managing employee performance for business success

A SMALL BUSINESS GUIDE

executive summary
Performance management or the way in which employers ensure that their employees are supporting the companys goals is a vital component of any employee management strategy. Research has shown that a welldesigned performance management system can have a signicant impact on the effectiveness and satisfaction of employees as well as the nancial success of a company. One study found that companies with performance management systems had 34% higher sales per employee, 90% higher sales growth and 200% higher overall prots than companies without such a system.1 Employees themselves have indicated that they would likely increase their output by as much as half if they were to receive more direction and support in their jobs.

A MAJOR OPPORTUNITY FOR IMPROVEMENT

Implementing a performance management system represents a major opportunity for small businesses to improve performance, because as many as 55% of small companies do not have a formal system in place.2 Even those who have adopted some performance management practices could benet from a more comprehensive approach that takes full advantage of the potential A performance management performance gain from aligning employees activities more tightly with the companys strategic goals. Perhaps the reason that so many small businesses fail to capture the potential of effective performance management is that designing and implementing an effective system may seem difcult. In reality, this is not the case. Every company already practices performance management on some level, and adopting a system that standardizes practices and formalizes expectations can actually make managers jobs easier.

system can make managers jobs easier while contributing to your companys nancial success.

COMPONENTS OF PERFORMANCE MANAGEMENT

An effective performance management system supports your companys approach to managing employees and achieving your nancial goals. An effective performance management system will: Align the behavior of your employees with your business strategy. Tie into your other employee management practices, such as stafng, compensation and training. Identify gaps in your employees knowledge or skills, enabling you to adjust your training and development efforts.

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A SMALL BUSINESS GUIDE

PERFORMANCE MANAGEMENT SYSTEM DESIGN

Small business owners and managers tend to think of performance management in terms of the periodic performance appraisal or review. While the performance appraisal is an important part of the system, it is only one element, as this graphic illustrates.
Training needs

Business goals Employee goals Performance appraisal Periodic feedback

Compensation & incentive plans Individual results Individual rewards

MANAGING THE PERFORMANCE APPRAISAL

While this white paper will help you understand all of the elements of designing a performance management system, it also will provide practical pointers for making the periodic performance appraisal productive and cordial for both managers and employees. Among the items that require special attention are: Who conducts the performance appraisal and where to nd sources of performance information. How to conduct the appraisal, including scheduling, providing a proper setting and planning to address identied deciencies. How to follow up on the appraisal through rewards, assessment of progress toward goals, providing training and offering overall support.

KEY TO SUCCESS
The key to success with any performance management system is to clearly identify your business goals and to correctly identify the employee behaviors that will help you achieve those goals. When performance management is integrated with a comprehensive employee management program, businesses ensure that their most valuable asset their people is also their most productive asset. ###

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how to manage employee performance

When you think of performance management, what is the rst image that comes to mind? If you are like many business owners and managers, you probably think immediately of performance appraisals, and probably not in a favorable light. Annual reviews are too often regarded as nothing more than time consuming meetings with little real-world bearing on performance. But this is a awed view for two reasons. First because there is much more to a performance management system than appraisals, and the second is that a performance review in the context of a well-designed performance management system can contribute signicantly to your companys success.

WHY MANAGE PERFORMANCE?

All companies manage performance, whether they recognize it or not. Even companies without a formal performance management system convey their expectations informally based on who they hire, who they re, how they give raises and who is reprimanded or praised by managers. The problem with this approach is that it is inherently inconsistent, and it leaves employees feeling unsure of what management expects of them and how, or if, they will be recognized for doing a good job. On the other hand, a company that develops a carefully considered performance management system is much better able to link the companys goals to employee performance targets and to give employees clear direction regarding what is expected and how they will be rewarded. The result is a more motivated workforce and a more The problem with an informal successful company.

Financial benets
One study found that employees believed their individual output could be improved by an average of 26% and as much as 50% if they were to receive more direction and support in their jobs.3 Two other studies demonstrated that the use of effective performance management systems resulted in higher prots, sales growth, cash ows, productivity and business value.4,5 One of the studies found specically that companies using performance management systems demonstrated 34% higher sales per employee, 90% higher sales growth and 200% higher overall prots than companies that lacked a performance management system.5

approach is that it is inherently inconsistent and confuses employees about what is expected of them.

