Performance Appraisal vs. Performance Management: Understand the Key Differences

What is performance management?

Performance management is the process of making sure that your organization's employees meet their objectives. It involves identifying, measuring, managing, and developing the performance of your people as a collective.

The key characteristics of performance management are:

• It is proactive and forward-looking.
• It is holistic and strategic in its perspective.
• It is an ongoing process that adapts to organizational needs.

Objectives of performance management

Performance management plays an essential role in organizations by nurturing and promoting a high-performance culture with the following objectives.

1. Set realistic expectations:

• the targets to be achieved by individuals and teams;
• the timeframes associated with targets;
• a linkage between targets and organizational priorities.

2. Increase organizational productivity by using a collective view of performance to plan training, create better role assignments, and motivate low-performing employees through constructive performance improvement plans.

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3. Improve job satisfaction by identifying areas of discontent amongst employees and finding ways to address them, for instance, through training or making role changes.

4. Reduce turnover by seeking out the underlying causes of discontent and tackling them.

5. Establish clear communication between individuals and teams.

6. Boost employee engagement by providing a framework for people to learn and grow. Growth potential is a crucial motivation for younger employees, highlights Gallup's research.

What is performance appraisal?

Performance appraisal is the periodic measurement and evaluation of the performance of individual employees in your organization.

The key characteristics of performance appraisal are:

• It is reactive to historical information
• It is operational and focused on individuals
• It is applied periodically and works within well-defined rules—the annual performance review being the most commonly used type of appraisal

Objectives of performance appraisal

Performance appraisal works within the framework of performance management and has the following objectives:

• Evaluate performance through a performance measurement system that's fair, accurate, and comprehensive.
• Analyze performance by identifying employee strengths and weaknesses, counseling poor performers, and creating plans to train and develop employees.
• Provide regular employee feedback through review systems.
• Facilitate promotion, hiring, and compensation decisions based on what's learned through employee evaluations.
• Promote recognition by identifying high-performing employees.
• Set individual employee goals and targets to provide clear objectives and an understanding of expectations for your people.

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The key differences between performance appraisal and performance management

While performance management and performance appraisal work together to form a complete performance function in organizations, they differ in several fundamental ways, as follows:

Process vs. system

Performance management is a process that's fluid and evolving and has few links to bureaucracy.

Performance appraisal is a system that has a well-defined framework and an associated bureaucracy.

Who runs it?

Performance management is a collaborative dialog process between multiple stakeholders, including managers and employees, with less directional orientation.

Performance appraisal is a top-down approach traditionally run by HR. It's typically cascaded across an organization, with managers carrying it out to their direct reports.

Growth vs. evaluation

Performance management targets the growth and productivity of employees. In contrast, performance appraisal involves evaluating employees and informing compensation decisions.

Past vs. future

Performance management focuses on the present and future. It maps out training and development programs based on feedback from employee performance.

Performance appraisal focuses on the past by using historical data and ranking systems to gauge employees' progress toward their objectives.

Proactive vs. reactive

Performance management is proactive in finding ways to engage employees while aligning employee goals with company objectives.

Performance appraisal is reactive in identifying employee weaknesses through performance evaluations based on previously-set goals. Managers can decide to update employee goals as a result of the reviews.

Holistic vs. operational

Performance management takes a holistic approach by considering the relationship between employees and the organization with a view to fostering better engagement.

Performance appraisal is operational and follows performance procedures specific to the employee under evaluation.

Strategic vs. individualistic

Performance management is strategic in its vision and keeps organizational goals and company growth objectives in mind.

Performance appraisal is individualistic and considers employees and their past performance, one at a time.

Ongoing vs. infrequent

Performance management is continuous and ongoing, utilizing real-time performance updates and a continuous feedback approach.

Performance appraisal is infrequent, typically occurring once or twice per year with a focus on ratings and evaluations.

Qualitative vs. quantitative

Performance management has a qualitative orientation, using judgment and metrics to form views based on organization-wide feedback systems.

Performance appraisal has a quantitative orientation, deriving evaluations based on scores and rating scales with a view to producing a final measurement.

Flexible vs. rigid

Performance management takes on a flexible approach and adapts to changing organizational needs and goals.

Performance appraisal is more rigid and inflexible, adhering to the rules of the evaluation system. Plus, it is mainly confined to information about an employee's past performance.

Organizational metrics vs. employee KPIs

Performance management metrics aim to track overall employee productivity in an organization and include:

• Work efficiency—outcomes achieved over a time period relative to the resources required to produce them.
• Quality of work—varies by industry, e.g., Net Promoter Scores in a customer-facing environment or the number of complaints and returns in a customer-centric environment.
• Teamwork and collaboration—qualitative assessment through surveys, relative proportions of high-performing vs. low-performing employees, and how well teams communicate.
• Training—completion rates, competency scores, and results of formal assessments (if relevant).
• Timelines—time to completion for major initiatives and delays.

Performance appraisal metrics focus on individual employees and often take the form of role-specific Key Performance Indicators (KPIs). Let's take some examples:

• For a sales role, some KPIs include the number of qualified leads generated, trial conversion rates, sales bookings per month, or the number of monthly onboarding and retention calls.
• For a customer service role, one would look at customer feedback ratings, average time spent on customer queries, or the number of callbacks on customer resolutions.
• For a marketing role, some KPIs are the number of content marketing pieces produced, click-through rates on email campaigns, growth in newsletter subscribers, or customer churn rates.
• For a consulting role, critical KPIs would be the number of billable hours, client feedback scores, growth in high-value assignments, or measures of timeliness and turnaround on client projects.

