Performance Management Systems


Learning Objectives

  1. Define the reasons for a formal performance evaluation system.
  2. Explain the process to develop a performance review system.
  3. Be able to discuss best practices in performance review planning.
  4. Be able to write an improvement plan for an employee.
  5. Explain the types of performance issues in the workplace and the internal and external reasons for poor performance.
  6. Understand how to develop a process for handling employee performance issues.
  7. Be able to discuss considerations for initiating layoffs or downsizing.

A performance management system is an integrated set of processes aimed at helping employees contribute to organizational effectiveness.  At their core, these systems involve the assessment of individual performance. To ‘manage performance,’ the first thing you need to do is find out who does what and how well they do it. After this information is collected, HR managers can feed the data in various systems to help the employee and improve the organization in general. Some of these processes include compensation, employee development, and employee records. Performance management is an important HR process because it goes to the essence of HR (employee performance) and relates to every other HR process. For example, to understand whether or not the design of a job is efficient you use the performance of employees as data. If you want to see whether your new interview protocol is suitable you look at whether candidates who score well on it also become superior employees. For training, you can base your needs analysis on performance appraisal data to target who requires training.  Performance data is essentially the bloodline of HR—it flows through every HR system.

Some researchers suggest that the performance appraisal system is perhaps one of the most important parts of the organization (Lawrie, 1990), while others suggest that performance appraisal systems are doomed and should be abolished (Derven, 1990), making them worthless. One of the most interesting (and thorny) facets of performance management systems is that, while very important, they are also very much disliked by employees and managers. The reality is that no one likes to be evaluated and ‘judged’. As a result, managers are often not comfortable evaluating (and judging) their employees because it can strain relationships. This makes performance management difficult for HR managers to manage: it is very important, and the organization needs the information, but people hate it! In a 2014 survey of the Society of Human Resource Management, HR Professionals’ Perceptions About Performance Management Effectiveness, HR professionals were asked their opinions on their organizations’ performance management systems. These professionals almost unanimously agreed that this process was a top priority for their organizations, but at the same time, more than half rated their own system ‘C+ to B.’

This is not to say that successful performance management is not possible, just that it requires careful consideration, design and implementation. In this chapter we will explain how to design such a system in order to maximize the contributions of employees and raise the effectiveness of the organization.

Why Performance Management?

Performance Management and Compensation

How will salaries and bonuses be determined if not by employee performance? You shouldn’t reward non performance? How do you define performance for the employee/job, i.e. quantity, quality, sales volume, team work, client satisfaction, team objectives, company objectives? The answer to these questions might seem obvious but HR managers have to consider it carefully when developing a performance evaluation process. There is research that shows employees have a greater acceptance of performance reviews if the review is linked to rewards (Bannister & Balkin, 1990). The linking of performance to compensation requires some careful analysis. Think of determining bonuses for salespeople: what should be the bonus for a salesperson working at Garage, a fashion retailer based in Montreal? What should be the objective? Should it be set monthly (a bonus level for every $20,000 in sales) or weekly ($5,000)? Should the bonus be adjusted to store location: the store on St Catherine has higher volume than the store in St Jerome, but it also has more sales employees! All this to say, that this can be a delicate exercise. It is even more delicate when the data is subjective (i.e., supervisor ratings instead of hard sales). Are supervisors fair in their evaluations or do they play favourites? Are they confident enough in their assessment to distinguish between good and poor performers or will they ‘play it safe’ and rate everyone the same? Basically, this process involves the translation of ‘soft data’ (i.e., performance) into ‘hard data’ (i.e., dollars) and when this translation takes place, employees pay attention so it must be done well!

One indirect impact of linking performance evaluations with compensation is that it takes away employee’s focus from another purpose: their use for development.

