What is a performance management system?

A performance management system is a structured approach organizations use to evaluate, measure, and improve employee performance and align it with the company’s goals and objectives.

It is a tool or framework that supports effectively implementing the performance management cycle. It provides the structure, processes, and technology necessary to manage performance consistently and efficiently across the organization.

What are the essential components of a performance management system?

An effective performance management system ensures employees work toward their organization’s mission, vision, and objectives.

It involves key components such as:

• Aligning employees’ and teams’ goals with the organizational goals
• Reviewing and assessing their progress toward these goals
• Evaluating employee performance, their strengths and weaknesses, and finding ways to help them grow
• Making data-driven decisions—e.g., regarding promotions, succession planning, compensation, merit increases, etc.
• Developing employees’ knowledge and skills

These components work together to ensure employees understand their responsibilities, receive constructive feedback, and have opportunities for professional growth.

Note: A performance management system goes beyond performance measurements. It is a proactive approach to improving performance.

Learn more about the differences between performance appraisals and performance management.

What are the different types of performance management systems?

Several types of performance management systems exist, each designed to address specific organizational needs and goals.

Traditional performance management systems

The main types of traditional performance management systems are:

• Annual reviews: Employee evaluations happen once a year based on their performance over the past year
• 360-degree feedback: Employees receive input from multiple sources, including managers, peers, subordinates, and sometimes clients
• Management by objectives (MBO): Employees and managers set specific, measurable goals they review periodically

Traditional performance management systems are best suited for organizations that prefer a structured, formal approach to performance evaluations and have stable job roles and expectations.

Continuous performance management systems

Continuous performance systems rely on three key elements:

• Ongoing feedback: Employees receive regular, real-time feedback rather than waiting for annual reviews
• Check-ins: Managers hold frequent, informal meetings with their employees to discuss progress, challenges, and development
• Goal-setting: Managers and their direct reports set and track objectives and their outcomes on a regular, often quarterly, basis

Continuous performance management systems are best suited for fast-paced environments where: 

• Timely feedback is crucial for continuous improvement and agility
• Goals frequently adapt to changing market conditions and business priorities

Competency-based performance management systems

A competency-based performance management system relies on two major components:

• Competency frameworks and models: Defined models showcasing the skills, knowledge, and behaviors essential for performing a job effectively
• Skills assessments: Evaluations based on how well employees demonstrate key competencies

Competency-based performance management systems are best suited for organizations focused on developing specific competencies that drive business success and support career development.

Additional resource: 

• How to Create a Comprehensive Competency Model From Scratch
• 9-Step Guide to an Effective Competency Mapping Process
• How to Implement an Effective Competency-Based Performance Appraisal in Your Organization

Balanced scorecard systems

Balanced scorecard systems align business activities with strategic employee goals.

• Strategic performance management: The overarching framework that aligns business activities and goals to the vision and strategy of the organization
• Key performance indicators (KPIs): Specific, measurable indicators used to track employee performance against strategic objectives

Balanced scorecard systems are best suited for data-driven organizations that seek to ensure all activities contribute to business goals and rely on precise metrics to measure performance and inform decision-making.

Project-based performance management systems

For project-based performance management systems, companies can choose to focus on individual or team performance:

• Project evaluations: Companies assess employee performance based on the completion and success of specific projects
• Team assessments: Focus on the performance of teams working on projects rather than individual performance

Project-based performance management systems are best suited for organizations measuring success by the outcomes of specific initiatives.

Who are the users of a performance management system?

Multiple types of users interact with the performance management system in different ways to ensure effective evaluation, development, and management of employee performance.

Employees

These staff members within an organization are subject to performance evaluations. Employees use the system to: 

• Set personal goals
• Receive feedback
• Track their performance
• Identify areas for development
• Document their achievements and progress

In 360 performance management systems, employees can also act as evaluators for their peers and managers. 

Managers

Managers oversee teams or departments within the organization and manage their performance. Managers use the system to: 

• Set goals for their teams
• Provide ongoing feedback
• Conduct performance reviews
• Assess employee performance
• Identify areas where employees excel or lag behind
• Identify training needs
• Mitigate performance risk, addressing issues that can compromise the achievement of the organization’s objectives
• Manage the development of their team members

Human Resources and People Ops professionals

HR staff are responsible for managing employee relations, performance, and development. HR professionals use the system to: 

• Design and implement a performance management strategy
• Define the aspects of performance the system will focus on (e.g., goal-focused, competency-focused, etc.)
• Select performance management methodologies aligning with organizational objectives 
• Create supportive materials for reviewers and reviewees (e.g., FAQs on the system objectives, key steps, policies, etc.)
• Ensure policy compliance
• Facilitate performance reviews
• Manage employee records
• Analyze performance data to support decision-making

Executives and senior leadership

Top-tier leaders are responsible for the strategic direction and overall organizational performance. Executives and senior leaders use the system to: 

• Align individual and team performance with the organization’s goals
• Monitor overall performance trends
• Make strategic decisions based on performance data
• Ensure the performance management process supports business objectives

Learning and development (L&D) professionals

L&D specialists focus on employee training and development. They use the system to: 

• Identify skills gaps
• Create and manage training programs
• Track employee progress in learning and development activities
• Evaluate the effectiveness of training interventions

Recruiters

Recruiters are responsible for hiring new employees. They use the system to: 

• Identify critical competencies required for roles
• Evaluate candidates against these competencies
• Ensure new hires align with performance expectations

Talent management specialists

Talent management specialists focus on managing and developing the organization’s talent. They use the system to:

• Identify high-potential employees
• Plan career paths
• Develop succession plans
• Ensure the organization is nurturing its talent effectively
• Streamline talent retention initiatives 

Additional resources: 

• How to Conduct a Skills Gap Analysis: The Complete Guide
• Skills Gap Analysis Template

What are the five stages of a performance management process?

