Why is performance management important for company success?
Written by
Writer, Culture Amp
Every organization relies on its people to achieve success. A great team can accomplish amazing things, but without clear goals, regular feedback, and a structured approach to growth, even the most talented teams can fall short of their potential. That’s where employee performance management comes in.
Performance management is about more than annual reviews – it’s a dynamic, ongoing process that aligns individual contributions with broader organizational objectives. It creates a framework for continuous improvement that drives employee engagement and organizational success.
In this blog post, we’ll explore why performance management is important when building successful teams and how it helps businesses foster accountability, recognize top talent, and drive sustainable growth. Whether you’re a people leader hoping to improve your team’s performance or an HR professional looking to refine your business’ processes, understanding the value of performance management can help you achieve these goals.
What is performance management?
Before diving into why performance management is important, let’s first define what it is. Performance management is an ongoing dialogue between managers and their direct reports to align on responsibilities, set clear goals, and strategically advance company priorities.
At its core, performance management is a continuous process that encompasses activities like:
- Setting meaningful, measurable goals
- Holding regular 1-on-1 meetings to track progress
- Providing timely, constructive feedback
- Conducting formal performance reviews
- Crafting employee development plans and discussing growth
- Recognizing and rewarding top talent
When executed together, these cornerstones of performance management allow managers to unlock their team’s full potential, driving both individual and organizational success.
Looking to learn more about performance management and the factors that can help your employees thrive? Check out our Complete guide to understanding performance management for actionable insights and strategies to drive success.
Key components of the modern performance management cycle
Five key stages make up the performance management cycle: planning, monitoring, developing, reviewing and rating, and rewarding. In this section, we’ll take a closer look at each phase and what it entails:
Planning
The employee performance management cycle begins with setting clear, actionable goals aligned with larger organizational objectives. Managers and employees can leverage frameworks like SMART goals or objectives and key results (OKRs) to define what success looks like and outline the steps needed to achieve it. The planning stage is essential for driving organizational alignment, ensuring everyone understands how performance will be evaluated during the performance appraisal.
It’s equally important to address employee development during this stage. Managers can collaborate with employees to create an individual development plan (IDP) that identifies growth opportunities and establishes a roadmap for achieving them. Having both performance and development goals helps employees focus on immediate priorities while also working toward building new skills, advancing their careers, and feeling a deeper sense of purpose in their roles.
Monitoring
The monitoring phase centers on regular check-ins (or 1-on-1 meetings) between managers and employees to track goal progress and make any necessary adjustments. When progress lags, these conversations provide an opportunity to identify roadblocks, address challenges, and brainstorm solutions to get back on track. Conversely, when employees consistently surpass expectations, managers can adjust goals to make them more ambitious. This approach ensures employees remain challenged, engaged, and aligned with evolving organizational priorities.
Developing
During the development stage, managers play a crucial role in helping employees reach their full potential. This involves addressing performance gaps through targeted coaching and providing constructive employee feedback to support growth. Whether it’s guiding underperforming individuals back on track or refining the skills of high performers, managers are encouraged to focus on continuous improvement to empower individuals to achieve their short- and long-term goals.
Reviewing and rating
The formal review process involves managers gathering 360-degree feedback from peers and employees to provide a comprehensive evaluation of individual performance throughout the review period. This approach introduces more diverse perspectives than just a manager, allowing for more accurate and fair assessments. Employee ratings not only give individuals a clear understanding of their overall performance but also help your organization make informed and equitable decisions regarding promotions, compensation adjustments, and career development opportunities, ensuring fairness and alignment with performance outcomes.
Including calibration meetings in this phase can improve the fairness of performance appraisals by enabling people leaders to discuss and align on performance ratings across teams, ensuring consistency throughout the organization. Calibrating ratings can help mitigate bias, standardize evaluations, and ensure the fair distribution of recognition, rewards, and employee development opportunities.
Rewarding
The final stage of the employee performance management cycle focuses on reinforcing strong performance through recognition and rewards. Consistently acknowledging and rewarding top performers boosts retention while keeping employees engaged and motivated. The right type of rewards will depend on your organization, but common options include raises, promotions, equity, bonuses, additional vacation days, or other meaningful incentives. Clear and tangible rewards inspire employees to do their best, achieve their goals, and even surpass expectations.
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Why is performance management important?
Implementing and maintaining a formal performance management cycle is a significant investment for your organization, managers, and employees. However, the long-term benefits – which we’ll explore below – can make it well worth your business’ while.
1. Aligns individual and organizational goals
Unclear and ineffective goals waste your organization’s resources and time. By implementing a performance management process with SMART goals and OKRs, you can ensure that every objective – whether at the department, team, or individual level – is strategically aligned to drive organizational success. This approach maximizes the impact of your employees’ efforts, creating a more focused and efficient workforce.
2. Drives engagement
Performance management plays a pivotal role in boosting employee engagement by fostering clarity, communication, development, and recognition. Here are some statistics that demonstrate its value:
- 80% of employees who say they have received meaningful feedback in the past week are fully engaged.
- Employees who say they are properly recognized for their work are four times more likely to be engaged.
