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A guide to understanding employee performance management

Learning and Development | 8 Min Read

A guide to understanding employee performance management


Performance management is a set of processes and systems that involve establishing a continuous feedback and communication process between employees and their managers, with an aim to achieve the organization’s strategic goals. This strategic and systematic process of performance management aims to facilitate learning and development, enabling employees to perform better in their job roles.

The goal of performance management is to help employees build on their skills to reach their full potential, boosting their chances of success and contributing to the organization’s goals.




How is performance management different from performance appraisals

Employee performance management and performance appraisal are two different concepts with different purposes, focus, timeframes, etc.

Performance management refers to a holistic, ongoing process that aims to improve employee performance, development, and engagement through the evaluation of employee performance in comparison to predefined goals. Performance management is a proactive approach that utilizes a broad range of inputs and data and fosters a performance-driven culture.

Performance appraisal is a component of the performance management system. Performance appraisals occur annually or at specific intervals, and they have a more structured and formal feedback process that relies on a snapshot of an employee’s performance during a specific period of time.


The purpose of performance management

The main aim of performance management is to provide managers and employees with a clear and consistent system within which both can work, improving organizational productivity. For employees, a performance management system shows them the path to success by measuring their performance, providing feedback, and offering opportunities for training and development. Performance management also allows employers to understand how their employees are working by tracking their progress and providing continuous feedback to facilitate employee development.


The goals of performance management

  1. Providing clear definitions of what is expected from an employee in a specific job role
  2. Increasing employee engagement
  3. Developing leadership and managerial skills in the workforce
  4. Boosting organizational productivity by improving employee performance
  5. Incentivizing accomplishments by developing performance reward programs


The significance of performance management

Future-proofing workforce skills

According to the Global Talent Trends 2024 report by Mercer, 98% of organizations report large skills gaps within their workforce, which makes reskilling and upskilling an urgent need.

Establishing a continuous conversation with employees, monitoring their skills, and providing learning and development opportunities can help uncover performance gaps and hidden potentials of employees. With this knowledge, it becomes easier for organizations to work towards closing these skills gaps.


Improved employee engagement

Effective employee performance management sets expectations for employees, helping them understand the impact of their job role on the achievement of organizational goals. Continuous performance management also provides employees with opportunities for learning and development, which helps them feel valued in the organization and makes them more open to receiving feedback and improving on it.


Increased employee retention

Having a clear understanding of the career path toward promotions and knowing what is expected of them improves employee engagement. Further, employees always prefer organizations that are invested in their learning and development.


Trust-based culture

A culture that promotes trust and communication begins with leadership initiatives that trickle down to all employees, including the performance management process and policies. Managers providing honest, constructive feedback and being open with their employees will encourage employees to communicate as well, fostering a healthy company culture.


Improved performance

Effective employee performance management can significantly improve organizational performance. As employees learn and develop their skills, they are able to perform better in their job roles.


Enhanced leadership development

The partnership built between managers and employees through performance management and consistent employee development can help organizations prepare future leaders from within the company. As employees develop their skills consistently, they can move up through the company, effectively building a leadership pipeline for the organization.


Optimized recruitment processes

Well-defined roles and performance standards make it easier for recruiters to hire top talent as they can better understand the hiring requirements and assess whether a candidate is a suitable fit for the job role or not. Clearly defined roles and performance standards also help L&D managers understand the exact areas that need improvement, making it easier for them to create effective employee training programs.




Types of performance management

1. Performance appraisal

The traditional performance appraisal method involves regular interactions between managers and employees, where the managers observe and assess employee performance all year round and provide their feedback during the appraisal period. Performance appraisals involve formal discussions about an employee’s performance, achievements, and areas for improvement.

Types of performance appraisals

  • General appraisal: Throughout the year, there is continuous communication between employees and their managers, based on which managers provide their feedback to the employees and set new goals for them.
  • 360-degree appraisal: Feedback and performance assessments in this method focus on the strengths and weaknesses of an employee and are collected from their direct manager, peers, other managers, and sometimes from their customers as well, to gain a holistic understanding of their performance.
  • Technological performance appraisal: These appraisals evaluate the technical expertise, competencies, and skills of employees during the appraisal period.
  • Employee self-assessment: Employees are asked to evaluate their own performance using this method. Their assessment is then compared to the assessment provided by their manager.
  • Project evaluation review: Evaluation and feedback is provided immediately after a project is completed.


