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Performance Management System 

Performance management system is a powerful management tool facilitating the process of continuous improvement in performance by setting strategically aligned goals, assessing and reviewing progress, and developing knowledge, skills and abilities of employees for successful completion of the organizational goals.

Though performance management is often considered to be a concept within management accounting, in today’s organization, performance management system has become an integral function of human resource management. Performance management system in human resource management (PMS in HRM) is an interdisciplinary subfield deriving concepts from management accounting, organizational theory, organizational behavior, and strategic management in a single integrated form.

Conceptually, performance management system enables organizations to improve the overall performance by improving the performance of individual employees and subsequently, team, department, and entire organization. It endeavors to produce better results by constantly working on planned goals and level of competencies required to maintain the standard of performance proposed. Let’s explore Performance Management System one by one:

Table of Content

What is Performance Management System in HRM?

The performance management system is the systematic approach to measuring the performance of employees. It is a process through which the organization aligns its mission, goals, and objectives with available resources (e.g. Manpower, material, etc), systems, and set the priorities.

Performance management system consists of a number of inter-dependent holistic activities, that when managed efficiently, leads to effective people management. Just as Human Resource Management consists of various management activities and processes summarized as planning, organizing, directing and controlling; PMS too represents a set of management processes like planning, implementing, reviewing, and taking curative actions to ensure agreed level of performance.

Performance is the core of any PMS where core activities revolve round setting objectives, assessing development needs, continuous review of performance, timely feedback and other corrective measures. Performance management system enables the human resource management practices to match with the organizational strategies and objective. PMS is a strategic link between the human resource inputs and practices, and organizational performance.

Performance management system in HRM is vital for the development of high-performance work system which is an essential requisite for the sustained organizational performance. It has now been found out that there exists a positive relationship between HRM practices and firm performance. Particularly, ability-enhancing, motivation-enhancing, and opportunity-enhancing activities of HRM practices directly influence high performance work systems, individual, team, and department level performance and subsequently the organizational performance.

The execution administration framework is a constant procedure of characterizing and conveying the activity parts and duties, execution desires, goals, and setting their needs between the boss (administrator) and subordinates (workers). It incorporates association, office, and representative shared objectives and targets which are lined up with frameworks and assets. It is the channel of providing clarity about goals and also improving the business processes through various methods and mechanisms.

Performance Management System Meaning Definition

Performance management system is a structured process through which organizations can cultivate talented employees for the competitive business.

Performance becomes the key concept in performance management system. And for managing performance it is first necessary to measure it. However, performance management system is not just concerned with the results but also how the results have been achieved. Thus, performance is a multidimensional construct which can be outcome or behavior or both at the same time. Some components of performance can be labeled as:

  • job-specific task proficiency,

  • non-job specific proficiency (ex. OCB, cooperation, dedication, enthusiasm, persistence, etc.)

  • written and oral communication proficiency

  • demonstration of effort

  • maintenance of personal discipline

  • facilitation of peer and team performance

  • supervision/ leadership

  • management/administration

  • meeting target / exceeding target

Thus, performance management system consists of both output (results), and input (behavior) taking care of “what” is achieved and “how” it is achieved.

Performance Management System Definition by Experts

Performance management system in a nutshell comprise of a set of activities which when implemented holistically leads to effective employee management. Many attempts have been made to answer what is performance management system definitions by a number of scholars and experts. However, given the complexity of size and type of organization, and nature of performance management system itself, it is difficult to provide a clear, precise and comprehensive definition of performance management system. Many scholars and experts have given their own version of performance management system definition:

Focusing on management control systems, Ralph W. Adler, suggests a working definition of performance management system as "the process by which senior managers of an organization influence employees throughout the organization to implement the organization's strategy and, when needed, the process informs the initiation of changes to the strategy."

In a similar line, Walters (1995), defines performance management system as a process of “Directing and supporting employees to work as effectively and efficiently as possible in line with the needs of the organisation”.

