How to Create an Effective Performance Management System in 12 Steps

Many companies follow a conventional approach to performance management, which many agree is now outdated. Leaders pour their time into report writing and appraisal meetings without adequate results. In contrast, an effective performance management system has a clear directive—to improve employees’ performance and influence their growth.

Our comprehensive guide will teach you how to drive success for your organization by designing a performance management system in 12 steps. You’ll learn to set goals, prioritize employee development, and introduce continuous performance management as part of your company culture.

1. Define the goals of your system

Start by outlining what you want your performance management system to achieve—why have you committed to this process? Speaking on the Operations Room podcast, Chief Operating Officer Bethany Ayers recaps some performance management experiences that have lacked direction:

Typically, your goals will fall into three categories:

• Performance: Use your process to assess overall performance, inform fair compensation, and align learning and development programs with your skills gap analysis
• Development: Identify high-potential employees for leadership development and succession planning
• Culture: Increase employee engagement and retention by providing opportunities for growth and recognition

When compiling your goals, select the metrics you’ll use for each. For example, analyze employee turnover rates and stay and exit interview data to understand the relationship between performance management and departure decisions.

Goals will also heavily influence how you:

• Communicate performance management to your employees, leaders, and key stakeholders
• Access essential resources, including performance management technology and tools
• Follow-up on both individual and organizational performance

2. Define the components of your system

Determined by your goals, lay the foundations of the performance management system using the following components:

• Performance expectations: Clearly outline what is expected from employees in their roles to ensure they understand the standards they need to meet or exceed
• Performance review process: Define whether you’ll use 360-degree feedback, competency-based review, skill assessments, goal progress, or similar to measure employee performance
• Raters: Choose from multi-direction feedback, including upward (from direct reports), downward (from supervisors), peer (from colleagues and business partners), and self-appraisals
• Frequency: Determine the right cadence for your appraisals, which could include continuous or monthly check-ins mixed with quarterly, bi-annual, or annual development reviews
• Questions: Select an appropriate mix of rating vs. open-ended questions and the number you want to include
• Cultural considerations: Align your system with your feedback culture—for example, define whether you value transparency or anonymity
• Outcomes: Determine how the data will prompt the following steps, such as informing development plans or using specific scores to trigger compensation adjustments and bonuses
• (Optional) Calibration: Use formal calibration committees to oversee how managers evaluate performance and ensure fairness

3. Develop an implementation timeline

A clear and realistic implementation timeline will ensure sufficient time for training, testing, and adjustments. Based on the sample below, create your milestones and deadlines, then communicate the final version to all key stakeholders to align them with the process.

This structured approach will enable a successful performance management system implementation.

4. Choose the right performance management tools

An effective performance management process flows smoothly, with each step completion signaling the start of the next. Performance management tools can streamline your process and store all data and workflows in a central location.

Select the right tool for your business by:

• Choosing intuitive tools that slip seamlessly into your existing workflows, perhaps integrating with other core systems such as your HRIS, internal communication tools, and payroll software
• Selecting tools with built-in analytics and reporting capabilities, enabling you to generate meaningful performance reports at the click of a button
• Considering how a performance management platform meets your short-term and long-term needs, such as changing headcounts or organizational goals

Based on your responses, choose one of the following options to handle your entire performance management process:

Spreadsheets and templates

Small teams or startups may rely on spreadsheets or project management templates to handle performance management. They are a good fit if your headcount remains low over the long term, your goals will likely remain stagnant, and your managers have the time and organizational skills to track everything manually.

Performance management software

Specialized performance management software such as Deel Engage allows you to automate performance, learning, and career development under one roof. It eliminates the need for multiple tools in your performance processes and makes it easy to tie follow-up actions to performance reviews.

Integrated HR platforms

An all-in-one HR system includes core modules to consolidate key HR processes and reduce overheads. Deel is a complete platform that integrates HRIS, talent management, payroll, and global hiring and provides powerful analytics to track entire employee lifecycles. This option maintains a single source of truth for your HR data, which is valuable for companies of any size.