Performance appraisal vs. performance management in a nutshell

Key similarities between performance appraisal and performance management

Noting how performance management and performance appraisal differ, they also share core similarities such as.

‍They set targets and goals and review progress toward them

Performance management harnesses employee performance to meet organizational goals. It sets targets for people and teams in an organization as a collective. Plus, it ensures a strong linkage with corporate priorities.

Similarly, performance appraisals set targets and goals for individual employees, guided by the framework provided by performance management. These individual goals are most effective when they're SMART, i.e., specific, measurable, achievable, realistic, and timely.

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They identify issues and obstacles to performance and try to mitigate them

Performance management leverages its organization-wide perspective to understand where there are deficiencies. A performance management strategy will include planning training and other initiatives to address weaknesses and improve outcomes.

For example, the company can invest in competency-based training for critical roles if there is a skill gap.

Performance appraisal considers individual employee strengths and weaknesses and creates customized plans to train and develop people.

They measure performance success

Both performance management and performance appraisal measure success using metrics, KPIs, and other ways of tracking progress against objectives.

They focus on making a difference in the day-to-day performance of your people

Ultimately, the performance function of your organization—whether through organization-wide performance management or employee-specific performance appraisals—aims to make a difference in the performance of your people and your organization as a whole.

They both focus on filling your organization with high-performance teams that:

• Work well together.
• Display high levels of engagement.
• Understand performance expectations.
• Have the confidence and competence to achieve great results.

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Tips for combining performance management and performance appraisal to get the best results

As we've seen, performance management and appraisal play essential roles in your organization.

Together, they drive a performance culture and high-level outcomes for your people and your organization.

So, how can you combine the core elements of performance management and performance appraisal to get the best results?

• Bring a more collaborative approach and multiple perspectives to your performance process rather than the top-down orientation of traditional performance appraisals.

Tip #1: Solicit views from others, not just managers, including peers, other managers, and even customers.

• Apply a coaching mentality to the way you provide feedback.

Tip #2: Be supportive and encourage open, transparent dialog rather than an attitude of authority.

• Make performance appraisals more frequent and regular, not just once or twice per year.

Tip #3: Get regular feedback from your people on how they're tracking against their performance objectives. But don't stop there. Identify any challenges leading to lowered job satisfaction.

• Bring a more holistic perspective to performance appraisals rather than an operational mindset.

Tip #4: Look beyond performance ratings and scores and encourage the growth and development of your people.

• Make sure there's a strong link between the individual and company goals.

Tip #5: Align your people's efforts toward company objectives.

• Be more strategic and forward-looking rather than individualistic and backward-looking.

Tip #6: Look to your organization's future and your people's role. You can stay ahead of industry trends by upskilling and reskilling your employees.

• Break the link between performance appraisals and compensation.

Tip #7: Avoid subjective biases in assessing performance-based compensation and focus on employee development.

Fortunately, there's a tried-and-tested approach that captures many of these suggestions—360 degree feedback.

360 degree reviews incorporate multiple feedback perspectives, i.e., from colleagues, direct reports, managers, customers, and even the CEO. As a result, they provide a more unbiased, comprehensive, and holistic view of performance compared to traditional performance appraisals.

The benefits of 360 degree performance reviews include the following:

• Less subjective feedback—harnessing multi-directional feedback gives less potential for bias from a single manager.
• More development-focused discussions—diverse feedback uncovers areas that would otherwise be missed and promotes a broader range of options for employee development.
• More honesty—360 degree reviews are usually anonymous, encouraging more honest, open, and frank feedback.

Tip: To get the best results, you should include the right participants for the best results, i.e., those who can offer a wide range of relevant perspectives.

But adopted alongside a continuous feedback approach that provides real-time insights and more frequent engagement, 360 reviews can make a real difference to the performance of your people.

In fact, many successful organizations have abandoned traditional performance appraisals in favor of continuous 360 degree feedback.

Netflix, for instance, adopted 360 degree feedback as a review process that's separate from their compensation discussions. The simple, honest, and regular performance conversations that 360 degree reviews encourage have been producing better results for Netflix's people, suggests Patty McCord, former Chief Talent Officer at Netflix.

Manage performance with Deel Engage, the all-in-one talent management system

A dynamic performance management system blends processes with software to supercharge team performance and achieve your business objectives. Deel Engage is an AI-powered people suite providing everything you need to assess and manage performance in your workplace. Our flexible software:

• Gives your managers and admins complete power over question types, visibility, anonymity settings, and more
• Collects qualitative and quantitative worker performance insights that enable transparent, bias-free promotion decisions
• Displays meaningful career progression pathways and empowers team members to track their performance progress, observe their strengths or development areas, and request support when needed
• Offers a skills matrix feature to identify existing skills gaps and strengths at individual, team, and organizational levels
• Transform managers into inspirational coaches and mentors with comprehensive training
• Takes advantage of generative AI to create training courses that address organizational skills gaps and strengthen your human capital

Additionally, Deel HR, our truly global HRIS solution, is always included for free.

Ready to commit to an ongoing performance management culture? Book a free Deel demo today.