Employee satisfaction benets

By providing employees with direction and support in carrying out their responsibilities, effective performance management also has a positive impact on worker satisfaction and other positive employee outcomes. The results for small businesses are increased innovation, higher levels of customer service and lower turnover.6

WHAT IS PERFORMANCE MANAGEMENT?

Simply put, a performance management system is the process through which managers ensure that employees activities and outputs contribute to the organizations goals.7 Obviously, this is a broad denition, and it should be, because in addition to performance appraisals the description encompasses goal setting, motivation and employee development. A performance management system impacts an organization in three key areas business strategy, employee management and employee development. Understanding the potential benets in each area will help you design a performance management system that produces the best results for your company. Strategic component. One purpose of performance management is to align the behavior of your employees with your business strategy. This strategic alignment simply means that your performance management system will be set up with the goals of your organization in mind. For example, a company whose primary strategic focus is innovation would align its performance appraisals, employee goals and employee development programs in a way that would

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managing employee performance for business success

A SMALL BUSINESS GUIDE

encourage innovative thinking and reward employees for developing new approaches and ideas. Specics on how to achieve this alignment will be presented later in the paper. Employee management component. In addition to aligning with the goals and strategies of your business, an effective performance management system also must be tied to employee management practices, such as stafng, compensation and training. For example, increases in employee should see the connection to their compensation base pay as well as incentive pay are generally linked to employees annual performance evaluations. Employees who perform well base pay and bonuses. in relation to certain performance criteria are given top priority for base pay increases and bonuses. In other words, what gets rewarded is what gets done. It is difcult to encourage employees to perform in certain ways or to accomplish outlined goals unless they know that their compensation is tied to performance. Similar lines of reasoning apply in other areas as well. Using the same example cited previously, a company pursuing a strategy of innovation would design hiring practices that give heavy weighting to creativity and would make sure that termination practices do not discourage prudent risk taking.

Employees who perform well

Employee development component. Aligning performance management with your training and development programs is a critical success factor. Your performance management system can identify gaps and deciencies in your employees knowledge or skills, which in turn enables you to adjust your training and development efforts accordingly. Also not to be overlooked is the value of performance review feedback in the employee development process. Positive feedback reinforces employees knowledge that they are pursuing the right strategies and developing the proper skills. Constructive criticism, on the other hand, lets employees know where and how they can improve. All three of these components should help employees see your performance management system as an effort to give them the incentive, information and support they need to contribute to the companys success and to be rewarded for their role in that success. This is accomplished by clearly communicating the goals of the organization and the role they play in achieving those goals. They also need to understand clearly how their contributions will be recognized and rewarded. Ultimately, you must ensure that employees understand that management is committed to helping them, not hindering them, in reaching their full potential.

Management Tip It is important that the employee development component of performance management not get lost in the bureaucracy of annual performance reviews, and that managers not get in the habit going through the motions of an evaluation rather than giving it their full attention.

DESIGNING A PERFORMANCE MANAGEMENT SYSTEM

With a clear understanding of the purpose of an employee management system, you can begin to design the elements of an effective approach and to identify ways to implement or improve the system. Performance management systems are as unique as businesses themselves, but the steps to developing a system that matches each companys specic needs are universal. The following diagram presents the process schematically, and each element is explained in detail in the sections that follow.
Training needs

Business goals Employee goals Performance appraisal Periodic feedback

Compensation & incentive plans Individual results Individual rewards

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Establish business goals

To create effective performance standards, you must clearly dene the goals of your organization. What is your company trying to accomplish? What are your short- and long-term goals? Without clear answers to these questions, it is difcult to evaluate employees on their contribution to the company.

BUSINESS GOAL EXAMPLE

Within one year, our company will increase sales by 15%.

Align business and employee goals

With established business goals, you can identify how your employees contribute to achieving those goals. This requires a thorough understanding of each job and the expectations for that role so you can dene specic criteria for evaluating employee performance. (For more information on how to dene jobs in your organization, see the Gevity Institute white paper on employee recruitment and selection.)

EMPLOYEE GOAL EXAMPLE

Employee will increase sales by 15% in one year within his or her sales territory.

