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How to evaluate the effectiveness of performance management systems an overview of the literature and a proposed integrative model.

1. Introduction

2. theoretical concepts, 2.1. strategic human resource management (shrm) and performance management (pm), 2.2. effectiveness of performance management system (pms), 3. research method, 4. results and discussion, 4.1. dimensions, criteria, and measures to evaluate the effectiveness of performance management systems (pmss), 4.1.1. reaction, 4.1.2. learning, 4.1.3. transfer, 4.1.4. operational results, 4.1.5. financial results, 4.1.6. societal impact, 4.1.7. methods and procedures for measuring the dimensions of performance management system (pms) effectiveness, 4.2. integrative model of evaluating performance management system (pms) effectiveness, 5. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.

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de Araújo, M.L.; Caldas, L.S.; Barreto, B.S.; Menezes, P.P.M.; Silvério, J.C.d.S.; Rodrigues, L.C.; Serrano, A.L.M.; Neumann, C.; Mendes, N. How to Evaluate the Effectiveness of Performance Management Systems? An Overview of the Literature and a Proposed Integrative Model. Adm. Sci. 2024 , 14 , 117. https://doi.org/10.3390/admsci14060117

de Araújo ML, Caldas LS, Barreto BS, Menezes PPM, Silvério JCdS, Rodrigues LC, Serrano ALM, Neumann C, Mendes N. How to Evaluate the Effectiveness of Performance Management Systems? An Overview of the Literature and a Proposed Integrative Model. Administrative Sciences . 2024; 14(6):117. https://doi.org/10.3390/admsci14060117

de Araújo, Mariana Lopes, Lucas Soares Caldas, Bruna Stamm Barreto, Pedro Paulo Murce Menezes, Júlia Cássia dos Santos Silvério, Laís Campos Rodrigues, André Luiz Marques Serrano, Clóvis Neumann, and Nara Mendes. 2024. "How to Evaluate the Effectiveness of Performance Management Systems? An Overview of the Literature and a Proposed Integrative Model" Administrative Sciences 14, no. 6: 117. https://doi.org/10.3390/admsci14060117

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The Performance Management Revolution

• Peter Cappelli

Hated by bosses and subordinates alike, traditional performance appraisals have been abandoned by more than a third of U.S. companies. The annual review’s biggest limitation, the authors argue, is its emphasis on holding employees accountable for what they did last year, at the expense of improving performance now and in the future. That’s why many organizations are moving to more-frequent, development-focused conversations between managers and employees.

The authors explain how performance management has evolved over the decades and why current thinking has shifted: (1) Today’s tight labor market creates pressure to keep employees happy and groom them for advancement. (2) The rapidly changing business environment requires agility, which argues for regular check-ins with employees. (3) Prioritizing improvement over accountability promotes teamwork.

Some companies worry that going numberless may make it harder to align individual and organizational goals, award merit raises, identify poor performers, and counter claims of discrimination—though traditional appraisals haven’t solved those problems, either. Other firms are trying hybrid approaches—for example, giving employees performance ratings on multiple dimensions, coupled with regular development feedback.

The focus is shifting from accountability to learning.

Idea in Brief

The problem.

By emphasizing individual accountability for past results, traditional appraisals give short shrift to improving current performance and developing talent for the future. That can hinder long-term competitiveness.

The Solution

To better support employee development, many organizations are dropping or radically changing their annual review systems in favor of giving people less formal, more frequent feedback that follows the natural cycle of work.

The Outlook

This shift isn’t just a fad—real business needs are driving it. Support at the top is critical, though. Some firms that have struggled to go entirely without ratings are trying a “third way”: assigning multiple ratings several times a year to encourage employees’ growth.

When Brian Jensen told his audience of HR executives that Colorcon wasn’t bothering with annual reviews anymore, they were appalled. This was in 2002, during his tenure as the drugmaker’s head of global human resources. In his presentation at the Wharton School, Jensen explained that Colorcon had found a more effective way of reinforcing desired behaviors and managing performance: Supervisors were giving people instant feedback, tying it to individuals’ own goals, and handing out small weekly bonuses to employees they saw doing good things.

• Peter Cappelli is the George W. Taylor Professor of Management at the Wharton School and the director of its Center for Human Resources. He is the author of several books, including Our Least Important Asset: Why the Relentless Focus on Finance and Accounting Is Bad for Business and Employees (Oxford University Press, 2023).
• AT Anna Tavis is a clinical associate professor of human capital management at New York University and the Perspectives editor at People + Strategy, a journal for HR executives.

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Performance management systems: Trade-off between implementation and strategy development

• Open access
• Published: 02 August 2022
• Volume 16 , pages 280–295, ( 2023 )

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• Roman A. Lewandowski Ph.D.   ORCID: orcid.org/0000-0002-9589-0629 1 &
• Giuseppe T. Cirella Ph.D., D.Sc.   ORCID: orcid.org/0000-0002-0810-0589 2  

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The aim of this study is to understand how performance management systems (PMS) affect the strategy development process. The research examines PMS implementation and evaluates how the implementation of PMS links measures with rewards, i.e., financial and non-financial, to influence strategy formation. This qualitative study is based on 74 semi-structured face-to-face in-depth interviews with board members, mid-level managers, and other employees in nine organizations. Theory-building is comprised of the transcribed and analyzed interviews using MAXQDA 12 software. Theory-testing, i.e., a verificatory stage, consisted of analyzing previously identified phenomena. Results suggest that PMS affects strategy development processes by influencing both employee relational and calculative trust in their superiors. It also indicates a direct behavioral effect on employee knowledge sharing and manager trust in their subordinates. As a result, this may determine the extent to which managers exploit shared knowledge while formulating a strategy. The research demonstrates there is a trade-off between PMS implementation and strategy development. A gap in the literature is filled by integrating relational and calculative trust with PMS implementation and showing how such changes in trust mediate knowledge sharing behavior and strategy development.

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1 Introduction

Performance management systems (PMS) have achieved immense popularity in academic and business communities. PMS generally can be defined as a set of management control mechanisms with the overall purpose of facilitating the delivery of organizational goals by influencing people’s behavior and performance (Broadbent and Laughlin 2009 ; Ferreira and Otley 2009 ) by embracing five fundamental elements: (1) a planning phase which includes the goals that reflect organizational expectation and delineate performance; (2) a measurement comprising of the metrics used to operationalize performance; (3) a review referring to the evaluation and feedback of performance information; (4) a performance-related reward system, and (5) a “refreshing” phase (Franco-Santos and Otley 2018 ). “Refreshing” of PMS is a crucial element since the environment and the organization itself changes over time and, thus, a constant re-evaluation of the existing performance measures as well as PMS as a whole must be rendered (Schleicher et al. 2018 ). PMS is an important tool in operations and strategic management since it allows for the integration of sets of metrics, namely, quantitative and qualitative data. Such data is used to quantify strategic objectives both on the operational and business level, so as to make it possible for decision making to better formulate (and adapt) a business model of efficiency and effectiveness of an organization’s actions (Glas et al. 2018 ). Additionally, it must be flexible to adapt to strategic changes that otherwise may affect performance and overall success.

From the literature, the most prominent PMS appears to be the balanced scorecard (BSC) (Bryant et al. 2004 ; de Waal and Kourtit 2013 ) which became a standard for other PMS dating to the early 2000s (e.g., Rampersad ( 2003 )). Speckbacher et al. ( 2003 ) announced that 44% of companies worldwide claim to be using BSC, and more recent studies prove this popularity (Tapinos et al. 2011 ). A detailed analysis of PMS implementation indicated, however, that many organizations started its implementation but only a few of them implemented it fully, i.e., linking strategic and operations objectives with financial and nonfinancial measures as well as combining these measures with rewards (Albertsen and Lueg 2014 ; Speckbacher et al. 2003 ). This linkage seems to be a central aspect of every PMS’ full development (Glas et al. 2018 ; Lee and Yang 2011 ) as a strategic management system, capable of translating strategy into action (Kaplan and Norton 2006 ; Malmi and Brown 2008 ). Decades of research has shown that there is no agreement among researchers of whether PMS improves or deteriorates organizational performance (Bonner and Sprinkle 2002 ; Bourne et al. 2007 ; Laitinen 2003 ; Liedtka et al. 2008 ; Nørreklit 2000 , 2003 ; Nørreklit et al. 2012 ; de Waal and Kourtit 2013 ). Extant studies have indicated a number of PMS weaknesses (Butler et al. 1997 ; Laitinen 2003 ; Levy et al. 2017 ; Liedtka et al. 2008 ; Nørreklit 2000 , 2003 ; Nørreklit et al. 2012 ) and negative unintended consequences such as information manipulation (Kalgin 2014 ; Li 2015 ), selective attention (Kerpershoek et al. 2014 ), myopia, gaming, illusion of control (Franco-Santos and Otley 2018 ), as well as increased tendency towards being in a rigid state, constraining responsiveness, and resisting change (Mannion and Braithwaite 2012 ). However, they have not pointed out that its primary purpose of supporting strategy implementation may negatively affect strategy formation. Thus, confirmation of PMS influence on strategy formation and explanation of mechanism changes would be an essential contribution to the existing theory on operations strategy process.

There is a significant number of publications concerning PMS, but only a few of them investigated its full implementation, e.g., where measures were linked with rewards (Albertsen and Lueg 2014 ) and those regarding strategy development in a processual model (Tapinos et al. 2011 ) work is an exceptional example that examines the impact of BSC on six elements of the strategy process—quantitatively and internationally. Their research confirmed BSC is an effective tool for strategy implementation and rejected the idea of its influence on strategy development. However, their lack of statistically significant evidence may have originated from a number of research limitations, i.e., by not considering different levels of BSC implementation (Lee and Yang 2011 ; Speckbacher et al. 2003 ) such as the link between measures and rewards. These limitations can considerably alter results since only a small portion of organizations link measures and rewards in their BSC (Albertsen and Lueg 2014 ; Speckbacher et al. 2003 ). Even assuming that Tapinos et al.’s ( 2011 ) quantitative investigation was suitable for examining the statistical correlation between users and non-users of BSC—i.e., regarding their overall view of BSC impact on the strategy process—it was unable to reveal sophisticated mechanisms underpinning strategy formation. At length, there is an important scientific gap in the literature on how the implementation of PMS links measures with rewards to influence strategy formation. Similarly, from the literature concerning operations or other types of functional strategy formation, there are no studies referring to the influence of PMS on strategy formation. Moreover, evidence that PMS may affect strategy development is perceptible, since strategy implementation is not a one-direction process but an ongoing flow in which development and implementation are intertwined. This engagement is central to how it affects trust and the trade-off relationship between strategy development and strategy implementation. Several studies investigated this relationship (Deluga 1995 ; Earley 1986 ; Mayer and Davis 1999 ; Mayer and Gavin 2005 ; Podsakoff et al. 1990 ; Rich 1997 ; Zaheer et al. 1998 ), but very few investigated the interplay between trust and PMS—and the few that did, did not sufficiently explained the relationship (Chenhall and Langfield-Smith 2003 ; Yang and Holzer 2006 ). There are no studies which investigate in what way the implementation of PMS affects trust, what types of trust, and how the changes of trust mediate knowledge sharing behavior and, hence, strategy development. This paper addresses these questions as complementary issues to the examination on PMS linkages.

2 Materials and methods

2.1 framework and definitions, 2.1.1 strategy process and strategy formation.

The strategy process can be defined “as a more or less formalized, periodic process that provides a structured approach to strategy formulation, strategy implementation, and control” (Wolf and Floyd 2013 ). This definition, when applied to strategy formulation supporting organizations, specifies three primary stages, including: (1) principal problems, (2) set objectives (i.e., by analyzing and evaluating alternatives), and (3) selection of the strategy for implementation (Mintzberg et al. 1998 ). The first stage requires information from the organization and their environment to detect strategic opportunities needed to narrow down any suitable alternative. The second stage focuses on the implementation of the chosen alternative by translating strategy into action (Johnson et al. 2008 ; Kaplan and Norton 1996 ). The last stage is the control to what extent the chosen strategy is achieved. Figure  1 depicts a model of strategy process adapted from Dyson ( 2000 ), Tapinos et al. ( 2011 ), and Kaplan and Norton ( 1996 , 2006 ). It illustrates not only the business level strategy but also the functional strategies such as operations, supply chain, and marketing strategy. As such, an organization is capable of developing effective strategies when any of the elements in the model are in place and working effectively (Dyson 2000 ) as well as when the functional strategies are aligned with the business level strategy (Adamides 2015 ).

