How to measure employee performance? A guide to performance management

How to measure employee performance?

A performance management process is the framework and activities that help an employee achieve their objectives. At its most basic level, it’s about getting the best out of people, helping employees to be effective and productive in driving the organisation in the direction it needs to go. Some of the components of a performance management process include setting objectives, monitoring progress against these and providing the support, feedback, and training necessary to ensure an employee can attain these goals.

Good performance management processes combine the employer’s need to ensure their employees are as productive as possible with the employee’s own life goals, motivations and aspirations. A system that encourages a win-win for employees and the organisation can be extraordinarily effective and that is exactly what Appraisd is designed to do.

Why is a performance management important?

An effective performance management process ensures all employees know what they are working towards, have the skills to make that happen and are aligned, working together to help the business get to where it needs to go. It is the tool that ensures an organisation’s most valuable asset is working to its full potential.

Think of it like the cox in a rowing boat. They provide the instructions to each oarsman, letting them know exactly what they need to do. They also provide the beat; the rhythm that ensures the whole team is working in harmony, following shared goals. Of course, you can row a boat without a cox, but the result will be chaotic, ragged, and ineffective. Vital energy will be wasted, and it will be much harder to compete with other, more organised crews. 

Rowers are happy to work to the same beat because they share common goals. And even though it looks repetitive with no room for individualism, the truth is quite different: every pair in a rowing eight has subtly different strengths; some seats require particular finesse and a deft touch of the oar. The middle, also known as the engine room, provides consistent power but with a lower impact on the direction of the boat. So, while everyone has their own goals, to be successful, these need to be aligned with the overall goals of the crew, just as employee objectives should contribute to strategic business objectives.

How does a performance management process work?

Determining how productive an employee is, is far from a new concept. Some historians believe the practice goes right back to the third century when the Wei Dynasty emperors in China rated the performance of their family members. From these early beginnings, performance management has evolved. It has developed from a top-down approach, where managers just looked at whether employees were achieving set targets to something much more collaborative where goals are mutually agreed upon, and reviewed regularly and progress is tracked.

Today a performance management process is about creating goals that work for employees and drive a business forward. These goals must be clearly communicated to employees so they know what is expected of them and what they need to do to develop themselves, as well as add value to the business as a whole.

How have performance management processes changed?

A decade ago, performance management largely consisted of an annual appraisal. This was the chance once a year for employers to go over an employee’s performance, reviewing how they had performed against their objectives. The chances are they would have been rated on how well they had done, and this rating would have been used to inform their annual pay rise or, for some, their bonus as well. Objectives for the next year would have been set as part of this process and that would have been it for the next 365 days.

This began to change in the early 2010s as companies began to see this approach wasn’t effective or efficient for an increasingly digitised workplace, where employees were used to having information at their fingertips whenever they wanted it. Waiting a whole year to talk about objectives that may have become irrelevant or outdated due to changing external and internal factors seemed archaic. Both employers and employees wanted something that was more agile, flexible, proactive, and inclusive. A new approach began to emerge – continuous performance management.

What is a continuous performance management process?

Put simply, this is about facilitating continuous dialogue between employees and their line managers around their objectives. This could be done in a variety of ways. Some organisations choose to do this through more regular reviews, for example, twice a year or quarterly. This allows employees to focus on a much shorter time frame, making their goals feel more immediate and relevant. Other employers will choose to do regular 1-2-1s or check-ins between line managers and their employees to discuss progress, offer feedback and plan development.

There is no right or wrong answer when it comes to how often you should hold reviews or check-ins, the important thing is finding the balance that works in your organisation. However, every successful approach requires an opportunity to:

• Review objectives and adjust as necessary depending on relevant circumstances
• Update progress
• Offer timely, relevant, and useful feedback on performance
• Make employees feel fully included in the process and have the ability to raise issues if they feel the process is going off track.

What are the benefits of an effective performance management process?

An effective performance management process is the glue that holds a business together, helping employees to perform to their full potential. Gallup's research found that employees whose managers excel at performance management are more engaged than employees whose managers struggle with it. 