Set measurement criteria

The next step is to create measurement criteria that are used to evaluate how well employees are doing in supporting the achievement of company goals. This is both a vital and difcult part of the process. The ip side of what gets measured is what gets done is that measuring the wrong things will drive the wrong results. You need to be careful, therefore, that your performance measurements are indeed encouraging the behaviors that will support your goals. Two general guidelines for creating measurement criteria are: Keep criteria simple to ensure they will be understood by employees and managers. Its also a good practice to limit the number of measurements. Too much detail and too many criteria will only complicate the performance management process and make it frustrating for everyone involved. Clear communication is essential so employees know how their performance will be evaluated. The result will be that employees will perceive the system as fair and will have a higher degree of trust in management.

MEASUREMENT CRITERIA EXAMPLE

Total sales revenue booked from all accounts in employees assigned territory for the calendar year.

Perform the measurements

Three basic items can be measured for evaluation: traits, behaviors and output.7 Any or all of the three may be appropriate, depending on your needs and the resources available to you.

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A SMALL BUSINESS GUIDE

Traits Typical traits or attributes that might be measured are knowledge, understanding, judgment, quality, teamwork or problem solving. A typical question in a trait-based performance appraisal might ask you to rate the level to which the employee possesses the required knowledge to perform the job.

TRAIT MEASUREMENT EXAMPLE

Employee demonstrates depth of product knowledge, including understanding of product features, benets and customer applications: Never Occasionally Consistently Behaviors Behaviors are similar to traits, but rather than focusing on an employees attributes, the measurement looks at specic actions. A knowledge-based question on a performance appraisal might ask you to rate the extent to which the employee has demonstrated his or her knowledge in the completion of required tasks.

BEHAVIOR MEASUREMENT EXAMPLE

Employee successfully resolves customer inquiries or complaints within one business day. Never Occasionally Consistently Output Depending on their responsibilities, such as piece rates for manufacturing or number of hours billed for service providers, employees can be evaluated on the level of output in their particular jobs.

OUTPUT MEASUREMENT EXAMPLE

Within his or her sales territory, the employee will increase sales by 15% in one year. Unsatisfactory: 0% to 5% sales increase Needs Improvement: 6% to 10% sales increase Satisfactory: 11% to 15% sales increase Strong: 16% to 20% sales increase Outstanding: 21% or above sales increase Each of these different types of measures serves a purpose, but an effective performance management system will incorporate all three. This approach provides a more holistic view when measuring employee performance and is more likely to assess true performance rather than individual components of performance.

Putting it together
Once goals, measurement criteria, traits, behaviors and/or outputs have been dened, the performance appraisal form is built. The performance appraisal form captures an employees results, summarizes overall performance and provides information used in compensation and training decisions.

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Completed Performance Appraisal Example

Employee: Michael Stevens Department: Sales Performance Period: 1/06 to 12/06 Manager: Melissa Johnson

business goal

employee goal
Within your sales territory, increase sales by 15% by 12/31/06.

measurement criteria
Total sales revenue booked from all accounts in assigned territory between 1/1/06 and 12/31/06.

actual results

rating

comments

strengths and/or areas for improvement Demonstrated great perseverance throughout the year. Helped train two new sales reps.

Within one year, increase company sales by 15%.

Sales revenue in assigned territory increased by 16% between 1/1/06 and 12/31/06.

1. Unsatisfactory: 0% to 5% sales increase. 2. Needs Improvement: 6% to 10% sales increase. 3. Satisfactory: 11% to 15% sales increase. 4. Strong: 16% to 20% sales increase. 5. Outstanding: 21% or above sales increase.

Same as above.

Within your territory, acquire by 12/31/06.

Total new customer accounts assigned territory between 1/1/06 and 12/31/06.

7 new customer accounts in assigned territory between 1/1/06 and 12/31/06.

1. Unsatisfactory: no new customer accounts. 2. Needs Improvement: 1 to 4 new customer accounts. 3. Satisfactory: 5 to 10 new customer accounts. 4. Strong: 11 to 15 new customer accounts. 5. Outstanding: 16 or more new customer accounts.

Did a great job bringing in new accounts during the rst half of the year, but slipped after that. Must improve this area next year.

10 new accounts sales acquired in

Within one year, improve companywide customer service scores by 20%.

