Why Your Small Business Needs A Performance Management System

Can we be honest?  No one really enjoys writing employee performance reviews.  Not many managers take pleasure in tracking employee goals.  And yet, everyone likes to see their organization and company flourish.  For small businesses, the idea of introducing a framework for managing performance may seem like a waste of precious energy and time.  I can see why that is the case. 

But while some parts of the performance management process may not be very enjoyable and can at times be laborious, there are also many underlying benefits that such frameworks contribute to the success of your organization.  To illustrate this, let’s dig into what a performance management system is, and then highlight some of the many advantages to measuring and managing employee performance.

What is a Performance Management System?

Before we get into why you need one, let’s briefly talk about what a performance management system is.  Imagine fielding a sports team. Eight of the eleven players are talented and top-notch athletes. The other players know the rules and contribute, but to a lesser level.  How do you go about improving this team?  How do you first identify, and secondly address specific development needs particular players?  Or, when do you know it’s time to make cuts?

Performance management is the framework through which managers can measure employee output as well as pinpoint and address the development needs of individual players.  Implementing such a program can improve the overall capability of an entire team; after all, you’re only as strong as your weakest link.

An effective employee performance management system will consist of 5 key components:

1. Employee Goal Setting
2. Employee Development Planning
3. Regular Manager and Employee Check-Ins
4. End-of-Cyle Performance Evaluations
5. Regular Compensation Adjustments

The process starts by setting goals at beginning of the period, typically on an annual basis.  It is against these goals that an employee’s performance will be measured at the end of the cycle.  Next, you will document an employee’s development targets for that same period. Over the course of the year, managers will regularly check-in with the employee on progress towards goals and development objectives.  At the end of the cycle, managers evaluate and ultimately score each employees’ performance according to a preset rating scale.  Merit raises are distributed based on the employee’s performance rating.

However, the benefits of managing employee performance extend well beyond just these five things.  Now that we have a clear idea of what we’re talking about, here are 13 advantages of measuring and managing employee performance.

1. Driving Organizational Focus on Strategic Objectives

I’ll start by making a pretty bold statement: an employee performance framework has the ability to focus an entire organization.  How does performance management drive focus, you ask?  When done correctly, the goal-setting component of managing performance should link every employees’ activities to a short list of strategic organizational goals, as outlined at the top of the organization.

Not only does this connection between individual goals and strategic initiatives offer employees a clear understanding of how their work supports the big picture, but it also helps leaders reinforce those select few things that are really important to the organization’s success.  So, if done correctly, everyone in the organization should contribute to a handful of key business priorities.

2. Standardizing How Employee Contributions are Measured

In order to reduce the subjectivity around how employees are evaluated, performance management systems introduce standard protocol for how managers measure their staff’s successes and contributions to the organization.

Every employee (including managers) goes through the exercise of setting goals that align to the key organizational initiatives.  Further, everyone is tracked to those stated goals over the performance period. At the end of the performance cycle, every employee is evaluated according to the results he or she achieved – results were missed, achieved, or exceeded.  This framework ensures that all supervisors evaluate employees on an equal playing field and that all employees are equally held accountable.

3. A Dedicated Focus on Employee Development

Let’s face it.  With all the daily pressures of getting things done, most managers are not going to dedicate much time, if any, to employee development.  We have customer commitments to meet, which will always take priority if we don’t force ourselves to do otherwise.

A robust employee performance structure, therefore, will prescribe a regular drumbeat for mangers to discuss development and growth needs with their employees.  Development planning is a standalone, deliberate exercise that outlines the near-term training, mentoring and hands-on experience an employee needs to grow and learn.

4. Providing Regular Feedback Accelerates Employee Growth

Thorough performance management guidelines will also require managers to deliver timely and periodic feedback to staff, which helps employees make small adjustments over time.  If feedback were only given once a year, employees will have fewer data points upon which they can adjust their behavior.  Further, receiving feedback on a mistake one made 9-months earlier will usually be less impactful than if it were within a week or two.

Thus, an effective performance management routine that requires managers to hold regular one-on-one meetings will augment the more formalized quarterly, semi-annual or annual performance reviews.

5. To Create a Fair, Scientific Approach to Compensation

Thus far, I’ve highlighted some of the basic components and benefits of performance management.  Moving forward, I’ll highlight some of the hidden advantages of managing employee performance, starting with compensation.

At the end of the year, you have a small pile of cash to reward Mary and Michael with performance raises.  How do you decide how much to give?  They’ve both been with the organization for the same amount of time, and both have similar job functions.  Do you split the pile of money you have equally?  Or do you reward one over the other based on how they did? If so, how?  Now, imagine you have 10 employees.  How do reward raises in a fair way that reflects what each employee accomplished?

