Many organisations are being let down by their approach to employee performance management at a time when they most need it to work for them, according to consultants Watson Wyatt.

With performance management systems being the driver for employee bonus payments and at a time when most companies have vastly reduced reward budgets, the ability to differentiate between employee performance to target reward spend towards genuine high performers is more important than ever.

In recent years, many employers have been updating what they have seen as failing performance management systems by streamlining the administration, improving rating systems and simplifying the communication documents.

But while these process improvements are important they do not get to the heart of failing performance management, according to Justin Grice, a senior reward consultant at Watson Wyatt: “It is the intangible aspects of performance management that make a tangible difference. Are line managers actually capable of managing poor performance? Do employees know how to set objectives, and provide and receive feedback? Are objectives set in the context of business objectives that balance financial performance with risk?”

According to Watson Wyatt, the need to get this right is underlined by recent guidance from the Financial Services Authority that regulated companies should take a more balanced assessment of performance in reaching bonus decisions and not just measure the achievement of financial targets. The FSA specifically concentrates on risk management but also implies that organisations should assess both financial and non-financial performance over both the short and the long term.

“Determining bonuses in this way relies on assessing performance ‘in the round’; You need to intelligently determine financial and non-financial delivery and balance this with behaviour in line with organisational values,” said Justin Grice. “This places renewed emphasis on performance management and ensuring organisations can assess the complexities of performance in a consistent way.”

“While this is an immediate challenge for FSA regulated companies, it is an approach to performance management and bonus structures that is likely to spread to other sectors.”

According to Watson Wyatt, there are four aspects of performance management that process improvements too often overlook:

  • Line managers’ capability to manage poor performance and have ‘difficult’ conversations, which can be addressed through coaching and training.
  • Employees’ capability to set objectives, and provide and receive feedback, which can also be addressed through training.
  • Ongoing communication to ensure undue emphasis is not inappropriately placed on objective setting and end-of-year reviews to ensure that performance management is seen as the ‘way we do things’.
  • Ensuring that performance management is placed in the context of overall business performance to provide employees with a ‘line of sight’ and help them to understand how achieving their objectives help to deliver organisational success.

“Addressing these less tangible aspects of performance management as well as the tangible ones is key to delivering an approach to performance management that is sophisticated enough to assess performance ‘in the round’,” said Justin Grice.