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Performance Management System (PMS) - An Introduction

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

Performance Management System Meaning and its Definition

So, what is performance management system? Performance management system is a 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 goals. PMS thus is a powerful systematic process of ensuring that the organization achieves its strategic goals.

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.

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.

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.

Purpose of Implementing Performance Management System

Managing employee performance is the key objective of establishing a systematic Performance Management system in an organization. These process servers’ six main purposes in the company:

  1. Strategic 

A performance management system is a tool that should be aligned with overall organization goals followed by department goals and individual goals. In other words, the organizational strategic goals should be linked with each activity performed by every department or employee.

  1. Administrative

The performance management system is also set as the deciding factor for employee promotion, demotion, salary increment, transfer, and terminations. It enables to identify the performers, non-performers, or underperformer employees in an organization. It merits the competency and skill level of employees. Hence, it clearly defines the administrative role as well and supports the management decisions.

  1. Communication

It is an effective communication channel to inform employees about their goals, job responsibilities, key deliverables, and performance standards. Further, it is also a structured method to indicate the key areas of improvement required by the employee in order to improvise his performance. In other words, it provides the platform to learn and train on skills, and knowledge for better performance and results.

  1. Developmental

It is the structured method of communicating positive feedback, improvement areas, and development plans. The manager can use various methods like training, mentoring, coaching, etc., and their team members perform better.

  1. Organizational Maintenance

The performance management system is the yardstick for measuring employee, department, and organization achievements and evaluating the performance gaps through various tools and techniques. Hence, it maintains the health of the organization and its performance standards.

  1. Documentation

The performance management reviews, feedback, and forms should be documented and maintained periodically by every organization. It would enable them to look forward, set new targets, design developmental needs, design training and learning programs, and career progression of employees and for the department. Hence, it helps in driving the organizational needs to desirable objectives.

Benefits of Performance Management​ System

In today’s global environment where the market is evolving at a very fast pace, it is important for an organization to understand the benefits of performance management. Therefore, managing employee performance is the ultimate need of an organization. The employees are considered an asset by the organization. The performance management  system serves various benefits to the organization, which are as follows:

  1. It supports providing data to find the skills and knowledge gaps of employees in order to improvise them through training, coaching, and mentoring systems.
  1. It motivates employees to take on new challenges and innovate through the structure process.
  1. It provides new opportunities to employees for their growth and development in their professional careers
  1. It defuses the grievances and conflicts among team members through a proper performance evaluation system.
  1. It assesses the employee’s performance fairly and accurately against the performance targets and standards.
  1. Employees would enable to provide better results because of clarity on their performance targets.
  1. Performance management system provides the platform to discuss, develop and design the individual and department goals through discussion among manager and their subordinates.
  1. The underperformer can be identified through performance reviews and can raise their skills levels objectively. It quantifies the learning needs through individual development plans or performance improvement plans as well.

Click here to learn and understand about:

  1. Performance Management
  2. What is Performance Appraisal


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