Understanding the performance management cycle: A guide for employers

A performance management cycle, incorporated into a broader business strategy, enables companies to drive organizational growth through continuous employee performance improvement. It relies on performance management expertise, structured processes, and effective tools. 

But what exactly is a performance management cycle, and what does it involve? How does it help maximize performance within a business? And how can HR teams implement the five key stages to create a powerful lift in employee performance? 

Those are precisely the questions we'll answer in this guide.

What is a performance management cycle?

A performance management cycle is a continuous process focused on monitoring, analyzing, evaluating, and rewarding employee performance. This holistic approach aims to improve and maintain high-level performance, aligning employee success with organizational goals. 

A great performance management cycle should be an iterative, ongoing process of employee evaluation. This approach creates a positive work environment—one where open communication and goal-setting boost morale and motivation to grow—all of which are the biggest factors impacting retention. 

Importance of the performance management cycle

A recurring performance management cycle is crucial for employees (and their companies) because it:

Improves employee performance and productivity

A well-structured performance management plan sets clear expectations and organizational goals, helping employees focus on what matters most and prioritize accordingly. Employers providing regular feedback support employees in gaining valuable insight into their performance, enabling them to identify areas that need improvement. 

According to Gallup research, employees who receive regular feedback are three times more productive than those with less feedback. 

Drives continuous performance improvement

Frequent performance reviews, as opposed to once-a-year assessments, keep employees aligned with evolving organizational goals and equipped to react accordingly to changes in work dynamics. Additionally, regular performance reviews foster a culture of improvement, encouraging employees to focus on professional growth, likely resulting in improved performance over time.  

Encourages employee engagement and motivation

The performance management cycle boosts employee engagement by providing actionable feedback, setting clear and reachable goals, and celebrating accomplishments. Research shows that an employee who feels their voice is heard is 4.6 times more likely to perform their best work.

Reduces employee turnover

By promoting open communication, addressing possibilities for improvement, and recognizing achievements, performance management cycles can significantly reduce turnover. When a company supports employee development and shows appreciation for its staff’s hard work, it’s more likely to see top performers stay long-term.

The 5 stages of a performance management cycle

Employees receive an evaluation of their professional engagement through five levels of the performance process, including:

Step 1. Planning 

Each performance management cycle should start with setting performance expectations, goals, and key performance indicators (KPIs). This is critical for employees to understand the criteria they will be held to in their eventual performance review. 

The planning phase is also a perfect time to encourage goal-setting—such as learning new skills, developing competencies, or taking on additional projects—and ideally align them with company objectives.

These types of goals can keep employees motivated throughout the cycle. They may also give managers insight into how to coach their direct reports toward achieving more than just their basic job requirements.

Step 2. Monitoring

Once performance expectations are established in the planning phase, it's time to move on to implementation. As employees start working towards their goals, managers should actively track their progress.

Monitoring is core to how management teams execute the performance management process. At this step, continually observing and providing constructive feedback allows managers to address suboptimal performance on an ongoing basis and recognize outstanding performance.

Weekly one-on-one meetings are a helpful tool for monitoring progress. They give employees and management a chance to align on improvement plans, share feedback, and work through roadblocks.  

Managers must focus on coaching and supporting goal achievement during these meetings instead of micromanaging day-to-day tasks. 

Step 3. Developing

Development doesn't just mean acting on underperformance. You can also zero in on stellar performance to boost it even further. 

At this phase, it’s the manager's responsibility to implement creative development opportunities that meet the employees where they are and guide them toward the goals they want to achieve.

Development programs may include:

• Skills gap analysis
• Upskilling/reskilling courses 
• Peer-to-peer coaching
• Matching with an internal mentor
• Team challenges that gamify performance improvement
• Knowledge-sharing activities (hackathons, lunch and learns, etc.)

Step 4. Rating

Next comes performance evaluation and scoring an employee's engagement throughout the cycle. Transparent communication will minimize surprises when it comes to these ratings. 

This is an opportunity to address any areas of underperformance while also recognizing and rewarding standout talent. 

One critical aspect for HR leaders and managers to consider during this phase is unconscious biases, which can be caused by:

• How similar or different demographically the person being reviewed is
• How the current person compares to the last person they reviewed 
• How the person performed in the previous cycle  
• Your first impression of the person in review
• A sense of sympathy for the person

Bias can influence performance reviews, especially when a manager is solely responsible for rating an employee's overall performance. To reduce bias and create a fairer performance appraisal, many organizations adopt 360-degree feedback. This incorporates peer reviews to provide a broad and diverse perspective of performance.

