A performance management system consists of the processes used to identify, encourage, measure, evaluate, improve, and reward employee performance at work.

Employees’ job performance is an important issue for all employers. However, satisfactory performance does not happen automatically; however, it is more likely with a good performance management system.

Performance management system is the talent within the organization which involves creating an appropriate work environment where employees can perform to the best of their abilities in order to meet the organizational goals.

It is a broad set of activities aimed at improving employee performance. The fundamental goal of performance management system is to promote and improve employee effectiveness. It is a continuous process where managers and employees work together to plan, monitor and review an employee’s work objectives or goals and his or her overall contribution to the organization.


Learn about:- 1. Characteristics of an Effective Performance Management System 2. Purpose of Performance Management System 3. Key Concerns 4. Actions Required 5. Implementing 6. Process 7. Pre-Requisites 8. Challenges 9. Key to Success.

Performance Management System: Characteristics, Purpose, Implementation, Process, Challenges and Pre-Requisites

Performance Management System – Top 5 Characteristics

(a) Objectives should be clear – The objectives of the appraisal should be clear and specific. An effective performance system will always have specific appraisal attributes to match the employee’s job description.

(b) Data should be Valid and Reliable – An effective performance appraisal system provides data that is consistent, reliable and valid. It supplies data according to the objective that serves the purpose of performance appraisal and succession planning.

(c) Performance Criteria should be well defined – An effective performance appraisal has standard appraisal forms, rules and appraisal procedures. It will have well defined performance criteria and standards.


(d) Economical and Less Time Consuming – Effective performance appraisal systems are designed to be economical and less time consuming to bring maximum benefits.

(e) Should Initiate follow Up – A post appraisal talk should be arranged for employees to get feedback from their managers. It also helps the organisation to learn about the problems and difficulties the employees might be facing and discover suitable training methods.

Performance Management System – 5 Main Purpose

A performance management system consists of the processes used to identify, encourage, measure, evaluate, improve, and reward employee performance at work. Employees’ job performance is an important issue for all employers. However, satisfactory performance does not happen automatically; however, it is more likely with a good performance management system.

Appraisal serves a twofold purpose:


(1) To improve employees work performance by helping them realise and use their full potential in carrying out their firm, missions, and

(2) To provide information to employees and managers for use in making work related decisions.

More specifically, appraisals system serve the following purposes:

Purpose # 1. Feedback Mechanism:

Appraisal system provide feedback to employees therefore serving as vehicles for personal and career development. Performance appraisals must convey to employees how well they have performed on established goals. It’s also desirable to have these goals and performance measures mutually set between the employees and the supervisor. Without proper two-way feedback about an employee’s effort and its effect on performance, we run the risk of decreasing his or her motivation.

Purpose # 2. Development Concern:


Once the development needs of employees are identified, appraisals can help establish objectives for training programmes. It refers to those areas in which an employee has a deficiency or weakness, or an area simply could be better through effort to enhance performance. For example, suppose a college professor demonstrates extensive knowledge in his or her field and conveys this knowledge to students in an adequate way.

Although this individual’s performance may be satisfactory, his or her peers may indicate that some improvements could be made. In this case, then, development may include exposure to different teaching methods, such as – bringing into the classroom more experimental exercises, real world applications, internet applications, case analysis, and so forth.

Purpose # 3. Documentation Concern:

A performance evaluation system would be remiss if it did not concern itself with the legal aspects of employee performance. The job related measure must be performance supported when a Human Resource Management (HRM) decision affects current employees. For instance, suppose a supervisor has decided to terminate an employee.

Although the supervisor cites performance matters as the reason for the discharge, a review of this employee’s recent performance appraisals indicates that performance was evaluated as satisfactory for the past two review periods.


Accordingly, unless this employee’s performance significantly decreased (and assuming that proper methods to correct the performance deficiency were performed), personnel records do not support the supervisor’s decision. This critique by HRM is absolutely critical to ensure that employees are fairly treated and that the organisation is “protected”.

Additionally in cases like sexual harassment, there is a need for employees to keep copies of past performance appraisals. If retaliation such as – termination or poor job assignments occurs for refusing a supervisor’s advances, existing documentation can show that the personnel actions were inappropriate.