5. Set clear performance goals and evaluation criteria

For employees to invest in your process and strive to do their best, they must understand what a good performance looks like and the steps they must take to become a top performer in your organization. Allow everyone to succeed by:

• Establishing objective criteria using a mix of qualitative and quantitative employee performance metrics—a qualitative approach could measure how well an employee demonstrates a core value, while quantitative metrics track progress toward a long-term training certification
• Choosing a goal-based or competency-based evaluation—a goal-based evaluation might assess the performance of a specific objective, for example, a sales target or project completion, while a competency-based evaluation measures employees’ skills and attributes required for effective job performance
• Ensuring performance criteria are relevant to the specific roles and responsibilities—for example, sales roles may have different goals and performance evaluation criteria than customer service roles.
• Aligning performance goals with organizational strategy and values—for example, a company focusing on innovation sets relevant development goals for employees to contribute to new ideas or processes
• Collecting 360-degree feedback, allowing a range of peers, subordinates, and managers to provide their opinions on performance—for example, a team leader might receive input from an individual contributor, manager, and team leader in an adjacent department

6. Create performance appraisal forms

A performance appraisal form is a blueprint that keeps you grounded throughout and beyond the appraisal process. Use the form to guide review meeting conversations and as a reference point for setting development plans based on outcomes. Include the following elements in the appraisal form:

• Basic employee information such as name, role, department, and review period
• Individual goals based on previous performance reviews
• Pre-determined questions for managers and employees to rate performance, behaviors, and competencies
• Evaluation criteria and rating system (if applicable) to assess performance
• A summary or overall performance rating from the manager’s perspective and the employee’s self-appraisal
• Areas of strength and areas for improvement identified by both manager and employee
• A development plan with specific action items and a timeline
• Signatures of both manager and employee agreeing to the review’s outcomes

7. Communicate the new system to the whole organization

Getting people to commit to your employee performance management system is essential to see real improvements. You won’t achieve the company goals you set in step one if managers vary in their performance management approach or employees can’t see the benefits of committing to their growth.

Unfortunately, Fractional Chief Operating Officer Brandon Mensinga suggests it’s rare to find companies involving everyone from the C-Suite downward in performance management:

Avoid this scenario by spreading the word about your new system using the following methods:

• Communicating its purpose and benefits clearly: Showcase real-life or illustrative examples of an employee’s career progress when linking review conversations to development goals
• Providing detailed information on how the system works and giving clear expectations for employees: Share check-in dates, evaluation criteria, and how you plan to calibrate performance reviews to ensure fairness
• Offering channels for employees to ask questions and provide regular feedback: Host a Q&A-based webinar, host town hall meetings, send out an email series, set up a dedicated Slack channel, or publish FAQs in an internal wiki
• Providing ongoing support: Ensure performance management never feels like a one-and-done activity but an organic, continuous process for employees throughout their employment journey
• Inviting private 1:1 conversations or Q&A between employees and managers: Discuss concerns about their performance or the overall system they don’t wish to air in public

8. Train managers and employees

Employee training for an effective performance management system can focus on offering educational sessions that ensure everyone is well-versed in why your company has implemented the process and how you plan to interpret employee performance. If you’re using 360-degree feedback, also offer training on how employees can give constructive feedback to their peers and managers.