Five interconnected stages help leadership manage employees’ performance properly.

Planning

Performance management starts with proper planning. This initial stage is critical for setting performance expectations. It involves defining job roles, responsibilities, and success criteria. Key activities include:

• Setting clear, measurable individual goals and objectives aligned with organizational strategy (e.g., OKRs, KPIs)
• Establishing performance standards and expectations

For example, a sales manager sets quarterly sales targets for each team member and specific strategies for achieving them.

Monitoring

In this stage, managers track performance against the set goals and objectives. Key activities include:

• Regularly observing and reviewing performance
• Providing continuous feedback and coaching
• Using performance metrics and data to assess progress
• Identifying roadblocks hindering goal progress
• Taking corrective actions immediately when an event occurs

For example, a project manager holds weekly check-in meetings to discuss progress, address challenges, and provide guidance.

Reviewing

The review stage is where you measure employee performance. This stage involves formally evaluating and rating employees’ performance based on the monitoring and feedback provided throughout the period. Key activities include:

• Conducting performance appraisals and evaluations
• Using a standardized rating system to ensure fairness and consistency
• Documenting performance results and feedback

For example, a company runs annual performance reviews, during which managers and their direct reports discuss employee achievements and areas for improvement. Employees receive a rating based on their overall performance.

Rewarding

Rewards and recognition are vital components of a performance management system. They provide motivation, boost employee engagement, and reinforce positive behavior. This stage fosters a sense of appreciation and encourages continued high performance.

Key activities include:

• Providing performance-based incentives, such as bonuses, salary increases, and promotions
• Recognizing achievements through awards and public acknowledgment
• Offering non-monetary rewards, such as additional time off or professional development opportunities

For example, an employee receives a year-end bonus for consistently exceeding their sales targets and contributing to the team’s success.

Additional resources: 

• 3 Types of Compensation: Choose the Best One for Your Team
• The Pros & Cons of Pay For Performance Model
• How Deel Simplifies Granting Equity to EOR Employees

Acting on results and developing

This stage focuses on employee growth—improving employees’ skills and competencies to enhance their performance and career growth. Key activities include:

• Identifying training and development needs through performance reviews and assessments
• Providing access to training programs, workshops, and learning opportunities
• Encouraging mentorship and coaching relationships

For example, employees attend a leadership training workshop to develop their management skills and prepare for a promotion.

Each stage of the performance management process builds upon the previous one to create a continuous performance improvement and development cycle.

Additional resources: 

• 70-20-10 Employee Development Plan Template
• Individual Employee Training Plan Template
• Career Discussion Template

What are the benefits of a performance management system

Improved performance management leads to employee and organizational growth.

Better understand employee performance

An effective performance management system enables companies to keep track of employee performance and understand the larger picture behind it.

For instance, consider these questions:

• Are workers receiving ongoing support?
• Do they have manageable workloads?
• Do they have the resources they need?
• Are their roles and responsibilities clear?

Once you have the answers to these questions, it becomes easier to understand why workers performed the way they did. Then, you can provide the proper support to get them back on track and enable their potential.

Create a high-performance culture

Each employee has unique abilities, talents, and experiences. A performance management system reveals each person’s strengths and weaknesses. As a result, you can create powerful teams of people with varying strengths or assign projects based on employees’ abilities.

Besides, the very nature of the performance management system process is a driver of a high-performance culture, as it involves:

• Setting SMART goals aligning employees with company objectives
• Providing clear expectations and a roadmap for success for each role
• Continuous performance coaching
• Fostering a culture of transparency and accountability with continuous feedback
• Acknowledging good performance—37% of employees say personal recognition can motivate them to perform better
• Establishing a culture of learning to build on employees’ strengths and develop their skills and talents
• Encouraging continuous improvement for employees
• Offering opportunities for professional development and career advancement

Enable data-driven talent management decisions 

An effective performance management system enables more informed and strategic talent management decisions. The credible data you collect from consistently monitoring employees’ performance makes it possible to: 

• Fill critical talent gaps
• Develop and retain top talent
• Decide who’s ready for more challenging tasks in the form of a promotion
• Evaluate training needs 

Additional resource: Learn why performance and talent management are inextricably linked processes.

Use performance data to measure organizational success

A performance management system can measure organizational success by aligning individual performance with strategic goals. KPIs and metrics derived from the performance management system can provide insights into how well the organization is achieving its objectives. 

By analyzing performance data, organizations can: 

• Identify strengths
• Address weaknesses
• Make informed decisions to drive business success

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

A sound performance management system combines the right processes with the right software to boost employee performance and achieve business objectives.

Deel Engage’s automated workflows can help you implement a modern performance management system in record time:

• Use Deel Engage’s performance management software to set performance goals and collect qualitative and quantitative insights into an employee’s performance
• Make your promotions unbiased and transparent by creating a meaningful pathway for career progression with our effective career management software
• Identify existing skills gaps with the skills matrix functionality and develop an effective L&D program to strengthen your workforce
• Create targeted training programs and assign them to your employees

Learn more about Deel Engage and how to use it for seamless performance management.