What are the elements of the performance management system

How does performance management work today? The classic and agile variant explained

Do your employees do what is expected of them? And how can you motivate them to achieve top performance in the company? Performance Management answers these questions. As a core function of the HR department, it has become indispensable in companies around the world. But like almost everything, this concept is also in a state of upheaval.

The demands of a changing world of work now make it essential to deal with this topic. In this article you will learn what performance management is and what the process looks like. We will also discuss the need for an agile process and present an alternative to the classic concept. Last but not least, we will go into suitable software instruments.

Definition: what is performance management?

Performance management, in German called performance management, comprises the activities and processes with which the performance of employees is controlled. The aim is to use these optimally to achieve the company's goals.

It is also about promoting the personal development of the individual workforce. They should be able to contribute their individual skills under the right working conditions. When personal goals and corporate goals are in harmony, the company's full potential is exploited.

The performance can be viewed at different levels, for example employees, teams or entire departments. Here we want to deal with performance management at the employee level.

What does the performance management process look like?

The performance management process typically consists of the following three elements:

  1. objective agreement
  2. performance evaluation
  3. Incentive systems (performance-related remuneration)

How these look in detail differs from company to company. Here you can find out what constitutes the elements in themselves.

1. Target agreement

Workers and their superiors agree on target agreements at least once a year. It stipulates which goals an employee should achieve in a certain period of time.

As a management tool, target agreements were introduced as early as 1954 by the American economist Peter F. Drucker. He called this concept, which is still relevant today, “Management by Objectives”. A study found that over 80% of the employees surveyed are convinced that target setting has a positive effect on their motivation and commitment in the workplace.

Having specific goals at work can help tremendously. They bring clarity to everyday work and help to prioritize tasks. When employees know what is expected of them, it creates security and transparency. It also strengthens personal responsibility when employees can determine the path to their goals themselves.

What kinds of goals should be set now? On the one hand, these should be based on the company's goals and, on the other hand, they should also include the personal goals of the employees. In general, there are three types of goals:

  • Behavioral goals: Define how the worker should react in certain situations.
  • Task-related goals: Refers to the activities that belong to the job description of the individual.
  • Development related goals: Describe how the employee wants to develop further within the company and personally.

Every goal set is either qualitative or quantitative in nature. While quantitative goals can easily be measured using key figures, qualitative goals can usually only be verified through observation. Good target agreements consist of a mix of both.

Here we have put together 7 tried and tested tips for better target agreements.

At the end of the period, the manager and employee jointly check to what extent the agreed goals have been achieved. That leads us to the next step.

2. Performance evaluation

When recording and measuring performance, the performance and behavior of an employee in the past are considered. As part of an employee appraisal interview, employees and their superiors discuss whether and to what extent the agreed goals and requirements have been met and the desired behavior has been demonstrated. This traditionally takes place once a year.

The input for the performance appraisal can be collected through various methods, for example:

  • Self-assessment: The employees rate their own performance. This is usually part of the overall assessment and does not stand on its own.
  • Downward assessment: Here the manager gives the rating. Also referred to as a top-down procedure or managerial assessment.
  • Sideways assessment: In this equal assessment, employees are rated by their colleagues at the same level of the hierarchy.
  • 360 degree feedback: In addition to the manager, colleagues, business partners and customers are also involved in the assessment.

Since performance management is an important part of talent management, potential analyzes are often carried out as part of the performance assessment. This is intended to show the further development opportunities for the employees. Questions like, is the worker ready for a promotion to the next higher position and how does the employee imagine the future in the company are also part of the performance appraisal.

Find out what the worst performance appraisal mistakes are and how to avoid them here.

If the company works with performance-related pay, then the performance evaluation has an impact on the employee's bonus. That's what the next point is about.

3. Incentive systems

The idea of ​​a performance-related or variable remuneration is to create an incentive system that increases employee motivation and thus their performance. This only works if the performance incentives also match the motivation structure of the employees. To achieve this, you could involve employees in creating incentives.

In general, companies set two types of incentives:

Material incentives:

  • Payments of wages and salaries
  • Bonuses
  • Vacation and Christmas bonuses
  • Profit-sharing
  • Benefits in kind (e.g. company car, smartphone)

Intangible Incentives:

  • recognition
  • Awards
  • Advanced training
  • More freedom
  • Flexible working hours

It is best to combine various incentives to encourage motivation.

Why modern companies need agile performance management

Classic performance management cannot do without criticism. In an Accenture study, while 9 out of 10 executives said regular performance reviews improve business results, the majority of employees were far from satisfied with the traditional process of target setting and year-end reviews.

At a time when the markets are faster and more unpredictable than ever before, the annual cycle of target setting and performance appraisal is considered outdated. In order to keep up with the competition, companies have to guarantee ever shorter innovation cycles. And for these goals often have to be adjusted or completely redefined several times during the year.

Unsurprisingly, a new approach to performance management comes from Silicon Valley. Companies like Google, Twitter and LinkedIn have been using the OKR method for years. OKR stands for Objectives and Key Results, which translates as goals and key results. The core idea is that the company, as well as the individual departments and employees, set five goals for each quarter. These each have no more than four core results.

Instead of determining goals from above, teams consider for themselves how they can best contribute to the company's success. They then discuss their ideas among themselves and with their superiors. The core results describe how exactly you want to achieve the individual goals. It is important that the OKRs are visually visible at all times (e.g. in software or a whiteboard) so that everyone knows what is currently being worked on.

One of the greatest advantages of the OKR method is that it forces the entire workforce to focus on the important things and use resources effectively. Success can also be measured immediately. This enables companies to see what is working and what is not much faster. If the general conditions change, you can react within a very short time.

Instruments for performance management

An agile, future-oriented performance management focuses on short-term goal orientation. This process can only work effectively if it is mapped digitally. Companies use software for this. Suitable HR software that supports this process must be characterized by high adaptability and flexibility.

There are now specialized performance management software solutions. Often, modules for performance management are also part of a talent management software or HCM suite. In any case, the software should enable the following:

  • Employees and superiors must always keep an eye on the corporate goals as well as their own goals.
  • You need a continuous overview of the status of the achievement of the individual goals.
  • You should be supported in prioritizing the daily tasks so that an efficient achievement of goals is guaranteed.
  • They should be able to exchange ideas and give feedback ad hoc via a communication channel.
  • You must be automatically informed about changes in the corporate strategy so that individual goals can be adjusted promptly.

In general, the software should support your managers in all activities related to the performance management process, for example in documenting target agreements, performance appraisals and personnel development measures.

As a rule, it is the HR department's job to implement the relevant software and train supervisors and employees in it. This is made easier if the software is easy to use.

In addition, the software is ideally not only accessible via the desktop, but also available as an app for the smartphone or tablet. Then it can become a daily companion and helper.


Performance management is changing, that much is clear. Companies that still adhere to the classic, annual system are in danger of falling behind. The tools required to introduce an agile, flexible process are now available. This enables companies to respond more quickly to changing conditions and remain competitive in the market.

Employer branding

Julia is always on the trail of the latest trends in HR and recruitment in order to conjure up interesting content. As a former HR manager, she also draws on her own experience and specialist knowledge.