Throughout the year, successfully resolve customer inquiries or complaints within one business day.

Comparison of customer service log entry and resolution dates.

85% of customer complaints successfully resolved within one business day.

1. Unsatisfactory: 0% This area was greatly to 60% resolved within improved from last one business day. year. Continue the 2. Needs Improvement: good work. 61% to 70% resolved within one business day. 3. Satisfactory: 71% to 80% resolved within one business day. 4. Strong: 81% to 90% resolved with one business day. 5. Outstanding: 91% to 100% resolved within one business day.

Overall rating: 3.7 (Strong) Overall Comments: This year represents a big step forward over 2005 performance. Sales growth and the resolution of customer complaints were both improved from last year. Still must improve new customer acquisition results. Look for training opportunities with senior sales reps during the coming year. Employee Comments

Manager Signature _____________________________________________________Date _______________________________ Employee Signature _____________________________________________________Date _______________________________

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managing employee performance for business success

A SMALL BUSINESS GUIDE

THE ASSESSMENT PROCESS

The primary process in any performance management system is the performance assessment. It gives management an opportunity to evaluate an employees strengths and weaknesses, identify areas for additional training and development, and give honest feedback to the employee. At the same time, the employee receives reinforcement of what is expected and understands how he or she can improve. Giving considerable attention to the structure of the assessment process, therefore, is well worth the effort.

Who performs the assessment?

In most cases, an employees manager is responsible for gathering the data for the performance assessment. Much of the information can be obtained by observing the traits and behaviors of the employee in the course of his or her work. While this method is straightforward, managers are unable to observe employees at all times and in all situations. It is often helpful, Management Tip Other therefore, to gather additional performance information for a more wellsources of performance rounded view. Gathering information from multiple sources also can information could include peers, help to avoid biases or perceived biases if, for example, a manager employees themselves, customers would tend to favor certain employees based on similar interests, and even subordinates in the case hobbies or personality. Yet another benet of using multiple sources is of employees with management that it often leads to higher likelihood that the employee will view the responsibilities. feedback as valid and helpful.

The performance appraisal discussion

When the criteria and measurement standards have been set and performance information has been gathered, employers must communicate the information to each employee. Most often, this communication takes place as part of a performance appraisal and is generally the responsibility of the employees direct manager. Because the performance appraisal involves the potential communication of weaknesses or deciencies on the part of the employee, it can be a difcult time for manager and employee alike. A few basic steps will make this process more comfortable for everyone. 1. The performance appraisal should be held on a consistent basis, whether you conduct appraisals annually, biannually, quarterly, or even weekly. Employees should be aware of the general time of the year, month or week that it will take place, and they should be notied well in advance of the specic time and location. 2. The appraisal should be scheduled for a private location where interruptions such as phone calls will not cause a distraction. Enough time should be scheduled so that the manager is able to fully communicate the necessary information and the employee is able to get answers to questions or concerns. 3. If a manager conveys negative information, such as under performance or deciencies in performance, a plan should be discussed at the meeting that establishes how the employee can make the improvements, acquire the skills or implement the changes that will address the concerns before the next appraisal. While these steps will not eliminate all of the stress that can accompany this process, they can help keep the meeting fact based and focused on improvement, not nger pointing.

Follow up
Finally, you must remember that the performance appraisal is only the beginning of a an effective, long-term performance management system. In fact, most of the work in a performance management system needs to be done after the appraisal. Keep in mind that the purpose of performance management is to improve performance, not merely to point out shortcomings. Here are three important follow-up items: Rewards. Managers must ensure that high performance is rewarded through the proper use of compensation and incentive plans, as well as individual rewards when appropriate. Simply put, great results should generate great rewards. GEVITY INSTITUTE

Goals. Poor performance needs to be addressed through the development of goals with the employee and periodic feedback on how the employee is achieving those goals. Training. Gaps in the knowledge or skills necessary for high performance need to be addressed through education and training programs. Support. Managers often assume that employees, upon being told of their deciencies, will automatically set out to improve. While this might be the case, employees do not always know what to do or where to turn. Manager involvement in this process is essential for a successful performance management. Proper follow up after the performance appraisal will ensure that high performance continues, that performance deciencies are improved and that gaps in knowledge or skills are lled.