This employee engagement is crucial. Employees that feel a connection with their workplace are happier, healthier, and more loyal employees. Further research from Gallup discovered engaged teams were 17% more productive than those that lack this connection.

However, this is not the only benefit. Effective performance management can positively impact other key metrics in an organisation, helping to create an inclusive, vibrant, and successful culture; a workplace where employees actively want to work. Here are some of the additional benefits of getting performance management right:

Reduced employee turnover

For nine years in a row, the Employee Retention Report has reported the number one reason why employees leave their jobs is due to a lack of career development. With effective performance management, which includes frequent conversations on development and career ambitions, employees can see clearly how they can get to where they want to go, encouraging them to stay with their current employer.

Reduced absenteeism

According to the Health and Safety Executive, more than half of all workplace sickness absences are caused by stress, depression, or anxiety. Research has shown that unrealistic management expectations, overwork and looming deadlines are the main causes of stress for employees. Effective performance management provides employees with a platform to raise issues around overwork, deadlines, or expectations, allowing managers to act before the situation causes an employee to go off sick.

“Growsari is in full expansion mode, with plans to extend our reach to other parts of the Philippines. Our performance management process is a crucial part of ensuring this happens, as employees need to be aligned, focused and motivated if we are to succeed.” <div class="author">Andrzej Ogonowski, Co-Founder, Growsari</div>

What are the essential elements required in an effective performance management process?

Whatever performance management process an organisation decides to adopt, there are certain elements that must be included in order to create an effective, robust and collaborative process that works for managers, employees and the business as a whole.

Setting SMART objectives

SMART objectives are the bedrock upon which everything else in the performance management process is built. Getting this right is key to ensuring employees have targets that are realistic enough for them to achieve but also challenging enough to allow for growth. These should always be set collaboratively; it’s vital that line managers and employees do this together so that both are completely aware of what is required and happy that the objectives provide sufficient direction and motivation. 

These should also align with the overall objectives of the organisation to ensure each employee contributes to the success of the business.

The more employees are involved in the process and have the authority to put forward their views, the more engaged they will be in achieving these goals.

There are a variety of approaches when it comes to objectives. Some businesses will favour setting personal objectives for each employee, while others will prefer shared objectives that go across teams or departments. Other companies use OKRs or objectives and key results. These were developed by tech companies in Silicon Valley, looking to promote greater creativity, encouraging employees to be as ambitious as possible. 

There is no right or wrong answer here. The important thing is to find the approach that works best for your organisation and your employees.

Regular performance reviews

Whatever cycle you choose, it’s important that everyone knows when the reviews are and complete them on time. These are a vital opportunities for the progression made against objectives to be discussed. If circumstances have changed and the objectives need to be adjusted, regular reviews provide that opportunity, ensuring everyone remains aligned and on track to contribute to the success of the business.

These regular reviews allow line managers and employees to build a stronger, more transparent relationship where both sides are clear about what is expected of them. These also provide an excellent opportunity to discuss other issues, such as any worries around health or outside responsibilities. These reviews can dovetail neatly with workplace wellbeing, acting as an early warning system for anything going wrong.

Timely, relevant, and useful feedback

Knowing what is working well and what could be improved is an essential part of employee development. Receiving feedback from across the business highlighting successes when they happen is of huge benefit to employees. It shows them that what they are doing is being valued and appreciated and ensures no useful information is lost or forgotten. 

Our recent research with employees and their attitude towards feedback revealed that only 9% would not want to work in an organisation that embraces a feedback culture. Feedback is especially important to younger employees who are starting out in their careers. They actively want to work in organisations that offer them timely, relevant, and useful feedback to help them develop and progress in their careers.

Personal development

An effective performance management process is all about giving employees the freedom, opportunity, and licence to manage their own development. Encouraging employees to think about what they need to grow as employees, consider what training would be useful and the ability to ask for it creates workers who are engaged with the business and feel energised and enthusiastic. It treats them like adults, empowering them to make decisions about their future.

