How to develop an effective performance management cycle: A comprehensive guide

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Employees that feel productive, and valued at work perform better, which comes as no surprise. Those who have well-defined objectives and supportive managers are likely to consistently create positive outcomes. It is critical to implement a performance management cycle that prioritizes these ideas.

A good performance management cycle might assist you in gaining the competitive edge your company need. You can celebrate a high-performing staff that consistently produces excellent outcomes when you have a clearly defined road to success.

What is a performance management cycle?

A performance management cycle is a procedure for planning, checking, and assessing employee performance on a continual basis. It works in a way that achieves the overall purpose of performance management: matching employee success with organizational success.

A manager works with each employee during a performance management cycle to:

  • Set goals that are both appropriate and impactful.
  • Investigate how the employee can fulfil the objectives.
  • Provide the resources and assistance needed to achieve the objectives.
  • Review and reward performance in relation to those objectives.

When combining these factors, a performance management cycle can function as a holistic process that produces excellent results from people.

Also Read: [120+] KPIs every founder must consider for faster growth

Performance management cycle in HRM

The most crucial duty of HR is to manage employee performance (Human Resources). Performance management is described as the process of identifying, measuring, and improving the performance of people in a company on a continuous basis. So, its major purpose is to focus on employee performance and steer their efforts toward the organization’s business goals.

Managers commonly use performance management as a technique to monitor and assess their workers’ work performance.

The tools begin operating as soon as the job is completed.

Why use a performance management cycle?

Simply put, performance management cycles help a company succeed in the long run.

These function in two distinct ways:

  • They increase employee engagement by allowing them to attain their full potential and take a more active role in their professional growth.
  • They aid productivity by matching each employee’s job goals with the organization’s strategic objectives.

Performance management cycles feature close collaboration between employees and managers, plenty of feedback, advancement opportunities, and recognition for good work.

And they’ve all been demonstrated to improve employee engagement. As a result, consider a performance management cycle as part of your organization’s broader performance management structure.

Performance management cycle model by Peter Drucker

Peter Drucker created one of the earliest examples of a performance management approach. He proposed management by objectives in his 1954 book The Practice of Management (MBO).

Individual goals should be matched with company goals, according to MBO. Management cascades higher-level organizational goals into smaller, individual goals. In this approach, the employee is assisting in the company’s achievement’s overall objectives. This alignment of individual and team goals with corporate goals is not always easy to attain, but it is a worthwhile goal to strive for.

Peter Drucker’s performance management process 

1. The strategy usually starts with planning, which includes creating goals and defining success criteria at the start of the year. Once the objectives have been established;

2. The second stage entails monitoring and keeping track of how these objectives are progressing. If there is room for improvement or if performance isn’t up to par;

3. The employee then undergoes an evaluation. Here, the manager can either be satisfied or unsatisfied with the work done by the employee. In the first case, the employee is given some kind of reward for his or her good work. Otherwise, if an employee isn’t fulfilling the job’s standards and expectations, the next level of performance management is corrective action. Corrective action requires the management and employee to collaborate to identify the causes of poor performance and devise a strategy to fix the issue.

4. The employee is then either given rewards for their work or put into a performance improvement program to improve. 

Although for many, this cycle begins at the start of the year, it is a year-round process. Goals should be reset whenever they change. Then, if ratings are poor, development takes precedence. On the other hand, if a senior job opens up and the person is ready to accept it, the reward comes early.

What are the stages of a performance management cycle?

Performance management cycle stages

Planning – Performance management stage 1

Setting performance expectations for the employee is the focus of the planning phase. These are frequently planned and outlined in job descriptions. So, it is recommended that the employee be actively involved in the planning process. This involvement boosts satisfaction with the performance cycle, as well as perceived fairness, usefulness, and drive to improve, according to a meta-analysis by Cawly, Keeping, and Levy (1998).

Employee performance plans should also be adaptable, allowing for changes in objectives and requirements as they arise. The SMART goal-setting method is a good framework for learning more about planning and goal-setting.

Also Read: OKR The Ultimate Guide: Learn how to create goals for your team

Monitoring – Performance management stage 2

The targets defined in the planning phase are actively tracked in the monitoring phase. Monitoring entails measuring performance on a regular basis and offering comments on progress toward the objectives. Instead of discovering unsatisfactory performance at the end of the year, when it is too late, the manager or supervisor can correct it by continuously monitoring.

