Building Performance Management Systems That Work
March 20, 2023
Authors: Devon Brown PhD + Daniel Montgomery
Performance management has been hotly debated for the last two decades. This debate started in the early 2000s with a push toward Continuous Performance Management (CPM) away from the traditional performance management with the sole annual performance review. Household names, such as Adobe[1], Microsoft[2], Deloitte[3], Gap[4], and GE have been at the forefront of this trend, that most often looks something like this:
| From | To |
| Annual retrospective of past performance | Continuous performance management |
| Evaluation of past performance | Coaching conversations focused on future performance |
| Standardized job description | Holistic perspective on the human |
| Individual effort | Team sport |
| Tight linkage of numeric ratings to compensation | Looser coupling, no formal rating or ranking |
| Highly formalized record keeping | Informal conversations without formal documentation |
Despite these much-needed changes to performance management, we frequently see organizations’ CPM systems failing to achieve the desired results: buy-in and engagement from employees and managers; being seen as a valuable tool of leadership and team member development (vs being perceived as drudgery and a necessary evil imposed by HR); and frequent and quality conversations, about performance, development, and feedback. Why is this?
Performance Management as a Cover-up for Poor Leadership
It is our belief that performance management systems are too often implemented to cover up for and address mediocre leadership. Great (and even good) leaders don’t need a performance system to dictate how and when to set and review goals; or recognize the importance of giving frequent feedback and the value of having conversations about performance, short- and long-term development and career paths, engagement, employee’s experience, and well-being. In 20+ years of experience in leadership and organizational development for both the authors, we have seen that these are qualities of good to great leaders. We’ve also seen that the most common behaviors of mediocre (to poor) leaders are to be distracted by solving immediate problems or focusing on the immediate people, operational or customer needs. Rarely do these leaders take time to step back and be strategic when it comes to their team’s and team members’ individual performance: setting goals, providing timely feedback, growing, and developing talent, career planning, etc.
The challenge of contemporary CPM systems is generally not the architectures, the design, or even the software, but a failure in leadership, and in ensuring alignment and support with other organization’s systems, values, practices and even strategy. Outlined below are 4 Principles that, if effectively addressed, will set the stage for performance management systems have greater impact.
PRINCIPLE 1: Create a culture of quality, ongoing conversations
Much of the focus and efforts to transform traditional performance management systems have focused on the architecture of performance systems and the technology. Debates about ratings vs no-ratings, goal structures, feedback and evaluation methodology, and tracking expectations are all important, but unfortunately are not the most important focus. These technical features are meaningless without rigorous and uncompromising focus on quality ongoing conversations.
The key issue here is both frequency and quality. Performance conversations are most effective, impactful, and drive performance when they happen frequently. The ideal cadence is context dependent, varying by the role, individual employee, and the work. While operational or tactical one-on-ones are important, even critical for getting work done and driving results, most managers do not spend nearly enough time on the bigger, more strategic, and development-oriented conversations. A great model is the check-in (borrowing from Adobe) – an ongoing, two-way conversation where employee and manager discuss performance and career growth, and exchange real-time feedback…a meaningful conversation about what’s going well, what can be improved, and what to focus on next to drive business impact and career growth. [5]
Regardless of the performance tool or technology used to enable performance tracking, what matters is the quality of the conversations. So, while the frequent check-in is important and critical, the quality of these conversations is where the magic happens. Having healthy conversations that surface the real issues impacting employee performance, engagement, and retention, requires that leaders cultivate an atmosphere of psychological safety. Google’s Project Aristotle[6] studied over 200 teams at Google to determine the factors that lead to high levels of team performance. Psychological safety — meaning that team members “feel safe to take risks and be vulnerable in front of each other” stood well above any other factor. People who feel safe are far more likely to speak the truth of what they are observing and learning, admit mistakes, and suggest innovative solutions. And, Google found, they feel more engaged and are less likely to quit.
Action Steps:
- Develop a performance management architecture that is built around frequent and ongoing conversations. A structured approach such as Adobe’s quarterly Check-in[7] focusing on 3 conversations (expectation setting, development, and feedback) provides a framework for these conversations. We like to add a 4th conversation – well-being.