This emphasis on personal development can also extend to goals outside of work, using the same process to help them achieve important milestones. This approach may not work for all organisations, but it can build even stronger bonds between employees and the organisation.

What insights can a performance management process provide to a business?

Data, which provides useful insights into employee performance, is invaluable to an organisation. It can highlight a whole range of information that senior leaders, managers and HR teams can act upon to improve the business. Performance management data is especially useful, providing indications on:

• Employee engagement – if employees are regularly updating their progress against their objectives and giving and requesting feedback, it is highly likely that they are engaged with what they are doing and are motivated and productive employees. 
• Effective management – if managers are completing their reviews on time and providing regular feedback to employees it shows that they are engaged with their team and involved in their development.
• Employee retention/succession planning – employees who are requesting feedback and setting personal development goals are those that have a clear vision for their future and a desire to improve. These are the employees an organisation should be looking to keep and help to thrive.
• Identifying training and development needs – if a number of employees are requesting training around a particular topic it could indicate a wider issue that exists across the organisation. By monitoring training requests, it is possible to spot these potential gaps and roll out wider training programmes, ensuring no one misses out.
• Workplace culture – if employees are regularly updating their progress against objectives, requesting and providing feedback and completing reviews on time it indicates that the organisation has an inclusive, supportive culture where employees have grasped the opportunity to share their views and ask how they can improve. If any employees or managers are failing to complete reviews, update objectives or feedback when those around them are, it could indicate there is a bigger problem. This could involve their role, their team, or their personal lives. This should be the trigger for those exploratory conversations to uncover what the problem is and try to rectify the situation before it turns toxic.
  

What is needed to make a performance management process effective?

An effective performance management process needs to be something that adapts and changes as the business and outside environment changes too. Just think about how much the world of work has changed over just the past 10 years, notwithstanding the current challenges presented by the Covid-19 pandemic. What employees want today has changed, as has what employers need to do to be successful. The last year has told us how difficult it is to predict the future, but it does tell us to be ready for anything and open to change. Making performance appraisals work in the modern workplace takes a flexible, agile and open mindset.

An effective performance management process must include:

• Buy-in from key stakeholders across the business. They must agree and support the approach you choose to take and be ready to lead by example.
• Collaboration with employees. They must feel the approach is there for their benefit and that their voice matters. Their suggestions for improvements should be encouraged to maintain their engagement.
• An emphasis on completing reviews on time. Everyone should be clear that this is not a tick box exercise and that reviews are important for development and growth, no one should be exempt from this.
• Training for managers and employees around areas like feedback to ensure everyone understands what is required of them and feels comfortable taking part in the process.
• Regular reviews to check that the approach is still fit for purpose. Investigate what is working well and what could be improved to ensure it is working as effectively as it possibly could.
• A user-friendly online tool which makes it as easy and simple for everyone to make performance management part of their routine, which can be accessed no matter where employees may be working.

How to build an effective performance management culture

Believe in what you are doing

Ask yourself why are you doing reviews in the first place? What is the motivation behind it? Is it because you think you should, because everyone does them? Is it to calculate bonuses and pay rises? Is it because you want to give your employees direction and focus? Whatever the reason, it needs to be more than a tick box exercise if it is to work, valued for it’s own sake rather than a means to an end.

It needs to be centred around your employees and what you can do in conjunction with them, to develop and nurture their talent, both for their own sake and that of the business. This process must have support from the top of your organisation and can’t be limited to your HR department. There must be a least one champion in the business who is willing to back what you are doing with words and with deeds.

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“We have come a long way with regards to performance management in the last few years”, says Marylin Peach, Head of People Ops at the UK’s leading casting resource, Spotlight. “The enthusiasm and support of our CEO has really helped to galvanise the senior leadership team and get them behind our vision of giving employees more control over their own development.