Because documentation issues are prevalent in today’s organisations, HRM must ensure that the evaluation systems used support the legal needs of the organisation.

Purpose # 4. Diagnoses of Organisational Problems:

As a result of proper specifications of performance levels, appraisals can help diagnose organisational problems. They do so by identifying training needs and the knowledge, abilities, skills, and other characteristics to consider in hiring, and they also provide a basis for distinguishing between effective and ineffective performers. Appraisals therefore represent the beginning of a process, rather than an end product.

Purpose # 5. Employment Decisions:


Appraisal system provide legal and formal organisational justification for employment decisions to promote outstanding performers; to weed out marginal or low performers; to train, transfer, or discipline others; to justify merit increases (or no increases); and as one basis for reducing the size of the workforce. In short, appraisals serve as a key input for administering a formal organisational reward and punishment system.

Performance Management System – Key Concerns

1. It is extremely result oriented and hence concerned with results, output in terms of knowledge gained and applied, skills learned and utilised and the desired level of output is produced or not etc. Having a result oriented performance management system is a very important aspect at the organisational level. When the process focuses on getting desired results and makes the employees work in a particular way fetches a huge amount of success for the organisation and at the same time it makes sure that the employees are motivated enough to work towards the desired results.

2. It is concerned with the measurement of performance and aligning it with the goals of the organisation for consistent growth. This is a very critical aspect of performance management. When the system measures the performance, it gives a clear idea to the management about how the employees are performing, where do, they stand as far as their performance is concerned and what needs to be done to bridge the gap between actual and standard level of performance.

The performance management system provides a scope for constant measurement of the performance and at the same time, aligns the performance of the employees to the organisational performance as a whole so that complete growth and development can be achieved.


3. It is concerned with setting the business objectives much in advance for the smooth conduct of operations. Having objectives set well in advance provides a clear picture to the employees as to what is expected out of them and what level of performance do they need to show.

By having the objectives set, performance measurement and then management becomes extremely easy and scientific, as management can any time go back and alter the objectives suiting the current requirements of the market, organisation, and individuals. This ensures smooth working and carrying out of the process in the organisation.

4. Always striving for continuous improvement and bringing about change in all the processes of the organisation for creating and developing the culture of performance. The main idea behind having a performance management system in the organisation is to change the way employees are performing at the moment. As it is very well known to all that change is the only constant and we all have to change with the change in order to sustain against competition.

And the employees can only survive in the market when they have adequate skills, right attitude and upgraded knowledge. This is possible with an extremely competitive performance management system. The system constantly checks for the performance loop and if there are any obstacles or grey areas in the performance of the employees, it provides scope for improving the performance of the employees for the growth and development of the organisation.

5. It is concerned with setting the culture of performance and along with that culture of openness, confrontation, trust, authenticity, proactive, autonomy, collaboration, experimentation. If the culture has these dimensions, the performance system can be implemented very quickly and effectively.

The performance management system of the organisation must always be aligned with the processes and practices present in the organisation in order to achieve overall growth and development performance management system must always try to bring about such a culture that it accepts the changing and growing knowledge and skills of the employees and at the same time motivates employees to perform even better every time.


6. It is concerned with the provisions related to decision making while giving rewards and remuneration to the employees. Trust builds performance and performance leads to success, growth and expansion of the business unit. The main idea behind having a performance management system is to make the employees independent as far as work, output and performance are concerned.

When employees come to know that their performance is going to be complimented with appropriate rewards and recognitions, they tend to perform with utmost care and precaution. They tend to concentrate more on their work and need very little supervision. This makes them much better at the decision making. And their dependency on their supervisors reduces.

Performance Management System – 6 Actions included in the Performance Management System

According to Armstrong and Baron (1998), Performance Management is both a strategic and integrated approach to achieve successful results in the organisation. This can happen through improving the capabilities of individuals and teams.

Performance management system includes the following actions:

i. Developing clear job descriptions and performance plan indicators in order to set Key Result Areas (KRAs) for the employees.

ii. Selecting the right kind of people for implementing and executing the process of performance management system.


iii. Analysing the performance and outcomes achieved as regards the performance standards set.

iv. Providing continuous, constructive and regular feedback for consistently improving the performance of the employees.

v. Constant support for career development and guidance for meeting individual current and future goals.

vi. Designing encouraging reward system in line with the performance standards.