Step 5. Rewarding

Regularly recognizing hard work isn't just a gesture; it's a key final step in the performance improvement cycle.

Recognition boosts motivation, employee engagement, productivity, and loyalty. Yet, only one-third of employees feel their work is currently being recognized.

Here are some ways to celebrate employees' accomplishments:

• Host an awards ceremony to provide public recognition 
• Build a peer-to-peer recognition program
• Offer personalized gifts related to hobbies, favorite foods, etc.
• Offer access to personal development programs
• Extend additional paid time off
• Offer compensation in the form of stock options, a bonus, or a raise
• Grant a promotion

You can also tier your approach, providing rewards commensurate with improvements or achievements, to make this phase of the cycle even more impactful. 

Key roles in the performance management cycle

Three workforce roles participate in creating, evaluating, and executing performance plans through mutual interactions. Let's examine each.

1. HR professionals

Typically, strategic HR teams are the drivers of the cycle, overseeing and leading performance management at a high level.

Their core job is creating the structure, education, and support that make the cycle function effectively.

This involves: 

• Putting a performance rating system into place
• Ensuring that managers and employees understand their roles and responsibilities throughout this process
• Setting dates and reminders for each step of the performance cycle process
• Training managers on using the performance rating system, giving actionable feedback, having productive conversations, and setting goals collaboratively
• Educating on biases to ensure consistent and equitable employee ratings and rewards 
• Remaining available for guidance

2. Managers

Managers are the boots-on-the-ground leaders who work with performance cycles. Their buy-in and participation are key because they will trickle down to the employees and create a culture of always-on performance management.

This involves: 

• Collaborating with direct reports to set performance expectations and solidify goals
• Conducting regular check-ins to monitor progress, address obstacles, and provide coaching
• Gathering feedback to ensure a fair performance assessment and develop relevant, actionable next steps
• Finalizing and delivering employee ratings, rewards, and feedback
• Assisting in creating performance improvement plans (as needed) and continuing to monitor and support progress

3. Employees

Employees are primarily on the receiving end of the performance management cycle. However, HR and management should also solicit feedback from employees in the form of 360-degree reviews and pulse surveys. This is vital to ensure that the performance management system is driving employee engagement.

In addition, there are several ways for employees to participate in their own career development and contribute to improving the performance management process. 

This involves: 

• Working alongside managers to create performance objectives that align with their professional development plans where possible
• Regularly updating management on goal progress and requesting help on any hurdles affecting it. 
• Maintaining a record of professional achievements to ensure a fair and comprehensive review, rating, and reward at the end of the cycle

Elevate employee performance management with Rippling

It’s no secret that HR teams are already stretched pretty thin and often under-resourced. This has historically posed a barrier to  implementing continuous performance management cycles. But this is quickly changing.

Thanks to new HR software, HR leaders are able to now roll out smooth and collaborative performance management cycles. The key to this is being able to connect your data as well as all the various modules of your HR systems (HCM, HRIS, etc.).

With Rippling’s performance management software, HR teams can now align on goals, automate review cycles, calibrate consistent and fair ratings, manage shifting roles and compensation, and report on performance, all from one platform. And, when you have Rippling connected with the rest of your systems, employee performance is always easy to track across multiple modules. This means any new data can simply be pushed from one place and quickly populated everywhere.

Performance management cycle FAQs

How does the performance management cycle improve employee performance?

The performance management cycle can boost employee performance by setting clear, achievable goals and delivering constructive feedback, allowing employees to adjust their actions to meet organizational goals effectively and identify specific areas of growth within their roles.

How often should the performance management cycle be reviewed?

Ideally, the performance management cycle should be reviewed at least quarterly. But these could be even more frequent, like once a month, especially in highly competitive industries where organizations must quickly adapt to changing market demands.

What tools can help streamline the performance management cycle?

Companies should consider solutions with time-saving features, preferably in one platform, to streamline the performance management cycle. These tools should allow employers to assign, track, and share goals across the organization, facilitating seamless collaboration. They should also enable timely payroll adjustments in response to raises and promotions. Lastly, unifying performance data and other employee-related information provide deeper insights, facilitating decision-making.

This blog is based on information available to Rippling as of November 4, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.