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Comprehensive Performance Management

We have researched the practice of performance management, and asked many business leaders how they define it and how it contributes to their organization’s continuous improvement effort; and we have concluded that effective performance management begins with the identification of what’s vital to the organization...

Effective performance management begins with the identification of what’s vital to the organization because if these priorities are not clear and it is not clear what role everyone plays in the priorities, the rest of an organization's performance management effort is unlikely to mean much.

Managing employee performance requires first and foremost clear communication of what is important for the organization and how the individual can best contribute. In fact, studies have shown that the primary reason people don’t do what managers want is that they don’t know what the managers want.

While communication about targets and goals can be done as part of the strategic planning, performance review and execution processes, it should also be reinforced in the everyday conversations and coaching sessions between employees and their managers.

Ideally, performance management refers not only to people management, but also to process management and plant management.

The most common element of performance management was identified as the annual performance appraisals, which came in for some criticism during our research. 

Several people mentioned that the annual reviews were a source of angst and dread, perhaps by both parties. They were always late and were considered among the more onerous of management responsibilities.

Others questioned their effectiveness. For example, when a bank implemented formal performance appraisals that evaluated Loan Officers on the dollar value of loans approved, and measured the Credit Department on ‘the quality of the loan portfolio’ (i.e. no defaults), it reduced profits and created dysfunction and animosity. The Credit Department was careful to take no risks, while the Loan Officers focused on quantity, hoping that something, at least would be approved. The bank as a whole suffered.

This example is by no means an exception — Purchasing Departments are often measured by purchase prices, leading to excess inventory when they order in bulk and substandard material when they give too much weight to price instead of incoming quality and timeliness. One of the drawbacks of annual individual performance reviews – especially when tied to compensation — is the high risk of driving the optimization of individual metrics while sub-optimizing the organization as a whole.

But a few people said that their performance review process was greatly improved by increasing the frequency from annual to quarterly, indicating the feedback discussions were both more timely and less stressful. Others found that when reviews were de-linked from salary adjustments they could focus more effectively on coaching.

While there are a wide range of views about how to manage performance, some of our key findings include:

  • Performance Management must be about much more than individual performance measurement. As Dr. Deming said, over 90% of problems are caused by the system not the person. To manage performance, we must manage the system by which people, plant, process interact to produce results.
  • Frequent observation and feedback is more helpful to people than formal annual reviews.
  • Frequent communication about what an organization needs and wants greatly increases the odds that the organization will get what they need and want.
  • Group rewards encourage teamworkFeature Articles, while individual rewards encourage an individual to optimize his or her own goals even if it may sub-optimize the organization as a whole.
  • Tying money directly to performance appraisal can be a two-edged sword – raising stress and reducing the intrinsic rewards and personal satisfaction from doing a good job for the team.
  • Avoid managing performance through the “rear view mirror” by including steps for more frequently assessing and impacting how people perform
  • Make more of the goal setting process which produces targets against which we measure performance (and take corrective action)

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Paul Donehue is a senior associate at

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