The future of performance management

In the past, assessing the performance of individual employees or the entire team was always output oriented and measured using defined metrics. While some company employees may have taken part in the goal-setting process, the final evaluation of the concept remained rigid. These days, this kind of performance management is generally outdated. With today’s changing work environment, evolving collaboration within teams, and ever-changing employee demands, the way performance is evaluated also needs to change. In this article, we will tell you the essentials of modern performance management and give you nine basic principles you can follow. 

Content

  1. What is performance management?
  2. How modern performance management works
  3. The nine fundamental principles for the future of performance management
  4. Combining performance management and OKR
  5. Performance management: FAQ

What is performance management?

As the term implies, performance management refers to the process of managing and monitoring an employee’s performance within the company. The goal is to tap into each team member’s full potential and efficiently use it to achieve overarching company goals.

Performance management focuses on both the time and resources needed within the scope of the work done as well as evaluating metrics and including accomplishments at the content level.

How performance management works

The human resources department within a company and their tasks are strongly linked to performance management. Among others, performance management consists of three basic elements:

  1. Defining and agreeing upon goals
  2. Measuring and evaluating performance
  3. Creating incentives, such as higher compensation or something similar

The four stages of the performance management cycle

Performance management should represent the continuous work on the entire team’s performance instead of something like a quarterly performance evaluation.

This makes a performance management cycle the best way to describe such work.

It is an ongoing process of planning, monitoring, reviewing and rewarding an employee’s performance.

The performance management cycle
The performance management cycle

  1. Planning: To start, the respective employee and/or team goals are defined and agreed upon with the respective participants.
  2. Monitoring: The second stage involves monitoring progress at regular intervals and removing possible obstacles. For this, regular feedback sessions can be organized to stay up to date.
  3. Reviewing: In this stage, employee results are evaluated and a performance review is conducted to assess successes or failures.
  4. Rewarding: In the final stage of the performance management cycle, employees are recognized for their efforts and work results. This recognition or reward can vary widely, from higher compensation to additional vacation days.

The nine fundamental principles for the future of performance management

Traditional performance management methods, such as Management by Objectives (MBO), show that performance measurement and evaluation have been a component of professional life since the beginning. What has changed, however, are the external circumstances performance management is guided by—keyword: digitalization. These days, 71 percent of people in Germany work at least some of the time in an office space. Accordingly, cognitive tasks are becoming all the more important, which can also have an affect on employee requirements. Systems, tools and the like are continuously being developed, meaning employees are constantly required to keep up with these changes and develop their skills accordingly. That means performance management can no longer be evaluated exclusively with metrics. Instead, personal development and skills also play an important role in the evaluation.

Workpath CEO Johannes Müller joined Anne Haker from HR Pepper to discuss these radical changes and the future of performance management. Among other things, they talked about what needs to change in terms of processes, tools and culture as well as strategy and people. This discussion resulted in nine new principles that can serve as a guide to rethinking performance management.

1. More focus on teams, fewer individual goals

Where value creation is driven much more by teams than by individuals and where increasing complexity of the tasks to be mastered is almost impossible outside of the team, performance management is a necessity. In most cases, key figures are also valid reasons to focus on teams, as the impact of one individual can rarely be broken down from the team’s success.

2. More collaboration on strategy, less rigid cascading of goals

Those who demand more accountability and entrepreneurial thinking from their employees also need to involve them in the goal setting to some extent. Teams should, therefore, define clear yet broad company guidelines themselves and open up the strategy process to employee ideas. Having employees work on the goals themselves make them more realistic and can motivate teams. This principle is expressed in a well-known quote from Steve Jobs: “It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”

3. A more iterative approach instead of a waterfall approach

In view of constantly and quickly changing circumstances and the increased complexity of the (working) world, goals need to be reviewed regularly, every two to four months, and adjusted accordingly. In most working contexts, classic annual planning no longer measures up to how fast the environment is changing.

4. More cross-departmental collaboration, fewer silos

If cross-functional teams can find the best solutions for existing challenges, their collaboration over previous departmental boundaries also needs to be supported. Instead of promoting departmental thinking, flexible team compositions and teamwork should be made possible.

5. More transparency, less secrecy

To make decisions independently, each employee needs to have the necessary information at their disposal. That means, for example, there is transparency regarding relevant company data, existing competencies and company goals. Only then can employees take responsibility for the goals and synchronize themselves.

6. More regular, multi-perspective feedback, fewer annual performance reviews

Those who want to continuously develop need regular, honest feedback from those who can best assess the impact of their actions. That is not always just leadership, it can often be teammates the company works closely with or even customers. Ideally, feedback should become a daily practice in all directions—from bottom to top, top to bottom, among colleagues and from the customer’s perspective. In this way, performance management can be used to measure behavior and learning objectives, while content-related goals can be measured at the team level using frameworks such as OKR.

7. More continuous, self-directed learning for all, less focus on training catalogs

Those who want to take on responsibility as well as actively thinking and shaping their circumstances need the necessary skills and knowledge to do so. Since knowledge is quickly becoming obsolete and skill requirements are continuing to increase, continuous learning and further development is becoming all the more important. Modern performance management relies on strong self-direction and multiple learning opportunities, separating itself from classic training catalogs.

