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Knowledge Base » Business » What is a Performance Management System?

What is a Performance Management System?

Last updated on 27th April 2023

Research conducted by global cloud HR software provider, Cezanne HR, which polled 1,000 employees across the UK in October 2019, revealed that:

  • Nearly half of all UK employees (49%) are either indifferent to or dread their performance reviews.
  • While a third of employees said they were indifferent to performance appraisals, nearly one in five (16%) admitted to ‘usually dreading’ or ‘always dreading’ them, and of these, nearly two-thirds (64%) cited their reason as finding the process uncomfortable or believing them to be a waste of time.
  • Indifference to performance appraisals was widespread across the board (33% of employees) but grew in line with age (45% of all ‘baby boomers’ said they were indifferent).
  • One in four UK employees has never had a performance review in their current organisation (24%) and more than one in ten (14%) has never had a performance review with any employer. Of these, over two-thirds (68%) feel they would benefit from having a documented performance review if given the opportunity.

As part of the Economic Review 2021, the Office for National Statistics (ONS) reported that UK productivity fell by 0.5% in Apr-Jun 2019, a concerning figure if organisations are not monitoring and reviewing the performance of their employees.

An ACAS commissioned online survey and workshop highlighted some rather contrasting findings about performance management:

  • Only 26% of respondents in the survey said their performance management systems included the option to customise their arrangements for staff with “special needs, disabilities and neurological conditions”.
  • 59% of survey respondents said that employees were strongly or somewhat motivated by the performance management system but 31% said their performance management system had no effect on motivation and 11% said it was demotivating.
  • Two-thirds of respondents (65%) had a written statement setting out what their performance management system is designed to achieve, but only 36% reported collecting regular data on staff satisfaction with their performance management system.
Meeting discussing performance management systems

What is performance management?

Performance management is a coordinated and collaborative method to create, measure, track and achieve organisational goals. It creates a performance-driven organisation because all members of the organisational team are on the same page in terms of direction, priorities, progress and accountability.

The Chartered Management Institute (CMI) defines performance management as “an integrated approach to helping an organisation to achieve its aims and objectives by monitoring and improving the performance of individuals, departments and the organisation as a whole”.

HR academics Michael Armstrong and Angela Baron defined performance management, as a “strategic and integrated approach to increase the effectiveness of companies by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors.”

Performance management is an important aspect in people / human resource management. It is used to create a work environment where people are motivated to provide their best performance and do quality work.

It brings together all the people management functions such as:

  • Goal / objective setting.
  • Regular performance reviews in accordance with the set goals.
  • Providing performance feedback.
  • On-going communication for performance coaching.
  • Providing employee learning, training and development opportunities.
  • Connecting performance with reward and recognition.

Performance management builds a communication system between a manager and an employee that occurs throughout the year, in support of accomplishing the strategic objectives of the organisation. It helps to manage, develop and retain talent within an organisation and strengthens employee engagement.

Over the last few years there has been a notable shift in the emphasis of performance management from a focus on predominately the employee’s contribution to the organisation’s performance to a balance between the employee’s contribution and the organisation’s role in keeping employees engaged, content, developed and productive.

What is a performance management system?

A performance management system is a continuous methodical process that tracks the performance of employees in a manner that is fair, consistent and measurable. It usually comprises a combination of technologies and methodologies to ensure people across the organisation are aligned with and contributing to the strategic objectives of the organisation.

The performance management system should be a collaborative one, with managers and employees working together to set expectations, identify employee goals, define performance measurement, share employee performance reviews and appraisals, and provide feedback.

Employees who are more invested in their work, tend to increase overall workforce productivity, so a properly defined and consistently applied performance management system can help to achieve this and minimise staff turnover.

Many organisations are moving from traditional performance management with an annual appraisal to a continuous performance management (CPM) model. The CPM process is less formal with employees and managers engaging in performance discussions more frequently, regularly scheduling one-on-one dialogues and providing ongoing feedback to help employees stay on track. This eliminates surprises and speeds up improvement cycles.

They also provide opportunities for employees to provide feedback too. These regular performance discussions are typically developmental and future-focused.

The development of technology has made performance management and employee evaluations easier and more efficient.

Most performance management software allows managers to outline employee profiles and expectations and to create objectives that align with the organisation’s goals. They can also monitor and document performance and write evaluations; they also have a positive impact on employee engagement by offering and encouraging transparency, recognition and feedback.

What is the purpose of a performance management system?

One of the main purposes of the performance management system is to develop a systematic feedback mechanism. It creates a formal channel through which the employees become aware of their contribution to the organisation in terms of performance. It communicates to the employee the improvement required in their performance to meet the role expectations and also provides encouragement for effort, and recognition for good performance.

Performance management addresses the development issues and skills gaps in the organisation. It identifies the skills and knowledge development needed in the organisation and helps to identify the appropriate learning and development solutions to meet these needs.