- Effective performance conversations are not just about frequency, equally, if not more important is the quality of these conversations. It will benefit the organization to ensure that leaders and employees alike have the skills and mindset to:
- build psychological safety[8][9];
- ensure the process and conversations are collaborative (a great resource for coaching conversations is Michael Bungay Stainer’s book, The Coaching Habit[10]);
- be forward focused[11];
- pay attention to not just results and outcomes but to growth and progress (see Carol Dweck’s work on Growth Mindset[12]), critical especially when aligning with goals that have a stretch element.
PRINCIPLE 2: Drive what Matters
Goal setting in all performance systems provides metrics by which organizations can measure performance. It is critical that these metrics reinforce the specific behaviors and outcomes we desire. Unfortunately, many performance goal metrics are problematic. We have seen performance goals that are unbelievably complex, encompassing business goals, development goals, organizational values, or leadership principles, as well as team goals, all of which are weighted. The result, lack of focus – too many goals to pay attention to, and the complete neglect or focus on certain goals can be watered down by the aggregate power of the rest of the goals.
Work is changing, for the most part becoming more complex, requiring interdependencies and collaboration with others and other teams. With that comes a need for performance management to NOT focus solely on the individual. While there is a place at times for individual goals, it is the team goals that truly deliver innovation. For this reason, setting and measuring individual goals is often unpractical and even counterproductive. When the entire team is required to work collectively to accomplish a purpose, team goals (and even rewards) are an effective way to drive outstanding collaborative effort. Increasingly, the movement to team goals is being identified as a trend in performance management systems.[13][14]
Too often, performance management systems encourage individual star performers and pay less attention to team performance. In fact, one of Project Aristotle’s more provocative findings was that “Who is on a team matters less than how the team members interact, structure their work, and view their contributions.”
One approach that many organizations have adopted is to have team goals based around measurable outcomes (achieving certain measurable targets) – the WHAT, and then have individual goals focused on HOW the individuals do their work – is it aligned with organizational values, are they a team player or collaborative, are they customer focused, etc. This latter measure is critical to ensure toxic, unhealthy, and destructive behaviors are not rewarded in those who maybe high achievers. We have all worked with the top performer who consistently hits or exceeds targets (the What), yet is unorganized, regularly asks, for work involving others, to be rushed or at the last minute, forcing others to drop what they are working on to accommodate this individual’s needs (because it is “for the customer” or a “high profile project”). Or there is the jerk[15] whose behaviors create a toxic workplace[16][17], but is excused from higher behavioral standards because they continue to be a top performer.
For goals in individual and team performance management to be effective and support the organization they must drive not only the desired business outcomes, but the behaviors (leadership principles or organization values) that are desired by the organization.
Action Steps:
- Goal setting can and should be a team sport. Ensure individual goals not only drive the desired behaviors and outcomes that matter but are aligned to support the goals of other team members, teams, and the larger organization.
- Encourage collaborative behavior by using team bonuses to reward outstanding goal performance on the part of an entire team.
- Keep goal setting simple, focus the attention of goals on a few categories, such as business results (the WHAT) and leadership behaviors (the HOW). This focus ensures that the necessary strategic work of the organization is accomplished in a manner that is aligned with the organization’s values or leadership goals, to support the desired culture.
PRINCIPLE 3: Balance Stretch and Agency
As organizations learned to adapt to COVID and now the economic, talent, and the redefining of the workplace challenges, they are being forced to rethink many fundamentals of doing business. A recent Mercer study[18] shows that nearly 50% of C-suite executives see that the pandemic helped them realize that “the fundamental shift in our business required a complete reset around work, the workforce and the workplace.” This shifting is often played out at the individual (and team level), requiring both to innovate, think differently, explore new ways of working, which translates to a need for stretch or what Jim Collins coined BHAGs,[19] goals at the individual and team level. Traditional performance management is incompatible with the stretch goals.
There is value in having goals provide inspiration and aspiration as well as the measurable and tactical activities necessary to drive these outcomes. Yet there is a challenge to linking stretch or BHAGs with individual performance goals. If rewards are tied to goal achievement, it is only natural that individuals will sandbag, setting goals that are achievable rather than stretchy. If organizations emphasize the performance of routine job duties and following the rules, and that punish people for failure, a rational person learns not to “rock the boat.” If this is the kind of culture you want, you should NOT be setting stretch goals at the individual level, or perhaps at all.
To reap the benefits of setting stretch goals, performance systems must be able to account for and reward stretch goal achievement and efforts (even if stretch is not fully met). They need to encourage stretch goals that transform without risk of individual “failure” and subsequent performance and compensation implications.