Strategy process after the implementation of a performance management system, adapted Dyson ( 2000 ), Tapinos et al. ( 2011 ), and Kaplan and Norton ( 1996 , 2006 )

Deliberate strategy formulation, both business level and functional, refers to the rational, formal, and centralized top-down process performed by top managers. It is driven by a situation analysis comprised of identifying an organization’s (or function’s) principal problems as well as monitoring and anticipating its internal and external environment. It is important, that the functional strategies are developed within the guidelines of the overall business strategy (Kim et al. 2014 ; Kremer 2019 ). The effectiveness of a situation analysis depends on the source of information and transfer of knowledge to back the monitoring of broad market trends—inclusive of technologies and policies—as well as internal capabilities. Thus, the central element of the model is feedback and strategic learning, which can be regarded as both feedback and feedforward control. Feedback control is focused on monitoring whether determined plans and objectives are achieved. The feedforward approach is future-oriented. It utilizes accessible information from performance measurement and employees observing and experiencing internal and external uncertainties that may affect previous assumptions based on the selected strategy. Through feedback and strategic learning, knowledge is interpreted and evaluated by employees and forwarded up the organizational hierarchy (Bol 2011 ; Ittner et al. 2003 ). Based on this structure, managers evaluate the current strategy, develop new strategic options, and select, according to their knowledge, the most effective. In the process of strategy development, the most critical factor is the quality of knowledge managers acquire from their subordinates and other sources (Mintzberg 1994 ).

The next element of the adopted model links the strategic objectives with measures by formulating performance targets. This is the fundamental element that improves strategy understanding and allows for its realization (i.e., the activities supporting its implementation) (Kaplan and Norton 1996 ; Kim et al. 2014 ; Kremer 2019 ). Linking measures and targets with rewards strengthen employee willingness to achieve these targets by involving them at a personal level. Objectives, measures, targets, and rewards are fundamental parameters of every PMS. The actual set of decisions are not only the results of purposeful planning (i.e., a deliberate strategy) but also are affected by any emergent strategies (Mintzberg and Waters 1985 ). Emergent strategies are autonomous strategic decisions or actions taken by employees located deep inside the organization as a response to immediate changes in their task environment or as a reaction to perceived opportunity (Burgelman 1996 ; Mintzberg 1978 ; Mintzberg and Waters 1985 ). Employee autonomous strategic actions can also be linked to the feedback and learning process since they acquire knowledge from their day-to-day activities specific to the organization’s ecosystem as well as on certain specificities on how performance (i.e., optimization) can be rendered (Kremer 2019 ). Through the immersion of the feedback and strategic learning process employees are not only sharing but also gaining knowledge which could drive individual actions “off the management radar” and be entirely different than those recommended by top managers. In relation to Fig.  1 , deliberate strategies are the result of managers interpreting the knowledge from the feedback and strategic learning process. Emergent strategies are initiatives taken by employees, partially based on the same feedback and strategic learning process, however entirely different and independent from those of top managers, i.e., marked by a dotted arrow. Strategies emerging without connection with the organizational feedback and strategic learning process are marked by a solid arrow.

Both types of strategy development processes indicate the critical role of middle managers and other low-level employees (Andersen and Hallin 2017 ; Burgelman 1983 ; Jarzabkowski and Balogun 2009 ; Kremer 2019 ; Spee and Jarzabkowski 2011 ). Recent strategic research emphasizes “compromises, interactions, and negotiations that take place over the planning process [and] social and political interactions over strategy making” (Jarzabkowski and Balogun 2009 ). Thus, the important issue is how the roles and responsibilities of middle- and low-level actors emanate in organizations and how this influences knowledge sharing and strategy development? Wooldridge et al. ( 2008 ) underline that “what makes middle managers unique is their access to top management coupled with their knowledge of operations.” Hence, they are an essential nexus of delivering knowledge about markets, competitors, and new technologies—gathered by themselves or acquired from their subordinates. Other research has demonstrated that middle managers involved in strategy development activities also improve organizational performance (Wooldridge and Floyd 1990 ) and strategic planning (Schaefer and Guenther 2016 ), two factors that compliment strategy formation experimentation.

2.1.2 Knowledge and trust

Knowledge can be defined as information integrated with personal experience, i.e., a subjective vision of reality located in a particular field of activity; in other words, a subjective interpretation of reality dependent on individual actors’ values, interests, experience, and view of the truth. Foucault ( 2019 ) claimed that there are several truths but different ways one can express the same truth (White and Jacques 1995 ; Willcocks 2004 ). This means that each person can possess their own version of the truth, and that version of the truth may depend on individual interests. As there is no “one truth” and knowledge is “a subjective vision,” organizational actors may perceive and interpret reality in a divergent manner possibly more congruent with their interests. Further, they may exploit knowledge and subjectivity of the truth to influence others by sharing knowledge in such a way that supports their interests (Westley and Mintzberg 1989 ) and thus affect strategic learning. In this environment, trust in organizational members appears to be a vital factor. Ko et al. (2005) claim that trust facilitates knowledge transfer, i.e., defined as an exchange of knowledge between a source and a recipient, in a way that knowledge can be applied. Trust makes people more willing to share genuine information (Holste and Fields 2010 ; McKnight and Chervany 2006 ; Sankowska 2013 ), even sensitive information, which can be used against them (Dirks 2006 ; Gargiulo and Ertug 2006 ; Szulanski 1996 ). The willingness to share genuine information results from trust properties, as trust leads to the optimistic acceptance of vulnerable situations in which the trustor (i.e., trusting party) believes the trustee (i.e., to-be-trusted party) will care for the trustor’s best interests, irrespective of the ability to monitor or control the trustee (Hall et al. 2001 ). The above conceptualization of trust draws attention to the trustor’s willingness to engage in risk-taking behavior. For example, employees may share knowledge which is vital for an organization but affects their interests mostly in situations when they trust that managers will ensure their interests in the future. The extent to which the trustor will be willing to accept vulnerability to other people depends on the perception of a particular person’s trustworthiness. Overall, the decision of whether to adopt or share knowledge is based on trust (Renzl 2008 ).

Rousseau et al. ( 1998 ) claim that managers can promote two types of trust: calculative and relational. When subordinates develop calculative trust in their managers, they believe that their actions complying with manager requirements will benefit them in calculable ways (Williamson 1993 ) and every fulfilled obligation concerning reward for performance strengthens this type of trust. Subordinates who maintain relational trust believe that their managers will consider their interests irrespective of their ability to control these managers (Rousseau et al. 1998 ; Sitkin and Roth 1993 ). In order to have trust in managers, employees need to believe not only that superiors will hold their words (i.e., are persons of integrity), but also have the ability and willingness to take care of their interests.

In organizations, it is not only important to have employee trust in managers but also manager trust in their subordinates, since it may determine the extent to which managers use the knowledge shared by their employees. However, how can managers recognize who transfers genuine knowledge and who is providing a distorted view based on their own interests? Dirks and Ferrin ( 2002 ) claim that beyond the previous experience with employees, managers might evaluate their level of trust in subordinates based on the source and degree of conflict with them. They may also judge the misalignment of task preferences or goals, or incompatibility of values between themselves and their subordinates as well as evaluate the risk of employee opportunism (Williamson 1993 ). Trustworthiness may also be assessed by the estimation of the level of motivation to lie, i.e., if subordinates have something to gain by lying (Hovland et al. 1953 in Mayer et al. ( 1995 )). When measures are linked to rewards, there are always some underlying interests. Thus, it is essential to investigate how patterns of trust relations and knowledge sharing behavior affected by PMS implementation influence strategy development.

2.2 Research methods

While it is understood how PMS influence strategy implementation, it is not understood how the linkage of strategic objectives with financial and non-financial measures and measures with rewards affect strategy development. To deepen the understanding of strategy development process under PMS, the research was designed as a type of “naturalistic inquiry” in which inductive reasoning was used to obtain insights (Lincoln and Guba 1985 ). During the field study, interview data were gathered from top managers and some key employees, including middle managers, directly involved with the organizational PMS as well as from relevant archival documents accessible in each organization. Hence, part of the dataset is perceptual in nature and may reflect informant and author bias (i.e., something not easily observable). The study, however, is designed in a way which should diminish the effects of this bias via the division of a two-stage process: (1) theory-building and theory-testing and (2) multiple-case study design in each stage. According to a number of studies, multiple cases typically leads to a more robust, generalizable, and testable theory than single-case research. It, among others, allows comparisons between cases to clarify whether an emergent phenomenon is unique for one case or is present in all of them (Eisenhardt and Graebner 2007 ; Tsang 2014 ; Yin 2014 ). In this replication, logic cases are treated as a series of experiments, each serving to confirm or disconfirm inferences (Eisenhardt and Graebner 2007 ). Multiple cases also deliver more empirical evidence supporting emergent findings.

The clear division between theory-building and theory-testing stages could be perceived as artificial, and one might consider that just analyzing more cases together would be more appropriate for congruency with the analytic cycle of moving from an inductive to more deductive attitude as the interpretations crystallized (Miles et al. 2014 ). In this research, however, the split is justified by the construction of distinct research samples and different manners of data analysis. For the theorybuilding stage, the selected organizations utilized were ones that fully implemented PMS and then abandoned it after a few years. It was assumed that organizations which abandoned the PMS must have noticed some critical problems with the concept. In such cases, “hard” evidence was sought—reasons which convinced organizations to abandon further exploitation of PMS. While in the theory-testing stage, the selected entities were organizations that currently use PMS, with the assumption that strategy development issues should also exist but were not visible. Thus, studying such cases, small signs of phenomena revealed in the first stage were sought. Combining organizations that abandoned the PMS and those which were actively using them at the time of the research brought together retrospective and real-time data. Retrospective accounts allowed the research to delve into organizations that experienced time after PMS abandonment and were able to see from a distance some changes in phenomena, while real-time data improved in-depth understanding of how events evolve over time. This, according to Eisenhardt and Graebner ( 2007 ), should mitigate bias concerning retrospective sensemaking. If retrospective bias were an issue, significant differences in accounts in these two groups of cases should appear, however, it did not.

2.2.1 Sampling

The research sample in the theory-building stage consists of three organizations that abandoned BSC and one that discontinued another PMS. In this study, BSC and the other PMS are considered the same (Kaplan and Norton 2006 ; Malmi and Brown 2008 ), i.e., regardless of how an organization named it, since linked objectives with financial and non-financial measures are associated with rewards. The research started from one case (i.e., “Konsta”) that was accidentally discovered by the first author during other similar research which sparked the idea of connecting PMS utilization and strategy development. Through consulting companies, seven additional organizations were found in Poland from different sectors which abandoned their PMS, five of them (i.e., “Konsta”, “Office”, “Hospital”, “Construction”, and “Center”) agreed to participate in the research. For the theory-testing stage, two organizations were selected that actively use BSC (i.e., “Bureau” and “Furniture 1”) and two firms that exploit the other PMS (i.e., “Furniture 2” and “Center” ) (Table  1 ). During the research it appeared that organizations hesitate to reveal information about their internal problems with PMS. To motivate informants to provide accurate data, confidentiality and anonymity for all organizations in both stages were agreed on and promised (Miller et al. 1997 ).

2.2.2 Data collection

In the theory-building stage, 41 semi-structured face-to-face in-depth interviews were conducted from September 2015 to November 2016 and from February 2022 to March 2022, while in the theory-testing stage 33 informants were interviewed from June 2016 to January 2017 and from February 2022 to March 2022. All 74 interviews were recorded and later transcribed, and analyzed using MAXQDA 12 software—i.e., software that is specifically designed for qualitative analysis. Apart from the chief executive officers (CEOs) or board members, typical case studies regarding BSC also include mid-level managers and some key employees since, according to the literature (Albertsen and Lueg 2014 ), they may play an important role in strategy formation processes. Additionally, multiple informants mitigate subject bias (Miller et al. 1997 ) and lead to a thicker, more elaborated model (Schwenk 1985 ). In every case, the first interview was conducted with the CEO, who was also asked to indicate the most experienced staff with PMS. In two cases, the CEO, chief financial officer, and some key informants who had implemented BSC changed their place of work, but they were interviewed anyway. Taking informants from different levels (i.e., superiors and subordinates) allowed for comparative interviews and some ancillary questions relating to the same events. This was important since informants had to recall facts from the past.

The duration of each interview ranged from 30 to 115 min and began with open-ended questions about the reasons for PMS implementation, possible resignation or its continuation, as well as the time before the PMS implementation and after the eventual abandonment. To avoid responses that could lead informants to specific answers, direct questions regarding strategy development were not asked. It was preferred to gather data more freely to allow the informants’ natural, undirected narration.

