What is performance management? (and how to use it)

By Indeed Editorial Team

Updated 21 November 2022

Published 3 January 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 is a way for managers to measure if their employees are performing well. Using performance management may help you and your team meet organisational goals more effectively. Performance management is important for organisational success. In this article, we discuss what performance management is, the benefits of performance management and how to make and manage a performance management system.

What is performance management?

Managers in a company use performance management to assess and give feedback to employees about their work performance. Performance management is the system managers use to assess and provide feedback. This system helps to communicate expectations and guidelines to employees to make their goals easier to meet. In a performance management review, managers might give both positive and constructive feedback, so their employee feels encouraged. If you motivate staff, they are more likely to succeed, have the required skill set, resources, support and are accountable for their actions.

Related: 5 steps to creating an effective training and development program

Performance management benefits

Performance management has a direct impact on organisational success. When used correctly, performance management can improve the quality of work of both managers and employees. Here are some of the main benefits of performance management:


By using performance management, managers can hold employees individually accountable. A significant part of performance management is goal setting. When you clearly outline these goals to both manager and employee, the expectations are clear and the employee knows what to do to be successful.


Managers often link performance management systems with an increase in overall performance in organisations. When the managers integrate a performance management system into an organisation, employees know and understand expectations.


Productivity, related to performance, is a benefit of performance management. If employees know that their managers are rating them on their performance, they are most likely to work harder to achieve their goals and meet their standards.


Performance management revolves are feedback. In an effective performance management system, managers give constructive and positive feedback and the employee can take that feedback, adapt their work and improve.

Organisational culture

When you integrate a performance management system successfully into an organisation, it becomes a significant part of the organisational culture. This may improve honesty between two employees and conflict resolution, as employees know their ability to work with others is part of their performance review.

Reduced stress

If the managers communicate the performance management system to employees clearly, the employee understands what you expect of them. By understanding the expectations, employees can focus on their work instead of feeling stressed about confusing guidelines.

Relationship development

A performance review is an opportunity for managers and employees to develop a relationship built on trust and honesty. Since performance reviews generally only occur between one manager and one employee, the employee may feel comfortable speaking honestly to their manager. In turn, it is the manager's responsibility to create a welcoming environment where the employee feels safe and comfortable.

Employee retention

If the performance management system is successful, employees and managers can have an open dialogue and leave the review feeling positive and ready to improve. Happier employees tend to stay longer with a company.

Related: What is a toxic workplace and how to avoid it?

How to make a performance management system

Performance management has the power to improve an organisation in almost every area. A productive and successful performance management system goes well beyond a single annual review. You could consider implementing a performance management system that functions as a cycle of feedback and improvement throughout an entire year.

Here are some of the essential aspects to creating a successful performance management system:

1. Create definitive role positions with clear expectations

The first step of creating an effective performance management system is defining each role within the organisation. Each employee is required to have a designated role that is clearly defined and communicated to them. Each role has a set of designated responsibilities that belong to the person in that role. The manager would likely communicate all of these responsibilities directly to the employee.

Related: What is a management model? With practical examples

2. Provide managers with performance management training

If managers are going to execute a performance management system effectively, they may benefit from participating in training around performance management. Once managers have received training in performance management, they can provide employees with positive and constructive feedback and deal with difficult interpersonal situations.

Related: What does an assistant manager do?

3. Provide employees and managers with resources for growth

A large part of performance management is an improvement - the goal of all feedback. Resources for growth may be available as soon as an employee joins your organisation. Onboarding and orientation likely can effectively prepare employees for their job. Additionally, on-the-job training, mentoring and upskilling opportunities are excellent ways to help employees improve from their feedback.

4. Reward behaviours that improve organisational growth

Rewards can be a powerful incentive for employees to work hard and deliver exceptional work. Positive rewards may come in the form of money such as a bonus or additional paid time off. Some employees are most motivated by hearing praise from their manager. Understanding your employees' motivations is a key aspect of using performance management.

5. Punish harmful behaviours

Employees are to know and understand what potential negative consequences may occur if they continually fail to meet their designated responsibilities in their role. For example, if an employee shows up to work late once, he may receive a verbal warning. If he is late a second time, he may receive a written warning. If he is late a third time, he may be let go from the organisation. Each organisation needs to decide what its rules and punishments are.

6. Treat people as your most valuable resource

A major part of performance management is human resource management. You may get the most out of your performance management system if you see your employees as the most valuable resource your organisation has.

Related: 7 effective skills to help you become a better leader

How to manage a performance management system

Effective performance management systems require a certain amount of attention and oversight. Here are some steps you may follow in your performance management system:

1. Maintain a plan

A successful performance management plan could start when an employee joins your organisation. Your onboarding process ideally might prepare your new employee for their role and communicate all of their role responsibilities to them. It may also be useful to describe the other key roles and responsibilities to the new employee.

Managers can apply the planning stage to all current employees. Having regular discussions with your employees to talk about their strengths, weaknesses and areas for improvement helps the employee to learn. It may be necessary to add or take away responsibilities from an employee. Throughout every step of the process, a manager is required to express positivity and appreciation for the employee's efforts towards organisational success.

2. Take action

Assessment is only one portion of performance management. Performance management requires managers to act. Managers can actively involve themselves with their employees. This may involve daily activities, meetings or mentoring when an employee needs help. A successful performance management system requires a manager to take ownership of their role as a leader.

Acknowledging your employees' hard work is important. It may be beneficial to allow time each day to discuss the things that went positively and how your employees succeeded. Employee recognition may increase your employees' confidence, build trust in you as a manager and cultivate healthy relationships with you and your team.

3. Measure appropriately

One key aspect of performance management is determining how to measure your employees' actions. It is important to consider that employees perform different tasks at different levels with different amounts of resources. One way companies are measuring their employees' success is by assessing their most valuable contributions to the organisation as a whole.

4. Reward your employees

Having a fair reward system is critical to performance management. For example, some companies choose to use a numerical scale where they rate their employees' performance on a scale from one to five. Whatever system you choose, it's important to use the same system across the entire organisation to promote fairness.

5. Conduct performance reviews

Reviewing involves a set meeting between a manager and an employee. Sometimes organisations also include a human resources (HR) representative at the meeting due to organisational policy. It may be useful to start with only positive feedback, explain your constructive criticisms and conclude with more positive feedback. This would be the appropriate time to disperse rewards as a result of successful performance.


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