Lockett (1991) defines performance management system as “The development of individuals with competence and commitment, working towards the achievement of shared meaningful objectives within an organisation which supports and encourages their achievement”.

Continues process and strategic alignment are considered two main components of aperformance management system. Herman Aguinis (2014) thus defines it as a“continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization.”

Similarly, T. V. Rao (2016), defines as “doing all that is required to continuously improve performance of every employee in relation to his/her role, dyad, team and the entire organization in the context of the short and long term goals of the organization.”

Further recognizing the importance of systematic procedures, Briscoe and Claus (2008), defines, “Performance management is the system through which organizations set work goals, determine performance standards, assign and evaluate work, provide performance feedback, determine training and development needs and distribute rewards.”

With myriad of performance management system definition, there exists a common ground that, it is systematic, a continuous process and is strategically aligned with the organizational goals and objectives.

Click here to understand about: Performance Management Meaning

The competency, skills, and knowledge gaps are also identified through this process which can be improved by providing guidance, training, coaching, and mentoring to employees or teams at different levels and designations. It optimizes the results through a roper channel and process which reduces the conflicts and grievances among teams or employees. Because each individual is clear about the expectations from his/ her role and puts their efforts to meet performance standards.

This process can be applied to a single department or to the whole organization.  It aims to continuously monitor and measure the performance standards against the desired goals and objectives.

The strategic focus of business goals makes performance management system in HRM distinctive with its own unique set of activities. PMS in HRM represents connection between organization’s strategic integration to its HRM processes linking goals and direction of the organization to its values, performance and competitiveness. Performance management system in HRM is very important organizational necessity for effective talent management, performance improvement and competitive advantage.

Types of Performance Management System

There is a unity with the concept and objective of performance management system but there is no fixed way of doing it. Different organizations have implemented PMS in their own way suiting their needs, goals and objectives. Over the years few methods of PMS have gained more support and are now considered as some established way of conducting PMS. While measure is key to assessing any performance, the type of measure that is used for any assessment depends on the objectives and goals of each activities and approach to these objectives, measurement, and reviews differentiates types of performance management system. Some well-established types of performance management systems are:

Balanced Scorecard: A distinctive feature of balance scorecard method is how goals and objectives are distributed from top to bottom based on organizational strategy and vision and how are they measured pulling employees towards organizational vision. The aim of the balanced scorecard method is to have a balanced presentation of both financial and operational measures by combining financial, customer, internal process, innovation and learning perspectives of the organization. The cascading down of organizational vision and strategy to team and individual levels, unique measurement, and their alignment to the organizational strategy is the cornerstone of the balanced scorecard method.

Management by Objectives (MBO): It is a management style where organizational goals are related with the individual performance. Clear goals and objectives are set where managers communicate it with individual employees and fixed targetsare agreed upon. The employee performance is then regularly monitored and performance results are assessed against the set target. MBO is often considered as precursor to the modern performance management system. Its overemphasis on quantifiable measures and output without consideration for qualitative input and output, makes it inferior by modern standards and other methods are preferred instead.

The 360-degree Feedback: It is multi-source feedback method where one’s assessment is done by a number of people such as manager and subordinates or even colleagues, clients and customers. 360-degree feedback provides a rounded view of performance from many different aspects of the job. Though 360-degree feedback has not been found a very effective methos due to cultural issues and thus is not popularly used, but it is still a preferred method for those in supervisory roles particularly when used for developmental purposes.

The Forced-Rating Method: Initiated by General Electric (Vitality Curve), it is one of the most popular method where the ratings of employees are assigned according to an approximate normal distribution and hence is also called bell-curve method. Using the distributed rating, employees can be further categorised into groups using percentage or other ratio methods. Though it is usually considered a good way of finding out top, middle or bottom performers of the organization and provides some consistency in the approach, it is usually resented by employees for being forced into some strait jacket. Moreover, in a long run, it is not very helpful in improving the overall performance of the organization.