2. Objectives and key results

Objectives and key results, or OKRs, encourage organizations to create, relay, and monitor goals and results. The transparent framework of OKRs aligns employees and teams with business objectives in a quantifiable manner and ensures that employees are aware of organizational goals. Generally, OKRs identify three to five goals, each of which has three to five key performance indicators or KPIs.


Types of approaches to performance management

1. Behavioral

The behavioral approach to performance management involves identifying and evaluating the behaviors of employees. This approach is best suited for job roles where individual employee results are difficult to measure. The approach involves providing employees with detailed feedback on their behaviors and mapping desirable future behaviors.


2. Result-based

The result-oriented approach to performance management involves evaluating employees based on objective criteria. The approach is best suited for job roles where there may be multiple ways to do a particular job, but the focus remains on the output in terms of quantity and quality. Under this approach, the end results are the prime focus, not how they were achieved.


How performance management works

Performance management programs help managers and employees get on the same wavelength about goals, expectations, and career progress and help them understand how an employee’s job role aligns with the overall vision of the organization. It views individual employees in the context of the broader workplace.

Performance management aims to define what an employee’s performance looks like and develop methods to measure the defined performance. It involves goal setting and tracking, marking milestones, and creating well-defined roles and performance standards for employees. However, instead of confining the approach to year-end reviews and feedback sessions, performance management should focus on continuous feedback, where every interaction with employees can be turned into a learning opportunity. Performance management tools can be used to adjust workflow, recommend courses of action, and provide support to the employees in achieving their objectives.




Stages of performance management

1. Planning

The first step is all about establishing performance expectations with employees. These goals should also be clearly outlined in job role descriptions at the time of hiring so organizations can attract the right talent. Post-hiring, the expectations should be reconfirmed, and SMART goals and performance management metrics should be set. Actively involving the employees in the planning process increases employee satisfaction and motivation. It is also important to ensure that performance management plans are flexible so they can be adjusted along the way.


2. Monitoring

After planning comes the monitoring stage, during which employee performance is regularly monitored and assessed based on the set goals. Providing feedback on performance regularly instead of once a year gives employees the opportunity to correct any issues that may be highlighted soon. While performance management software can help track employee performance in real time, reports and data should not replace face-to-face discussions.


3. Development 

During this stage, the data and feedback collected about an employee’s performance during the previous stage are analyzed for insights that can help boost employee performance. Refresher courses, performance coaching, training programs, and other learning and development methods can be used to correct underperforming employees.


4. Rating

Employee performance should be rated throughout the year and during the performance appraisal period. The rating process should collect 360-degree feedback from peers and the managers of an employee. This will help quantify the performance of employees and understand the value added by each employee to the organization. Based on the performance evaluation, changes can be made to their development plans.


5. Rewarding

Recognizing and rewarding good employee performance and development progress is a crucial part of the performance management process. Whether it is through recognition, praise, salary raise, award, or promotion, it is important to reward superior performance within the organization.


Automating the employee performance management process

Performance management focus has shifted towards helping employees reskill and upskill their competencies to meet set performance standards. That is why it is becoming increasingly important for organizations to leverage the capabilities of performance management systems to automate the process. These systems work throughout the year to analyze the strengths and areas of improvement of employees and help identify their potential for growth and development. Feedback based on these metrics, delivered on a regular basis, can help employees effectively improve their performance.


Benefits of automating performance management processes

1. Real-time feedback

According to a Gallup report, around 74% of employees have performance evaluations conducted only once a year, and only 15% of employees feel motivated to improve their performance after these assessments.

This only emphasizes the fact that traditional performance management practices may be outdated now. Performance management systems can provide consistent and ongoing feedback to employees throughout the year, reinforce positive behaviors through seamless feedback exchange across different departments, and facilitate effective monitoring of the development progress of employees.

2. Enhanced transparency 

Through performance management automation, organizations can ensure transparency and accountability among all stakeholders. Performance management system provides the capability to continuously monitor how employees work through collected data. This makes it possible for managers to furnish each employee with tailored feedback. Performance appraisals that are based on objective, real-time insights empower employees to take charge of their professional development.

3. Optimized training programs

Automated performance management systems enable organizations to utilize real-time employee performance data to establish personalized development goals for each individual, which can also be used to customize their training programs for maximum efficiency. Performance management systems can also help monitor and evaluate the efficacy of different approaches to employee development.

