Ready to Modify Your Performance Management System?

harnessing performance management 3

We hear a great deal during interviews about the merits or otherwise of performance management processes. Some HR people are so disillusioned with them they act as the prompt to look around for alternative employment, the effect can be so negative. So it was interesting to read a recent review of the subject carried out by McKinsey. Here’s an extract from the full article…


Done well, three key practices of effective performance management can unlock positive outcomes for employees and the business, a new survey finds.

These days, performance management is a source of dissatisfaction at many organisations. Large shares of respondents to a recent McKinsey Global Survey on the topic say their organisations’ current systems and practices have no effect—or even a negative one—on company performance. Moreover, they do not see positive returns on investment for the time spent on performance management.

Yet the results also show that when executed well, performance management has a positive impact on employees’ performance and the organisation’s performance overall.

business performanceOur analysis indicates that the key to reaping positive business outcomes from performance management is to establish a system that employees and managers perceive as fair.

To ensure that perception, managers should master three critical practices: linking individual’s goals with business priorities, coaching effectively, and differentiating compensation across levels of performance.

On the whole, respondents express doubt that their current performance-management systems foster strong performance. In fact, more than half of respondents believe performance management has not had a positive effect on employee or organisational performance.

Accordingly, many respondents say their companies are making changes. Two-thirds report the implementation of at least one meaningful modification to their performance-management systems in the past 18 months. These results also show that companies are making a wide variety of adjustments. No more than one-third of respondents report implementing even one of the three most commonly cited changes—simplifying ratings, streamlining formal review processes, and separating conversations about performance and compensation.

Despite the lack of consensus on where to focus improvements, the responses clearly indicate that performance management, when done well, boosts overall performance. Respondents who say their companies’ performance-management systems have a positive impact on both employee and business performance are much likelier than others to report better business outcomes. Among respondents who consider their companies’ performance-management systems effective, 60 percent say their companies have outperformed their peers in the past three years—nearly three times the share of respondents who rate their companies’ performance management as ineffective.


…….among respondents who say their organisations perform well on all three practices, 84 percent report a positive impact on performance management.

1. Linking performance goals to business priorities.

The first practice of the three, linking individual employees’ performance goals to business priorities, not only correlates with a higher level of perceived fairness but also helps companies achieve their strategic goals. Where employees’ goals are linked to business priorities, 46 percent of respondents report effective performance management, compared with 16 percent at companies that don’t follow this practice.

The results suggest that performance goals, besides being linked to strategy, should be adaptable and revisited as market conditions change or extenuating circumstances occur. The regular review of goals helps ensure that individuals in the organisation continue to believe that the system is fair and also has a positive impact on performance management. Of respondents who report effective performance management, 62 percent say their companies revisit goals at least twice a year or on an ad hoc basis.

manager coaching

2. Manager coaching.

Our analysis indicates not only that effective coaching is the strongest driver of perceived fairness but also that there is a direct relationship between effective managers and the effectiveness of a company’s performance-management system.

When managers effectively coach and develop their employees—a practice that less than 30 percent of all respondents report—74 percent say their performance-management systems are effective, and 62 percent say their organisations’ performance is better than that of competitors. Where respondents do not see managers as effective coaches, only 15 percent report effective performance management, and just 30 percent report outperformance relative to competitors.

On specific coaching methods, the results suggest that ongoing development conversations between managers and employees also support better outcomes. In fact, 68 percent of respondents agree that ongoing coaching and feedback conversations have a positive impact on individual performance. Respondents who say that ongoing discussions take place are ten times likelier than others to rate performance-management systems at their companies as effective, and they are nearly twice as likely to say their companies have outperformed competitors. So if organisations do nothing else to improve performance management, they should invest in managers’ capabilities and communicate their expectations for having high-quality coaching and development conversations with employees.

3. Differentiating compensation.

The third practice is meaningful differentiation of compensation among low, midlevel, and high performers.

Less than half of all respondents agree that at their organisations, employee pay is meaningfully different across levels of performance—and the results confirm that this practice links closely with outperformance. Of the respondents reporting differentiated compensation at their companies, 54 percent rate their performance-management systems as effective, compared with only 16 percent at companies without meaningfully different compensation. Among those following the practice, 52 percent say their organisations have performed better than their peers in recent years.

Also on compensation, the results suggest that effective performance management is more likely when organisations separate compensation conversations from formal evaluations. Of the respondents who say their companies separate discussions about performance from discussions about compensation, 47 percent report effective performance management—compared with 30 percent at companies that don’t separate such discussions.

Beyond these key points, the responses also indicate a few secondary—but important—practices that can encourage effective performance management. One is the use of technology to revamp performance-management systems. Respondents say their organisations are using technology for a wide variety of performance-management interventions, from tracking progress against performance goals to monitoring completion of development conversations. Yet other than the completion of forms for formal performance reviews, none of the other applications is used moderately or greatly by a majority of respondents. The value of technology seems to be clear, though, for the companies that have already implemented it. At companies that have launched mobile technologies to support performance management in the past 18 months, 65 percent of respondents say this change has had a positive effect on both employee and company performance. But while technology can certainly enable effective performance management, the most important measures to get right are the three best practices that foster a sense of fairness across the organisation.

Read the full McKinsey article here.