Results-based performance frameworks lend themselves to standardizing things like pay, promotions and bonuses.  At the end of the cycle, it should be clear if a given employee achieved, exceeded or missed their objectives.  From this, you can directly, and fairly, attach performance pay increases.

6. Identifying Trends and Skills Gaps in the Organization

Another benefit of driving regular feedback discussions with staff is the insight it can reveal to managers and leaders.  While periodic feedback is intended to provide employees with continuous coaching and mentoring, casual conversations such as these also give managers a chance to identify departmental strengths, issues and trends.  Along with this, supervisors and leaders are given an opportunity to identify important issues such as general skills gaps, training needs, and other roadblocks to the team’s success.  If you never talk about performance, you’ll have a hard time trying to identify such needs.

7. Long-Term Employee Development is Crucial

Over a period of several years, employees want to see their careers grow and evolve. Today’s workers want to continuously improve their skills.  A formalized performance management framework helps organizations craft development plans that detail the steps throughout their journey.  Does this mean you cannot do this without a formal system in place?  No, but it is significantly harder to have long-term career discussions with employees when you lack any data, history or infrastructure.

8. Identifying Top Talent For Succession Planning

No matter how big or small your team may be, succession planning is a vital component of maintaining a stable, sustainable organization. Succession plans for an organization chart possible career growth paths for employees, develop retention mechanisms for top talent, as well as identify key individuals whom the organization can lean upon when there are sudden or unexpected job openings. A comprehensive performance management system will include deliberate succession planning activities over the course of every year to maintain an up-to-date “short list” of the key talent within the organization.

RELATED:  How To Develop a Succession Plan For Your Team

9. Giving Senior Leadership Visibility Into The Organization

As with succession planning, monitoring and managing employee performance usually involves periodic discussions about the company’s workforce with its senior leaders. Whether the discussion is simply to outline training plans for the next year, to address critical skill gaps, or to discuss top individuals by name, performance management frameworks offer an avenue for senior leaders to look deep into the workforce.  This is particularly hard to do the bigger your organization is, and the further removed leaders get from the working level.  This added visibility enables helps senior leaders make decisions about organizational development, strengths and weaknesses.

10. To Develop Managers into Mentors

Not every organization has the luxury of putting professional managers into supervisory positions.  Often times, department managers are simply subject matter experts in that field who are put in charge of the team based on his or her expertise.

Implementing a system that emphasizes regular feedback sessions between a supervisor and their employees allows managers to develop their own leadership and mentoring skills.  Further, it gives a chance for senior staff to identify the organization’s future leaders and motivators.

11. Serves as a Vehicle for Documenting Concerns

Management is not always a walk in the park, and dealing with poor performance is one of those areas where many managers struggle.  Whether an employee’s quality of work is just mediocre, or it is in need of a sharp turn around, performance management frameworks create a system in which all parties (managers and employees) know what is expected.  Further, they give managers the ability to record and document concerns.  If the employee is unable to improve and  is ultimately terminated, managing the situation is far easier with a structure in place.

RELATED: Managing Your Poor Performers

12. To Recognize and Reward Employees for a Job Well Done

While you do not need a performance management system to reward your staff, such frameworks make it very easy for managers and business leaders to reward employees for a job well done.  Additionally, building rewards systems into your organization’s DNA serves as a great motivator and engagement booster for your people.  If you see that Johnny is consistently exceeding his targets, an award or promotion becomes a no-brainer!

13. Word Gets Out!

The advantages of managing employee performance are not limited to setting goals and development plans of your current employees.  A strong talent management system is also a great vehicle for recruiting future employees.  Employees talk to their friends.  Today’s workforce wants to work in places where they can learn, grow and pursue their career ambitions.  A strong emphasis on this is a great recruiting tool for job-seekers.  The graphic below illustrates how many of these performance management aspects link to one another.

Managing Employee Performance Enhances Your Organization’s Capability

As these 13 advantages of monitoring and managing employee performance illustrate, there is a lot more to the process than just setting goals and development plans.  These types of systems create a frame of reference for multiple organizational tools, including succession planning, skills gaps assessments, reward mechanisms and termination protocol.  While some of these aspects of running a smooth business do not require such a system, having one in place greatly improves your ability to plan, organization, and manage your workforce.

Looking for More on Managing Performance?  You Might Like…

• How to Manage Your Top Performers
• Coaching Through Questions
• How to Write a Performance Review
• 29 Great Ways to Develop Your Employees