Performance Management System – 9 Key Points for Implementing Performance Management System

Performance management system is the talent within the organization which involves creating an appropriate work environment where employees can perform to the best of their abilities in order to meet the organizational goals. It is a broad set of activities aimed at improving employee performance. The fundamental goal of performance management system is to promote and improve employee effectiveness. It is a continuous process where managers and employees work together to plan, monitor and review an employee’s work objectives or goals and his or her overall contribution to the organization.

The performance management system is aligned strategically with the corporate strategy and HR strategy so as to derive unit, team and individual objectives. It has become essential today to keep in mind the fast changing nature of internal and external environments while carrying out this alignment.


Performance appraisals are a part of the performance management system (PMS) and are a tool used by the organization to evaluate and inform employees where improvements are needed and why. Although performance appraisal information provides input for the performance management process, performance management takes a holistic look on ways to motivate employees to improve their performance.

The effectiveness of every system is in its implementation and that to proper implementation.

Some key points are described below:

1. Emphasis Right Areas:

It has been found that most of the appraisal systems end up emphasizing performance appraisal or rating, the moment when ratings take precedence over performance improvements an unhealthy competition is generated. Ratings are deceptively subjective.

Say there are four managers who are giving rating seven to their subordinates in differing conditions:


i. A conservative purchase manager rates his well performing subordinate.

ii. A lenient IT manager rates his average performing subordinate.

iii. A newly appointed HR manager rates his only subordinate.

iv. A production manager rates his subordinate who has met all his targets.

This shows how subjective is the rating system.

So, over emphasis on the numbers is the first problem of performance management system, therefore emphasis on the given key points:


(a) Performance management process

(b) What all activities have been completed?

(c) What work is left?

(d) What are the activities not to be done?

(e) How can the processes be done cost effectively.

(f) Are the employees competencies being put to use.

(g) How does one improve work motivation?

2. Design the System:

Poorly designed performance management system may take many forms, Ranging from lengthy formats to ill designed questions. A lengthy form is not pleasing to fill as many questions are not paid attention. A small form without guidelines is also of no use. For any performance management system to be implemented properly the system as well as its format should be well designed meaningful.

The format should contain the minimum required reminding points or details. It should contain the guidelines to fill the form. The layout of the form should be attractive and give open look adequate space should be provided to give answers.

3. Multiple Choice Questions:

A performance management system has 12 objectives:

i. Role clarity

ii. Gaining insight into strengths and weaknesses

iii. Identification of development needs

iv. Competency development

v. Facilitating upward and downward communication

vi. Promote mutuality

vii. Promotion decisions

viii. Culture building

ix. Value promotion

x. Performance rewarding

xi. Monitoring

xii. Enhancing accountabilities

While designing the appraisal system many organization aim at multiple objectives. This creates problems as all objectives cannot be achieved at one time. Some organizations can make them as specific as enhancing internal customer satisfaction.

4. Multiple Components:

There are 8 identified components:

i. KPAs or KRAs

ii. Goal setting

iii. Attributes or competencies

iv. Self-appraisal

v. Performance analysis

vi. Identification of developmental needs

vii. Potential appraisal

viii. Review by a committee or reviewing officer.

All these components can become the part of process but should not be overplayed. They should be internalized.

5. Over Criticism and over Projection:

It is believed that when a new system is introduced it points out the problems of previous systems. The exact problem areas are not being identified and the whole system is considered as a failure. Over criticism of the old systems create over expectations from the new system. Therefore it is necessary to find critical difference either in terms of objectives or in terms of the process and emphasize the same.

6. Inadequate Effort to Implement:

The HR department should keep in mind that a well-defined system will give desired results only if it is implemented properly, the real work begins after introducing the new system the internal task force, workshops, manuals, new formats, or skill building workshops is to be organized. Therefore it is necessary to pay attention to post initiation work. The implementation needs to be monitored in a more rigorous manner.