Using a performance management system helps to diagnose organisational problems, as it provides an idea about where the work is going wrong or where there may be performance issues, and helps to identify what adjustments are required to improve the performance status of the organisation.

Management can use the information and data gathered from the performance management system to plan training and development initiatives, inform hiring decisions, devise recognition and reward strategies, and for workforce planning including promotions, succession planning and organisational restructures. The data also provides information about the performance levels, skills, knowledge and expertise of the current workforce.

Manager of business looking at feedback

How does a performance management system work?

In order for performance management to be implemented successfully into an organisation’s management practices, it is essential that it should be a participative process attracting high levels of commitment from all members of an organisation. Senior management’s open support and commitment is essential for building a sound performance culture in an organisation.

Organisational vision, mission and goals should be clearly defined and understood by all levels so that efforts are directed towards the realisation of the organisational ambitions. Open and transparent communication should prevail and there must be consistency and fairness in the application of performance management. In order that they can contribute effectively to the process, training should be provided to all line managers and their line reports prior to implementation.

Performance management follows a systematic process that includes:

  • Planning work and setting expectations – Planning means setting performance expectations and goals for groups and individuals to channel their efforts toward achieving organisational objectives. Getting employees involved in the planning process helps them understand the goals of the organisation, what needs to be done, why it needs to be done, and the level of effort or responsibility required.
  • Continually monitoring performance – Monitoring well means consistently measuring performance and providing ongoing feedback to employees and work groups on their progress toward reaching their goals. Ongoing monitoring provides the opportunity to check how well employees are meeting predetermined objectives and to make changes to unrealistic, obsolete or problematic objectives. Unacceptable performance or capability issues can be identified at any time during the review period and assistance provided to address such performance rather than waiting until the end of the period when summary review and/or rating levels are assigned.
  • Developing the capacity to perform – Developing in this instance means increasing the capacity to perform through learning and/or training, giving projects or tasks that introduce new skills or higher levels of responsibility, improving work processes, or using other developmental methods such as work shadowing, coaching or secondments. Providing employees with learning, training and developmental opportunities encourages good performance, strengthens job-related skills and competencies, and helps employees keep up with changes in the workplace, such as the introduction of new technology, new working practices and changes in regulations and legislation.
  • Periodically reviewing and/or rating performance in a summary fashion – It is useful to summarise employee performance. This can be helpful for looking at and comparing performance over time or making comparisons among various employees. Organisations need to know who their best performers are. Reviewing and/or rating means evaluating employee performance against the elements and indicators in an employee’s performance plan and assigning a summary review and/or rating.
  • Rewarding good performance – Rewarding means recognising employees individually and as members of groups for their performance and acknowledging their contributions to the organisation. Recognition is an ongoing, natural part of the day-to-day working experience. A lot of the actions that reward good performance may be as simple as saying ‘thank you’ or ‘well done’.

A performance management system utilises a continuous cycle that allows management and employees to better achieve organisational goals through a structured process of employee development. The performance management cycle encompasses the main stages outlined above.

Why do you need a performance management system?

An effective performance management system is arguably the most important component in ensuring that employees are delivering what the organisation needs to be successful. We have all heard the saying, “What gets measured gets done” coined by management guru Peter Drucker. It means that regular measurement and reporting keeps employees focused on what is important for an organisation to achieve its goals.

However, there is another saying which is just as important to performance management and setting valid objectives, and that is, “it is essential to make the important measurable, rather than making the measurable important”. This is called the McNamara fallacy.

In other words, the McNamara fallacy is when a decision is based solely on numbers such as metrics or statistics and all qualitative factors are ignored. A performance management system that only evaluates quantitative metrics will most likely create a culture where a lot of low-quality work gets done, with less opportunity to learn and improve processes.

The purpose of a performance management system is to create a set of processes that focus on employees’ job roles, with the aim to maintain and improve performance through review and feedback on performance as a whole, not only of what is achieved but also how it is achieved.

Performance management systems used throughout the year help to enhance communication and documentation between employees and managers to support performance improvement and to highlight any issues in attitude and/or capability so that they can be addressed fairly, appropriately and promptly.

Employee retention and engagement are associated with feelings of value and security which are provided through the performance management system of expectation setting, regular monitoring, development and improvement, rewards and compensation and feedback.

What are the benefits of a performance management system?

An effective performance management system can play a very crucial role in managing performance in an organisation.

