Understanding the Performance Management Framework and Its Role in Employee Development

June 5, 2024
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Understanding the Performance Management Framework and Its Role in Employee Development

Performance management isn’t just nice to have — it’s an essential tool for driving both employee development and organisational success.

Without the right type of performance management framework in place, there can be a lack of communication and clarity between employees and their managers. And it’s estimated that for large companies, this disconnect can cause the loss of millions of euros per year

That’s why developing the right type of performance management framework is so crucial. Linking these frameworks to your compensation strategies also helps encourage employee development and motivation, because the connection between performance and compensation is crystal clear. 

Here’s everything you need to know about performance management. From what your framework should include to how to link performance and compensation, we’ve got it all covered. 

What is a Performance Management Framework?

A performance management framework helps create a formal structure that helps guide employee performance and development. Ideally, it should be tied to your overarching organisational goals.  

The exact framework varies depending on your company’s overall goals, but usually includes:

  • Setting clear expectations
  • Assessing performance against established goals and objectives
  • Providing constructive feedback at regular intervals 

Traditionally, this process involved an annual meeting — the dreaded performance review. But, many companies are moving towards a more modern approach, offering a regular feedback loop that guides performance throughout the year. 

These changes came about, in part, to help boost engagement (and in turn, performance) by offering regular feedback that helps influence day-to-day activities. But switching to a continuous performance management cycle also helps companies remain agile and able to adjust to changing needs. 

Something else that has influenced this shift towards a more regular performance management cycle is the availability of new technology. Now, it’s easier than ever before for companies to move towards creating a more effective feedback culture with integrated performance management cycles. 

Components of an Effective Performance Management Cycle

When companies are considering how to overhaul their performance management cycles, it’s important to include the following components: 

1. Goal setting

Without clear goals, employees don’t know what they should be working towards. There are many goal-setting techniques to choose from, but one of the most popular is SMART goals, which are: specific, measurable, achievable, realistic, and time-bound. Objectives and key results (OKRs) are another goal-setting framework that’s popular with companies that want to tie employee goals to wider business objectives. 

2. Regular feedback

Once goals are discussed and set, it’s crucial to revisit them with regular conversations about how each employee is progressing. This ongoing feedback helps employees identify areas for improvement, growth, and development. This feedback should be two-way, with employees allowed to voice any thoughts about their managers, too. Regular feedback, constructively given, helps build trust and improve the relationship between managers and their teams. One framework that helps guide feedback conversations is the COIN model, which covers: context, observation, impact, and next steps. 

3. Performance reviews

These more formal reviews should take place alongside regular conversations around performance. The frequency of these reviews is usually annual or bi-annual and includes a more comprehensive overview of an employee’s performance than the regular feedback sessions they’ll have over the entire year. Performance reviews are often also tied to compensation and development planning. 

4. Development planning

This component involves outlining a plan for career development. This often includes discussing any training required to boost an employee’s skills and knowledge. It usually also covers identifying any areas for improvement and creating a plan to work on those areas. During these discussions, salary bands can be useful to demonstrate what an employee might earn once they reach the next level of their career. This can help boost retention because it’s easier for them to see what’s possible. 

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Linking Performance Management to Compensation Strategies

A well-structured performance management framework and effective compensation strategies go hand-in-hand. Together, they can help drive employee engagement and performance which in turn, drive business performance. 

Here’s how performance data can be used to help inform compensation decisions:

Creates transparent compensation decisions

When performance-related pay decisions are firmly based on objective data rather than subjective opinions, employees are reassured that their performance is being assessed fairly and equitably, which helps drive trust. 

Helps identify high-performing employees

Performance management reviews help companies identify any employees who consistently meet or exceed their targets. Recognising high performance through monetary or other benefits can help drive continued success while also maximising your budget. 

Encourages continuous development

When employees have clear goals, they know what they need to do to reach them. Basing compensation decisions on performance data helps make it easier for employees to visualise their career development within the company. 