7. Organizational Support:

The biggest hurdle in the effective implementation of the performance appraisal system is lack of support from top management and middle managers, organizational support may in terms of basic working conditions, resources, facilities, inputs from customers. The organization should build credibility on a continuous basis. The HR department’ should act like an OD facilitator. They should devise special mechanism to keep collecting data, feeding them to respective areas and creating problem solving machineries.

8. Competent HR department

9. Follow up of the system

Performance Management System – 7 Steps Involved in the Process of Performance Management System

Step # 1. Clarify Objectives:

A vital first step is identifying some major objectives for the program. Clarifying the need for a performance management system, what and who it should include, what it will deliver and agreeing measures of what a successful implementation will look like.

Some organisations choose to complete this step collaboratively with inputs from various employee groups; others delegate this as an HR Department responsibility; some organisations have a particular champion from anywhere within the business; others will involve outside consultants. Any of these methodologies can work.

Whoever is involved in clarifying the objective, a good start is to use the definition above – improving performance and satisfaction.

It is also vital to consider the business benefits rather than presenting the concept only from an employee’s perspective.

Many systems fail because they try to do too much and become too complex. Once a system is running effectively and delivering the expected results, it may be possible to add additional objectives when all parties have confidence in it and can see the value.

Experience suggests that a business needs to complete self-examination before committing to implementing a new performance management system:

(a) Do employees believe the work we do here is “worthwhile” and that their individual jobs make a contribution to this?

(b) Do we have clear organisational values which we demonstrate consistently? Do we “walk the talk”?

(c) Are employees confident that if they do the right thing they will be recognised for that and appropriately rewarded?

(d) If the organisation cannot confidently answer in the positive in each of the three areas, then it helps to be aware of where there may be shortfalls and seek to address such issues concurrently with implementing the performance management system to increase its chances of success.

(e) A clear and communicated company vision, supported by clarity in people’s jobs helps deliver the first element;

(f) Documented, communicated and demonstrated core competencies helps with the second;

(g) Formal and informal rewards which are seen as transparent, consistent and fair will help deliver the third.

Step # 2. Secure Senior Manager Buy-in:

Once the objectives are set with associated expected business outcomes, then the agreement of the senior management team is required before any implementation steps are taken.

Most systems fail because they are seen as outside a manager’s day-to-day responsibilities, rather than integral to them – senior managers must believe in the process and be seen to actively support it, “talking it up” at every opportunity and leading by example with line managers who report to them.

It is important for senior managers to have a realistic understanding of how much management time will be required to implement and then integrate this system on an ongoing basis.

(a) Experience tells us that more time is required in the first year and, conversely, the first year usually delivers the poorest results.

(b) Understanding of the system, how it works and what it will deliver; and developing the skills necessary to carry our effective performance management often take time – more time than expected.

(c) Having a clear understanding of the potential benefits is vital to securing the necessary support of senior managers.

Step # 3. Prepare the System and Supporting Materials and Documentation:

Develop a process and documentation to support the system.

The format of the documentation is less important than the prompts included for managers and their staff to confidently address the key areas. The minimum prompts must include opportunity to –

(a) Review performance against the key parts of the job.

(b) Review performance against any specific goals or objectives which have been set.

(c) Review performance against the organisation’s core competencies if they have been defined.

(d) Identify any learning and development needs for both short and longer term.

(e) Set goals for the next period.

(f) Allow for feedback on progress on an on-going basis.

Ensure job descriptions are current and in a form that provide clear and measurable results.

If they are to be used, ensure core competencies are defined with associated behaviours and are communicated to all staff.

Determine how direct the link will be with pay review – will there be an overall rating system or not?

(a) The main advantage of a direct link is enhanced objectivity in the pay review process.

(b) The main disadvantage is a risk that the rating may become disproportionately important during the process and focus is lost on the other objectives of the performance management and development program.

Make the documentation easy to use – providing hard copy or electronic or web-based.

Consider the system as a cycle with goal setting, progress reviews and recognition/ feedback on achievement and then determine a calendar for the key elements of the cycle. For example –

(a) Will goal setting be completed annually or six monthly?

(b) Will progress reviews be every month or two months?

(c) Will the formal achievement review – the formal performance management and development interview – be annually or six months and how will it fit with the pay review timetable and the annual business plans?