Visual Assessment Method: As an alternative to the rating method, visual assessment method assessment of individual contribution which is represented visually on a performance matrix showing both output and behaviour. A typical matrix usually presents performance levels on vertical axis and behavioural potential on horizontal axis while some matrix represent “how” of performance on vertical axis and “what” on horizontal axis. Effectiveness of this method depend on the quality of the performance analysis and it is often criticized as an “over-formalized approach”.

Objective and Key Results (OKRs) Method: This is not a performance management system in true sense, rather a goal setting method for the team. Initially pioneered by Intel, aggressive goals are set for the team which are always quantifiable and broken into individual key performance indicators (KPIs). The set objectives determine what employees need to achieve and key results frame how are they going to achieve the goal within the specified timeframe. OKRs are reviewed and revaluated parodically. Depending upon the business needs, this method allows objectives and key results to be dynamic as well. While completion of goal is expected, it is not a necessity, rather progress towards completion is given more importance. Many agile organizations in modern times use this method along with performance management system to assess performance and manage reward and talent management.

Functions of Performance Management System

The only core function of performance management system is to track and help manage performance of the employees. However in doing so, PMS touches many related aspect of talent management. The function of performance management system revolves round empowering, motivating and rewarding employees to bring the best out of them. Some of the important function of performance management system are:

One of the basic function of PMS is to make clear understanding among employees as to what is expected from them by the organization in terms of results and behaviour.

An effective performance management system sets measurable goals and objectives for every employee in alignment with the organizational vision and strategies.

The core function of the performance management system is to manage performance. Effort (input) made by employees in achieving the goals are monitored and reviewed with respect to results and behaviour and a clear feedback is provided to make any corrective measures. This also helps in suggesting training and development needs of the employees or any other competencies.

Many organizations use performance management system as input to rate and categorise their employees for planning training needs and rewards management.

An effective performance management system does not simply function as a control mechanism to monitor performance but empowers and gears employees towards continuous improvement enabling them in achieving their goals.

In sort the function of performance management system is to maximize potential of employees so that they as individual, team and organization achieve their objectives. Organizations use performance management system for role clarification, performance planning, performance development, and performance measurement.

Performance Management System Process

It is advised to treat performance management not as a system but rather as a flexible process. In fact performance management is a natural process of management and is often described as a continuous self-renewing sequential cycle. There are four basic sub-processes in a systematic performance management process:

Planning: Planning outlines what to do and how to do. It involves activities like role definition, reaching an agreement regards goals and objectives, deciding performance standards, look for required competencies and create an effective performance and development plan.

Action: It represents actual activities and tasks carried out by employees to achieve planned goals and objectives.

Monitoring: Monitoring involves checking on progress of employees towards the completion of the planned objectives and goals based on the agreed measurement. It is a continuous process involving feedback on performance, semi-progress reviews, updating objectives and measurements if necessary and make corrective actions and recommendations.

Reviewing: It involves assessing achievements and progress towards completion of the planned goals and objectives, making note of any hindrances or problems and make report for corrective actions that may become the basis of the next performance management process cycle. In the reviewing phase performance ratings are given which organization may use for number of purpose like rewards management.

Purpose of Performance Management System

The real purpose of performance management system is to correct poor performance, sustain good performance, and improve overall performance. By adopting performance management system organizations aim to integrate their HRM processes with their strategic vision and goals. This strategic focus linked with the values and performance of the organization provides direction to the HRM functions and help improve internal processes and financial results. Though PMS can be used for a variety of purpose, the overall purpose of performance management system can be categorised as:

Strategic Purpose: Performance management system links organizational goals with the individual goals and tried to streamline employee behaviour towards attaining individual and organizational goals. Another strategic importance comes to light in onboarding process.