It’s crucial to focus on how the goal is met rather than whether it’s met, especially when dealing with highly educated professionals. Hence, a manager should avoid micromanagement, guide the employee and outline how this aim must be attained. As a result, for effective monitoring, good management techniques are essential.

During a progress check-in, what should you talk about?

And so, during a performance check-in, you can discuss the following subjects and prompts:

Issue Question
Accomplishments What accomplishments are you most proud of during this time period?
Progress Are we on track to meet our objectives? Why do you think that is?
Roadblocks What is preventing us from achieving our objectives?
Changes Do we need to rethink our objectives in light of setbacks?
Support How can I assist you in achieving or surpassing these objectives?
Recap How do you think your performance compares to the same period last year?

Developing – Performance management stage 3

When it comes to boosting performance, development is crucial. We can identify areas for improvement as a result of active monitoring. These could be areas of underperformance that need to be addressed or areas of excellent performance where the person wishes or needs to improve even more.

This can also be accomplished through training and development, as well as more assignments and other possibilities for personal and professional development.

Rating and rewarding – Performance management stage 4

The inevitability of evaluating performance in order to determine the added value of employees to the organization is unavoidable. This is normally done as part of the employee’s (bi) yearly performance evaluation.

If a person’s performance is consistently poor, the individual may not be in the correct function or organization, and both parties should say their goodbyes. On the other hand, reward employees for their efforts who perform really well. This can be done by praising them, giving them a raise, giving them time off, giving them recognition goods, offering them a promotion, or all of the above!

Check out our salary increment – performance based pay calculator (to understand how to distribute salary increment in a fair way across employees)

So what Are Common Ways To Reward Employees?

The most common ways to reward an employee include:

  • Salary increases
  • Bonuses
  • Public recognition (e.g., awards, privileges)
  • Extra vacation time
  • Being able to take part in a special program or project
  • Promotions

What are the key components in a performance management cycle?

Every company’s performance management method may be unique, but in general, every excellent one keeps these fundamental characteristics in mind.

Consistency in your performance management cycle:

While coaching methods and strategies may differ, everyone should follow the same performance management methodology. Otherwise, confusion and dissatisfaction will only be worsened by inconsistencies.

Accuracy in your performance management cycle:

This is critical for capturing key outcomes throughout the performance management process. You want your written record of events to be an unimpeachable narrative, not an inferred one, if at all possible.

Agility in your performance management cycle:

Future-proofing your performance management approach doesn’t imply looking around every corner; rather, it means putting agility first. As a result, you can adapt to changing situations.

Employee participation in your performance management cycle:

When it comes to performance management, it’s ideal when it’s a two-way street between employees and supervisors. As a result, employees are more engaged, Then, employees who are engaged at all levels benefit from the process by assisting organizations in improving their coaching.

Easy to use performance management cycle:

Making the performance management system simple to use is an important part of keeping people interested in the process. Obstacles or time-consuming processes in this process will not benefit either the employee or the organization.

Performance management cycle cta

Top tips to develop the best performance management cycle

While a performance management cycle is a wonderful framework for achieving goals, there are a few best practices to follow to keep your process running smoothly. So, keep these pointers in mind as you assist your staff with their projects. And as a result, you will have a better performance management system

Make goal-setting a team effort.

Include your staff in the goal-setting process. Employee buy-in is essential for high performance, therefore setting goals together is the best way to proceed. Also, to improve motivation and achievement, help employees and make them know that you appreciate the value of their endeavours.

Communicate regularly and provide frequent feedback.

Consistent communication should be a top priority throughout your performance management cycle. As a result, check in with workers to see how far they’ve come, ask them questions and give them feedback. This ensures the meeting of staff objectives.

Provide resources and constant guidance.

Employees frequently require support in order to achieve their objectives. Make sure your monitoring plan is working, so you can keep on top of your employees’ demands. Productivity increases when people feel prepared to achieve their objectives and are supported through setbacks.

Don’t be afraid to evaluate and alter the employee’s goals.

Continuous monitoring should occur throughout your performance management cycle so that you can make necessary modifications. When goals and objectives change, alter business metrics to keep them reachable and relevant.

Focus on how the objective is met rather than whether it is met.

This will help you understand where the employee is falling short when it comes to meeting the goals. It will also help you develop a better PIP i.e. performance improvement plan if needed.

