Performance management is central to a business’s operational and bottom-line success. However, many companies are unsure how to make meaningful improvements to their performance management systems. Mercer’s 2008 Performance Management Practices Survey, completed in July by 350 leading US companies, confirms the findings of a 2002 Mercer study that executive commitment and the ability to differentiate performance are critical drivers of overall performance management success.

While there are no “silver bullets” for creating a performance culture, the findings suggest that there are key elements that companies should focus on first to make meaningful improvements to this critical HR program. Among the key findings:

• Success drivers – Mercer’s new study indicates that overall performance management success is determined by four key drivers:

• Executive commitment to the process (deemed more relevant in for-profit organizations)
• Calibration meetings to ensure that managers use the same “yardstick” to evaluate performance
• Strong manager capability (specifically, ensuring that evaluations are “fair” and “equitable” and holding formal performance evaluation discussions with employees)
• Use of technology (deemed more relevant in nonprofit organizations)

• Differentiation – To ensure differentiation of performance ratings, the majority of companies (57 percent) conduct a next-level manager review. To a lesser extent, companies hold informal (22 percent) or mandatory (11 percent) calibration meetings – one of the key drivers of overall success.

• Primary purpose – While most companies’ (48 percent) “primary purpose” for having a performance management system in place is to provide performance feedback to employees, 56 percent of companies surveyed indicated that their feedback process “needs work.” In addition, the majority indicate that managers are only “marginally skilled” at linking performance to “actionable” development planning (51 percent) and providing career development coaching (67 percent). Just 19 percent of respondents indicated that the primary purpose is to make pay decisions.

• Opportunities for improvement – While the majority of companies indicated that one or more areas of their performance management systems “need work,” the most common element in need of improvement is the link to other HR processes (for example, compensation or succession planning), closely followed by improving the performance planning process (63 percent and 60 percent of respondents, respectively). 

• Technology – Forty percent of the companies surveyed have performance management technology in place. Of companies without technology, 65 percent plan to purchase an external system and 14 percent plan to build during the next two years.

• CEO involvement – Formal CEO evaluation (written evaluation plus discussion) is positively related to executive commitment, one of the four key drivers of performance management success.

Based on Mercer’s research and experience, companies have made strides over the past six years in increasing employee and manager access to performance management through technology and in linking performance management to other HR programs. However, they still struggle with some of the “fundamentals” of performance management – such as performance planning, manager capability and ability to differentiate performance levels – that hinder overall system success. Even if a company has limited resources to devote to making wholesale changes to performance management, examining and addressing even one of the four key success drivers is a starting point and can produce noticeable improvements to this important HR program.