Control or Administrative Purpose: Performance management system serves as a useful and valid information source for making many administrative decisions like merit increase, pay, job responsibility, promotion, rewards, retention and termination, career growth, beside others.

Developmental Purpose: The feedback mechanism of performance management system can be used to identify strength and weakness as well as other cause of deficiency in performance, along with ways to improve them. The corrective actions aimed at improving performance by providing training and development, coaching, and counselling, help employee enhance their knowledge, skills, abilities, competencies and work behaviour which not only enhances overall quality of human resource but also help them in their career path.

Informational Purpose: Performance management system serves as an important communication system where performance plan as individual goals and objectives are communicated with the subordinates along with clear communication as to what is expected of them and later proper feedback is communicated with clear information on improvement areas.

Organizational Maintenance Purpose: Performance management system can also help in workforce planning by determining goals priorities and talent inventory. It can also help in assessing future training needs, organizational performance levels and effectiveness of Human Resource interventions.

Documentational Purpose: PMS uses a lot of information and also provides many other types of information which can be used by the organization for several documentational purpose.

Objectives of Performance Management System

The objective of performance management system is to improve performance through reviewing, assessing, appraising, guiding, coaching, motivating and rewarding such that employees rise to their potential and give their best performance in the organization. Some of them can be summarised as:

  • Improving organizational performance

  • Aligning individual objective with organizational goals

  • Develop a performance culture in the organization

  • Improve the overall level of individual performance

  • Aligning individual behaviour to the organizational values

  • Provide rationale for individual development

  • Better performance-pay decision making



Benefits of Performance Management System

There are many benefits of performance management system when implemented well in an organization. Some benefits may include:

Increased motivation to perform: Receiving feedback or how one is doing in ones performance, and past recognition increases motivation of employees for future endeavours.

Increased Self-esteem: Receiving feedback also fulfils the basic need to be recognized and valued in the organization which increases self-esteem of the employees.

Sub-ordinate insight: The monitoring and review process help direct managers gain insight about their sub-ordinates which help managers built better relationship with them and have a better understanding regards their performance and contribution

Job definition clarity: Performance management system helps define job clearly so as to measure them in terms of KPIs. This gives employees better understating of overall job, required results, and behaviour.

Enhanced self-insight and development: PMS helps participants develop better understanding regards their strength and weakness which help them define better career path.

Fair administrative actions: Performance management system uses valid information based on performance which makes many administrative activities like salary increment, promotions, rewards management merit based, fair and appropriate.

Clarity of organizational goals: PMS helps streamlining employee’s goals and objectives in line with the organizational strategy. This gives employee more information on expected goals and improve employee acceptance towards performance expectation by the organization.

More competent employees: By timely review on actual output of employees against performance standards and laying foundation for training developmental activities, PMS helps make more competent employees.

Employee differentiation: Performance management system can assists in segregating employees based on their performance levels into various categories like unsatisfactory, moderate, or good performers which can also help in creating appropriate interventions on timely basis.

Improved communication: Clear information about role, objective, goals, and expectation from managers to subordinates is an essential perquisite about any effective performance management system which further enhances overall accountability and communication.

Organizational change: Performance management system also enforces timely appropriate interventions if needed. Once goals and objectives are decided upon PMS can steer organizational culture in new direction in line with organizational strategy to make change possible.

Increased motivation, commitment and stay intention: A well implemented performance management system has been found to increase overall satisfaction level of employees keeping them with more motivated to perform well, with higher commitment levels, and all these together work towards increasing stay intention of employees.

Enhanced employee engagement: An effective performance management system produces more engaged workforce. There is strong positive correlation between a good performance management system and employee engagement.


Performance management system is an important link between human resource management and business strategy. In today’s globalized and hyper-competitive market, effective talent management with continuous learning and growth is the top priority for becoming innovative and remaining ahead of competition. A well implemented performance management system 

Explore more about :

  1. Performance Management

  2. What is Performance Appraisal




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