Performance Management and Employee Development

Performance management is important for employee development. In order for this development to occur, employees need to know what is expected of them and where they stand: what aspect of their work they need to work on (weaknesses) and what aspects they can capitalize on (strengths). Performance management provides the feedback essential for this awareness and change to take place. However, for most people, receiving feedback is not an easy thing. One often becomes defensive and finds ways to discredit the feedback, especially if it is negative. Conversely, giving feedback is also difficult. Managers tend to shy away from these difficult conversations by either avoiding them or by simply ‘sugar coating’ the message. HR managers play an important role in structuring the process so that both employees and managers are equipped and supported when they have these conversations.

Performance Management and Employee Records

A third and final use for performance management is to document HRM decisions and actions – maintaining a full employee history. Basically, this data provides a record of performance ratings and  discussions that took place over the years and the actions agreed upon by employees and supervisors. These records are important in the case of employee discipline and termination, or further development and advancement. It is important to note that employee records, and ‘paper trails’, are a legal requirement when taking legal action against an employee for non-performance and termination.

Designing a Performance Management System

As stated above, there are a number of factors to consider before designing or revising an existing performance management system. For the purposes of this chapter, let us assume we can create a system that will provide value to the organization and the employee. When designing this system, we should recognize that any process has its limitations, but if we plan it correctly, we can minimize some of these.

Defining Performance

The first step in the process of designing a performance management system is to define the performance that is to be measured. By now, it is probably obvious to you that this definition will stem from a job analysis.

Performance Appraisal


The first step in the process is to determine how often performance appraisals should be given. Please keep in mind that managers should constantly be giving feedback to employees. The performance appraisal is a formal process for managing performance on a scheduled basis. Some organizations choose to give performance evaluations once per year, while others give them twice per year or more. The advantages to giving an evaluation twice per year, of course, are more feedback and more opportunity for employee development. The downside is the time it takes for the manager to write the evaluation and discuss it with the employee. If done well, it could take several hours for just one employee. Depending on your organization’s structure, you may choose one or the other. For example, if most of your managers have five or ten people to manage (this is called span of control), it might be worthwhile to give performance evaluations more than once per year since the time cost is not high. If most of your managers have twenty or more employees, it may not be feasible to perform this process more than once per year.  This does not preclude the manager or supervisor from providing ongoing continuous feedback throughout the year.


The person evaluating (evaluator) an employee’s performance is most often their direct manager. However, performance input may also be provided by subordinates, clients, other managers and those who having regular work related dealings with. The employee is also encouraged to conduct a self-evaluation or appraisal. Figure 7.1 “Advantages and Disadvantages of Each Source for Performance Evaluations” shows some of the advantages and disadvantages of each source of information for performance evaluations. Ultimately, using a variety of sources might garner the best results.

A 360-degree performance appraisal method is a way to appraise performance by using several sources to measure the employee’s effectiveness. Organizations must be careful when using peer-reviewed information. For example, in the Mathewson v. Aloha Airlines case, peer evaluations were found to be retaliatory against a pilot who had crossed picket lines during the pilot’s union strike against a different airline.

Management of this process can be time-consuming for the HR professional. That is why there are many software programs available to help administer and assess 360 review feedback. Halogen 360, for example, is used by Princess Cruises and media companies such as MSNBC (Halogen Software, 2011). This type of software allows the HR professional to set criteria and easily send links to customers, peers, or managers, who provide the information requested. Then the data is gathered, and a report is automatically generated, which an employee can use for quick feedback. Other similar types of software include Carbon360 and Argos.