For goal setting to drive focus and priorities, individuals must have the ability and the control over the activities and behaviors necessary to achieve the desired results. As roles change and increase in responsibility and leadership, so does the level of impact and agency. An individual contributor or front-line supervisor may have a limited span of control, and therefore relatively narrow goals. Conversely a department head or VP is ultimately responsible for a much wider area and therefore a wider span of goals. While the VP of HR may have a broad overarching goal, focused on improving employee engagement, a Training Specialists may have a narrower goal around the onboarding training, which may ultimately serve to help with engagement. If an individual is going to be measured on a goal, they must have the resources to impact the results.
Action Steps:
- Consider using OKRs[20] (Objectives and Key Results) for goals that require new practices, ways of thinking, or transformational change to performance and use SMART goals or KPIs for business-as-usual goals, tasks, activities.
- Individuals should have the ability to impact or control the variables that drive (stretch) goal achievement.
- For individual goals, explore a combination of stretch goals conjunction with achievable goals.
- If compensation/bonus is (to any extent) associated with goal achievement, then ensure that rewards are distributed not just for stretch goal achievement but for valuable and impactful efforts, transformations, and results accomplished in the name of stretch goal achievement.
PRINCIPLE 4: Decouple Performance and Compensation
As discussed previously, linking goal achievement to performance, and therefore rewards, has some potential intrinsic challenges. If not addressed – sandbagging goals to ensure success, and potentially reinforcing the wrong behavior (the heroic individual vs the team player) becomes commonplace. It is difficulty therefore to have a conversation about performance systems without addressing compensation/rewards.
Most organizations utilize some form of pay-for-performance for making compensation decisions. Increasingly, though, we are finding that pay for performance is not as powerful of a motivator as we have historically thought, and in fact may reduce performance. According to a study by Willis Towers Watson[21], a leading compensation consultancy, only 20% of North American employers say merit pay is effective at driving higher levels of individual performance. Only half agree that annual bonuses boost performance. And only a third say their merit pay program works to differentiate pay based on individual performance. Other studies have shown that extrinsic rewards, to the extent they are effective, have a relatively short-term impact. Merit-pay and bonuses are soon taken for granted and forgotten. And traditional performance management conversations can have a negative impact on morale and voluntary attrition.
Intrinsic motivators play a much bigger role in performance than most companies assume. Daniel Pink’s review of a wide body of research showed that three factors most influence motivation and performance[22]:
- Autonomy: the ability to have control over one’s priorities based on observation of what’s most important
- Mastery: the capacity to keep learning new things
- Purpose: meaningful work tied to greater impact in the world
McKinsey research shows that praise from immediate managers, leadership attention (e.g., one-on-one conversations), and a chance to lead projects or initiatives are no less, and in some cases, even more effective as motivators than common financial incentives. And work from the NeuroLeadership Institute focuses on the importance of perceived pay fairness (an argument for transparency of compensation in relation to market compensation).
Many CPM experts recommend decoupling performance management from compensation[23][24]. John Doerr, the godfather of OKRs, suggests that compensation and goal performance conversations, specifically when dealing with stretch goals, be amicably divorced, saying “OKRs and compensation can still be friends. They’ll never totally lose touch. But they no longer live together, and it’s healthier that way.”[25]
But what does “decoupling” mean exactly?
Is it realistic for a manager to separate her perception of someone’s performance from her perception of the level of deserved compensation? We think not. Much has been made of the Silicon Valley practice, at least in some firms, of simply paying enough, based on market rates, to take money off the table. One suspects that this is a function of a particular high-growth industry rather than an approach that works in every industry, job market, and stage of the economic cycle.
We’ve said that in most cases, few individuals can be held solely accountable for business outcomes, the results that aspirational or stretch goals point to. Beyond that, there’s more to organizational life than defined business outcomes, such as leadership behavior and values. An all-too-frequent scenario is an employee that produces stellar results but does so in a manner that does not align with the company values (i.e., working solo vs collaboratively, leaving the proverbial train wreck behind due to aggressive behavior, rudeness, arrogance, or poor communication). Another potential scenario is the employee that may miss or barely achieve a goal but provides invaluable organizational contribution through other work and efforts. This points to a need for manager discretion and appreciation for how individual attributes benefit the health of the organization.