2.2.3 Theory-building stage

In the theory-building stage, cases were used as a base to inductively recognize phenomena and patterns of relationships—firstly within one case and then across all five cases (Eisenhardt and Graebner 2007 ). Interviews and relevant sections from archive materials were transcribed as well as grouped around repeated statements and related subjects, creating qualitative unit types (Graneheim and Lundman 2004 ). Then, to facilitate the understanding of the unit types and relationships contained in the dataset, they were condensed to a certain degree, i.e., the reduction of the text while still maintaining the same meaning. This consisted mainly of removing redundant statements. Table  2 presents an example of how the process was performed. Next, the condensed unit types were carefully reviewed with frequent reference to the original transcripts. At this point, the analysis was, to some extent, latent. Condensed unit types were interpreted using what already was known about the subject and the context within which the data was gathered to create themes (Downe-Wamboldt 1992 ). While developing themes, it was obvious that there was no single correct meaning but only the most probable from a particular perspective. Once all themes were established, their meaning were triangulated with archival materials (Yin 2014 ). The themes are defined as an expression of the observed and latent (i.e., subjective) content of the dataset.

When the procedure to develop themes was initiated, similar unit types were collated and new meanings appended in subsequent cases. This cyclical procedure codified all the cases to create the condensed unit types. In a few instances, some informants were also called back to clarify meanings. All coherent unit types were condensed and summed up into themes and justificatory narratives. Only the unit types which were replicated, in some way, in all cases remained. When all themes were identified, the research became more systematical and iterative between the themes and relevant literature to develop appropriate codes and phenomena. Next, the research concentrated on searching through literature without any preconceptions or established theory using keywords from condensed unit types and themes. When some threads were found (i.e., areas of research), the literature was further refined to those more relevant to knowledge sharing, communication, strategy process, and trust. In this procedure, nine phenomena were identified which were coded as follows: the subjectivity of PMS parameters, perception of personal interests, sense of injustice, trust in managers, enhancement of calculative trust, unfulfilled expectations, psychological contract, pressure on the board, and manager trust in subordinates.

2.2.4 Theory-testing stage

Data analysis in the theory-testing stage was different. While during the theory-building stage, the search concentrated on objective evidence, here the focus went to less apparent signs of previously identified phenomena. Replication logic also determined how informants were interviewed in this verificatory stage. After asking similar questions as in the first stage, the research openly referred to the phenomena from the emergent theory. In this stage, two phenomena identified in the previous stage were not confirmed: unfulfilled expectations and psychological contract. The other seven phenomena were present in all four cases, although with a few informants it was confirmed only after direct questions. Since the interpretation of the dataset always involved multiple meanings and the researchers’ interpretation and personal history, a draft report (i.e., before translation) was consulted with the CEO of each organization. In the draft report, the words “manager”, “superior”, “executive”, and “CEO” were assigned to top managers and board members including city mayor, while “employee” and “subordinate” were assigned to lower rank managers.

3 Results and discussion

Seven categories were identified as possibly being associated with strategy development processes in organizations using PMS: (1) subjectivity of PMS parameters, (2) perception of personal interests, (3) sense of injustice, (4) trust in managers, (5) enhancement of calculative trust, (6) pressure on the board, and (7) manager trust in subordinates.

3.1 Subjectivity of PMS parameters: Identification of the cause-and-effect relationships, selection of measures of intangible assets, and determination of their optimal value

The study revealed that at the beginning of BSC implementation organizations were able to reach a consensus concerning measures of tangible assets quite quickly. However, to establish measures of intangible assets linked to valued organizational outcomes, their reference values and cause-and-effect relationships were much more challenging. According to the interviewees, non-financial measures proposed by the consultants, and also mentioned in the literature (Ivanov and Avasilcăi 2014 ), were problematic to quantify and difficult to interlink correlatively with the organizational outcome. Respondents also indicated a lack of objectivity concerning both reasons for the selection of measures and the assessment of their optimal value. These obstacles weakened the effectiveness of the boards’ social accounts. For example, the CEO of “Konsta” noted:

There is no problem with the development of measures relating to production processes, quality, or sales, but that we have done it without BSC. [...] I was convinced to use BSC with the promise that it would allow the measurement of our intangible assets and protect our growth in the future. [...] But when it came to its implementation, it turned out that the consultants did not have much to offer.

Malina and Selto ( 2001 ) suggest critical conditions that measure optimal value should be “accurate, objective, and verifiable. Otherwise, measures will not reflect performance and may be manipulated, or managers could in good faith achieve good measured performance but cause the organization harm.” In practice these conditions are rarely met. The chief financial officer of “Office” described it in this way:

In our network we tried a lot of non-financial indicators and most of them created problems. When we adopted sales growth, [...] they [employees] questioned it as unfair. They argued that offices which were effective earlier, already had a large share of their market, and had smaller growth opportunities than those which were initially lazier. [...] The absolute market share—as a measure—was also criticized because in large cities where there were lots of competing agencies, our share was only a few percent, but in smaller towns we were sometimes the only ones.

Hence, even in an organization that has a homogeneous network of offices, the choice of measures may favor some locations over another. Management can establish different levels of indicators for individual offices, but the problem of optimal value for each office remains. Managers also indicated, that rarely they were able to identify cause-and-effect relationships before the implementation of new objectives and measures, thus they had to test them in practice, which led to their frequent changes. Other researchers also raised similar problems, claiming comparable results lead to an imperfect BSC structure (Chenhall and Langfield-Smith 2007 ; Laitinen 2003 ; Nørreklit 2000 , 2003 ; Nørreklit et al. 2012 ).

3.2 Perception of personal interests, sense of injustice, and trust in managers

In all of the surveyed organizations, the same pattern was repeated to a greater or lesser extent. All changes to BSC parameters, especially those related to rewards affected the interest structure in the organization. For some employees this was also perceived as displeasing or as an incumbrance to their position. As such, managers tried to explain the reason for their decisions, but as was mentioned earlier, many goals and measures were determined arbitrarily and they encountered difficulties in terms of their rational justification to make them. People who felt that they might lose would develop a sense of injustice and consequently suspect others, who in their opinion gained. This led to conflicts within the board. An employee from “Office” complained, “when superiors do not clearly explain reasons for new goals or measures, and we see that others gain […] For us this means that they [the board] give in under the pressure from the stronger [stakeholders] […] How can we trust them then?” When employees had problems in achieving desired results and boards had not reacted upon their claims they often felt unfairly treated and were losing relational trust in their executives (Dirks 2006 ; Robinson and Rousseau 1994 ). Managers also felt that subordinates lose trust in them; for instance, the CEO of “Konsta” said, “one change in the reward system is not a problem. After sometime people got used to new conditions, even if they were not convinced at the beginning, but frequent not well justified changes eventually undermine trust.” Before BSC implementation, board members were prepared for BSC reviews and changes. However, most of them admitted they did not envision that changes would be so frequent and in practice produced a number of negative consequences.

Executives emphasized that in many cases subordinates had complained that the changes of BSC were breaking their agreement with the company, although the modifications concerning rewards were within the legal framework of their formal employment agreements. The CEO of “Furniture 1” said:

After the implementation [of BSC] it turned out that certain measures in general cannot be achieved [...] and that staff did not question their changes. [...] The problem has been with measures in which employees successfully achieved. Change of these measures, mostly induced resistance and resentment, even though employees were informed that it was necessary—since in practice it appeared that they [these measures] did not support an [organizational] outcome. [...] I have to say that each change, especially when related to items associated with the rewards, the concept often undermined trust in us.

For each new objective, measure, or related reward adopted by employees, i.e., a kind of two-sided commitment can be said that it is not solely about remuneration. Additional notes included respect and the feeling that people are taken seriously. When employees devoted themselves to the realization of a goal, they expected that it would be important for the organization and that their contribution was to be appreciated. Frequent changes of objectives undermined this belief.

The team leader from “Konsta” stated, “when the board had set a goal, they expected us to engage in it wholeheartedly, […] people often devoted their private time. […] We expected that our work would be respected. […] When it occurred that the goal was changed after a short time we felt disrespected.” The research demonstrated that in organizations where the changes of BSC parameters were frequent (e.g., “Konsta”) and strategic goals ambiguous (e.g., “Hospital”), levels of conflicts with employees and their feeling of injustice were more intensive. In situations where goals were imposed by law or other forces independent from the organizations (e.g., regional government), or they were easy to explain (e.g., via effective social accounts), interviewees less intensively reported their feeling of injustice. A clerk from a local government mentioned, “sometimes the changes are incomprehensible to us, […] but what to do […] its politics! […] Our boss must somehow be involved in this.” This comment paralleled a number of individuals who were also working in regional and local government positions.

3.3 Enhancement of calculative trust and pressure on the board

Experienced managers learnt that frequent changes of BSC parameters connected with incentives may harm employee trust in them. They noted, however, especially at the beginning of BSC implementation, that effective performance measurement and related rewards schemes would substitute the loss of relational trust. A manager from “Office” said:

At the beginning of the implementation [BSC], I believed that employees do not need to have trust in us. It will be sufficient that they will efficiently carry out their tasks, achieve measures, and this should allow us to accomplish our objectives. [...] And, indeed at the beginning, staff are heavily involved in achieving agreed targets. [...] However, after a few changes of measures, I had the impression that they began to use different tactics, for example, they were approaching near optimum level, but did not cross it, although I think, they could.

In a broader sense, managers using BSC have built calculative trust which supports or substitutes relational trust. This is similarly noted by Fadlallah et al. ( 2018 ) and Spreitzer and Mishra ( 1999 ).

Trust based on financial incentives, invoked employee engagement mainly in these activities which brought them tangible benefits. Employees had known that measures were more or less arbitrarily determined by the board therefore they were trying to influence this process. They could do it by manipulating information they delivered to their superiors or by directly exerting pressure on them. Consequently, employees often were more focused on building pressure on the board to change BSC parameters, than overcoming external obstacles and stepping up efforts to achieve targets. The CEO of “Furniture 1” said, “I had the impression that sometimes employees were putting more energy in convincing us that a measure or goal is unachievable, than it would cost them to achieve it.” Rewards, as such, produced employee engagement mainly in these activities, which brought them benefits.

3.4 Manager trust in subordinates

Manager conflicts with employees in terms of objectives, measures, and rewards made executives suspicious of subordinates’ actions. Superiors realized that the interpretation of reality, communicated by the staff, might be misshaped by their interests. A few interviewed managers suggested that before BSC implementation, i.e., when the incentive schemes were based either on the aggregated financial indicators or on overall company performance, there was greater congruence between the organization and employee objectives—even though this relationship was much less intensive. However, after the assignment of specific measures, employee interests were more closely aligned to the measures than to organizational outcomes no matter how the market situation changed. This awareness (i.e., sometimes only faint suspicion) made the managers become more mistrustful to knowledge provided by employees, especially the one that could have an impact on the selection of BSC parameters. Generally, interviewees indicated that BSC may change the flow of information. The CEO of “Office” stated:

After linking measures to bonuses [...] in conversations [with the staff], I always had at the back of my head questions like: “what can they lose or gain by giving me this information?” and “what is being marginalized, or even ignored, and what is being overexposed?” [...] After the implementation [of BSC] we have become more distrustful of each other.

In the same tone, the hospital director admitted, “employees not only openly questioned some measures, but I am convinced that they also manipulate shared information to gain better rewards.” Hence, managers reaffirmed a potential awareness of mistrustful of employee knowledge and understood that the implementation of a BSC changes the flow of knowledge in an organization.

3.5 Strategy formation process after PMS implementation

The study indicates that the strategy development process is affected by PMS implementation, mostly through its influence on knowledge sharing behavior in an organization (Fig.  2 ). Each change within a set of PMS parameters may lead to a situation in which some people perceive that they are losing more or gaining less than others and develop a sense of injustice (i.e., moving closer towards victimhood). Frequent changes to some PMS parameters may lead to ongoing alteration of the organization’s structure (i.e., in terms of employee interest) and increase likelihood some employees may feel that their position worsens. In this situation, “victims” may struggle to assert their rights and may try to press the board to produce another modification of PMS to favor them. The influence can be explicit or implicit or both.

