Performance management systems: a comprehensive guide

Performance management isn’t just about reviews anymore. Today, it’s a critical lever for retention, engagement, and growth. With one in three employees considering quitting their roles — largely due to limited career development opportunities* — investing in effective performance management is no longer optional.

‍Future-ready performance management systems should do more than just assess performance. They must create pathways for career growth, strengthen company culture, and improve business outcomes. Plus, companies that invest in employee performance are 4.2x more likely to outperform their peers, achieving higher revenue growth and lower turnover.**

In this article, we’ll discuss the essential components of a robust performance management system and how to build one with people enablement tech.
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*Leapsome’s Workforce Trends Report, 2024

**McKinsey & Company, 2024
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What is a performance management system?

A performance management system (PM system) is a structured set of processes that organizations use to measure and improve employee performance. Today’s systems go far beyond traditional performance reviews; they encompass formal evaluations, but also include continuous feedback and recognition, goal setting and tracking, 1:1 check-ins, learning and development initiatives, and more. 

People-centered, growth-oriented organizations use holistic performance management software to set up robust, consistent performance management systems that foster employee growth and long-term company success.
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7 key components of performance management systems

A thorough performance management system goes far beyond performance appraisals and facilitates a truly continuous approach to performance management. Let’s take a look at all the pieces of the puzzle.
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Key component #1: performance reviews

A great performance review tool should be fundamental to your performance system, especially if your company prioritizes continuous growth and development.

However, there are a few different types of performance reviews you can apply within various contexts. Specifically, you might benefit from running:

• 360° reviews — These are holistic performance appraisals based on 360° feedback gathered from various sources (such as a self-assessment and feedback from peers, managers, reports, and even external collaborators).
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• Probation period reviews — Managers typically conduct these at the end of a new hire’s trial period to assess whether the individual is a good long-term fit for the role.
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• Leadership performance reviews — These are designed to assess leaders beyond daily performance and focus on strategic skills related to creative thinking, coaching, and professional development.
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An effective performance management solution should help you set review cycles so they recur automatically, with no need for external alarms or reminders. It should also leverage AI to summarize notes and turn them into growth-oriented recommendations, allowing for better and more efficient evaluations. 
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Key component #2: competency frameworks

Development-focused performance reviews emphasize team member growth and potential, while accountability-focused reviews center around results and focus on where the employee has fallen short of expectations. To ensure you’re keeping reviews focused on development and not judgment, your company should establish clear competency frameworks, which are visual matrices that highlight the skills every team member should hone before moving to the next level. 

Implementing competency frameworks helps organizations set clear expectations and chart a career path for employees to follow as they improve their skills. 

For instance, a junior employee might excel at skills like motivating themselves and others, which are clearly outlined in their competency framework, but may still need a bit of support and practice with active listening or managing expectations. 

Platforms like Leapsome make the process simple by consolidating all performance data into one dashboard so managers and direct reports have all the information they need during performance review conversations.
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🤓 New to developing competency frameworks?

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Key component #3: goals & OKRs

Performance management systems can help you drive performance by ensuring that all employees are bought into your organizational objectives. They do so by giving teams more visibility over:

• Cascading goals — Long-term company objectives that guide the development of team-wide and individual goals.

• Objectives and key results (OKRs) — High-level goals broken down into specific milestones and results for teams and individuals.

Leapsome helps organizations, teams, and employees achieve objectives by making it easy to track progress with goal dashboards and progress timelines. Collaborators can also give feedback and leave notes directly within the Goals module, so there’s always room for open conversation.
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Key component #4: learning, development & onboarding

Great performance management systems do more than measure employee performance: they help people improve as professionals and grow in their careers. That’s where dedicated learning and development tools come in, allowing HR teams and management to build high-quality, customizable training materials to enable employees to identify areas for improvement, improve upon them, and move forward. Platforms like Leapsome also have built-in learning marketplaces with expert-designed, ready-to-use courses on topics like compliance, IT security, and leadership.

