Why Performance Management Is Important (With Definition)

By Indeed Editorial Team

Published 23 August 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Performance management enables managers to track and evaluate the performance of their employees. It can be a helpful tool for motivating employees and improving their performance and productivity. Understanding how it works can help you achieve organisational goals by implementing effective management strategies in the workplace. In this article, we explain why performance management is important, compare it to performance appraisals and list some key components of performance management plans.

What is performance management?

Performance management is a set of strategies for managing the performance of employees. Human resources managers may use a performance management system to track the progress and performance of staff members. Managers can then use this data to evaluate employee performance and establish strategies to improve it. Managers may aim these strategies at individual employees or design them to improve the overall performance of teams, departments or the organisation as a whole.

Performance management strategies may consist of several tools, processes and methods, including the following:

  • goal setting

  • target tracking

  • performance data collection

  • performance data analysis

  • staff appraisal and evaluation

  • team development

  • leadership identification and training

  • employee training and development

  • skill acquisition

  • career progression paths

Why performance management is important

Understanding why performance management is important can give you insight into the benefits it can offer in the workplace. Performance management is important because it provides you with the data and tools to evaluate and improve staff performance. This then allows you to design and implement strategies that aim to increase productivity by improving the performance of employees. Performance management is also important for:

  • providing an effective way to quantify employee performance

  • highlighting employees that may need further training or experience

  • highlighting employee skill sets and their suitability for particular tasks or roles

  • establishing which employees may be suitable for promotions

  • establishing a career path for employees who want a leadership role

  • allowing managers to collect data and track employee progress

  • establishing long-term goals for employees

  • establishing short-term targets that are in line with a long-term goal

  • providing a way for managers to engage with employees

  • enabling accountability and transparency in the workplace

  • creating a system that's flexible, adaptable and customisable to individual goals and needs

  • improving the overall productivity of employees

  • increasing staff retention levels

  • improving the overall productivity of the organisation

Related: Measure of Performance: How to Evaluate Achievements at Work

Performance management vs. performance appraisal

Performance management may offer an alternative to traditional performance appraisals that are common in the workplace. Performance appraisals often focus on evaluating what an employee has already achieved in the workplace by tracking and measuring past performance. Performance management differs because it not only provides a measure of past performance but also evaluates how employees can improve their performance and productivity in the future. You may find performance management strategies to be more comprehensive and informative than performance appraisals, particularly if you wish to drive change within a company.

Related: What Is a Performance Review and Why Does It Matter?

Key components of performance management strategies

Performance management often includes elements like goal setting and leadership development, which you may use under a wider, multifaceted strategy. You can customise the individual components of any performance management strategy so that it suits company targets and is appropriate for the responsibilities, skills and experience level of the staff.

You can create and implement an effective performance management strategy in the workplace by including some or all of the following components:

Long-term goal setting

Performance management is useful because it enables you to align the development of employees with the goals and visions of the organisation. Senior managers may wish to set team, departmental or company-wide targets, while team leaders may wish to set individual goals for their employees. Long-term goal setting may recognise the skills, experience level and career desires of individuals and reconcile these with the company's overall vision. For example, a company may wish to improve its sales targets over the next five years, so a manager may aim to improve the annual sales figures of their employees year-on-year.

Related: How to Utilise Goal-Setting Theory in the Workplace

Short-term targets

Effective performance management may require short-term targets that are in line with long-term individual, team and company goals. Short-term targets are generally most effective when they're specific, measurable and achievable. Managers may find it helpful to set target deadlines, schedule regular meetings with employees to evaluate performance and establish how employees may meet their future targets. For example, senior management may ask for an improvement on sales figures by the end of the year, so a manager sets individual employee targets to increase the number of individual sales each month.

Related: 15 Effective Techniques for Closing Sales to Meet Targets

Data collection and analysis

Data collection tools allow you to collect important statistics on employee performance, a process which may allow for improved tracking of targets and goals. Analysis of the collected data may provide valuable insights into how employees are performing and what they can do to improve their performance. Collective team data may highlight which employees require further training or support and which employees are excelling.

Related: What Does a Data Analyst Do? (With Skills and Career Steps)

Team building

Performance management allows you to focus on team building, which may be useful for hitting collective targets and improving the overall performance of teams and departments. Team building may involve holding regular meetings and discussions where team members can propose ideas or raise concerns. It may also involve providing team activity days, meet-ups outside work hours or team-building weekends away that the company pays for.

Related: The Benefits of Corporate Team-Building Games

Leadership development

Performance management strategies may help you identify employees with potential leadership abilities and ambitions. This then helps you to develop leadership talent in the workforce. For example, regular evaluations and meetings may identify that a particular employee would like to be a team leader. You can then place that employee in a leadership development course and provide them with opportunities to lead projects in the workplace. Leadership development pathways may help employees feel valued and engaged with the company they work for.

Related: What Is a Leadership Development Plan? (With Examples)

Regular evaluations

Performance management methods may benefit from holding regular evaluations. These allow you, as a manager to assess the progress of employees and determine how it aligns with wider company goals. You can conduct evaluations in the form of team or individual meetings. Regular one-on-one meetings with employees may help to foster a sense of inclusion in the workplace.

Related: What Does a PMO Analyst Do? (Duties and Requirements)

Transparency

Performance management may benefit from transparency, which allows employees to better understand the process and the reasons behind it. You can improve transparency within performance management strategies by making the data and statistics you collect available to employees. You can also hold regular meetings to discuss the aims of using performance management tools and ask for regular feedback and opinions from employees.

Training and education

You can improve workplace productivity by developing a regular schedule for training and educational opportunities. This may include workshops, opportunities to join skill development courses or improved access to online training resources. Performance management strategies may highlight which employees can benefit most from further training and education.

Related: Training Program Examples (With Step-By-Step Guide)

Recognition

Performance management strategies provide employees with regular opportunities to gain recognition for their achievements. This may help them feel valued and appreciated and can lead to improved staff satisfaction and retention levels. Recognition may include providing regular praise or highlighting achievements in team meetings. Companies may host an annual awards evening to recognise high achievers or they may reward employees for their achievements with benefits or perks.

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