There are clear, measurable benefits to implementing, one, as it:

  • Builds and defines ownership and accountability.
  • Aligns strategic goals to help employees at all levels understand how their work contributes to the overall success of the organisation’s strategy and goals. Employees not only understand their own objectives but also recognise their contribution to the organisation’s overall success.
  • Provides performance information to effectively manage the organisation.
  • Clarifies expectations and the job accountabilities of employees at all levels.
  • Creates opportunities for line managers to communicate organisational / departmental / team goals, policies, strategies and information and for line reports to express their views and opinions as well as suggestions for improvement.
  • Encourages managers and line reports to have regular ongoing conversations about objectives and expectations, accomplishments and challenges, as well as development needs. Feedback, whether it is positive or constructive, is more effective when it is delivered promptly and regularly.
  • Engages employees at all levels ensuring they are continuously developing their skills and capabilities, resulting in a higher level of employee satisfaction and retention.
  • Provides valuable information that can be used during succession and career planning.
  • Highlights and documents any issues with performance, capability and/or behaviours so that they can be effectively addressed through the capability or disciplinary process.
  • Helps to bring about a continuous learning culture within the organisation.
Showing employees their work contributions

What are the elements of a performance management system?

The elements of a performance management system are based upon the performance management cycle outlined above; more specifically they involve:

Setting objectives

Setting realistic objectives for employees inspires them to strive to achieve better results which impact positively on the organisation’s overall productivity. This is because individual objectives should be aligned with departmental objectives which in turn should be a subset of organisational goals. Objectives need to be specific and represent an end result.

They should also be SMART.

  • Specific – The wording should leave no doubt about what is required.
  • Measurable – The goal or objective should be readily measurable, and the results should be available quickly and regularly.
  • Agreed – The goal or objective should be reasonable and within your ability to accomplish for you to agree.
  • Realistic – If the goal or objective offers poor chances of success then it will rapidly turn into a de-motivating force.
  • Timed – How much, how soon? A goal or an objective without a time constraint is little more than a wish list.


Aligning employee performance to the objectives of the organisation and assigning work that is meaningful and fulfilling to increase employee engagement. When business priorities shift, quickly adapt the objectives to meet the changes. The qualities and degree of expertise the employee should develop in order to meet objectives are set out in the performance plan.

Communication and collaboration

A good performance management system aids in building an atmosphere of free, open, ongoing communication about the team, tasks assigned, and challenges encountered. Constant communication motivates the team, keeps everyone on the same page and makes the process proactive.

Performance evaluations  

These are regular short-term check-ins to review how well an employee is performing on the tasks or projects allocated to them. It allows for timely corrections or adjustments when deviations are detected. These should be two-way, 1-to-1 conversations between the line manager and every line report at least once every two weeks.

They should be a feedforward process that motivates, focused on continuous improvement. The more frequent and precise the feedback, the better the individual performance.

Performance reviews

These summative reviews which can be annually or quarterly, allow the employees first to self-assess themselves before managers evaluate their performance. Reviews should be an open discussion to analyse performance measured against clear and specific goals and expectations with a focus on learning from mistakes.

In recent times the introduction of 360-degree evaluation has greatly enhanced the process and increased team productivity. 360-degree feedback is a process in which employees receive confidential feedback from the people who work around them such as peers, team members, and even customers or service users.

Good performance recognition

A critical aspect of a performance management system is the recognition and reward for high performers. This creates an atmosphere of fair play and a level playing field within the organisation.


This component of a performance management system provides the opportunity to indicate areas in need of improvement, those that can be developed further and strategies on how to achieve this. Feedback, whilst not always positive, should always be constructive.

Learning and development

Active learning and development which is an integral part of a performance management system should be promoted vigorously. It should be ongoing and of a nature that will help employees to attain their performance potential.

Performance management system encouraging development

Who would use a performance management system?

Effective performance management is essential to any organisation regardless of industry or size. Any organisation irrespective of its size or complexity can benefit from implementing a performance management system, and the organisation doesn’t necessarily need bespoke software to implement one.

Performance, responsibilities, learning and development, and business objectives are part of everyone’s role in an organisation and so everyone within an organisation at every level should be using the performance management system.

Employees work with their managers to define their performance objectives. They build their individual employee performance reviews within the system and participate in the review cycles.

Managers are predominantly the drivers of the system and must ensure that every employee actively participates in the process. Managers are also ultimately responsible for the performance of their team(s).

HR professionals define the HR processes and systems that support the performance management cycle. They work with managers and employees to ensure processes are fair and that each stage is carried out in a timely manner.

Senior management provide commitment to and open support for the performance management system, leading from the front, as this is the essential component required for the success of any performance management system.

Final thoughts

A performance management system is not about micro-managing employees, but rather about empowering employees to take an active role in their performance and development management. It helps to provide the whole organisation with a broad view of how the organisation is performing, creating a close link between successful employees and a successful organisation, developing a continuous learning and improvement culture.

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About the author

Evie Lee

Evie Lee

Evie has worked at CPD Online College since August 2021. She is currently doing an apprenticeship in Level 3 Business Administration. Evie's main roles are to upload blog articles and courses to the website. Outside of work, Evie loves horse riding and spending time with her family.

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