A Guide to Developing a Competency-Based Performance Management System

A competency-based performance management system measures and manages the skills, knowledge, and behaviors employees need in their roles. Instead of focusing on past performance or results, managers track and reward employees based on their current level of competence. This guide explores how to set up a competency-based performance management system and ensures you have the necessary tools, framework, and actionable advice to implement it.

1. Define the goals of your system

Start by understanding the “why” of your competency-based performance management system—why are you introducing it, and what do you want to extract from it?

Use the SMART framework to set specific, measurable, achievable, relevant, and time-bound goals. For example, you might aim to improve employee performance by 15% within the next year by developing specific core competencies.

Your goals shape how you:

• Communicate expectations to employees
• Measure and analyze performance data
• Commit to follow-up action plans, such as creating tailored professional development paths
• Access resources such as competency frameworks and performance management tools

Based on these goals, select relevant metrics to track progress toward them. Using the example goal above, you might rely on metrics such as competency assessments, training completion, or performance review scores to understand if your system is working. Tip: Setting multiple goals is possible, but prioritize them early to avoid confusion. Use a hierarchy or ranking system to determine the most important goals.

2. Design the components of your system

Create the foundation of your competency management system by using the following core building blocks:

• Competency frameworks: Establish a clear and comprehensive set of competencies required for your organization’s various job roles
• Career paths: Create a clear graph of competencies for current and future roles
• Cadence: Determine how often you’ll run performance evaluations and feedback sessions (e.g., quarterly, bi-annually, annually) to maintain regular, consistent assessments
• Calibration: Ensure consistency and fairness in competency-based appraisals using calibration meetings and standardization criteria
• Assessment tools: Use tools such as 360-degree feedback, self-assessments, and role-based competency lists
• Competence and career development plans: Create tailored plans for every employee to address competency gaps and support continuous employee growth
• Technology integrations: Sync competency tools and performance management software with other HR software to streamline your processes, aid data collection, and provide accessible platforms for tracking and reporting

3. Develop an implementation timeline

Styling your performance management system toward competencies can be time-consuming but worth the effort. Create a thoughtful implementation timeline, considering important factors such as company size, available resources, and the level of change required. Adapt this structured, phased template to form your roadmap:

Month 1: Initial planning and framework

Form a project team that includes human resources professionals, managers, and other key stakeholders to establish a clear competency framework and identify the core, technical, and leadership competencies required for various organizational roles.

Month 2: Job profile alignment and communication

Align job profiles with the newly established competency framework. This step may involve updating job descriptions to reflect required competencies and job responsibilities. Once complete, you’ll communicate the new competency framework and job profile updates to all employees.

Month 3: Select assessment tools

Design your assessment method using tools such as 360-degree feedback forms, self-assessment templates, and performance appraisal documents. Ensure your managers and employees understand how to use these appropriately and consistently to deliver fair evaluations.

Month 4: Pilot testing and calibration

Before rolling out your performance management company-wide, conduct a pilot test with a select group of employees. It is your chance to gather their feedback and hold calibration meetings to maintain accuracy in the assessment process.

Month 5: Full-scale rollout and monitoring

Once you’re confident with the results of your pilot project, implement the competency-based performance management system organization-wide and begin regular performance evaluations using the new approach.

Month 6: Review and adjust

Periodically revise your competency-focused process—competency, role, and personnel changes can all influence an effective performance management system, making regular monitoring and adjustment key. To do so, collect and analyze feedback from all system users (employees, managers, and HR professionals) to identify strengths and areas for improvement. Based on your findings, establish a plan for continuous improvement and deliver regular updates to the competency framework and assessment tools.

4. Build a competency framework

One of the earliest steps in developing a competency-focused performance process is building a comprehensive competency framework for every role across the organization.

This intensive time and resource task requires a deliberate, logical process as follows:

• Define and benchmark the competencies for each role, such as core, functional and technical, and leadership competencies
• Select different levels of competence, such as basic, intermediate, advanced, proficient, or expert
• Map competencies for each role in your organizational chart—for example, a Junior Developer might require basic communication skills, but advanced time management skills

Learn more about the process of building competency frameworks in our guides:

• How to Create a Comprehensive Competency Model From Scratch
• 9-Step Guide to an Effective Competency Mapping Process

Executive Consultant and Strategic Advisor, Laura M Hume, recommends:

5. Establish relevant performance metrics and indicators

Tie role competencies to employee performance by developing a range of metrics and indicators. For example, an Operations Manager needs leadership, problem-solving, and communication competencies. But what does mastering these competencies look like in real life?

To make them tangible, a Behaviorally Anchored Rating Scale (BARS) is an alternative to standard performance planning. Instead of assigning an employee a score, BARS uses a list of text-based statements ranging from least to most effective.

BARS example of teamwork competency

A systematic approach like this for every competency makes it easy to establish role expectations.