Learning and development features also come in handy for employee onboarding, reducing admin for the HR team and empowering new hires with all the information they need to get started.
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Key component #5: continuous feedback & praise

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Ongoing feedback, praise, and recognition are essential for engagement and are key aspects of performance management. Sadly, only one-third of companies currently measure staff engagement — a missed opportunity for improvement. Companies must track engagement metrics to learn from their people and make data-guided decisions.

To that end, here are the feedback tools you should look for in your performance management program:

• An employee survey tool — An excellent performance management system should give you access to survey templates and let you build custom questionnaires that provide actionable insights into what matters most to your employees‍.
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• ‍Built-in features for a culture of feedback and praise — Regular encouragement and feedback from leadership and coworkers help foster a happy, development-oriented culture.
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Key component #6: communication between features

The many arms of people management are more effective when they feed into and inform each other. Many tools offer distinct performance management features, but a strong performance management system unites those components and allows them to communicate seamlessly.

For example, performance reviews need competency frameworks to make them more meaningful and outcome-oriented. Competency frameworks, in turn, should inform the learning paths your company creates for employee development. None of those elements work well in isolation.
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Key component #7: best-practice templates, customization & integrations

Updating your company’s approach to performance management is challenging without a flexible system. Rather than opting for a solution with a rigid, prebuilt framework, look for a system you can customize to your specific business needs.

That means looking for a performance management system with dedicated functions for customization — ensuring that even if you start with ready-to-use templates, you can tweak them and build your own processes as you grow.

And if you’re not ready to break up with your favorite tools, modern performance management systems should also have built-in integrations so you can bring them along.‍
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Why a performance management system is essential for growth-minded businesses

If your business is laser-focused on growth, a comprehensive performance management system is crucial to help you:

• Retain employees and improve satisfaction with more development-focused performance evaluations. This is crucial in the face of increasing worker stress and managerial burnout.
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• Scale your performance management cycles, leaving behind unsustainable solutions like spreadsheets, forms, and outdated HR tools that don’t integrate well with each other.
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• Drive value alignment and boost productivity by allowing more company-wide collaboration on overarching goals and OKRs.
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• Upskill your team members with customizable learning paths and courses.
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• Transform the way teams communicate with tools for providing continuous feedback and recognition.
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Invest in your people’s growth & enablement with Leapsome

Building and maintaining a top-tier performance management system is essential if you want to stay resilient, build high-performing teams, and foster long-term organizational success in the rapidly changing world of work.

If you want an all-in-one, people-centered HR platform for your company’s people enablement processes, Leapsome is for you. Our comprehensive suite of tools encompasses everything you need to develop a robust performance management system, including Reviews, Goals, Learning, Competency Frameworks, and more. 

Because Leapsome wants to make work more fulfilling for everyone, and we know that meaningful performance conversations and development opportunities are the way to get there.

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FAQs about performance management systems

What are the different types of performance management systems?

Traditionally, there are two different types of performance management systems:

• OKR-driven performance management — Measures employee performance and development according to clear, specific goals that connect directly with company objectives.
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• HR-driven performance management — Evaluates employee performance beyond OKRs and SMART goals and determines how they’re moving forward professionally and embodying the company culture and values.

Leapsome’s performance management software combines OKR- and HR-driven models to create a holistic, people-centered performance management strategy.
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How should I choose the right performance management system for my team?

To choose the right performance management system for your team, look for a solution that:

• Offers the performance review frameworks you need — Consider your organization’s preferred performance management approach and search for a system that’s optimized accordingly. For example, you might need a platform that supports 360° feedback, leadership reviews, or continuous feedback.
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• Allows for customization — No two companies run their performance management cycles the same way. An ideal solution will let you set up customizable performance management workflows, build various performance review templates, and access best-practice question banks.
  
• ‍Provides complementary HR & people enablement features — If you want centralized employee data, a streamlined tech stack, and a great employee experience, find a performance management system that has additional HR and engagement capabilities, like a comprehensive HRIS, goal-setting features, and learning and development tools.