“Another important step was removing the link between pay and reviews. We also got rid of our scoring system, which we found to be very subjective and inconsistent across the business. Now our employees are much more relaxed in their reviews, knowing that they are there to help them reach their goals, not to pass judgement on them. The benefit for all is much more obvious.”

Trust your employees

The very first interaction between an employer and a new employee recruited to the organisation is based on an element of trust. When a candidate is hired, a decision has been made that they are the best person for the job. They have the skills and experience that fill the gap in the organisation. The trust is there that they can do what is required. Sadly, in some companies this trust quickly evaporates and employees are not given the license to control their own development. If employees are constrained, forced to follow rigid structures, told to follow, rather than encouraged to lead, it is not possible to create a culture that will foster growth and development.

“I joined the business in November last year and we’ve been on a massive journey over the last eleven months with our people”, says Jade Bessent, Human Resources Manager at SMD Ltd. “I conducted a review of the current process and employees felt the questions being asked were too generic and supportive, focusing on things like timekeeping, rather than what value they bring to the company. Now the questions are much more related to each individual and their role. We trusted employees to set their own objectives and KPIs and the results so far have been amazing. We’ve just completed our first found of reviews and the biggest difference was that employees were excited to complete them. They wanted to add in more detail and were putting in far more effort as they could clearly see them benefit of doing so.”

An online tool is great step forward, but it doesn’t solve everything

There are so many benefits to moving reviews online – it saves time, it keeps everything in one place, it makes them easy to update, it allows greater collaboration and visibility to name but a few. For organisations of any size, it is a vital component that is required if performance management is going to be effective. But, and this is a big but, it is not a silver bullet. It will not change things overnight. A system is only as effective as the people using it. If they don’t understand what they are doing, why they are doing it and don’t see the benefit then the best system in the world will not make the desired difference.

However, a system can help change behaviour. “The meeting rooms in the Spotlight offices have glass walls”, says Marylin. “When we introduced Appraisd, I started to notice a difference to how reviews were being conducted. Before, managers would sit opposite employees and oversee the conversation. Now, in reviews I see managers and employees sitting side by side, both looking at Appraisd on a laptop, having a much more vibrant, engaged conversations.”

Take everyone on the journey

This is not a solo voyage; everyone needs to come along for the ride. The key is starting a conversation with employees, listening to what they want, what matters to them, and what they want to get out of the process. Performance management needs to be something they can understand, identify with and get behind. If they can see the value and the benefits for them, the more enthusiastic and involved they will become. Once this process has begun, employees will start to take ownership, and it becomes ingrained in their thinking and working day.

“We spent a lot of time listening to our employees really carefully and it’s changed and shaped our approach to performance management. I really think the key to a successful approach starts with understanding what engages and motivates your employees. For most people this comes down to feeling valued for their efforts. We’ve seen a complete change in attitudes towards reviews, our employees are now so excited about them and I feel it is really shaping the culture of the business”<div  class="author">Jade Bessent, Human Resources Manager at SMD Ltd.</div>

Not once and done

Performance management is ongoing process that doesn’t have a final destination. It should always evolve reflecting the changing needs of the business environment and your employees. This year has shown the huge value of being agile, ready to adapt to events that happen in the outside world. It is so easy for plans or objectives to become irrelevant. An effective environment must embrace change, quickly react to any situation and be open to improvements.

These changes must be at a pace that works for everyone. Changing too much too quickly can be counterproductive. Completely overhauling a system and expecting employees to understand and engage with this overnight is simply unrealistic. Introducing alterations, a little bit at a time will ensure employees are given time to understand them, absorb what they mean and get to grips with the change.

How to calculate performance management ROI

‍Get the figures to demonstrate performance management ROI to senior leaders 

Any effective performance management system should enable the following three things in any organisation:

• Help employees to perform to their full potential
• Align employees to the goals of the organisation 
• Focus employees on their development and progression within the business

It is the role of any HR team to make sure their performance management system supports these key pillars and facilitates improvement in all these areas. In turn, these improvements will provide a boost to the bottom line. However, calculating just how much this amounts to is complex. Many factors will affect the engagement, motivation and ultimately the performance of any employee – management, leadership, support, training – to name but a few. Nevertheless, having an online performance management system that employees like using, that is simple to navigate and provides useful insights and reports will undoubtedly benefit any organisation.