Figure 7.1. Advantages and Disadvantages of Each Source for Performance Evaluations

Source Advantages Disadvantages
  • Usually has extensive knowledge of the employee’s performance and abilities
  • Bias
  • Favouritism
  • Self-analysis can help with employee growth
  • Works well when the supervisor does not always directly observe the employee
  • In the employee’s interest to inflate his or her own ratings
  • Relationships can create bias in the review
  • Can bring different perspectives, since peers know the job well


  • If evaluations are tied to pay, this can put both the employee and the peer in an awkward situation
  • If confidential, may create mistrust within the organization
  • Personal relationships may introduce bias
  • Customers often have the best view of employee behaviour
  • Can enhance long-term relationships with the customer by asking for feedback
  • Can be expensive to obtain this feedback
  • Possible bias
  • Data garnered can include how well the manager treats employees
  • Can determine if employees feel there is favouritism within their department
  • Can be used as self-development tool for managers
  • Possible retaliation if results are not favourable
  • Subordinates may not understand the “big picture” and rate low as a result
  • Rating inflation
  • If confidential, may create mistrust within the organization
  • If nothing changes despite the evaluation, could create motivational issues among employees

Reliability and Validity

As seen earlier in the book, any measurement has to be reliable and valid. Reliability refers to how consistent the same measuring tool works throughout the organization (or job title). When we look at reliability in performance appraisals, we ask ourselves if two raters were to rate an employee, how close would the ratings be? If the ratings are far apart from one another, the method may have reliability issues. To prevent this kind of issue, we can make sure that performance standards are written in a way that will make them measurable. For example, instead of “increase sales” as a performance standard, we may want to say, “increase sales by 10 percent from last year.” This performance standard is easily measured and allows us to ensure the accuracy of our performance methods. A common practice is developing SMART goals – specific, measurable, achievable, relevant and time bound. Also, HRM often performs calibration meetings to ensure that evaluators understand the performance standards being assessed. During these meetings, supervisors and an HR representative openly discuss their evaluations and, most importantly, the rationale behind them. This allows the supervisors (the raters) to establish a common, more uniform perspective on the process so that their evaluations are more reliable.

Validity is the extent to which the tool measures the relevant aspects of performance. The aspects of performance should be based on the essential skills and responsibilities of the job, and these should be reviewed often to make sure they are still applicable to the job analysis and description. There are two common issues that compromise the validity of performance appraisals – contamination and deficiency.

First, contamination occurs when extraneous elements (i.e., factors that are unrelated to performance) influence the evaluation.  For example, think of a retail company that uses ‘weekly sales’ as a performance measure for its salespeople and applies this standard equally for its store in DIX-30 (a large and busy commercial centre) and its store in Magog (a small municipality). The location would contaminate this measure (i.e., sales will naturally be higher in the  high-traffic  store). There  are   many ways to contaminate a performance appraisal. A supervisor liking one  employee more than another (or disliking an employee) is another classic example.

Deficiency occurs when the measure fails to capture the entire range of performance. Sales revenue can also be an example of a deficient measure if it is the only criteria used because it fails to capture other areas that may be important such as customer service, collaboration, etc.

Essentially an effective performance assessment process is one that captures the whole spectrum of an employees’ performance. This level of precision is only an ideal because it is very hard to achieve in organizations. The role of HRM is to try, as much as possible, to minimize the presence of contamination and deficiency in the performance appraisal system. This can be done through various means such as a good design of the appraisal tool and proper training on how to use it.



Bannister, B. and David Balkin, “Performance Evaluation and Compensation Feedback Messages: An Integrated Model,” Journal of Occupational Psychology 63 (June 1990): 97–111.

Derven, M., “The Paradox of Performance Appraisals,” Personnel Journal 69 (February 1990): 107–11.

Field, H. and William Holley, “The Relationship of Performance Appraisal System Characteristics to Verdicts in Selected Employment Discrimination Cases,” Academy of Management Journal 25, no. 2 (1982): 392–406.

Halogen Software, accessed March 22, 2011,

Kent, R., “Why You Should Think Twice about 360 Performance Reviews,” ManagerWise, accessed March 22, 2011,

Lawrie, J., “Prepare for a Performance Appraisal,” Personnel Journal 69 (April 1990): 132–36.

Pulakos, E.D. Performance Management: A Roadmap for Developing Implementing and Evaluating Performance Management Systems: Effective Practice Guidelines, Society for Human Resource Management (SHRM).


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