6. Select a competency assessment method and tool

Determine how you will measure competencies as part of your performance management process. Deciding who is responsible for this assessment is the most challenging part of your decision-making. Some options include:

• Requiring employees to fill out a self-appraisal form
• Setting up peer reviews using 360-degree feedback systems
• Using traditional top-down manager evaluations

Whether you include one or all of the above sources, it’s worth using one of the following tools to keep all data centralized and secure:

• Spreadsheets or knowledge documents: Templates can be a helpful starting point for small companies or startups with only a few roles or competency types to track; however, this will become unsustainable if your headcount grows
• Online assessment platforms: Software solutions may come equipped with built-in competency assessment modules
• Feedback and performance management software: A comprehensive performance management tool allows you to collect feedback on competencies from multiple sources

7. Design competency-based performance appraisals

This step will form the meat of what your employees see during the process and is a blueprint for how managers should conduct a fair appraisal. Design your competency-based review by determining:

• Your question categories and the number of questions in each—for example, 2-3 for generic performance, 8-10 for competency-based performance, 1-2 for growth, 1 open question
• Defining quantitative or qualitative questions—or a mix of both
• Detailed, clear expectations for each competency to reduce bias
• The frequency of your appraisals—for example, annual reviews for comprehensive competency assessments, quarterly check-ins for short, frequent alignment meetings, or project-based competency assessments at the end of critical projects or milestones
• Follow-up deadlines, such as when you’ll schedule a meeting for face-to-face feedback and goal-setting

8. Introduce the new system to the organization

Successfully adopting a new performance management system depends on how well you introduce it to your employees. Without this step, Megan Leasher, an award-winning industrial and organizational psychologist, says HR leaders will see employee resistance as many don’t understand what competency is and why it suddenly matters. Explain what competency-based performance management includes, address any questions, and offer ongoing training.

Communication content

Clearly describe the following:

• The purpose and benefits of the performance management system
• How the system works
• What you expect from each employee and manager in the process
• Your appraisal follow-up plan, for example, using the assessments to set performance goals and identify training needs

Communication type

Part of your communication strategy should include a mechanism for employees to ask questions or log feedback, such as:

• Town hall meetings: Host company-wide meetings to introduce the system and invite questions
• FAQ communication channel: Use an internal networking tool like Slack and set up a space specifically for this topic
• Email communication: Send a single email or a series outlining the new system, its benefits, and how you will roll it out—include contact information for follow-up questions

Ongoing training

Everyone involved in a competency-based performance management system will need baseline and ongoing training to learn:

• How to use the competency assessment tool
• How to evaluate competency mastery
• The importance of competencies in performance management
• How to give and receive feedback based on competencies
• The importance of developing career programs to help employees acquire the competencies required for their roles

Your training format will depend on your budget, the company’s learning culture, and individual learning styles.

Some options include:

• Workshops: In-person or virtual workshops to train managers and employees
• E-learning modules: Generate tailored online courses for flexible, on-demand training
• 1:1 coaching: A dedicated manager-employee session is an excellent chance to answer questions in private and help employees understand how their competencies tie to performance expectations
• Refresher training: Toshi Jain, an HR leader with over 17 years of experience, conducts at least one quarterly training session that gives an overview of performance management systems in her current organization

9. Launch, analyze, and communicate your first competency-based appraisals

Once you’ve launched your new competency-based performance management process, it’s time to analyze the results. At this point, you’ll be able to:

• Review individual performances
• Identify top performers versus those with room for improvement
• Conduct an employee skills gap analysis by looking at competency levels across all team members
• Monitor progress toward individual and company-wide goals

Based on the results, communicate with your employees transparently about their performance. Use this opportunity to recognize achievements, discuss improvement areas, and set actionable goals for the future.

10. Follow up with competency-based plans

The beauty of competency-based performance appraisals is they focus on skills. Use the information from performance management reviews to create personalized plans for each employee based on their specific competencies.

A training needs assessment will help you understand the gap between their current and expected high performance, then select relevant skills training to close it. You can choose from:

• Group or individual training sessions to build specific competencies
• Cross-functional job shadowing allows employees to acquire new competencies by watching or trying out roles in adjacent teams
• Job rotation provides opportunities for employees to develop competencies through different roles or projects
• Online courses are a convenient way to slot skills-based training into a busy schedule
• Mentoring programs pair employees with seasoned professionals who excel in the desired competencies

A competency development plan will help you revise your training plans and ensure your people continuously develop the competencies required for their current and future roles.

11. Leverage competency data for other HR processes

Competency-based performance management is data-intensive; it requires identifying, tracking, and analyzing multiple competencies for each employee, resulting in a goldmine of data. You can repurpose much of this information throughout other talent and workforce management processes, such as:

• Recruiting: Use competency frameworks to assess job candidates’ fit for specific roles
• Succession planning: Identify internal talent with the potential and desire to move into new organizational roles
• Learning and development: Map training programs to particular competency needs

12. Continuously monitor and evaluate the system

As with any new process, it’s crucial to continuously monitor and evaluate how well it’s working. Gathering this data will help identify areas for improvement, determine its effectiveness in meeting business goals, and make necessary adjustments. You can do this by:

• Gathering feedback from employees and managers on the ease of use and effectiveness of the system
• Analyzing performance data to see if there are any correlations between competencies and overall performance
• Conducting regular check-ins with HR managers and leadership teams to discuss the impact of competency-based performance appraisals on company culture and employee
• Being prepared to make adjustments based on feedback and changing needs

As an example of a company that continuously refines its approach to performance management, Aquatic runs regular “feedback about feedback” cycles, which ask employees poignant questions like:

• How much time did performance management take?
• Did you find the process straightforward?
• Were you satisfied with the results?

HR can use these feedback results to improve the performance management process incrementally, ensuring it meets the needs of employees and the overall organization.

Enable seamless competency-based performance management with Deel Engage

Deel Engage is an AI-powered people suite, equipping employees with the competencies they need to succeed in their roles. Our versatile platform:

• Defines competencies across levels and roles at speed with AI
• Creates competency-driven career paths, ensuring employees have full transparency of role and level expectations
• Automates regular competency-based performance reviews using multi-source feedback to support employees
• Enables customized growth plans for each competency
• Allows HR and L&D professionals to develop and assign courses to ace each competency

Ready to see our platform in action? Request a free Deel demo today.