LEGAL ISSUES
While the legal issues involved in the performance management process are not within the scope of this paper, it must be noted that there are legal implications to performance management. Primarily, they center around the fact that performance appraisals and the overall performance management system are tied to important events such as pay raises, bonus distribution and even employee termination. Business owners and managers should obtain appropriate legal advice in relation to their performance management process so that they can ensure that they are in compliance with the law and avoid costly litigation.

conclusion
An effective performance management system is imperative for a company that seeks to achieve nancial success. Far from being a burdensome exercise characterized by tense performance appraisals, a performance management system is one of the primary mechanisms by which a company increases the value of its most valuable asset its people.

references
1,5

McDonald, D., & Smith, A. (1995). A Proven Connection: Performance Management and Business Results.

Compensation and Benets Review, 27(1), 5962.

2

Hornsby, J. and Kuratko, D. (1999). A Study of Human Resource Practices and Trends in U.S. Small Businesses. Yankelovich Partners Survey for William M. Mercer (1995), as quoted in Bernthal, P., Sumlin, R., Davis, P., & Rogers, R. (1997). Performance Management Practices Survey Report. Development Dimensions International.

Martell, K. and Carroll, S.J. (1995). How Strategic is HRM? Human Resource Management, 34(2): 253267. Gevity Institute Cornell University (2005), Human Resource Management Practices and Firm Performance in Small Businesses, Report #3.

Noe, R.A., Hillenbeck, J.R., Gerhart, B. & Wright, P.M. (2004). The Fundamentals of Human Resource Management. McGraw Hill, New York

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managing employee performance for business success

A SMALL BUSINESS GUIDE

11

Key Performance Management Checklist

Understand the purpose of performance management. Much more than just performance appraisals, it is the
process through which you ensure that your employees are helping the organization achieve its goals.

Align with your business goals. Be sure that your performance management system is aligned with the
strategy of the business and that what you measure and assess is what you want to achieve, because what you measure is what gets done.

Tie in all your employee management practices. All of your people management practices should support
the performance management process. Be sure that practices such as compensation and training are tied to the results of your performance management system.

Provide training and development. One of the key goals of performance management is to develop and
improve the employees who will impact the performance of your business, so be sure to provide appropriate training opportunities.

Know the jobs in your organization. You must understand the role of each employee and how each role
contributes to the accomplishment of your strategy.

Measure the right things. When measuring performance, use a combination of traits, behaviors and output
whenever possible. This will give you a clearer picture of actual employee performance.

Use multiple sources of performance information. Using many sources of information, in addition to the
manager, gives a more well-rounded picture of an employees strengths and weaknesses.

Avoid surprises. When performance data is regularly gathered and shared with employees, their nal
performance rating will be understood well ahead of the nal performance appraisal discussion.

Plan ahead. Make sure that appraisals are held consistently, in a private location and with sufcient time. Also
make sure that goals for improvement are developed during the performance appraisal to take some of the stress out of the process.

Follow up. The actual performance appraisal is only the beginning of the performance management process.
Proper follow up will ensure that the desired benets are achieved.

Reward success. Performance management is most effective when employees see a direct link between their
performance and their compensation.

Get legal guidance. Be sure to seek proper legal advice in relation to performance management to ensure
compliance and avoid litigation.

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THE GEVITY INSTITUTE: KNOWLEDGE AND APPLICATION

The Gevity Institute was established to identify and quantify the link between people management practices and smalland medium-sized business performance. The Institutes goal is to establish an ongoing stream of information, data and recommendations focused on effective people management for smaller companies. The Institute sponsors research at leading universities and business organizations. Gevity will apply knowledge gained from Gevity Institute research to practical solutions that help small- and mediumsized businesses to improve prots, productivity and longevity. To learn more, visit our Web site at www.gevityinstitute.com.

ABOUT GEVITY
Gevity helps clients increase prots, grow sales and improve customer satisfaction through our comprehensive employee management solution. We serve as the insourced human resource department to small- and medium-sized businesses nationwide. Our unique approach integrates three key drivers of business success: workforce alignment, administrative relief and business protection. We deliver our solution through our innovative people, processing and portal approach, combining the resources of our highly skilled human resource consultants and our scalable, Web-enabled technology platform. To learn more, visit our Web site at www.gevity.com.

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