Strategy process after PMS implementation comprising of the identified phenomena

Explicit influence may be exerted by the open questioning of PMS parameters. Managers may reject victimhood claims or accept them and make appropriate modifications to the parameters. When they reject these claims, the “victims” might have a proof that the board has violated their interests, which may reduce employee relational trust in managers (Rousseau et al. 1998 ; Sitkin and Roth 1993 ). However, when superiors manage to convince employees that the changes were justified, the trust may be saved or even increased (Lines et al. 2005 ; Tucker et al. 2013 ). Acceptance of such claims in conjunction with amendments to PMS parameters does not automatically save trust, especially if repealing any previous decision caused a certain level of harm. According to interviewees, retreat may also reduce trust in managers since it proves that adopted parameters of PMS were arbitrary and showed that exerting pressure on managers is effective. Annulment of the decision might confirm managers susceptibility to backstage forces from interest groups or individuals competing within the organization. Moreover, another change of PMS may also lead to a violation of interests in the organization’s structure and claims via subsequent groups. Employees, however, may exert an implicit impact on management decisions by manipulating knowledge they share by way of the feedback and strategic learning process. As a result, they do not necessarily need to lie, they need only selectively share knowledge.

Decreased level of relational trust in managers has been shown to mean that employees do not strive to achieve assigned objectives. As long as rewards exceed incurred efforts, however, employee trust within the organization has been shown to fulfil its obligations and achieve its goals (Long and Sitkin 2006 ). Long and Sitkin’s ( 2006 ) research is analogous with this study and confirms that a strategy formation process after PMS implementation can encourage open questioning of superiors’ decisions—revealing: interest incongruence, lead to the emergence of conflicts, and raise manager suspicion (i.e., rejecting employee claims by which subordinates may undertake opportunistic action). At length, this consciousness contributes to the decline of manager trust in their subordinates. Hence, from the above analysis, it could be inferred that the implementation of PMS may affect knowledge sharing behavior as well as the whole feedback and strategic learning process (Fig.  2 ), which influence strategy formation.

3.6 Knowledge sharing

To gain a competitive advantage, the strategy development process (i.e., including functional strategies such as operations strategy) must be based on recent knowledge, encompassing the broadest group of stakeholders (Jarzabkowski and Balogun 2009 ; Mintzberg 1994 ; Schaefer and Guenther 2016 ; Spee and Jarzabkowski 2011 ), and functional strategies that should be developed within the guidelines of the overall business strategy (Kremer 2019 ). People are willing to share their knowledge, even unfavorable to their interests, when they trust each other (Dirks 2006 ; McKnight and Chervany 2006 ). Thus, the level of trust determines the knowledge sharing behavior. For this study, two types of trust in managers have been identified: relational and calculative. The level of relational trust may determine the genuineness of the knowledge (i.e., the tendency to share knowledge, including unfavorable knowledge against one’s actual interest) (Krishnan et al. 2016 ; Lado et al. 2008 ). Calculative trust may also motivate people to share knowledge, but mainly if it is favorable (Claro and Claro 2008 ; Poppo et al. 2016 ; Williamson 1993 ). To affect knowledge, it is sufficient that organizational actors, sometimes even unconsciously, interpret their environment (i.e., surrounding reality) in the context of their interests. They do not have to lie, as stated by Foucault ( 2019 ), since an understanding and interpretation of the same truth by different people, and even by the same people in a different situation, can be different (Willcocks 2004 ). In addition, knowledge transfer, which stands in contrast with manager assumptions, may affect the assessment of such an employee by inhibiting the realization of organizational strategy. Therefore, the transfer of knowledge maybe incompatible with current parameters of PMS and requires a high level of relational trust in superiors that have nonconformist behavior so not to adversely affect the subordinate.

Taking into account different levels of relational and calculative trust in managers, distortions of knowledge might be predicted (Fig.  3 ). There may be four possibilities. In the case of the low-level relational trust, employees are not willing to share genuine knowledge because they might be afraid that this may lead to organizational change violating the status quo. It may also bring the risk of deterioration of their situation by way of employees not trusting superiors to take care of them. Low-level calculative trust would imply employees do not believe that managers will reward their effort. Acquisition of valuable knowledge about an organization and its environment as well as sharing knowledge requires intentional exertion. Thus, in a situation where there are low-levels of both relational and calculative trust employees might not share their knowledge. In the case of a low-level relational trust and high-level calculative trust, knowledge might be distorted by a structure of interest in the organization. Employees would have the motivation to exhibit this knowledge which would be beneficial to them and, due to the weak relational trust, there would be a diminishing level of trust, i.e., even though it would be genuine. In a situation of a high-level of relational trust and low-level of calculative trust in managers, knowledge might be the most “genuine” due to employees not being afraid of imposing their particular narrative. They would be neither lured by incentive nor discouraged by fear of losing their interests.

Impact of relational and calculative trust on knowledge sharing behavior

An ambiguous situation occurs when there are simultaneously high-levels of relational and calculative trust. Both types of trust motivate people to share knowledge, but it is problematic to predict the extent to which transferred knowledge may be affected by personal interests. In this environment, employees may take two types of actions concerning knowledge sharing. Having a high-level of relational trust, they can openly share their knowledge, believing that the possible change would not worsen their situation, i.e., because managers would look after their interests. But, having a high level of calculative trust they may also succumb to “short-term temptations to grab the golden opportunity or cut corners” (Six and Sorge 2008 ) and try to gain more by sharing knowledge in a way favorable to their actual interests. It is likely, however, that different people could behave differently and, consequently, knowledge could be mixed. In this situation, however, a discussion between employees could arise that would reveal several arguments which would help managers recognize which knowledge is genuine. It is essential to notice that in none of the four instances, knowledge is purely genuine or distorted, it is always a matter of probability and proportions.

3.7 Use of shared knowledge

Employees who possess unique knowledge might gain considerable power in an organization. In the case of data or information, manipulation may be verified and forgery discovered. However, knowledge defined as a personal interpretation of reality, in the light of individual experience, by its very nature cannot be easily verified. Thus, even if shared knowledge is firmly focused on securing employee interests, the discovery of the distortion is challenging. For instance, suppose the board performed an action based on employee knowledge. After some time, it might be known that this action has not brought expected results, however, to prove employee intentional manipulation is highly unlikely. Undoubtedly, if in the next few situations poor outcomes repeat, managers may lose trust in their employee capability, but they would not be certain whether the failure was due to intentional manipulation or lack of competence. In a turbulent environment, it is likely there would be even no possibility to verify whether taking different actions would be more effective. This means that managers having virtually no objective grounds, enabling them to verify received knowledge and only relying on trust in employees, may determine the extent to which they would benefit from acquired knowledge (Long and Sitkin 2006 ; Spreitzer and Mishra 1999 ). Taking into account the four configurations of relational and calculative trust in managers and the level of manager trust in employees benefits from shared knowledge can be predicted.

Organizations may achieve the greatest benefits from shared knowledge when two conditions are met simultaneously, i.e., when the knowledge is genuine and superiors trust their employees. This may encourage managers to apply, in practice, the acquired knowledge and exploit opportunities by making quick and bold strategic decisions based on actual and comprehensive knowledge. From Table  3 it appears that this would happen in two cases—when there is a high-level of relational trust and low-level of calculative trust and when there are high-levels of both types of trust. However, the second situation is ambiguous since it is more complicated to predict to what extent the knowledge is distorted. Moreover, managers might not be inclined to formulate a strategy based on subordinate knowledge if they do not trust in their employees’ willingness to reveal knowledge impartially and honestly. In this case, they would wait for a confirmation of the genuineness of the knowledge through their observations or other sources, or they would select strategic options inconsistently—pending actual trends—even though shared knowledge was available and genuine. Irrespective, the decision would force delay or error, which could significantly reduce the chance of formulating an effective strategy and opportunities may be lost.

If employees present a low-level of relational trust and a high-level of calculative trust in managers (Fig.  3 ), shared knowledge might be significantly affected by personal interests. When managers overlook the game of interests and naively trust in the knowledge, the organization may be exposed to adopt an unsuccessful strategy. In contrast, when managers have low trust in the knowledge, then the skeptical approach is justified. Although this prevents an organization from errors, due to knowledge distortion, it also dooms it to drift or search “blindly” for an effective strategy. Low-levels of relational and calculative trust offer no incentives to employees, thus sharing of knowledge is likely weak, and managers may not be able to use it, regardless of the trust bestowed on their subordinates. When employees possess high-levels of both relational and calculative trust in managers, then the knowledge sharing behavior may be mixed. In this situation, managers have to evaluate which part of knowledge is genuine.

4 Conclusions

The qualitative study reported mechanisms through which PMS may influence the strategy development process both on the functional and operational level as well as on the business level. It shows that employee relational and calculative trust in superiors influence knowledge sharing behaviors while manager trust in their subordinates determines the usage of this knowledge. From the study, it appears that calculative trust may support strategy implementation since it increases the motivation for the achievement of PMS targets and, correspondingly, organizational objectives. Development of an effective strategy is supported rather by relational trust, which facilitates genuine knowledge sharing. This means that organizations should try to maintain, at the same time, high-levels of both types of trust: relational by enhancing strategy development and calculative by supporting strategy implementation. Notwithstanding, this is difficult to achieve.

After implementation, during which managers were able to agree with the majority of employees, a set of PMS parameters, both relational and calculative trust in managers may rise. Since employees at the same time can observe their requirements were included in the set of PMS parameters and they are rewarded, in relation to their achievements, successful implementation can be considered. However, this state is difficult to maintain in the long run because, sooner or later, either PMS parameters need revision (i.e., since they may effectively not support the implementation of the current strategy) or the current strategy needs amendment and, consequently, also will the PMS parameters. As such, in all of the studied organizations, changes in PMS parameters lowered relational trust in managers. From the research, it appeared that high-levels of relational and calculative trust could be maintained in organizations which do not undertake numerous PMS changes or such changes are based on objective premises understandable for all actors. It is challenging to fulfill each of the above requirements in a turbulent environment where organizations, in order to win, must introduce a strategy before its foundations would be apparent for all employees, also for competitors. Therefore, both types of trust may be maintained when there is a low frequency of PMS changes resulting either from the fact that an organization operates in a stable environment, or managers deliberately delay changes.

Intentional avoidance of changes of strategies in organizations that have implemented PMS may have its sources of origins also in other areas. Subordinates, for instance, who are aware that superiors’ trust in them depends on their compliance with superiors’ priorities (i.e., manager priorities emanating from the selection of objectives and measures which they link to rewards) may be more prone to share knowledge that is more compatible with the current PMS parameters than with reality. In this way, subordinates support positive evaluation about current strategy, even though it is ineffective, instead of challenging it. Superiors, on the other hand, may feel a sense of comfort being convinced of employee trust in them. Hence, having at the same time access to genuine and distorted knowledge, because of high-levels of both types of trust, managers may select the part of the knowledge which is more compliant with the present status quo. Maintaining the status quo allows managers to avoid the change of PMS parameters that may threat trust in them. All these forces may create an environment in which new ideas are not shared openly by subordinates and are not accepted eagerly by superiors, thus, focalizing an organization towards a stable fantasy instead of responding to an evolving reality (Mintzberg 1978 ; Mintzberg and Waters 1985 ; Westley and Mintzberg 1989 ). The same mechanisms may also restrain employee willingness to involve themselves in activities that can lead to emergent strategies and manager openness to adapt it. Thus, postponing of organizational change both by limiting the formulation of deliberate strategies and hampering adoption of emergent initiatives may lead to the stiffening of an organization.

Overall, the study contributes to the existing theory about strategy process by revealing mechanisms through which PMS affect strategy development. It shows that there is a trade-off between strategy development and implementation. This trade-off relationship may be responsible for the inconclusive results of the research concerning PMS influence on organizational performance (Bonner and Sprinkle 2002 ; Bourne et al. 2007 ; de Waal and Kourtit 2013 ). Organizations strongly linking employee rewards with present organizational objectives reinforce strategy execution but, at the same time, are affecting knowledge sharing behavior and weakening organizational ability to develop effective strategies. This trade-off might also be a cause which discourages managers from the implementation of PMS as strategic management systems and forces organizational leaders to abandon PMS even though significant resources were devoted to its adoption. Moreover, there are several practical implications for when organizations may be looking for more genuine knowledge to form new strategies or review their current one, i.e., this is often related to when managers implement relational trust-building policy at the organizational level. Such policy should focus on “(1) creating a culture in which positive relational signals are the desired way to interact ([e.g.,] a relationship oriented culture); (2) facilitating ([i.e.,] unambiguous) relational signaling; (3) socializing newcomers; and (4) managing and matching competencies” (Six and Sorge 2008 , p. 881). At the same time, an organization should consider diminishing the tie between rewards and current strategy but in such a way that it preserves employee perception while maintaining a mutual, two-way positive rapport.