4. Higher employee engagement

Unrealistic performance expectations, lack of career growth and development opportunities, and a shortage of purposeful tasks are some of the primary factors that lead to employees leaving an organization. Automating performance management establishes employee evaluation practices based on data-driven methods, eliminating the risk of unachievable performance targets. Additionally, an automated performance management system also helps plan training programs that are tailored to the requirements of every employee.


The impact of AI on performance management

Artificial intelligence has completely changed the way organizations approach performance management. Along with automating the process, AI also harnesses the power of data analytics and advanced algorithms. AI goes beyond assessing collected performance data by processing huge amounts of data to provide valuable insights. It also mitigates biases from the performance management process and provides objective assessments based on predefined criteria. With capabilities for performing predictive analyses, AI can evaluate large volumes of historical performance data and forecast future performance trends, helping organizations make proactive, informed decisions.




How to improve the performance management process

1. Understand the needs of the workforce 

Ineffective performance management practices hinder the workforce more than they help. Therefore, assess the current processes and tools being used to understand what is working and what is not. It is also crucial to consider what employees expect from the performance management program. When evaluating the existing processes, it is important to talk to as many employees and managers as possible to understand the requirements of the workforce.


2. Ensure continuous feedback 

The happiness and satisfaction of employees are important for all organizations. However, for employees to feel motivated at work, they need to know if their work matters to the organization and why.

Establishing continuous conversations and regular feedback sessions are important for driving employee motivation and engagement. However, what is discussed during these conversations and feedback sessions is just as important as the frequency at which they are being held. There is no point in conducting regular feedback sessions if there is no value being provided during them. Motivation comes from a future-based outlook that focuses on growth and development opportunities. That is why it is important for managers to authentically engage with their employees to provide constructive feedback and discuss their goals and progress regularly.


3. Offer necessary resources to managers 

Managers are an important part of the performance management process, they play an important role in engaging, motivating, and developing the workforce. Therefore, it is essential to ensure that they are trained enough to provide and receive constructive feedback and that they have been coached in the essential elements of a continuous performance management process. Time should be set aside for meeting with and training managers on important performance management practices. Having the right HR technology designed to support a continuous performance management process is also important in this step.


Best practices of the performance management process

1. Define the objectives of the program 

Before conceptualizing the performance management program, it is important to first have a clear understanding of what you want to accomplish through the program. Performance management programs can be designed to increase organizational productivity, identify and develop potential leaders, streamline the compensation process, and improve employee engagement and retention. Knowing exactly what the organization wants to achieve through the program will make it easier to build a suitable performance management process.


2. Define each job role in detail 

Write concise and relevant job role descriptions and set basic performance expectations for each. It is challenging for an employee to succeed in their job role if they do not understand what is expected from them, how they should work to meet those expectations, and what end results are expected.


3. Create performance plans for goals 

After goals have been set for employees, a performance plan should be developed to achieve them. Meeting year-long goals is challenging for many employees as the goals seem to be too large at first, overwhelming the employees before they even start. With a well-thought-out performance plan, employees can visualize the path that will take them to their goals, breaking the journey into smaller and more achievable segments.


4. Involve the employees in the process 

Performance KPIs have a direct impact on employees, and unrealistic KPIs can demotivate them. It is important to ensure that employees also have a say in the goal-setting process. Asking employees for their opinions and feedback can offer valuable input on the performance management process. Further, employees should also be involved in creating their development plans. Clearly defined plans for career progression not only empower employees to take charge of their professional growth but also help reduce turnover rates.


5. Track employee progress toward performance goals

Use performance metrics and analytics to review key performance areas. Continuously monitoring the progress of employees and tracking how their goals are progressing allows employers to intervene when required.


6. Create guidelines

The performance management cycle should include creating guidelines for each job role in the organization. These guidelines or policies should stipulate specific areas for search, opportunities, and experimentation and if there are any limits to the same. With clearly defined guidelines to follow, employees tend to achieve more.


7. Set SMART goals

SMART goals advocate creating specific, measurable, achievable, relevant, and time-bound goals. Each employee should have their own set of personalized key performance indicators so they have a clear understanding of what is expected from them, and managers can track their achievements too. These goals should be further personalized based on the job role, function, and professional ambitions of the employee.


8. Monitor performance continuously 

Continuous monitoring involves tracking the performance and progress of employees in real time with a focus on the end results and output being delivered. Continuous monitoring may also include keeping tabs on employee sentiment, which can help managers address the root cause of any issue or problem that may surface.