- Employees who strongly agree their organization encourages them to learn new skills are 47% less likely to be searching for another job.
Every stage of the performance management cycle helps drive employee engagement, ensuring your workforce feels supported and motivated as they pursue success.
3. Improves business performance
Effective communication is the foundation for employee performance management and all of its associated benefits. When managers and employees engage in regular, meaningful conversations, they improve alignment, encourage strategic thinking, and enhance their ability to adapt to shifting business priorities. This creates an agile and resilient workplace, ultimately leading to stronger business outcomes.
Take employee feedback as an example. Real-time feedback empowers teams to make swift adjustments, enabling your organization to respond proactively to challenges and opportunities. Research shows that real-time feedback is something employees want – they are 3.6 times more likely to strongly agree that they are motivated to do outstanding work when their manager provides daily feedback. By fostering open dialogue and continuous employee feedback, performance management drives workplace agility, productivity, and success.
4. Supports career development
Offering opportunities for growth and development demonstrates your organization’s commitment to its people. When employees feel valued and can picture a future with your company, they are more motivated to stay and grow alongside your business. Individual development plans, professional goals, and feedback give employees the growth blueprint they need to grow personally and professionally within your company.
5. Builds accountability and transparency
Clear, actionable goals provide employees with a precise understanding of performance standards, what success entails, and how their contributions align with broader organizational objectives. This enhances individual accountability and, at the same time, promotes transparency across the company. When goals and progress are visible to everyone, employees feel connected to a larger purpose – and more focused, confident, and motivated in their roles.
6. Fosters trust and collaboration
Consistent 1-on-1 meetings help employees feel supported and heard. This open communication builds trust between managers and employees, fostering a culture of transparency, collaboration, and mutual respect. When managers build closer, more trusting relationships with their direct reports, employees are more likely to share concerns, seek guidance, and actively contribute to problem-solving, ultimately creating a more engaged and resilient workforce.
7. Recognizes top talent
Acknowledging and celebrating achievements is vital for keeping employees engaged and motivated. Recognition serves as positive reinforcement, inspiring employees to maintain high performance and strive for further success. Whether it’s through verbal praise, public acknowledgment, or monetary rewards, recognizing top talent reinforces their value to the organization. It also strengthens employees' connection to your company by fostering a sense of appreciation and belonging, ultimately boosting morale and retention.
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Common performance management challenges and how to overcome them
Creating an effective performance management strategy requires avoiding common pitfalls. From poorly defined goals to inconsistent feedback, here are seven performance management mistakes to watch out for.
- Using ineffective goals: Effective goals provide employees with clear objectives and a defined path to success. Vague or one-size-fits-all metrics often lead to confusion instead of clarity. To give employees the direction they need, consider using proven goal-setting frameworks like SMART goals or OKRs.
- Failing to align individual and organizational goals: When employees understand how their daily responsibilities contribute to broader organizational objectives, they gain a stronger sense of purpose and direction. Cascading goals help bridge this connection, showing employees the impact of their work and contributing to greater fulfillment and satisfaction.
- Providing infrequent feedback: Delayed feedback limits employees’ ability to adjust and improve their behavior or performance. Real-time employee feedback is essential for driving immediate change. Ask managers and peers to share feedback as promptly as possible (like after a presentation, conclusion of a project, etc.), so the individual can make adjustments quickly.
- Sharing unhelpful feedback: Giving and receiving feedback supports growth and development, but it’s a skill that takes practice. To ensure your managers know how to give effective feedback, organize regular training programs on the topic.
- Allowing bias in performance appraisals: Relying solely on a manager's perspective to assess an employee's performance can unintentionally introduce bias into the process. To ensure fairer and more balanced evaluations, adopt 360-degree reviews. This review style incorporates feedback from multiple sources – managers, peers, and the individual themselves – reducing the risk of bias.
- Failing to leverage technology: Managing goals, feedback, 1-on-1 agendas, and performance reviews across scattered documents creates unnecessary confusion and inefficiency. A centralized performance management platform, like Culture Amp, simplifies the process by keeping everything in one easily accessible place. It also equips managers with valuable insights into team and individual performance, empowering them to make data-driven decisions that drive team success.
- Not recognizing top talent: Rewarding high-performing employees is essential for maintaining motivation and engagement. Acknowledging top talent through promotions, raises, bonuses, or other incentives reinforces their value to the organization and shows that you appreciate their contributions.
What does great performance management look like in action? Read our customer story to learn how MLB hit a home run with a culture of continuous performance following these best practices.
Building a better performance management strategy with Culture Amp
Now that you understand the importance of performance management, consider this: only 2 in 10 employees say their performance is managed in a way that motivates them to do outstanding work. In order to be one of the businesses that gets performance appraisals right, consider partnering with an employee experience platform like Culture Amp.
Culture Amp’s robust suite of tools has everything you need to set meaningful goals, streamline 1-on-1s and performance conversations, simplify giving and receiving feedback, develop top talent, and celebrate employees’ wins. If you’re ready to unlock high performance for your teams and business, request a free performance demo of Culture Amp today.