Moreover, this research showcases the importance of trustworthiness of a manager via their ability, benevolence, and integrity (Mayer et al. 1995 ) as well as the regular delivery of social accounts and signaling interest in the well-being of employees. Managers trying to implement a strategy by strongly interlinking measures with reward systems or endeavoring to achieve short-term objectives by “cutting corners” and succumb to the temptation of taking advantage of employees, have to be aware that this may destroy relational trust, hence strategy formation capability in the future. Superiors should be conscious of their employees’ trust in them while absorbing knowledge from employees as well as their trust in employees when using the knowledge for evaluation or formulation of a strategy. This awareness may also allow them to recognize distorted and genuine knowledge and improve their strategy formulation ability. At large, a vital contribution of the study is the suggestion that there is a trade-off relationship between strategy formation and implementation. This means that managers have to choose which activity they are going to support “more” in a specific period in terms of the organizational life cycle, since both processes cannot be supported at the same strength. In all, this study opens the new field of research linking performance management and strategy development with trust.

Data Availability

All data generated or analyzed during this study are available from the corresponding author on reasonable request.

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Lewandowski, R.A., Cirella, G.T. Performance management systems: Trade-off between implementation and strategy development. Oper Manag Res 16 , 280–295 (2023). https://doi.org/10.1007/s12063-022-00305-4

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7 questions to ask about performance management - performance made easy

Performance management has been getting increased attention in the last couple of years, with many questioning its return on invested time and attention, and the effectiveness of the process. We wanted to explore this further—especially with the recent buzz about eliminating performance ratings. As a result, we asked employees and managers for their thoughts about performance and preferences for performance management. And we’ve identified opportunities for improvement each step of the way.

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What are employees saying about performance management?

Seven of 10 employees surveyed took the time to answer this question: “If you could change one thing about how your company manages individual performance, what would you suggest?” The most common suggestion is more frequent performance and feedback conversations.

Here’s what else we heard:

• Managers need to make the time to know their employees and understand the work they do on a daily basis.
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• Managers and employees are looking for a simple, streamlined performance management process.

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With all the effort that goes into the performance management process and year-end performance ratings, employers can take active steps to improve the outcome. Start with understanding the current state of performance management in your organization—perhaps asking some of the same questions we asked in this study.

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Why is performance management important?

In any organization, no matter the size, it is important to understand what your employees are doing, how they are doing it, and why they are doing it.

Without a system in place to define roles, understand individual strengths and weaknesses, provide constructive feedback , trigger interventions and reward positive behavior, it is much more difficult for managers to effectively lead their employees.

Smart organizations pair their performance management with an incentive management process. The two systems have a lot in common, from defining roles and setting goals to reviewing and rewarding employee behavior, and as such, do very well when run simultaneously. Using incentive management also means that the all-important ‘reward’ step of performance management is done properly.

Talent management is an important part of every organization. Three of the main problems that organizations face are:

• keeping employees engaged
• retaining talent
• developing leaders from within

These are the issues that performance management very effectively targets.

1. Keeping employees engaged

Engagement of employees is a focus of any management team. In a yearly appraisal system, goals would be given at the beginning of the year and then revisited 12 months later to see if they had been met. This long stretch of time without feedback or check-in is an almost certain engagement killer.

In fact, 94% of employees would prefer their manager gives them feedback and development opportunities in real-time, and 81% would prefer at least quarterly check-ins with their manager, according to the Growth Divide Study .

Studies show that employees do best with feedback on a monthly or quarterly basis, with regular check-ins serving as a zone to problem solve, adjust goals as necessary, and to refresh their focus on the goal. In fact, companies where employees meet to review goals quarterly or more frequently are almost 50% more likely to have above-average financial performance.

When surveyed, employees had some negative feelings about a yearly appraisal system:

• 62% of employees feel that their performance review was incomplete
• 48% did not feel comfortable raising issues with their manager in between performance reviews
• 61% feel that the process is outdated
• 74% feel that they would be more effective with more frequent feedback
• 68% of executives don’t learn about employee concerns until the performance review

All of this adds up to a lot of missed opportunities to solve problems and increase employee performance and engagement.

As employee engagement rises, nine key performance indicators show successful outcomes. Absenteeism, turnover, shrinkage, safety incidents, patient safety incidents and defects in quality are lessened by at least 25%, and often more, across the board. Customer experience, productivity and profitability all show positive outcomes.

This study, by Gallup , was conducted across a broad range of industries, showing that employee engagement is a critical factor, no matter the industry.

2. Retaining talent

Employees who have frequent meetings with management to discuss performance, solve problems and receive training are more likely to stay with the company.

If employees see that their management team is putting in the work to develop them professionally, help them succeed with their goals, and reward performance on a consistent basis, then they are more incentivized to both stay with the company and work harder.

3. Developing leaders from within

This consistent development and partnership between managers and employees allow for the development of leaders from within the company.

Recruiting costs can be extremely high, as are costs for onboarding and training new employees. To be able to groom leaders from within the company means that there is already a proven culture fit with this individual and that training costs and resources spent developing this person into an asset are not lost.

This leadership path also serves as a motivating force for employees, who can see that their hard work will be rewarded with promotions and other benefits.

Performance management also creates a need for management to consistently focus on company objectives and goals, and to consider how best to achieve them. This continual revisiting of goals means that they are more likely to stay relevant, as goals will be adjusted in light of new technology, changes in the market, or other factors throughout the year.

According to Forbes , ‘companies that set performance goals quarterly generate 31% greater returns from their performance process than those who do it annually, and those who do it monthly get even better results.’

The purpose of performance management is to give both managers and employees a clear and consistent system within which to work that, in turn, will lead to increased productivity.

• This system shows employees the pathway to success, allows for the measuring of performance coupled with feedback and offers training and development opportunities.
• Performance management allows management to understand what their employees are doing and track progress on company objectives while providing consistent feedback.

There are five main objectives of performance management:

• Develop clear role definitions, expectations and goals
• Increase employee engagement
• Develop managerial leadership and coaching skills
• Boost productivity through improved performance
• Develop a performance reward program that incentivizes accomplishment

These performance management goals show a clear path from the developing of goals to the rewarding of increased accomplishment. If one of these performance management objectives is not done well, then the others will suffer as a result.

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Performance management has a multitude of benefits for employees and managers, as well as for the company as a whole. If a company can successfully create an environment of engagement where customers are equally engaged by employees on the front line, their outcome is even better.

When organizations successfully engage their customers and their employees, they experience a 240% boost in performance-related business outcomes compared with an organization with neither engaged employees nor engaged customers. – Gallup

• Having well-defined roles and performance standards makes hiring an easier process, as candidates know what is expected of them, and HR can more easily understand if a candidate is a right fit for the role.
• Those well-defined roles and standards make training easier, as trainers know exactly which areas need to be covered, and which information is nonessential.
• Consistent developing and revisiting of goals ensure that the organization keeps up with changing market forces easily, and reacts quickly as a whole, regardless of the size of the organization.
• Clear expectations and roles set employees up for achieving goals from the start, providing a springboard to success.
• Employees who feel that their company is invested in their success stay with their companies, increasing employee retention.
• Consistent feedback and coaching from managers lead directly to increased engagement from employees while developing the ability to provide good coaching and feedback leads to more skilled managers.
• As employees become more skilled, they can move up through the company, creating a leadership pipeline.
• Productivity will increase thanks to increased engagement, clear goals and upskilling of employees.
• Employees remain incentivized to perform long-term, as they are properly rewarded for their hard work.

While performance management can sound deceptively simple, with just four steps as outlined above, the process itself is very complicated. That’s why we have put together this list of best practices for performance management.

Think of it like the essentials of performance management – these will help make sure that your employee performance management system is performing the way it should.

1. Identify the goals of your performance management initiatives

As you are creating your performance management program, you need to understand what you want to accomplish.

Asking the following questions can help you:

• Is increased productivity a priority?
• Does your organization want to identify leaders from within and develop them?
• Do you want to streamline the compensation process?
• Are you seeking to improve employee retention or engagement?

If you know what you want your program to do, it will be easier to build it to accomplish that goal.

2. Define and describe each role

We mentioned this above, but it bears repeating. It is much harder for an employee to be successful if they don’t know exactly what is expected from them, how they should do it, and what the end result should look like.

3. Pair goals with a performance plan

As you set goals, develop a performance plan to go alongside. Year-long goals often fail, as they are too large and employees can get overwhelmed before they start. A performance plan helps them visualize their path, making it much more likely that they will meet their goal.

4. Monitor progress towards performance targets

Review key areas of performance. Use metrics and analytics to your advantage, tracking how goals are progressing to make sure that interventions can happen early, if necessary.

5. Coaching should be frequent

The point of coaching is to help identify and solve problems before they get too big. If it’s not frequent, it’s not going to help at all. Monthly or quarterly meetings should be held to help keep employees on the right track.

6. Use guidelines to your advantage

Guidelines should be created for each role as part of the first stage of the performance management cycle. These policies or guidelines should stipulate specific areas for, or limits on, opportunity, search and experimentation. Employees do their jobs better when they have solid guidelines to follow.

7. Build a performance-aligned culture

Make sure your workplace has shared values and cultural alignment. A sense of shared values, beliefs and expectations among employees creates a more harmonious and pleasant workplace. Employees should be committed to the values and objectives outlined, and exemplified by, top management.

8. Organize cross-functional workshops

This helps employees – and managers – understand what other departments do, how they think and what their strengths and weaknesses are. They can discover something new and find new connections, which can help them in future work.

9. Management should offer actionable feedback

During these coaching meetings, tensions can arise if the feedback is not given in a constructive, actionable manner. It is not very important to look backward and point fingers, rather management should guide employees towards future success.

10. Keep it professional, not personal

Giving less-than-stellar feedback is hard on both managers and employees, it’s one of the reasons that performance appraisals tend to be a least-liked task. Managers should make sure to keep feedback professional and remember to focus on behavior, rather than characteristics.

For example, pointing out that David regularly turned in important reports late is feedback about a behavior. Saying that David is lazy, and that’s why the reports were often late is feedback about a characteristic. One of these can help an employee own their role in a project’s success (or lack thereof) and the other will make them defensive instantly.

11. It’s not only employees that need training

Management should be trained too. Coaching and offering good feedback are not easy jobs, which is why there are so many specialist coaches out there. For managers to be able to lead well, they should be trained in these skill sets.

12. Take advantage of multiple-source feedback

Ask employees to write feedback for each other. This will give management a more holistic view on employee performance, understand the challenges that teams are facing, and be able to better offer feedback.

13. Don’t depend only on reviews

While the review process is important, it is only one part of the system as a whole. Planning, coaching, and rewarding employees are equally key parts of the system.

14. Problems are not always employee-based

It can be easy to assume that problems are always caused by employees, but that simply is not the case. Problems can arise from external factors such as availability of supplies, internal processes that are causing issues, or organizational policies. Seek out the source of problems as precisely as you can in order to fix them.

15. Recognize and reward performance publicly and frequently

Management cannot expect employees to stay motivated if they are never rewarded, yet many companies overlook this key step. Make sure that employees are compensated and recognized for their hard work, and they will continue delivering for your organization.

Of course, it’s one thing to understand the theory of what performance management is, but it’s another thing to use it in a real company. Let’s take a look at some real-world examples of the performance management process in action:

It’s no surprise that Google would show up on a list of companies that use a newer, innovative system of management. This company has always been a trendsetter, and their performance management process is one that relies on data and analysis, as well as making sure that their managers are well trained.

When assessing their performance management system, Google launched a project dedicated to assessing their managers, which has led to a thorough training and future development process that sets managers, and thus employees, up for success.

They also use a system of setting goals that have caught on across multiple industries. Using their Objectives and Key Results (OKRs) system, they reframe the goal-setting process, with great results.

Another tech trendsetter, Facebook has a performance management process that puts a heavy emphasis on peer-to-peer feedback. In semi-annual reviews, they are able to use that feedback to see how well teams are performing and understand where collaboration is happening – and where it is not. They also have developed an internal software to provide continuous, real-time feedback. This helps employees solve issues before they become problems.

Cargill is a Minnesota-based food-producer and distributor with over 150,000 employees and serves to demonstrate that even huge companies can ditch unwieldy performance appraisals and institute a new system. In following the latest research on the dissatisfaction of management with outdated performance management process, Cargill created their ‘Everyday Performance Management’ system. The system is designed to be continuous, centered around a positive employee-manager relationship, with daily activity and feedback being incorporated into conversations that solve problems rather than rehash past actions.

The Everyday Performance Management system had overwhelmingly positive results, with 69% of employees stating that they received feedback that was useful for their professional development, and 70% reporting that they felt valued as a result of the continuous performance discussions with their manager.