8. Changed roles and team composition, fewer rigid boxes in the organizational chart

Development does not just take place through explicit learning and training measures. It also occurs implicitly through the assumption of roles and responsibilities. Performance management has to actively promote this flexibility. This also means that job and role descriptions should be more openly oriented to overarching principles, such as degree of responsibilities, rather than concrete positions.

9. More focus on value creation, less actionism

Up until now, the traditional cascading of goals was accompanied by a variety of measures, which, once decided, were successively worked on and rarely examined for effectiveness. Moving forward, company actions should be guided by the value created and combined with the audacity to identify and remove tasks from the list that are not creating value. In addition, leading indicators can be used. These are metrics that an individual can directly influence. That means you could directly measure the quality of the individual’s work, which would ideally indicate added customer value.

Combining performance management and OKR

To define the goals for individual employees, many companies use the goal-setting framework OKR.

However, this is not recommended.

The big discrepancy between performance management and OKR

Goal definition and the measurement from performance management are always individual and can vary greatly from the definition of other goal-setting methods, such as OKR. While performance management and its evaluations are employee-oriented, OKR is business-oriented.

That means the performance evaluation conducted with performance management concentrates on specific employees or teams as well as their skills and career development.

OKR and its business-orientation concentrate on company development. OKR consists of Objectives and Key Results. The Objective is the value proposition for internal and external customers and the Key Results measure whether the respective value proposition has been achieved. Although the individuals within the organization are aligned with the respective goals, the focus remains on the company and its development in the course of achieving the defined goals. This could be anything from  improving product quality to increased revenue or improved customer satisfaction.

The optimal combination of both systems

OKR should be used to link long-term strategic goals and company KPIs with the operational level, not to measure the individual goals of team members. This can quickly impact the entire team spirit, as personal OKRs force employees to focus on themselves rather than the overarching goal for everyone.

A better solution would be to use performance management and OKRs as separate yet coordinated systems. For example, within performance management, things like bonus systems for employees are quite popular. In the course of setting up performance management and bonus systems, factors that support OKRs can also be added, such as cross-functional collaboration among various teams. In this case, the goals of individuals should not be placed above the team or company goals. Instead, individual goals should serve the overall goal. However, note that tying compensation to OKRs can lead to reduced ambition, exaggerated performance and stagnant innovation.

So, what does a good integration of performance management look like and what does it contribute to? To answer this, it is best to get an exact overview of how the project management structure with OKRs can look for a company.

OKRs, KPI and Project Management

OKR in the link between company strategy and the execution level. The Objectives and Key Results are defined based on the company strategy and the strategic KPIs. Here is an example using the area of software development:

Objective: 

  • We have close to no bugs and are lightning-fast at fixing the few that are reported.

Key Results: 

  • We have fewer than 10 reported bugs open at all times.
  • We fix 80 percent of bugs within 1 week.

Based on the defined OKRs, Initiatives are created and carried out at the execution level. For example:

  • Increase test automation before deployment
  • Increase speed of bug fixes
  • Improve bug reporting and handling system

With the help of performance management, it is possible to define and monitor the individual performance of each employee. This means performance management has a direct impact on the Initiatives, which then has a direct influence on the defined OKRs and operative KPIs. In any case, it is important not to make the mistake of using OKRs to define individual employee goals. Personal OKRs can lead to competition among team members, although, in reality, the method should be used to strengthen team spirit. The result can be a reduction in team spirit and a decrease in overall team performance for the overarching company strategies.

However, team OKRs can be one of the various factors in the integration of the goal-setting framework into performance management.

In this case, the performance of team OKRs should make up no more than one-third of the individual performance evaluation of the employee. It is also important to include a balanced mix of easier goals, which can definitely be achieved, with more ambitious goals to be conducted within the team.

OKR and Performance Management

Performance management: FAQ

What is performance management?

Performance management refers to the process of managing and monitoring an employee’s performance to tap into each team member’s full potential and efficiently use it to achieve overarching company goals. It focuses on both the time and resources needed within the scope of the work done.

What are the three elements of performance management?

Performance management is tightly linked to the human resources department and consists of three core elements.

1. Defining and agreeing upon goals;

2. Measuring and evaluating performance;

3. Creating incentives.

What are the four stages of performance management?

Performance management does not just take place during the annual review or every few months. Instead, it is a continuous process. It can also be displayed as a cycle with four stages: planning, monitoring, reviewing and rewarding. The first stage, planning, involves setting the employee and team goals together. In the second stage, progress is monitored and obstacles removed. In the third stage, employee results are evaluated and a performance evaluation is conducted. The final stage of the cycle includes recognizing and possibly rewarding achievements. This reward could be anything from a bonus to more vacation days.

Are there examples of performance management? 

Let’s take, for example, that a software development department has defined OKRs for themselves. An objective, in this case, could be something like, “We have close to no bugs and are lightning-fast at fixing the few that are reported.” The respective Key Results could be, “We have fewer than 10 reported bugs open at all times,” and “we fix 80 percent of bugs within 1 week.” Based on these definitions, Initiatives and measures that can be used to achieve the goals are developed. With help from performance management, employee performance can be defined and monitored at the execution level. This means performance management has a direct influence on the Initiative plan, which impacts the OKRs and, as a result, the company strategy and strategic KPIs.