in performance management, some managers have more "guts" than others. They coach and give feedback on a more regular basis and more regularly complete assessments thoroughly and on time. Companies whose managers do this are more likely to perform better than companies whose managers do not (see Graph 2 below).
One technique that is helpful for improving the quality of execution is to increase the visibility of performance ratings, messages and actions through performance calibration across managers or through audits that publish distributions of ratings for each organizational unit. This makes it less likely that managers will "game" the system or rate everyone high or in the middle. When managers know that their ratings will be visible to other managers, they tend to do a better job getting their assessments done and are more objective in their assessments. Additionally, many organizations have found that skill training for managers and employees on how to have effective performance conversations can help improve the quality of execution.
The respondents also believe that effective performance management helps their organizations achieve their strategic objectives (see Graph 3 below).
Although a solid connection between individual goals and corporate goals also surfaced as a differentiator, it is not very strong in most organizations, indicating that this is an area in need of improvement.
Conclusion: Focus on the Elements That Make a Difference
In sum, an organization needs to make sure that the design of its performance management system is sound. It must execute the program carefully, align organizational and individual goals and calibrate or audit ratings across managers. The organization should engage its leaders as champions of the process and encourage them to drive a culture of open feedback and thoughtful reviews. Finally, it must be sure that its managers have the training and the "guts" to make performance management work. In the end, performance management needs to be the main way that the organization manages individual performance, not "just something HR requires."
* In early 2007, a sample of WorldatWork members were invited to participate in a confidential online survey to gather information about performance management practices and outcomes. More than 550 individuals, primarily senior-level HR professionals, responded. The demographic profile of the respondents was similar to that of the WorldatWork membership. The organizations represented in the study ranged in size from fewer than 100 to more than 100,000 employees. The following industries were represented: finance and insurance, health care, higher education, manufacturing, professional services, public sector and utilities.
About the authors:
Jim Kochanski is a Senior Vice President in the Raleigh office of Sibson Consulting. He specializes in developing proven approaches for upgrading the level of talent in organizations, improving performance and reward systems and managing large-scale organizational change. He can be reached at 919.233.6656 or jkochanski@sibson.com
Elyse Lyons is a Consultant in the Raleigh office of Sibson Consulting. She specializes in compensation and rewards and talent management. She can be reached at 919.233.6653 or elyons@sibson.com
Wayne Kriemelmeyer is a Senior Consultant in the Chicago office of Sibson Consulting. He specializes in compensation plan design, leadership development, competency and HR system development, change management, employee survey design and analysis and culture change. He can be reached at 312.456.8378 or wkriemelmeyer@sibson.com