There must be an appraisal and compensation strategy that recognizes the difference between achieving safe versus stretch goals. Would you rather reward an employee who always sets safe goals and inevitably achieves them? Or an employee who takes a risk, tries hard, doesn’t quite get there, but learns and contributes a lot along the way? Which one deserves the merit increase or bonus more?
Action Steps:
- Allow for manager discretion in handing out merit increases or bonuses, not a narrow, mechanical approach tied to measurable achievement of stated goals. Reward ambition, contribution and learning rather than predictable performance of safe goals.
- If you can, pay people enough to get money off the table, and rely on better proven, intrinsic motivators of engagement and performance. Roles where this may not be appropriate for many include traditional sales roles with a commission structure, executive roles, or certain roles in which there are clearly defined outcomes or tasks that do not allow for variation or are compliance based.
- Part of the problem is the fear-inducing nature of traditional performance appraisals. When an anxious conversation is paired with news about adjustments to compensation, the association of the two is stamped on the recipient’s mind. Laszlo Bock, former chief people officer for Google, made it a practice to separate performance coaching sessions from compensation discussions by at least 30 days.
Conclusion
Without a doubt, rethinking performance management continues to be a pressing topic for HR, and organizations in general. The recent emphasis on humanizing work and the need to address the impacts of the great resignation make this topic even more relevant. Organizations continue to struggle with creating performance management systems, not because the architecture or the design is faulty, but because these HR driven systems are too often in place to ensure leaders do the work of leading, which creates an environment of compliance rather than valuing performance systems and the important performance conversations of CPM. The 4 Principles outlined in this article provide a framework for rethinking about and aligning performance management with the ultimate purpose: to ensuring clear focus and prioritization of work, develop and grow team members and leaders, and offer a meaningful metric for success.
Interested in finding out more about how you can create a Performance Management System that works with contemporary business needs? Reach out to the authors:
Devon Brown, Founder, Inciting Leaders. Email: devon@incitingleaders.com Web: www.incitingleaders.com
Daniel Montgomery, Managing Director, Agile Strategies. Email: dmontgomery@agile-strategies.com Web: www.agile-strategies.com
[1] https://www.adobe.com/check-in.html
[2] https://learn.microsoft.com/en-us/dynamics365/human-resources/hr-develop-performance-management-overview
[3] https://hbr.org/2015/04/reinventing-performance-management
[4] https://www.hbs.edu/faculty/Pages/item.aspx?num=49707
[5] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.adobe.com/content/dam/acom/en/aboutadobe/pdfs/adobe-check-in-toolkit.pdf
[6] https://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html
[7] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.adobe.com/content/dam/acom/en/aboutadobe/pdfs/adobe-check-in-toolkit.pdf
[8] Edmondson, Amy, The Fearless Organization.
[9] https://www.strategy-business.com/article/Using-Neuroscience-to-Make-Feedback-Work-and-Feel-Better
[10] Stainer, Michael Bungay, The Coaching Habit: Say less, ask more & change the way you lead forever.
[11] https://www.gartner.com/smarterwithgartner/motivate-employees-with-ongoing-forward-looking-feedback
[12] Dweck, Carol, Growth Mindset.
[13] https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/the-organization-blog/from-me-to-we-the-next-shift-in-performance-management
[14] https://www.gartner.com/en/articles/6-predictions-for-the-future-of-performance-management
[15] The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn’t
[16] See: Kusy, Mitch and Holloway, Elizabeth, Toxic Workplace!: Managing toxic personalities and their system of power.
[17] https://sloanreview.mit.edu/article/how-to-fix-a-toxic-culture/?utm_source=googleads&utm_medium=adv&utm_campaign=MITSMR%20-%20Articles%20-%20DSA&gclid=Cj0KCQjw2cWgBhDYARIsALggUhrUkrD6j0r-q7S24uxFoWlkFB5em0c-A1lm-Rzp4874RT9H9yiQQBsaAtroEALw_wcB
[18] https://www.mercer.com/our-thinking/career/global-talent-hr-trends.html
[19] https://www.jimcollins.com/concepts/bhag.html
[20] See, John Doerr, Measure What Matters or https://www.whatmatters.com/faqs/okr-meaning-definition-example
[21] 2016
[22] Pink, Daniel, Drive: The Surprising Truth About What Motivates Us.
[23] https://www.performancemagazine.org/separate-performance-compensation-strategy/
[24] https://www.betterworks.com/magazine/financial-compensation-linked-to-employee-performance/
[25] Doerr, John. Measure What Matters.
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