Adapt your procedures to a remote environment if necessary.

As remote work becomes more common, it’s critical to adapt all of your operations, including your performance management cycle, to an online setting. Hence, to compensate for the loss of in-person cooperation, provide channels that promote ongoing communication, feedback, and alignment.

Give merit-based rewards.

The most effective rewards are those that are based on the results that an employee achieves. Employees can spot individuals who aren’t putting out enough effort. Motivation might weaken when ordinary employees are paid the same as elite achievers. So, to maintain productivity and engagement, make sure your awards are merit-based.

Why you need to automate your performance management cycle

AI and automation have pretty much taken over function in business. And performance management is no different. Now, you can track goals, conduct reviews, provide employee feedback and thus maintain consistency and efficiency in the performance management cycle in your company!

What are the benefits of having a performance management system in your company?

How does it really help?

Increased transparency between employees and management

This is because both employees and management have access to the feedback, reviews and other aspects of the performance management cycle. When an employee logs into their management system they can see their own progress with respect to achieving their own goals and also the feedback received from the seniors.

This ensures that employees stay motivated because they can track their own performance over time

Saves time and is cost-efficient

Time is money, so when you save time, you also save loads of money. True!!

But what I also mean here is that, even though you are spending money on the performance management system, you are consistently tracking employee performance. You don’t have to wait until the end of the year for a review.

This kind of consistency helps take preventive rather than corrective measures when you think an employee is going down the wrong path.

Increased productivity and motivation levels

Since employees can constantly track their own goals and performance levels, they will likely be more productive and motivated to achieve those goals. This, as opposed to employees, thinking that their boss will only review their performance at the end of the year and the last 2 months are when they really need to put in some substantial effort!

Availability of better metrics and analytics

The system can give you a timely update on any employee’s work. Both in terms of how much they have achieved and how well they did it. This allows you access to much better metrics than if you were reviewing an employee’s performance manually.

Check out our salary increment – performance based pay calculator (to understand how to distribute salary increment in a fair way across employees)

3 steps to establish a performance management cycle

1. A performance management software should ideally support your performance management method. It may automate performance cycles in this way, with employees and managers receiving rapid notifications and being able to offer feedback and self-reflections with ease (and with helpful reminders).

2. As a result of step 1, more regular conversations around performance are possible conversations.

3. A year’s worth of performance cannot be quantified in a single meeting. You should ideally test cognitive performance over a period of 2-4 months. As a result, feedback should be given in appropriate portions and consistently. It should also be related to a certain event or occurrence.

Best practices of the Performance management cycle (downloadable list!)

It takes a lot of time and effort to set up a procedure for performance management cycles at your firm. As a result, you’ll want to double-check that it’s working. So, what are some best practices for performance management that you can put in place along the way?

Fill out the form to find out!


Performance management cycle – FAQs

What is performance management?

Performance management is a corporate management technique that assists managers in monitoring and also helps in evaluating the performance of their staff.

What are the five performance management steps?

Five steps to effective performance management
1. Getting the Right People.
2. Setting Expectations.
3. Coaching for Better Performance.
4. Getting Rid of the Poor Performers.
5. Summing It All Up.

Why is the performance management cycle important in business?

A performance management cycle enables managers to continuously help their employees improve and accomplish business goals. When effective it aligns employee and business success through a continuous process of planning, monitoring, reviewing, and rewarding employee performance

What are the 4 purposes of performance management?

Managers may use a performance management cycle to assist their staff improve and achieving corporate goals on a continual basis. Through a continual process of planning, monitoring, reviewing, and rewarding employee performance, an effective performance management cycle links employee and corporate success.

How can I improve my performance cycle?

Here are 9 ways to improve your employees’ work performance:
1. Set realistic goals for yourself.
2. Make a list of milestones and objectives.
3. Prioritize, organize, and plan.
4. Distract yourself as much as possible.
5. Take it one step at a time.
6. Don’t leave anything undone.
7. Every day, read something new.
8. Effective communication is essential.
9. Recognize flaws and enhance knowledge sharing

What is 360-degree feedback?

360-degree feedback is a feedback process where not just your superior but your peers and direct reports and sometimes even customers evaluate you.

What are the 3 types of performance management systems?

3 Types Of Organizational Performance Management Systems
1. The Balanced Scorecard
2. Management By Objectives. 
3. Budget-driven Business Plans.


Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.