The Past, Present, and Future of Performance Management
One way for organizations to gain a competitive advantage is to maximize human capital through performance management (PM). However, research from the Corporate Leadership Council reveals that managers, human resources (HR) departments, and employees are often frustrated by their PM system1:
- Of the managers surveyed, 95% reported dissatisfaction with their PM system.
- Of the employees surveyed, 59% felt PM reviews were not worth the time invested, and 56% reported they do not receive feedback on what to improve.
- Of the HR department heads surveyed, almost 90% reported their PM systems do not produce accurate information.
As a result, companies and organizations are reviewing their PM systems and practices, and experimenting with new approaches. The purpose of this article is to review the past, take stock of the present, and outline future best practices in PM.
Looking back, taking stock, and moving into the future of PM
A 2017 review summarized the key trends in performance management (PM) research over the last 100 years2. PM research is a relatively new addition to studies investigating Performance Appraisal (PA). Whereas in PA the research focus is on understanding how ratings work best, in PM the research agenda is to help employees improve performance.
Historically, there have been three major themes in PM research:
- Overview of the PM process and how to improve it;
- Detailing specific aspects of the PM process, such as interventions designed to improve individual employee performance; and
- Suggestions on how to improve organization-level performance through HR practices.
We will now take a deeper look at these three themes by considering the past, present and future of each.
1. Overview of the PM process and how to improve it
Over the last 20 years, researchers have expanded ideas about performance management systems from simply rating or ranking employee performance to comprehensive programs that align staffing, performance feedback, incentives, and supervision with the strategic goals of organizations. While the number of activities that qualify as valid approaches to PM have increased over the years, most of the research is descriptive and does not yet provide empirical insight into what works best (and for whom). These limitations notwithstanding, descriptive research can still provide interesting insights into the PM process and how to improve it.
In 2017, researchers conducted a broad survey of PM practices. The survey was completed by 101 HR leaders across diverse industries.3 The survey revealed important gaps between how PM systems are used and what the research has identified as best practices. For example, most HR leaders (87%) reported that PA reviews typically take place once or twice a year, with 39% reporting that they do not provide informal feedback between reviews. Yet, there is a general consensus amongst researchers that frequent and informal feedback is a crucial success factor in PM. In addition, despite the growing push by researchers to utilize multiple sources of data in PA and PM, very few organizations reported collecting performance data from customers/clients (8%), and just one in five reported the use of any type of 360-degree feedback in their PM process. Finally, while researchers recommend that employees across an organization are trained in effective PM behaviors, just 31% of organizations reported that they provide such training to non-managers (76% train their managers in the PM process).
In sum, although research has not identified a magic bullet for PM, organizations would be wise to complement the nuts and bolts of PA (e.g. performance ratings, type of documentation required, goal setting) with increased opportunities for formal and informal feedback, multiple sources of performance data, and training to embed effective PM behaviors (e.g. setting clear expectations, providing informal feedback, building rapport with direct reports, and working collaboratively to solve problems) throughout the organization.4
2. Improving individual performance
A large number of PM studies have examined ways to improve individual productivity and performance of employees. Early on, researchers invested heavily in understanding how to improve the accuracy of ratings. The assumption was that if researchers could create the perfect assessment, it would reveal an ultimate, irrefutable truth about employee performance. However, study after study proved that this was an elusive goal. As such, researchers switched their focus from perfecting the rating scale to understanding the rater. Today, PM research seeks to understand what drives employees to try to improve their performance. The major levers driving employee motivation to improve performance are goals, feedback, and incentives.
Researchers point out that disappointing PM results have often been caused by well- intentioned efforts to improve PM processes. However, over time these efforts have created a PM process that is increasingly bureaucratic and detached from the daily activities that it is supposed to support, such as establishing clear expectations, setting meaningful goals, and providing timely feedback. In the future, organizations need to shift their attention from perfecting formal ratings and review processes to utilizing PM systems to reinforce the everyday PM behaviors that matter most. The best PM systems will enable managers and employees to engage in continuous feedback designed to help an employee learn, grow, and develop skills that drive (a) employee engagement, meaning and purpose, and (b) organizational ROI.
3. Improving organizational performance
The ultimate goal of PM is to improve the overall performance of the organization. Ideally, PM systems help the organization reach strategic goals and deliver a healthy ROI in terms of key metrics aligned to the organization’s priorities (e.g. customer satisfaction, EBIT). Surprisingly, researchers in this area are unclear about what combinations of PM practices make an impact on firm level performance, and why some practices work but others do not.
Nevertheless, there is a growing understanding that the most effective PM systems do at least five things well:5
- Instead of time-consuming, long-term goal setting sessions held at the beginning of the PM cycle, effective organizations are moving to more real-time expectations and goals that change as the situation changes.
- Learning and development is valued and understood as part of day-to-day work, rather than limited to formal training that is often tied to annual reviews.
- Effective PM ensures employees receive meaningful, real-time feedback from managers, direct reports, peers, and (when applicable) customers. Unlike scheduled comments or arbitrary ratings delivered infrequently or as part of a mandatory evaluation, real-time feedback provides employees with the data they need to continuously improve their performance day to day and week to week.
- PM training goes beyond providing managers with instructions on how to complete the PM steps, and extends to training for all employees on effective PM behaviors (including how to set clear expectations, how to give and receive informal feedback, and how to work collaboratively to solve problems).
- Ratings are simplified and streamlined to minimize the time and cognitive load demanded by complicated systems that do not distinguish between employees well.
A bright future awaits organizations that are able to learn from the past and correctly identify how best to move their current PM practices forward. Over 100 years of PM research suggests that, although we have yet to find the perfect recipe to amplify individual and organizational performance, we do know that the most effective PM systems will (a) set clear expectations and goals, and enable revisions as the circumstances shift, (b) provide frequent opportunities for informal and formal feedback, and (c) drive specific behaviors that motivate and inspire employees to improve their performance.
- Pulakos, E. D., Hanson, R. M., Arad, S., & Moye, N. (2015). Performance management can be fixed: An on-the-job experiential learning approach for complex behavior change. Industrial and Organizational Psychology, 8(1), 51-76. https://doi.org/10.1017/iop.2014.2
- DeNisi, A. S., & Murphy, K. R. (2017). Performance appraisal and performance management: 100 years of progress? Journal of Applied Psychology, 102(3), 421-433.
- Gorman, C. A., Meriac, J. P., Roch, S. G., Ray, J. L., & Gamble, J. S. (2017). An exploratory study of current performance management practices: Human resource executives’ perspectives. International Journal of Selection and Assessment, 25(2), 193-202.
- Mueller-Hanson, R. A., & Pulakos, E. D. (2015). Putting the “performance” back in performance management. Society for Human Resource Management and Society for Industrial and Organizational Psychology.