The timing of the calendar should meet your organisation’s specific needs. Experience tells us that more frequent progress reviews save time in the long run and help the process deliver better results.

Step # 4. Ensure Managers are Trained:

When the process is agreed and supporting documentation in place, training is the next key step. Most performance management systems fail because of lack of training of the people involved.

Managers should be trained in the following:

(a) The objective of the system.

(b) The benefits of effective performance management – for them, for the business and for their staff.

(c) Their responsibility for the system.

(d) The particular process you are going to use – and why.

(e) Setting objectives – why and how

(f) Measuring results – do the hard work up front.

(g) Providing feedback – what and how.

(h) Addressing performance issues – why and how.

(i) Identifying development needs -why and how.

Managing performance is often an assumed skill – in practice many line managers find this difficult and welcome development in this area. The development should include a mix of soft skills and process management as suggested above and should focus on this being an integral element of the line manager’s role – not an additional or administrative burden. Their own success will be impacted by how well they carry out this vital responsibility.

If a manager cannot articulate a simple and common reason for using the performance management and development process, and be supportive of it, then it is unlikely the programme will be a success.

A typical training workshop to achieve this may run for one and a half days for each small group to allow understanding and skills to develop to the required level. Experience suggests that refresher sessions should also be scheduled.

Step # 5. Ensure All Participant Employees are Trained:

Most performance management systems fail because of lack of training of the people involved.

For the employee groups selected to be included in the programme, training should include the following:

(a) The objective of the system.

(b) The benefits of effective performance management – for them individually and for the business.

(c) Their responsibility within the system – linked to delivering the expected benefits.

(d) The particular process you are going to use – and why

(e) Preparation – what they need to do to make the most of the process.

(f) Setting objectives -why and how.

(g) Measuring results – doing the hard work up front.

(h) Identifying development needs and own aspirations.

Such training sessions can be completed with groups and each may run for a couple of hours or so – this can be included in the induction program for new staff after the initial launch of the programme.

Step # 6. Launch with Champion:

A senior management champion for the process should be identified and should take responsibility for launching the programme in an appropriate forum, outlining the major objectives and expected benefits.

Subsequent to launching the programme, the champion should continually seek opportunities to explore how the programme is working, address opportunities to enhance it, “talk it up” and set the expectation that this is a core element of the organisation’s business process.

Step # 7. Monitor and Review Success:

A schedule should be set and followed for reviewing the implementation of the programme against key milestones and against the success measures which were determined in Step 1.

Most systems require some adjustment during the first couple of years – those which had clear objectives in the first place and were supported by appropriate training and senior management endorsement, are most likely to succeed.

It is quite usual for other employee management processes to be reviewed during this time also to ensure full integration of the materials, techniques and supporting mechanisms. We strongly recommend using our training workshop manuals for training both managers and employees in the process of performance management to ensure a greater chance of success.

Performance Management System – Pre-Requisites

Some of the essential pre-requisites without which performance management system will not function effectively in an organisation are:

i. The performance management process cannot function on its own. It needs the support of all the employees. Hence, high level of participation is required in order to generate an effective performance management system.

ii. No process in the organisation can be implemented without the support of top management. Thus top management’s help and assistance must be requested for the smooth implementation and functioning of the process.

iii. Before implementing the performance management system, it must be confirmed that all the employees have clearly understood the vision and mission statements of the organisation. This is because when the vision and mission is clear to the employees, their performance can be directed towards achievement of the same.

iv. Role clarity and the relationship of the particular role with other roles must be clear to the employees. This improves the performance in terms of team effort, group building etc. And when employees understand the relationship of their role with other roles, they tend perform better.

v. Along with improving the processes, communication across the departments in the organisation must be clear and transparent. Open channels of communication builds trust among the employees and they feel valued. When the trust in the minds of employees is built, they tend to perform on the guidelines given by the organisation.

vi. Identification of performance parameters and key performance indicators must be done and shared with the employees to generate the standard level of performance from them.

vii. There must be a high level of transparency, consistency and openness in the applied processes.

viii. The performance management system must be complimented with better rewards and recognition policy. Performance can be improved if employees know what are the rewards associated with it.

ix. Performance management system must also have provision for proper training. Training must be provided to supervisors and employees, for better review of their performance and further improvement and corrections, if any.

