For many companies, the third quarter is when planning for the performance management review cycle kicks off. An organization’s performance management process represents an essential element in how it values its employees. Effective performance management provides structure, feedback, and measurable outcomes that ensure employees understand expectations and how their work drives company success. In short, individual performance fuels company performance.
McKinsey’s 2024 performance management research supports this and is highlighted in the article “In the Spotlight: Performance Management that Puts People First.” Organizations that prioritize their people’s performance are 4.2 times more likely to outperform peers, achieving on average 30% higher revenue growth and five percentage points lower attrition. Beyond the numbers, companies that invest in both their people and organizational health see lasting benefits in culture, collaboration, and innovation – driving sustained competitive advantage.
Many would agree that aligning employees’ contributions with organizational goals generates collective momentum needed to achieve company growth and long-term success. However, the process of review is often made overly complex.
From self-assessments to manager reviews, to senior manager oversight to calibration – the more complex the process, the harder to get to the goal of a positive impact on employee and organizational performance. As organizations and managers alike find the assessment process difficult (and time-consuming), they don’t clearly appreciate the return on investment of this important process that impacts their greatest asset – their employees. When people become so focused on the exercise of checking boxes to rate and rank, they miss whether the process is delivering results or creating value. Further, there is often little incentive to devote time and energy to a process filled with paper (or process) and challenging to manage.
So, how can leadership make performance management effective and meaningful? How do you create a process to inspire teams, remove barriers, and create an environment where people can perform at their best?
The answer is different for every organization. To start, leadership should listen, understand, and motivate while also maintaining strategic clarity. A leader who prioritizes performance management not only sets standards, but also invests in developing talent, recognizing potential, and empowering individuals to stretch into new opportunities. Together, leadership and performance management form the backbone of an organization’s ability to adapt, innovate, and sustain long-term success.
Alternatively, when performance management is not prioritized or appraisals are not done well, the negative effects ripple across both the organization and its employees. This can weaken organizational performance, as employees disengage and the company loses its competitive edge due to poor talent management.
According to McKinsey’s research, perceived fairness is the strongest driver in overall effectiveness of performance management. This starts with individual goals linked to business priorities and objectives, supported by the direct manager’s ability to effectively coach the individual, and compensation that differentiates a low performer from a valued performer from a top performer.
The research also supports what those in HR already know: when talent management is thoughtfully designed and centered on people, it can be a competitive differentiator – boosting growth, retention, culture, and innovation. The research also showed that the most successful systems are those that:
- Align with organizational context
- Emphasize team outcomes where relevant
- Mix results with behaviors
- Stay agile
- Utilize AI thoughtfully
- Are based in a strong, consistent performance culture
When performance management puts people first and appraisals are done well, they serve as a powerful tool to strengthen employee engagement and motivation. A thoughtful appraisal process provides employees with clear recognition of their accomplishments and constructive feedback on areas for growth. This acknowledgment reinforces their sense of value within the organization, boosting morale and encouraging continued commitment. When people feel seen and appreciated, they are more likely to invest energy and creativity into their work.
Well-executed appraisals also create alignment between individual performance and organizational goals. By connecting day-to-day responsibilities with the company’s broader mission, leaders help employees understand how their contributions matter. This clarity fosters accountability and drives productivity, as employees are empowered to prioritize the right actions and make better decisions.
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