Performance Management

Article byNanditha Saravanakumar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Performance Management Definition

Performance management is an organizational process in which the performance of an individual, a team, a department, or a company is evaluated as part of collective progress. It is executed by monitoring each unit of an organization and coordinating it effectively and efficiently to achieve its objectives in the best possible way.

What is Performance Management

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Rather than viewing it as a human resource department function, each company stakeholder can adopt it for better results. Unlike performance appraisal, in which the achievements of the employees are reviewed at regular intervals, performance management is a continuous process and is not ritualistic.

Key Takeaways

  • The performance management process in an organization is a set of activities undertaken to meet the company’s goals effectively and efficiently.
  • In the long run, merely considering the organizational goals will not be sufficient. Its integration with individual goals is also necessary. Employees work better when they can identify themselves and grow with their firm.
  • Organizations frequently use it to manage different aspects and facets effectively. However, it requires a minimum level of commitment from each individual to make it a success.

Performance Management Explained

A performance management system is like many other human resource (HR) management tools that aim to bring employees closer to the organization and ensure good output in productivity. Employees are an important part of any entity, and their regular contribution helps any organization progress.

The employee-employer relationship has grown beyond a simple exchange of work and salary. In such a situation, it is important to consider various aspects an effective integration of employees to the firm can bring.

Every enterprise has a purpose and many objectives – to increase profits, enter a new market, increase market share, launch a new product, etc. To realize these objectives, the contribution of employees and different units, like teams and departments, is significant.

Therefore a performance management process that tries to encompass a more-than common purpose is necessary. As the term implies, it is a tool for managing and controlling employee performance. But unlike traditional systems are not usually harsh on employees or strict.

The performance management system aims to provide a friendly and comfortable space for all the firm’s employees to receive comments, share ideas, and optimize their performance at the level of their organizational and personal objectives.

That said, it is necessary to distinguish between performance appraisal and management. Performance appraisal is a regular and periodic process most organizations follow religiously. The responsibility is upon the HR department to maintain the performance appraisal reports and oversee them.

In appraisal, the manager provides feedback to the employees and evaluates them. There are many scientific methods in the appraisal, which score and rank the employee based on their performance and evaluation. Rewards and recognitions, like ‘Employee of the Year or increments, too, follow appraisal.

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The performance management cycle has three stages – plan, monitor, and review. Some also include ratings or rewards. However, rewards are a part of performance appraisal and not management. However, it depends on the organization and its ability to reward the employees for achieving certain tasks.

Irrespective of that, let’s look at the most commonly accepted performance management cycle.

Performance Management Cycle

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  1. Plan – Planning is key. It is deciding beforehand the objectives and the approach to achieve them. It also includes allocating resources and responsibilities. In an organization, planning encompasses operations, finance, logistics, customer relations, etc.
  2. Monitor – Planning as such is of no essence to an organization. Every step and every action also needs to be monitored. Likewise, the desired performance and actual performance should be compared.
  3. Review – Performance management aims to improve the performance of employees and departments. Hence, the organization should improve its performance from one period to the next.


Performance management is significant to organizations, as many are now breaking the traditional organizational setup. As a result, the division is becoming flattered, and the hierarchy is diminishing. In such a case, merely viewing employees as a resource to increase the company’s value may not be the best approach in the long run.

Hence, a system is required which would view employees as assets, and instead of evaluating and overseeing employees’ performance, the focus should be to align the organizational and personal goals. Then, this process should be controlled to track the performance and accomplishment of tasks and objectives.

It helps achieve higher levels of productivity and efficiency. This is because it considers the whole organization a single team working towards the same goal. Therefore, the whole team’s performance is tracked, along with the performance of each unit or employee in accomplishing these goals.

It facilitates clear communication between all the components of the team. Unlike methods like performance appraisal, where the employer examines the employee, this system does not put the members under tough scrutiny. This eases the environment in the organization and promotes open speech.

Aligning organizational and personal goals helps individuals see the company’s growth as their individual growth and simultaneously benefit from it. In addition, satisfaction is important for employees as they seek to develop their careers.

Frequently Asked Questions (FAQs)

1. Are performance management and performance appraisal the same?

No. Performance appraisal and management are not the same. The former is periodic, and the employer examines the employee. Based on this, the employer provides feedback and rewards for excellent performance. But the latter is a continuous process and doesn’t put the employee on the hot seat. Instead, the focus is on accomplishing objectives and the performance of everyone involved.

2. Why sometimes performance management fails?

Performance management might fail due to the lack of structure. For example, it doesn’t have a standard procedure and protocol like most other company processes. However, some claim that is an advantage. Other reasons for failure include overemphasizing recent performances and lack of rewards.

3. How performance management influences effective teams?

The main purpose of performance management is to effectively manage teams or units of employees. Each team has a short-term objective, so it helps them manage every employee and team’s performance and contribution. In addition, it opens up space for free communication and is flexible.

This has been a guide to Performance Management and its definition. Here, we explain its stages and importance. You may also find some useful articles here:

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