Adobe calculated that managers were spending about 80,000 hours a year on performance reviews, only to have employees report that they left those reviews demoralized and turnover was increasing as a result.

Seeing a system that only produced negatives, Adobe’s leadership team made a bold leap into a performance management system that began by training managers how to perform more frequent check-ins and offer actionable guidance, then the company gave managers the leeway they needed to effectively lead.

Management was given much more freedom in how they structured their check-ins and employee review sessions, as well as more discretion in salaries and promotions. Employees are often contacted for ‘pulse surveys’ – a way for the leadership team to make sure that individual managers are leading their teams well. One of the many positive results of this has been a 30% cut involuntary turnover due to a frequent check-in program.

Accenture is a massive company – over 330,000 people, so changing their systems means a huge effort. When they switched to their new system, they got rid of about 90% of the previous process. Now, they are using a more fluid performance management process where employees receive ongoing, timely feedback from management. This has been paired with a renewed focus on immediate employee development and an internal app for communicating feedback.

There are common threads in all of these examples. Each company has built a system that works for them, rather than following a one-size-fits-all approach. What works for one company might not work for another – it depends on the industry, the speed and flexibility of the company, and the overall goal of the system itself.

With similar names and purposes that sometimes align, it is no surprise that some people find it hard to spot the difference between performance management and performance appraisals.

In fact, performance appraisals are often part of the performance management process , although some companies still rely on performance appraisals alone.

An easy way to understand the difference between the two is that performance appraisals are reactive, and performance management is proactive.

A performance appraisal looks at all of the past actions of the employee within a set amount of time , and rates how well they performed in their role and how many goals they met.

Performance management looks at the present and future of the employee, and what can be done to help future performance and meet future goals . Performance management is focused on the development and training of an employee, and how that can benefit both the employee and the company.

A performance appraisal is a formal, operational task, done according to rigid parameters and in a quantitative manner. HR leads performance appraisals, with input from management. Performance management is much more informal and strategic, led by management with input from the employees in a more flexible manner.

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The fairness factor in performance management

The performance-management process at many companies continues to struggle, but not for lack of efforts to make things better. Of the respondents we surveyed recently , two-thirds made at least one major change to their performance-management systems over the 18 months prior to our survey. With growing frequency, human-resources departments are dispensing with unpopular “forced curve” ranking systems, rejiggering relatively undifferentiated compensation regimes, and digging deeply into employee data for clues to what really drives motivation and performance. (For a look at how Microsoft CEO Satya Nadella is innovating with a system that uses hard and soft performance measures to reshape the culture, see “ Microsoft’s next act .”)

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Yet companies don’t seem to be making much headway. Employees still complain that the feedback they get feels biased or disconnected from their work. Managers still see performance management as a bureaucratic, box-checking exercise. Half of the executives we surveyed told us that their evaluation and feedback systems have no impact on performance—or even have a negative effect. And certain experiments have gone awry: at some companies, eliminating annual performance reviews without a clear replacement, for example, has led employees to complain of feeling adrift without solid feedback—and some employers to reinstate the old review systems.

Amid ongoing dissatisfaction and experimentation, our research suggests that there’s a performance-management issue that’s hiding in plain sight: it’s fairness. In this article, we’ll explain the importance of this fairness factor, describe three priorities for addressing it, and show how technology, when used skillfully, can reinforce a sense of fairness.

The fairness factor

When we speak of fairness, we’re suggesting a tight definition that academics have wrestled with and come to describe as “procedural fairness.” 1 1. For additional research and insights into fairness in the organization, visit EthicalSystems.org . It’s far from a platonic ideal but instead addresses, in this context, the practical question of whether employees perceive that central elements of performance management are designed well and function fairly. This eye-of-the-beholder aspect is critical. Our survey research showed that 60 percent of respondents who perceived the performance-management system as fair also stated that it was effective.

More important, the data also crystallized what a fair system looks like. Of course, a host of factors may affect employee perceptions of fairness, but three stood out. Our research suggests that performance-management systems have a much better chance of being perceived as fair when they do these three things:

• transparently link employees’ goals to business priorities and maintain a strong element of flexibility
• invest in the coaching skills of managers to help them become better arbiters of day-to-day fairness
• reward standout performance for some roles, while also managing converging performance for others

Such factors appear to be mutually reinforcing. Among companies that implemented all three, 84 percent of executives reported they had an effective performance-management system. These respondents were 12 times more likely to report positive results than those who said their companies hadn’t implemented any of the three (exhibit).

Our research wasn’t longitudinal, so we can’t say for sure whether fairness has become more important in recent years, but it wouldn’t be surprising if it had. After all, organizations are demanding a lot more from their employees: they expect them to respond quickly to changes in a volatile competitive environment and to be “always on,” agile, and collaborative. As employers’ expectations rise and employees strive to meet them, a heightened desire for recognition and fairness is only natural. And while embattled HR executives and business leaders no doubt want to be fair, fairness is a somewhat vague ideal that demands unpacking.

Winning the battle of perceptions

In working with companies pushing forward on the factors our research highlighted, we have found that these require much greater engagement with employees to help them understand how their efforts matter, a lot more coaching muscle among busy managers, and some delicate recalibration of established compensation systems. Such shifts support a virtuous cycle that helps organizations get down to business on fairness.

1. Linking employees’ goals to business priorities

Building a foundation of trust in performance management means being clear about what you expect from employees and specific about how their work ultimately fits into the larger picture of what the company is trying to accomplish. Contrast that sense of meaning and purpose with the situation at many organizations where the goals of employees are too numerous, too broad, or too prone to irrelevance as events change corporate priorities but the goals of individuals aren’t revisited to reflect them. A typical ground-level reaction: “Managers think we aren’t sophisticated enough to connect the dots, but it’s obvious when our goals get disconnected from what really matters to the company.”

Give employees a say and be flexible. Connecting the dots starts with making employees at all levels feel personally involved in shaping their own goals. Mandating goals from the top down rarely generates the kind of employee engagement companies strive for. At a leading Scandinavian insurer, claims-processing operations were bogged down by surging backlogs, rising costs, and dissatisfied customers and employees. The company formed a working group of executives, managers, and team leaders to define the key areas where it needed to improve. Those sessions served as a blueprint: four overarching goals, linked to the problem areas, could be cascaded down to the key performance indictors (KPIs) at the business-unit and team level and, finally, to the KPIs of individual employees. The KPIs focused on operational measures (such as claims throughput and problem solving on calls), payout measures (like managing contractors and settlement closures), customer satisfaction, and employee morale and retention.

The company took a big further step to get buy-in: it allowed employees to review and provide feedback on the KPIs to assure that these fit their roles. Managers had observed that KPIs needed to vary even for employees in roles with seemingly similar tasks; phone calling for a targeted auto claim is different from skills needed to remedy damage to a factory. So the insurer gave the managers freedom to adjust, collaboratively, the KPIs for different roles while still ensuring a strong degree of consistency. A performance dashboard allowed an employee’s KPIs to be shared openly and daily with team members, making transparent both the teams’ overall progress and the efforts of motivated, top performers.

For the vast majority of traditional roles, this collaborative approach to KPI design is fairly straightforward. For more complex roles and situations—such as when tasks are deeply interdependent across a web of contributors—it can be more challenging to land on objective measurements . Such complex circumstances call for even more frequent feedback and for getting more rigorous about joint alignment on goals.

Adapt goals as often as needed. In today’s business environment, goals set at a high level in the strategy room are often modified in a few months’ time. Yet KPIs down the line are rarely adjusted. While we’re not suggesting that employees’ goals should become moving targets, they should certainly be revised in response to shifting strategies or evolving market conditions. Revisiting goals throughout the year avoids wasted effort by employees and prevents goals from drifting into meaninglessness by year-end, undermining trust. Of respondents who reported that their companies managed performance effectively, 62 percent said that those organizations revisit goals regularly—some on an ad hoc basis, and some twice a year or more. Managers must be on point for this, as we’ll explain next.

2. Teaching your managers to be coaches

Managers are at the proverbial coal face, where the hard work of implementing the performance requirements embodied in KPIs gets done. They also know the most about individual employees, their capabilities, and their development needs. Much of the fairness and fidelity of performance-management procedures therefore rests on the ability of managers to become effective coaches. Less than 30 percent of our survey respondents, however, said that their managers are good coaches. When managers don’t do this well, only 15 percent of respondents reported that the performance-management system was effective.

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Start with agility. In a volatile business environment, good coaches master the flux , which means fighting the default position: goal setting at the year’s beginning ends with a perfunctory year-end evaluation that doesn’t match reality. At the Scandinavian insurer, team leaders meet weekly with supervisors to determine whether KPI targets and measures are in sync with current business conditions. If they aren’t, these managers reweight measures as needed given the operating data. Then, in coaching sessions with team members, the managers discuss and adjust goals, empowering everyone. Even when things aren’t in flux, managers have daily check-ins with their teams and do weekly team-performance roundups. They review the work of individual team members monthly. They keep abreast of the specifics of KPI fulfillment, with a dashboard that flashes red for below-average work across KPI components. When employees get two red lights, they receive written feedback and three hours of extra coaching.

Invest in capabilities. The soft skills needed to conduct meaningful performance conversations don’t come naturally to many managers, who often perform poorly in uncomfortable situations. Building their confidence and ability to evaluate performance fairly and to nudge employees to higher levels of achievement are both musts. While the frequency of performance conversations matters, our research emphasizes that their quality has the greatest impact.

One European bank transformed its performance-management system by holding workshops on the art of mastering difficult conversations and giving feedback to employees who are missing the ball. To ready managers for impending steps in the performance-management cycle, the bank requires them to complete skill-validation sessions, moderated by HR, with their peers. Managers receive guidance on how to encourage employees to set multiyear stretch goals that build on their strengths and passions. Just before these goal-setting and development conversations with employees take place, managers and peers scrum it out to test each other’s ideas and refine their messages.

Make it sustainable. At the European bank, the support sessions aren’t one-off exercises; they have become a central element in efforts to build a cadre of strong coaches. That required some organizational rebalancing. In this case, the bank restructured aspects of HR’s role : one key unit now focuses solely on enhancing the capabilities of managers and their impact on the business and is freed up from transactional HR activities. Separate people-services and solutions groups handle HR’s administrative and technical responsibilities. To break through legacy functional mind-sets and help HR directors think strategically, they went through a mandated HR Excellence training program.

The Scandinavian insurance company chose a different road, seeking to disseminate a stronger performance-management culture by training “champions” in specific areas, such as how to set goals aligned with KPIs. These champions then ran “train the trainer” workshops to spread the new coaching practices throughout the organization. Better performance conversations, along with a growing understanding of how and when to coach, increased perceived fairness and employee engagement. Productivity subsequently improved by 15 to 20 percent.

3. Differentiating compensation

Capable coaches with better goal-setting skills should take some of the pain out of aligning compensation—and they do to an extent. However, new organizational roles and performance patterns that skew to top employees add to the challenges. Incentives for traditional sales forces remain pretty intuitive: more effort (measured by client contacts) brings in more revenue and, mostly likely, higher pay. It’s harder to find the right benchmarks or to differentiate among top, middle, and low performers when roles are interdependent, collaboration is critical, and results can’t easily be traced to individual efforts. The only way, in our experience, is to carefully tinker your way to a balanced measurement approach, however challenging that may be. Above all, keep things simple at base, so managers can clearly explain the reasons for a pay decision and employees can understand them. Here are a few principles we’ve seen work:

Don’t kill ratings. In the quest to take the anxiety out of performance management—especially when there’s a bulge of middle-range performers—it is tempting to do away with rating systems. Yet companies that have tried this approach often struggle to help employees know where they stand, why their pay is what it is, what would constitute fair rewards for different levels of performance, and which guidelines underpin incentive structures. Just 16 percent of respondents at companies where compensation wasn’t differentiated deemed the performance-management system effective.

Dampen variations in the middle. With middle-of-the-pack performers working in collaborative team environments, it’s risky for companies to have sizable differences in compensation among team members, because some of them may see these as unfair and unwarranted. Creating the perception that there are “haves” and “have-nots” in the company outweighs any benefit that might be derived from engineering granular pay differences in the name of optimizing performance.

Cirque du Soleil manages this issue by setting, for all employees, a base salary that aligns with market rates. It also reviews labor markets to determine the rate of annual increases that almost all its employees receive. It pays middling performers fairly and consistently across the group, and the differences among such employees tend to be small. Managers have found that this approach has fostered a sense of fairness, while avoiding invidious pay comparisons. Managers can opt not to reward truly low performers. Cirque du Soleil (and others) have also found ways to keep employees in the middle range of performance and responsibilities whose star is on the rise happy: incentives that are not just financial, such as explicit praise, coaching, or special stretch assignments.

