The Financial Benefits of Proper Performance Management

We all like to think we are doing a great job when it comes to performance management. Unfortunately, research suggests the opposite.

An astonishing 77 percent of HR executives believe performance reviews aren’t accurate representations of employee performance, while only 14 percent of employees strongly agree performance reviews inspire improvement.

Considering how costly the performance review process is — $120,000  per year in terms of just the value of the time spent on the process —it’s troubling that employees and managers alike say annual reviews are not as effective as they should be.

The question is: What makes for great performance management, and how does great performance management translate to profitability?

Managing Goals Means Better Motivation

As a manager, you already know that your employees like to work toward goals. Goals give them purpose and provide clear paths to accomplishments. Unfortunately, it is all too common for busy teams to adopt the “set it and forget it” mentality when it comes to managing goals.

Great performance management relies on defining success. By establishing goals, employees and managers articulate exactly what the organization needs to happen in order for the company to reach its potential. Clear goals also give employees guidance for their own career trajectories, as well as some much-needed extrinsic motivation to stay on track. Furthermore, a good goal-setting approach helps managers more easily see who is and isn’t meeting those goals, spurring better performance conversations and employment decisions.

Overall, a great goal-setting process leads to more engaged employees, and companies with engaged employees have 8.6 percent higher profit margins. Goal-setting can also be good for retention, as 78 percent of employees would stay with their current employer if they knew their career path within the organization. By giving employees goals, you can reduce your organization’s recruiting costs.

Constructive Criticism Boosts the Bottom line

Today’s employees are aware of just how important constructive criticism is, and they know that receiving such criticism gives them a chance to do better. One study found that 57 percent of employees prefer corrective feedback to praise, and that 72 percent believe their performance would improve if their manager offered more corrective feedback.

The effect of constructive feedback on your bottom line is apparent. Constructive feedback helps employees get back on track and work more effectively, which means business is conducted more efficiently.

But constructive criticism only works if it is truly constructive. It should be rooted in helping an employee perform better. If this is not the intent, the employee will be able to tell — and they will lose motivation. When providing constructive feedback, be sure to point out successes as well as opportunities for improvement. Help the employee see where their skills are still valuable. Work with the individual to create a performance plan, and offer yourself as a resource.

As a manager, you should practice what you preach. Make it abundantly clear that you are also open to constructive feedback when the situation warrants. Feedback loops like this build trust and push performance.

Performance Depends on Communication

Performance reviews are not planned attacks. They’re meant to provide goals and steer careers. It is crucial that communication is at the root of your performance management process, whether you use an annual performance review structure or hold weekly one-on-ones.

Much of the research suggests employees perform continuous feedback above all other performance conversation methods. Continuous feedback means problems are solved before they become major ordeals. Employees like having clarity for their own work, and regular performance conversations ensure the organization’s profitability and performance don’t suffer for long.

According to Fortune, 45 percent of employees say a performance evaluation has helped them get better at their jobs. When employees have clear feedback to work with, they can improve their results, which leads to happier clients, which leads to increased profits.

Though continuous feedback is useful, it can be overwhelming at first to managers who are new to it. Continuous feedback requires managers pay more attention to the everyday challenges and accomplishments of their workers. Managers must also keep track of what happens in their frequent feedback conversations — a task with which a great performance management system can help.

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Realizing your employees are part of your investments will help you see the true ROI on performance management tools. Improved performance management equals improved employee performance — which is the key to better overall business performance.

A version of this article originally appeared on the iRevü blog.

Michael Heller is the CEO and founder of iRevü.