Performance Management System – 5 Major Challenges

The performance management system challenge in organisations has many dimensions in today’s business environment and creating focused initiatives to overcome these challenges is not a silver bullet approach. In many cases remuneration schemes are driving the performance system, which creates a number on long term consequences in organisational behaviour and culture.

In other cases senior management are so focused on scorecard management to hold people accountable that the creation of the scorecard is not aligned with business focus areas, but rather a number of deliverable projects and tasks.

Challenge # 1. Lack of Alignment:

The first challenge is the lack of alignment due to various organisational processes being created in isolation. The link between strategy development, budgeting and operational planning is developed by different groups of people with different frameworks being used. The performance management system lacks alignment between individual performance, departmental performance and organisational delivery and so all systems default back to financial measurements.

Challenge # 2. Lack of Measurements:

The second challenge happens at various levels of the organisation in that poor measures are developed, in many cases targets are set but no relevant measure is put in place. In other cases no data can be collected or is kept as evidence to track performance.

Challenge # 3. Leadership and Management Commitment:

The Leadership and Management challenge has a huge impact on integrating and aligning a management system to deliver a comprehensive performance management system. The commitment and understanding of leadership and management of the requirements for achieving a workable performance system is critical to performance success.

Challenge # 4. Managing of the Performance System:

Managing a performance system in an organisation requires a disciplined framework; it requires the organisation to work off one master plan broken down into relevant parts and areas of responsibility. The management responsibility at various levels needs to understand the contracting, measurement development and appraisal process very well and apply it consistently. Secondly, management needs to appreciate that performance management is not an event but something that is managed daily but recorded and reported at certain times through reviews and appraisals.

Challenge # 5. Managing Poor Performances:

The management of poor performance is normally a reactive action, but in many cases, it is delayed and therefore turns into a discussion that is difficult to make relevant. Another reason why poor performance is not managed on time is the lack of valid measurements and the collection of required evidence and measurement data.

Performance Management System – 5 Keys to a Successful Performance Management System

Before you develop your action plan in detail, let’s look at five keys things, in addition to culture, which serve as a foundation for a successful performance management system –

1. Communicate Expectations:

People want to know what is expected of them. A great way to start is to verify that job descriptions are accurate and to help your employees establish S.M.A.R.T. goals. As you interact with your employees on a regular basis, use the goals as a tool to keep employees focused on the expectations. Keep in mind that your ultimate goal is for employees to take responsibility for their own performance. They are more likely to do this when they work with you in partnership to clarify performance expectations.

2. Involve Employees in the Process:

Employees always want to know the answer to the question, WIIFM, or what’s in it for me? Your employees’ commitment to performance management will depend on how they perceive the answer to that question. In order to have a true partnership, you have to involve your employees at each step in the performance management process – planning, monitoring, analysing, improving, and maintaining. When you involve your employees in the process, you are on your way to establishing performance management as a win-win system.

3. Use a Systematic Approach:

Performance management is not just setting goals. It’s not just doing annual performance appraisals. It’s not providing occasional performance feedback. Performance management is a system that encompasses all of these things and much more. The system works best when managers and employees are actively engaged in each step in the process. Then, the whole becomes greater than the sum of the individual steps.

4. Be Willing to Work Hard:

Implementing performance management takes time and effort. There will need to be lots of one-on-one meetings with employees as well as some team meetings. You and your employees may even experience “brain strain” if you are setting goals and objectives for the first time.

As you and your employees become more experienced, however, the process should require less time up front so that more time can be spent in doing the work required to achieve the goals. Performance management is a partnership. You don’t do the work for your employees. They have to work hard too, if the system is going to work.

5. Make a Commitment to Success:

Are you really committed to implementing performance management? If not, then success will be limited or even non-existent. You have to take the lead in communicating your commitment to your employees. They will know whether your commitment is total or half-hearted. In the end, their commitment will be a reflection of your commitment. Your commitment must be maintained throughout the process.

If you don’t conduct a performance review on time, you are delivering a message about your level of commitment. If you don’t follow up on established goals, employees will take this as a sign that you lack commitment to the goals. If performance management is to have long term success, you have to have long- term goals.