Embrace the power curve for standout performers. Research has emerged suggesting that the distribution of performance at most companies follows a “power curve”: 20 percent of employees generate 80 percent of the value. We noted this idea in a previous article on performance management and are starting to see more evidence that companies are embracing it by giving exceptional performers outsized rewards—typically, a premium of at least 15 to 20 percent above what those in the middle get—even as these companies distribute compensation more uniformly across the broad midsection.

At Cirque du Soleil, managers nominate their highest-performing employees and calibrate pay increases and other rewards. Top performers may receive dramatically more than middle and low performers. In our experience, employees in the middle instinctively get the need for differentiation because it’s no secret to them which of their colleagues push the needle furthest. Indeed, we’ve heard rumblings about unfair systems that don’t recognize top performers. (For a counterpoint to radical performance differentiation, see “ Digging deep for organizational innovation ,” where Hilcorp CEO Greg Lalicker explains how the oil and gas producer sets exacting production standards and then—if they’re met—gives every employee a power-curve bonus.)

Innovate with spot bonuses. Recognizing superior effort during the year can also show that managers are engaged and that the system is responsive. Cirque du Soleil rewards extraordinary contributions to special projects with a payment ranging from 2 to 5 percent of the total salary, along with a letter of recognition. In a recent year, 160 of the company’s 3,500 employees were recognized. Spot bonuses avoid inflating salary programs, since the payments don’t become part of the employee’s compensation base.

Technology’s role

Digital technologies are power tools that can increase the speed and reach of a performance-management transformation while reducing administrative costs. They’re generally effective. Sixty-five percent of respondents from companies that have launched performance-related mobile technologies in the past 18 months said that they had a positive effect on the performance of both employees and companies. A mobile app at one global company we know, for example, makes it easier for managers and employees to record and track goals throughout the year. Employees feel more engaged because they know where they stand. The app also nudges managers to conduct more real-time coaching conversations and to refine goals throughout the year.

Does technology affect perceptions of fairness? That depends on how it’s applied. When app-based systems are geared only to increase the efficiency of a process, not so much. However, when they widen the fact base for gauging individual performance, capture diverse perspectives on it, and offer suggestions for development, they can bolster perceived fairness. We have found that two refinements can help digital tools do a better job.

Sweat the small stuff

In an attempt to move away from a manager-led performance system, German e-commerce company Zalando launched an app that gathered real-time performance and development feedback from a variety of sources. The company tested behavioral “nudges” and fine-tuned elements of the app, such as its scoring scale. Yet it found that the quality of written development feedback was poor, since many employees weren’t accustomed to reviewing one another. The company solved this problem redesigning the app’s interface to elicit a holistic picture of each employee’s strengths and weaknesses, and by posing a direct question about what, specifically, an employee could do to stretch his or her performance. The company also found that feedback tended to be unduly positive: 5 out of 5 became the scoring norm. It did A/B testing on the text describing the rating scale and included a behavioral nudge warning that top scores should be awarded only for exceptional performance, which remedied the grade inflation.

Separate development from evaluative feedback

Digitally enabled, real-time feedback produces a welter of crowdsourced data from colleagues, and so does information streaming from gamified problem-solving apps. The data are powerful, but capturing them can trigger employees’ suspicions that “Big Brother is watching.” One way to address these fears is to distinguish the systems that evaluate employees from those that help them develop. Of course, it is tempting to make all the data gathered through these apps available to an employee’s manager. Yet when employees open themselves to honest feedback from their colleagues about how to do their jobs better, they’re vulnerable—particularly if these development data are fed into evaluation tools . That also undercuts the purpose (and ultimately the benefits) of digitally enabled feedback. Apps should be designed so that employees can decide which feedback they ought to share during their evaluations with managers.

To broaden adoption of the system, Zalando stressed that the app was to be used only for development purposes. That helped spur intense engagement, driving 10,000 users to the app and 60,000 trials in the first few months. Employees reacted positively to sharing and evaluating data that would help them cultivate job strengths. With that base of trust, Zalando designed a performance dashboard where all employees can see, in one place, all the quantitative and qualitative feedback they have received for both development and evaluation. The tool also shows individuals how their feedback compares with that of the average scores on their teams and of people who hold similar jobs.

An agenda for the talent-first CEO

The many well-intentioned performance-management experiments now under way run the risk of falling short unless a sense of fairness underpins them. We’ve presented data and examples suggesting why that’s true and how to change perceptions. At the risk of oversimplifying, we’d also suggest that busy leaders striving to improve performance management listen to their employees, who have a pretty good idea about what fair looks like: “Just show us the link between what we do and what the company needs, make sure the boss gives us more coaching, and make it all pay.” In our experience, when leaders understand, address, and communicate about the issues at this level, employees see performance management as fair, and the reform efforts of their companies yield better results.

Bryan Hancock is a partner in McKinsey’s Atlanta office, Elizabeth Hioe is an alumna of the New Jersey office, and Bill Schaninger is a senior partner in the Philadelphia office.

The authors would like to thank Sabrin Chowdhury for her contributions to this article.

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How to Select a Performance Management System

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What is a performance management system, why do you need a performance management system, what are the elements of a performance management system, what features should your performance management system have, how to increase the effectiveness of your performance management system, 12 performance management system questions to ask when evaluating a solution .

Online systems have revolutionized the way companies look at, measure, and manage employee performance. Effective software makes the entire process easier for administration, engaging for employees—and most importantly—frictionless for managers.

But how do you identify which performance management software is best? 

Finding the right performance management software provider isn’t a process to take lightly. In this guide, we discuss the benefits, features, and important evaluation considerations for your performance management system.

Let’s dive in:

A performance management system is the collection of processes and tools that enable you to build a culture of growth, drive engagement, and increase employee impact. The right system will equip your leaders with the insights they need to monitor and coach employee performance, create dynamic two-way communication, encourage top-down and peer-to-peer feedback, and much more. 

The primary goals of your performance management system include elevating individual and collective performance, aligning your teams with organizational goals, and creating a high-impact workforce.  Certain features within an effective performance management system help leaders stay on top of employee performance to continuously motivate and engage them, which reduces turnover and maximizes business outcomes.

In today's dynamic and fast-evolving business landscape, achieving and sustaining employee success should be top of mind. It's not just about the quantity of work but the quality, innovation, communication, and adaptability that drives higher impact from your employees and teams - leading to organizational excellence. 

If you’re still relying on a single annual performance review, you may be missing the mark. Modern organizations require a continuous performance management approach that fosters real-time data collection, ongoing performance conversations, and strategic alignment with business goals.

A cutting-edge performance management system is more than just an evaluation tool; it's the foundation that enables organizations to adapt, improve, and drive performance at all levels. 

Now, let’s dive into the top reasons why leaders need a performance management system, and why it’s so crucial in achieving employee success.

1. Measure Performance Accurately

Accurate performance measurement is table stakes. But, only 36% of employees say they fully understand their job responsibilities and performance expectations. A performance management system provides clarity, aligning employee efforts with organizational objectives. This clarity is vital for effective performance, as revealed by Lighthouse Research & Advisory.

2. Close Employee Skill Gaps with Effective Coaching

Many employees crave more feedback and coaching, with 50% desiring additional feedback. A performance management system empowers leaders to bridge skill gaps, equipping employees with the tools they need to grow and succeed.

3. Discuss and Align Employee Goals—Both Personal and Professional

Clearly articulated individual goals are a powerful engagement driver. Quantum Workplace Research indicates that employees with individual goals are twice as likely to be engaged. Performance management systems facilitate these conversations, aligning personal aspirations with organizational objectives.

4. Increase Employee Morale and Reduce Turnover

Recognition and appreciation matter deeply to employees. Approximately 20% of employees feel regularly recognized and appreciated for their work, and half of employees desire more recognition. A performance management system enables leaders to recognize achievements and efforts which help boost morale and reduce turnover.

5. Create a Foundation of Trust Between Employees and Their Managers

Trust is vital in any successful workplace. Effective performance management creates transparency and fairness, building a strong foundation of trust that's essential for strong working relationships. But how do you start to build trust? 

It all starts with communication and transparency at every level. Organizations should be actively working to provide employees with open feedback, regular connection with their managers, and visibility into their performance.

6. Create a Path to Growth for All Employees

Every employee should have a clear path to growth within the organization. Performance management systems incorporate details that bring your talent development to life. The right system helps you shift talent development from an aspiration to a structured process.

7. Increase Company-Wide Alignment

Quantum Workplace Research shows that performance management significantly impacts the overall organizational culture. Effective performance management systems align every employee with the broader mission, creating a sense of purpose.

8. Drive the Outcomes That Matter to Your Business

Ultimately, a performance management system is a strategic tool. Brandon Hall Group reveals that 62% of organizations believe their current performance management processes don't enhance performance. A modern system, however, is designed to drive the outcomes that matter most to your business.

Your performance management system should contain four key capabilities: planning, monitoring, reviewing, and rewarding. 

Let’s review each of these capabilities in more detail:

1. Planning

Effective performance management begins with thoughtful planning. Your performance management system should assist in defining and aligning employee goals with organizational objectives. This initial stage provides a critical opportunity for employees, teams, and leaders to set clear expectations and outline actionable plans. By doing so, the system enables organizational alignment and sets the stage for a collaborative effort. It helps everyone understand their role in achieving the organization's mission and provides a structured framework for action.

2. Monitoring

Monitoring performance is an ongoing process that requires real-time data and insights. A robust performance management system should enable organizations to track key metrics and continuously monitor employee progress toward their goals. This monitoring function serves multiple purposes: it helps identify potential roadblocks early, ensures that employee and team goals remain on track, and provides a foundation for data-driven decision-making. Monitoring is essential for addressing challenges promptly and motivating sustained productivity.

3. Reviewing

The reviewing phase is where the magic happens in terms of employee development. An effective performance management system should facilitate efficient and meaningful performance reviews. These reviews go beyond simple evaluations; they provide a platform for managers to engage in constructive, two-way conversations with employees. This includes offering feedback, understanding and removing obstacles to success, and collaboratively creating strategies and action items for the future. 

But reviews aren’t limited to top-down management. The right system will effectively enable peer-to-peer and cross-team feedback when and where you need it, so you can make sure you’re getting comprehensive view of employee performance.

The system should streamline this process, making it easy for both managers and employees to engage in open and productive dialogues. Your system should also help you document conversations in a meaningful way so you can call up feedback from any time frame.

4. Recognizing

Recognition is an important element in driving employee motivation and performance. Your performance management system should equip leaders with the tools needed to acknowledge and reward employees for their efforts. 

Effective recognition fosters a positive work environment, reinforces desired behaviors, and inspires employees to consistently deliver their best. By providing a platform for leaders to express public appreciation and reward outstanding contributions, the system contributes to a culture of excellence and continuous improvement.

Incorporating these elements into your performance management system ensures that it comprehensively supports the entire performance management cycle, from initial goal setting to performance review to succession planning and employee recognition. This holistic approach not only streamlines the process but also maximizes the potential for employee success and organizational excellence.

1. Set, Track, and Collaborate on Goals:

  why it matters: goals help organizations achieve more, faster, with less. .

Clear, aligned, and shared goals guide employees, ensuring work stays in sync with the organizational strategy. This fosters accountability, motivation, and strategic alignment at all levels.

How tech can help:

Look for a performance management software that has:

• Cascading goals: align organizational, team, and employee goals 
• Collaborative tools: share goal progress and ownership across teams 
• Interactive newsfeed: celebrate and stay aligned on goal progress
• Flexible formatting: choose from OKRs, SMART goals, or something else

2. Conduct Ongoing Performance Conversations:

Why it matters: frequent, documented conversations provide a comprehensive view of performance..

Performance conversations should be frequent, collaborative, and documented. And employee-manager one-on-ones are the perfect opportunity to discuss performance. From check-in meetings to formal performance reviews, one-on-ones might be the most important part of your performance management platform. When managers effectively coach and develop their employees, 74% say their performance management systems are effective.

How tech can help

With so many moving parts, it can feel daunting to try to capture the right information, document it, and create an action plan for every single employee, every time.

Your performance management software should empower managers to have regular and effective performance conversations.