Boosts retention and motivation

When employees know their pay is determined fairly, and that good performance leads to increased compensation, retention and motivation both tend to increase

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The Role of Feedback in Employee Development

Without feedback, we can’t learn. Creating a company culture where feedback is celebrated can help employees grow and develop, which in turn, improves a company’s chances of success. 

This can be challenging though. Often, feedback is seen as a negative thing — highlighting something that employees need to improve and making them feel defensive as a result. But feedback is essential for boosting performance, which is why it’s such a crucial skill to master. 

The development of a feedback culture relies on managers, and their teams, knowing how to both receive and give constructive feedback.  

Here’s what’s important: 

  • Feedback should be delivered with compassion and consideration
  • It should focus on a specific aspect of work, not personal traits
  • It should offer concrete recommendations for improvement and growth
  • It should include follow-up actions
  • It should encourage employees to ask follow-up questions 

Aligning Performance Metrics with Organisational Goals

Sometimes, employees can feel like their actions have little to no bearing on the overall success of the company they work for. This kind of disconnect between individual performance and the wider goals of an organisation can lead to a lack of engagement and performance.

A better solution is to align performance metrics with the overall goals of a company. Doing so creates a culture of shared purpose which then drives business success. 

Here’s what that can look like. 

Boosting employee engagement 

When employees can connect how their performance helps the company they work for meet its goals, they feel more engaged. This sense of purpose helps drive performance and contributes to a positive work environment. 

Adaptability in a changing market

In a fast-moving market, business goals can change quickly. Annual performance reviews don’t allow employees to react to these evolving needs, which can lead to a disconnect between individual performance and organisational goals. Switching to more frequent discussions around performance, with goals linked to wider business outcomes, can help employees not only understand what they’re working towards but refocus their efforts in the right direction. 

Creating a culture of continuous development 

By linking employee performance to organisational goals, companies can develop a culture of innovation, growth, and development. 

Challenges and Solutions in Performance Management 

On paper, switching to a new performance management framework might seem simple. But in reality, it can come with a range of challenges. Luckily, we’re here to suggest some solutions. 

Challenge: Inconsistent performance management processes

Solution: Switching to standardised processes for performance reviews. Doing so reassures employees that the performance data used to inform compensation decisions is objective, and the process used to evaluate all employees is consistent. 

Challenge: Lack of regular feedback

Solution: Switching to a platform that collects performance data. This makes it easier for managers to collect the data they need to inform regular performance reviews. 

Challenge: Lack of transparency around how performance and compensation are linked

Solution: Switching to measurable, objective criteria helps employees understand how their performance impacts compensation. It also means these decisions are made using data rather than opinions, which can help ensure consistency across the company. 

Challenge: Unclear performance expectations

Solution: Establish clear guidelines for the communication of employee goals and how these will be measured. When implementing this new system, it’s important to train both managers and new employees on how to set goals and measure progress. 

How others made it work

When the job search platform Welcome to the Jungle needed to overhaul its compensation strategy, Figures was on hand to help.  

The goal was to create salary bands that would drive equitable pay practices while also recognising each employee’s performance. These salary bands help inform career development, making it easier for employees to anticipate how their salary might change as their career develops. The goal behind this strategy was to build loyalty and retain top talent. 

Salary bands are also used during twice-yearly performance review campaigns, with pay increases being based on this objective, consistent data. This transparent approach also reassures employees that their pay is determined equitably. 

When Artificial Intelligence studio Slimmer AI wanted to promote fair pay and transparency, the HR team knew they needed a strategy that showed their employees what pay to expect, and how they could progress their careers within the company. 

Rather than spend hours manually collecting salary data, Figures provided real-time market data that allowed Slimmer AI to carry out salary benchmarking. This data was used to create salary bands, which are then used during twice-yearly reviews.  

Creating performance management frameworks that just… work 

Performance management frameworks and compensation strategies shouldn’t be viewed as completely separate entities. A better approach is to integrate these discussions around performance and compensation into a holistic framework that drives employee development and organisation success — at the same time. 

Optimise your performance review framework, with Figures. Sign up for a demo, and see what’s possible. 

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