How can HR teams deduce the performance management ROI on their system?

A return on investment (ROI) forecast is exactly that: a forecast. While it is possible to make good assumptions, true ROI can only be calculated in retrospect, and even then, it's not a controlled environment and many variables are involved that are beyond true measurement. Just as with marketing spend, performance management ROI cannot be attributed to one element or another with absolute certainty.

However, a performance management ROI forecast is still essential for evaluating whether to proceed with an investment with a system like Appraisd and it will help to set expectations with stakeholders internally. Senior leaders, especially the Chief Financial Officer or Finance Director, will want to know what this investment will mean for the business. Will spending this money lead to financial gains through improved productivity?

Even for those organisations who could not imagine having an online performance management system, it is still worth making the ROI calculation. It is an effective way of checking that your process is providing employees with the support and focus they need to ensure they work to their full potential.

For HR teams who are still making the business case for a dedicated performance management platform, our comprehensive Performance Management ROI Calculator can help strengthen your argument, giving you the figures to back up your proposal. 

In our calculator, we have focused on some key measurable figures: 

• Costs due to absenteeism
• Costs due to employee turnover/churn
• Revenue per employee increases due to productivity.

Try our FREE ROI calculator

Understand the impact of introducing a new system into the work environment

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Building the performance management ROI case for HR teams

What are the predicted returns?

From our experience of working with hundreds of clients over the past decade, we understand what the benefits are of having a relevant and tailored performance management process on a dedicated platform. We have deduced when using Appraisd to provide one-to-ones, performance reviews, feedback-giving and objectives-tracking, performance managers can expect the following improvements:

• More timely and relevant feedback is given to employees, increasing their engagement and helping to improve their performance and productivity as they understand their strengths and where to focus their efforts. As feedback becomes embedded in the performance management culture of the business, the value of the work employees produce increases every year.
• Employees attain a greater sense of purpose through more frequent one-to-ones or check-ins with their manager and greater clarity on their objectives. They feel more valued, more in control of their own development and are less likely to leave the company.
• Managers build up a stronger relationship with their direct reports, getting to know them better and understand what motivates them and what their ambitions are. Through this process they can more easily spot those who are likely to leave the company and, in some cases, avoid this happening and reduce the costs around employee turnover.
• By introducing a performance management process that is consistent across the organisation, with everyone following the same framework, it helps to increase inclusion and promote diversity within the business. Measuring employees against SMART objectives, reduces subjective assessments and enables more meritocratic promotions within the company.
• Employees who are measured against relevant objectives are more likely to be motivated and engaged with the organisation. This can help to increase the reputation of the employer brand (for example through more positive Glassdoor reviews or support an Investors in People applications) which can make it easier to attract the most talented candidates for new positions and fill those vacancies more quickly.
• With a clear overview of performance across the organisation, it can help senior managers to create succession plans. This means the business is less exposed if key employees leave the organisation as likely successors have already been identified within the business.

Time and money savings from moving performance management online

For organisations moving from paper-based processes to online performance management systems like Appraisd, we estimate reviews will be at least 25% quicker, with far less time needed to prepare for them and follow them up. For an organisation with 500 employees, who have reviews twice a year, this could save upwards of 1,000 hours. This is already a huge saving that can be included in any performance management ROI calculations. 

What are the costs?

The costs of implementing a new performance management system are:

• The licence fees
• The cost of time spent by employees conducting 1:1s, setting objectives, giving feedback and other performance activities.
• The cost of the time spent by the performance manager and the rest of the HR team in implementing it against the cost of managing the old paper-based or legacy online system.

Download our free Performance Management ROI Calculator to use it for yourself to discover how much you could save your organisation. There is also a worked example for a 100-person organisation illustrating the savings involved based on our own experience.