Performance reviews should be future-focused, transparent, and two-way. Look for one-on-one software that can help you prepare for and follow-up on meetings with features such as:

• Digital conversation tools: collaborate on and track any 1-on-1 
• Performance integrations: easily see progress by pulling in goals or feedback, or viewing a performance snapshot 
• Curated templates : help managers have effective conversations 
• Automated cycles: build healthy communication habits with HR-prompted workflows and alerts
• Mobile access: take meeting agendas and notes with you wherever you go

3. Facilitate Peer-to-Peer, Real-Time Employee Recognition:

Why it matters: 69% of employees indicated they'd work harder if recognized more effectively. publicly acknowledging and praising employee behavior or achievements offers many benefits, such as increased productivity, increased engagement, decreased turnover, and improved company culture..

Only 37% of employees nationwide are satisfied with the way they receive recognition and appreciation at work. And a staggering 45% of workers have not been recognized in the last six months.

Recognition software can help you bridge the gap to celebrate, motivate, and engage teams across your organization.

Look for recognition software that has:

• Peer-to-peer recognition: allow any employee to easily celebrate another 
• Automated milestones: always remember work anniversaries 
• Customized badges: tie recognition to cultural values that matter 
• Social newsfeed: create a public and fun celebration space 

Integrated notifications: amplify success stories to Slack and Teams

4. Collect and Share Immediate and Continuous Feedback:

Why it matters: feedback cultivates strong relationships and drives performance..

Great companies are built on trust, and trusting cultures are built on feedback . Our research shows that a strong feedback culture correlates with a highly engaged workplace.

Continuous feedback should be individualized, constructive, and unbiased. Regular feedback from managers and peers builds strong relationships by encouraging transparent dialogue and helps drive better performance through continual improvement.

Too many organizations aren’t providing enough feedback. In fact, 71% of employees prefer immediate feedback, even if it’s negative. The right software can make sure your teams are getting the feedback they need to succeed.

Choose a feedback tool that helps you create a feedback culture across the organization.

Look for software that has: 

• Flexible frameworks: collect any type of feedback you need with multiple configuration options for requesting and giving feedback 
• Easy access: empower anyone to request or give feedback in minutes 
• Automated cycles: initiate feedback based on calendar or employee milestones 
• Actionable analytics: identify and act on development opportunities
• Curated templates: provide best-practice guidance and collect consistent analytics across the organization

5. Track vital talent metrics.

Why it matters:  frequent, collaborative talent reviews enable informed, data-driven talent decisions..

Talent reviews should be frequent, unbiased, and rooted in data. Managers and leaders across the organization need to know who is doing the best work, who is ready for promotion, and who is at risk of leaving. Talent reviews allow leaders to track and evaluate performance, identify and coach performers who need more support, develop and retain top talent, and intervene before employees burn out or quit.

Talent decisions should be based on credible data that is easy to access, understand, and act upon. Performance management software can help you track talent metrics on an ongoing basis so you can make informed and strategic talent decisions.

Look for features that simplify and increase the quality of the talent review process, such as:

• Reliable performance feedback: collect actionable and objective ratings with our simple framework 
• 9-box or 4-quadrant visualization: quickly identify talent risks, and those ready for promotion or development 
• Calibration settings: allow multiple raters and easily filter data for effective calibration sessions 
• Collaboration tools: comment and add talent insights over time
• Integrated succession planning: seek successor nominations and automatically pull ratings into succession plans

6. Identify Talent and Develop Successors

Why it matters: proactively identifying talent gaps will minimize business disruptions and foster a culture of career growth..

Visibility into your company’s critical roles and your company’s talent pool is the first step to creating a board-worthy succession strategy for your organization. Start by outlining the roles that are most important to your business function. The c-suite is a no-brainer, but don’t neglect other critical roles such as information technology, security, and specialized roles. Once you have visibility into your roles, you can create targeted pathways for your talent to gain access to training, mentoring, knowledge sharing, and more.

With the right tools, leaders can have actionable reporting on your talent pipeline, readiness, and risk all with just a few clicks. If your performance management system is fully integrated, you’ll be able to quickly understand who your talent leaders are, when they’ll be ready to take on key roles, and where your talent gaps are. 

Look for succession planning software that has:

• Collaborative nomination process: request nominations and performance details from any leader or manager 
• Readiness tracking: track candidate readiness by 12-month increments so you can easily see progress over time 
• Integrated performance: see candidate performance ratings and development goals 
• Diversity visibility: align succession plans with diversity goals 
• Personalized, board-ready insights: share real-time insights with stakeholders

Effective performance management, as a pillar of employee success, aims to nurture a culture of growth, engagement, and excellence. It establishes a strong foundation within your organization, aligns teams with strategic goals, and promotes open communication, feedback, and coaching. By fostering alignment and engagement, it inspires employees to reach their full potential and supports effective team leadership.

An effective performance management system isn’t just about function, features, and tools. The right system should help you capitalize on your larger organizational initiatives. To help you meet your goals, you should look beyond the functionality of your system and make sure you have a strong foundation, scalable goals, quality coaching, and proper alignment within the organization. 

In order to get the most value from your system, make sure you have:

• A Strong Performance Management Foundation: This foundation isn’t just a set of processes. It’s a fundamental aspect of your culture. It’s about fostering a work environment where communication, feedback, and coaching can thrive. This isn’t merely a strategic choice—it’s essential to employee and business success.
• Defined Goals For Your System: The primary goals of a performance management system are to enhance individual and collective performance, align teams with organizational objectives, and cultivate a high-impact workforce. When executed effectively, this system empowers employees to excel in their roles while nurturing a culture of continuous improvement. It’s not just a tool; it’s your secret weapon for sustaining a competitive edge.
• Quality Communication, Feedback, and Coaching: Quality communication, feedback, and coaching are the lifeblood of effective performance management. These are not isolated processes but a reflection of your organization’s commitment to growth and development. Tools like regular 1-on-1s and feedback sessions play a pivotal role here, helping to facilitate open dialogue that drives improvement. 
• Alignment and Engagement: Performance management goes beyond evaluations. It ensures that managers and employees are aligned, engaged, and consistently delivering their best. It inspires everyone to reach their full potential and fosters a shared sense of purpose. This alignment is achieved through tools that connect individual goals to broader organizational objectives, creating a workforce united in pursuit of excellence.
• Developing A Strategy to Build Effective Managers and Teams: One of the cornerstones of a successful performance management system is the development of effective managers and teams. It’s about equipping managers with the skills and resources they need to lead and coach their teams to success.

Seek a partner, not just a solution

In your search for a performance management system , remember that you're not just seeking a solution; you're seeking a partner in your journey to employee success. 

Look for a provider who not only offers cutting-edge technology but also understands the unique needs and aspirations of your organization. A true partner will collaborate closely with you to tailor the system to your specific requirements, ensuring it aligns seamlessly with your culture and goals. 

This partnership goes beyond implementation; it's about ongoing support, growth, and mutual success, ensuring your performance management system evolves with your organization and continues to drive excellence.

When picking out the right solution for you, there are many things to consider. That’s why we’ve compiled a list of 12 questions you should ask to get the most out of your performance management system. 

Big-picture evaluation questions

When first adopting a performance management system, it’s important to understand the why behind your performance initiatives. By doing this, you can uncover the opportunities and obstacles that you want your performance management system to help you navigate. This will help you gain insight into whether your system is the right fit or not. 

1. Why is it important for us to have a performance management system?

Effective performance management is essential to driving business success. It includes giving and receiving feedback, holding regular performance reviews, recognizing employees, and more. But juggling all these performance activities is time-consuming—for both managers and employees—and can easily overwhelm leaders, resulting in miscommunication, dropped balls, and frustration all-around. 

A performance management system can help leaders organize and prioritize performance management activities to enable better outcomes and aligned actions. But what solution you should choose will depend on why you’re investing in a performance management system.

This will help guide your decision-making and position the business case to other stakeholders.

2. What should our performance management system do for us?

Similarly, it’s important to consider the specific features and capabilities you’re looking for in a performance management system. Choosing a system with lots of bells and whistles isn’t always the right move if it doesn’t provide the core functions you need to improve performance and streamline your processes.

Consider what your performance management goals and needs are. What do you hope to gain from the software? 

This might include:

• Communicating expectations and accountabilities
• Aligning goals with the organization
• Engaging and retaining top talent
• Developing and coaching employees
• Promoting critical thinking, agility, and innovation
• Motivating employees toward success

3. What's going well with our current system, and what's not?

Assess what processes are working well and identify what needs improvement so you can pick a performance management solution that addresses those gaps and enhances your successes.

4. What opportunities do we have now vs. in the future?

As you evaluate your current state of performance management, look for short-term and long-term opportunities to drive business outcomes.

For instance, a performance management system can help you fill obvious gaps in the short-term, such as transitioning from annual reviews to quarterly 1:1s, making employee recognition public, and creating team-based goals to further align employee efforts with the organization.

All of these systems can help organizations understand what performance looks like throughout the year and begin connecting the dots from employee to business success.

But performance management systems can also help you take advantage of long-term opportunities like:

• Implementing continuous conversations
• Opening feedback to all employees and instances
• Building agile goals that align with team and organizational goals

All of these describe a more ongoing, iterative process that allows you to understand, motivate, and coach to higher performance across your organization.

Software Evaluation Questions

Use these performance management system questions to drill down to the specific software capabilities and features you need and help you choose a system that aligns with your goals.

5. What aspects of performance management does the system support?

Make sure the performance management software you're evaluating provides all of the tools your managers need to better serve their teams. Sit down with team leaders and ask what kinds of software they need to fulfill their managerial responsibilities.

• Could they benefit from a peer-to-peer recognition board to make sure their employees feel valued?
• Do they need a transparent goal setting and tracking system to ensure team alignment?
• Would one-on-one meeting technology foster better manager-employee communication?
• Would 360 feedback help both them and their employees grow and develop in their roles?

The performance management software you choose should be a benefit (not a burden) for managers.

6. Is the performance management software customizable to our culture?

Ideally, your performance management software will provide you with some structure and process. For example, a system could include one-on-one meeting templates and a suggested cadence for meeting. That's great, but make sure the provider you choose allows for some flexibility. Your company's culture is unique and constantly evolving. Choose a performance management software that can fit your needs now and in the future.

Take personalization one step further and find software that lets you customize employee profiles, include images, videos, or gifs in posts and updates, incorporates your company branding, and emulates your core values.

7. Does the developer use their own performance management software?

You'd be surprised how common this actually is. If a provider of performance management software doesn’t use their own tools, your company shouldn’t be either. Enough said.

8. Does the performance management software integrate with other systems?  

The last thing your managers need are more systems, more passwords, and more hassle. Ask your potential software provider if their tools integrate with other systems your managers use in their everyday workflow, like chat apps for example. 

At the very least, your performance management software should integrate with your HRIS so all employee data stays up to date. If your potential provider doesn't have the integration you need, see if they’ll make it happen for you.

Service Evaluation Questions

Finally, it’s important to evaluate the supporting service behind the software.

9. How easy is it to set up a performance management system?

The easier it is to implement a program, the easier it will be to get buy-in from managers and employees. Look for a performance management system that is easy-to-use and has strong customer support to train and onboard new users, answer questions, troubleshoot issues, and spur adoption.

10. Can we ensure manager and employee adoption of the system?

The last thing you want to do is invest in performance management software that your managers and employees don't use. Ask potential software providers how they encourage organizational adoption. The best systems will provide admins with log-in and usage stats, give you the ability to nudge users who haven't been active in a while, display recent activity for all employees to see.

But, if we're being honest, none of the above should be needed to drive adoption. The best performance management software will be a seamless no-brainer for managers and an engaging solution for employees, earning adoption all on its own. Ask software providers if they offer a free trial of their performance management system to see if it’s up to snuff for your workforce.

11. What is the vendor’s level of support?

When implementing a new system, you want to know your vendor has your back. Some vendors are only involved with the initial software installment and setup—then they leave it up to you to figure out how to use it, how to communicate the system to your employees , and how to get the most of its capabilities.

This means you’re less likely to enjoy the full value and potential of your new system. Look for a vendor that offers reliable service every step of the way—from sales conversations and new customer calls to implementation plans to coaching support along the way. 

When evaluating vendors look for things like:

• Software and user reviews
• Support team ratings or "time to respond"
• Availability of support (chat, phone, email)
• NPS score of customers
• Resources like webinars and help libraries

12. Can the software provider help us measure impact?

Any performance management software worth its salt can prove its impact. Make sure your system can measure what's important to you and your leadership team. Ask potential providers if they can show that public recognition makes employees feel valued. Or if transparent goal setting and tracking lead to greater organizational alignment.

Ready to make your performance management process the pillar of employee success? Download our eBook and learn how to build an effective performance management strategy unique to your organization.

Published October 26, 2023 | Written By Natalie Wickham

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