Manager training is more complex, ensuring anyone involved in rating or reviewing performance understands their role in the process and follows a tried-and-tested system to execute it effectively. Key areas to focus on include:

• Feedback delivery: Educate managers and employees on the principles of providing specific, actionable guidance and the need for a balanced approach that includes positive feedback and improvement areas
• Goal setting: Explain how to select SMART (specific, measurable, achievable, relevant, time-bound) goals aligning with organizational objectives and individual career aspirations
• Employee performance ratings: Clarify the metrics and criteria for assessing performance, including qualitative and quantitative measures and objective and subjective assessments.
• Performance levels: Teach managers to identify different performance levels and offer strategies for constructively addressing underperformance and supporting employee development

Depending on your organization’s size and the depth of your training content, there are various ways to deliver your training, including:

• Workshops and seminars: Conduct in-person or virtual training sessions that allow participants to practice skills and ask questions in real-time
• Online courses and webinars: Provide flexible, on-demand learning options for employees to access conveniently
• Mentorship programs: Pair managers with experienced mentors for personalized guidance and real-world advice, helping them effectively apply what they’ve learned

9. Implement regular performance reviews

One-off performance reviews are a missed opportunity. Typically, they don’t benchmark employees’ specific performance levels or implement strategies to set new goals and discuss development plans. Instead, extract more value from the process by setting regular performance management meetings on a cycle that makes sense for your business, such as:

• Annual reviews: Conduct comprehensive reviews once a year, which you might mix with more regular informal check-ins
• Quarterly reviews: Schedule more frequent, shorter check-ins to stay aligned
• Continuous feedback: Implement an ongoing feedback system to address performance in real-time

A performance review template can shape the conversation and provide a smart framework for managers to follow. Whatever your cadence, ensure you document all performance reviews formally and include relevant follow-up mechanisms in your process.

10. Analyze and communicate performance results

Determine how you’ll assess performance results and compare them across your teams. For example, use a nine-box grid template to evaluate each employee’s performance and growth potential. Those who score well in both areas could be excellent succession candidates or be worth promoting into managerial roles.

Motivated employees will be eager to review their performance results and understand how they influence ongoing development. Determine how you’ll communicate the following aspects of their review:

• An overall summary and highlights
• Constructive feedback
• Action points
• Details of any follow-up meetings required

Typically, the best format for communicating this information is a combination of a written report and a 1:1 meeting between manager and employee.

11. Plan for the future: Address performance gaps and develop employees

Tie performance reviews to ongoing development by designing a personalized action plan for each employee. The process looks like this:

• Using career pathing to plot out potential internal mobility opportunities throughout the organization
• Identifying training and development needs, such as skills-based training courses, mentoring, or career coaching
• Creating tailored development plans with specific goals and timelines—for example, Sue should complete a soft skills training course by Q3
• Monitoring progress and providing relevant development resources, such as allocating budget for external training or facilitating mentoring relationships internally

12. Monitor and adjust the system to nurture a culture of continuous feedback

Review the effectiveness of your performance management system regularly to sustain a high-performing culture. Speak to your managers and employees to encourage honest, timely feedback on the process and all steps involved. Be prepared to make adjustments to ensure the performance system remains relevant over the long term.

Some ways to collect feedback include:

• Formal feedback sessions: Schedule dedicated times for providing structured feedback from your employees
• Anonymous feedback channels: Offer ways for workers to give feedback anonymously, always outlining how you plan to share their comments and insights
• Performance data analysis: Assess performance data to identify trends and areas for improvement; for example, you might track self-appraisals or answers to open-ended questions and compare them over several quarters

Manage performance with Deel Engage, the all-in-one talent management system

A dynamic performance management system blends processes with software to supercharge team performance and achieve your business objectives. Deel Engage is an AI-powered people suite providing everything you need to build high-performing teams. Our flexible software:

• Gives your managers and admins complete power over question types, visibility, anonymity settings, and more
• Collects qualitative and quantitative employee performance insights that enable transparent, bias-free promotion decisions
• Displays meaningful career progression pathways and empowers team members to track their performance progress, observe their strengths or development areas, and request support when needed
• Offers a skills matrix feature to identify existing skills gaps and strengths at individual, team, and organizational levels
• Transform managers into inspirational coaches and mentors with comprehensive training
• Generates training courses to address organizational skills gaps and strengthen your human capital

Ready to commit to an ongoing performance management culture? Book a free Deel demo today.