9. Use 360-degree feedback 

360-degree feedback involves anonymous evaluation surveys that are used to gather insights about an employee’s performance. These assessments provide a holistic image of the performance of an employee by tapping into data collected from their peers, direct reports, managers, and sometimes their customers or clients. 360-degree feedback may even include a self-evaluation from the employee. This approach supports professional growth and encourages open communication and teamwork.

Using AI, comprehensive data can be collected and analyzed to understand patterns, eliminating the need to manually sift through numerous survey reports from multiple people. With the capabilities offered by AI, assessments can be transformed into forward-thinking tools, propelling organizations toward efficiency, and revolutionizing the entire concept of employee performance management.


10. Reevaluate and modify KPIs 

It is important to regularly reevaluate set KPIs to ensure their relevancy to the evolving market landscape. In order to ensure that your performance management process is effective, it is crucial to make sure that the goal and expectation setting for the employees are aligned with the latest industry trends.


11. Reward strong performers 

When a team or employee meets a set goal or is performing very well, their efforts should be rewarded. Rewards are a great way to improve performance and motivation within the workforce.


12. Use the right tech solutions 

Leveraging the capabilities of HR technology and software can significantly improve the effectiveness and efficiency of your performance management process by removing biases, assessing employees objectively, and facilitating honest discussions. As long as you have a clear strategy in place, performance management systems can help save a lot of time. These systems collect performance management data in real time and identify patterns to provide actionable insights.




Examples of performance management for high performers

1. Stretch goals

Stretch goals are ambitious targets that exceed the current abilities and resources of individuals and are usually quite challenging to meet. High performers generally thrive on challenges, and stretch goals provide the motivation and direction they need to go beyond their performance levels. Stretch goals are not meant to be 100% achieved, but they are designed to push one’s boundaries while providing them with new growth opportunities.


2. Mentorship programs 

Mentorship programs help build leadership pipelines for the future and reduce turnover. High-performing employees are always on the lookout for opportunities to learn and grow and pairing them with mentors who can guide them is one of the best ways to achieve this.


Examples of performance management for underperformers

1. Expectations and feedback 

To help employees improve their performance, it is important to clearly communicate what is expected from them. It is equally important to provide regular constructive feedback regarding their performance and areas of improvement. This helps employees understand where they may be lacking and offers them the opportunity to improve their performance.


2. Coach and mentor

Assigning a coach or mentor to work closely with underperforming employees and help them improve is an important step. Mentors can offer guidance and practical tips to employees for enhancing their skills and improving their performance, which also showcases to the employees that the organization wants them to succeed.


3. Progress tracking and regular check-ins 

Once the strategy for helping an employee improve their performance has been created and communicated to the employee, allow the employee a reasonable amount of time to implement the suggestions and improve their performance. Weekly meetings can be scheduled to track their progress and encourage them further.

During these meetings, employees can also relay how they are developing and what aspects still pose a challenge for them. Regular meetings hold the employee accountable and provide managers the chance to follow through with required training or support and reevaluate the action plan based on the employee’s progress.


How Mercer | Mettl can help

Mercer | Mettl offers a range of technological solutions for talent acquisition and management, including online talent assessments and advanced tools for high-potential identification, leadership development, succession planning, training needs assessment, and much more. To help organizations optimize their performance management processes, Mercer | Mettl has built a highly refined 360-degree feedback tool, 360View. The solution is packed with valuable features and capabilities needed by organizations to streamline performance management. Some features of 360View include customization freedom, scalability, skills gaps identification, auto-saved responses, email failure notifications, customizable email templates, personalized development plan creation, and real-time performance tracking.





Performance management is crucial for organizational success, and it depends on the overall performance of its employees. A performance management system that focuses on setting clear goals, defining performance expectations, and implementing regular feedback empowers employees to grow and develop with each passing day, thereby improving organizational productivity and growth.



1. What is the difference between performance management and performance appraisal?

2. What are the three pillars of the performance management cycle?

3. What is management by objectives vs objective and key results performance management?

Originally published June 23 2024, Updated June 23 2024

Written by

Vaishali has been working as a content creator at Mercer | Mettl since 2022. Her deep understanding and hands-on experience in curating content for education and B2B companies help her find innovative solutions for key business content requirements. She uses her expertise, creative writing style, and industry knowledge to improve brand communications.

About This Topic

360 degree feedback is a method of collecting anonymous feedback about an employee from multiple sources - manager, peers, subordinates - for appraisals and organizational planning. 360 degree feedback empowers organizations to make better people decisions.

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