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With such positive benefits to be gained, SMEs need to get performance management right.
The data tells us that 95% of UK managers are unhappy with current performance management systems and only 48% of employees have basic performance objectives set. There’s clear and significant room for improvement.
Performance management has evolved dramatically in recent years, shifting from annual reviews to continuous, people-centred approaches that drive business results. For UK SMEs with 20-200 employees, effective performance management isn't just nice to have – it's essential for survival and growth in today's competitive landscape.
This guide provides practical strategies to transform your approach and drive real business results. We will cover:
Why performance management matters
The business case for robust performance management
What good performance management looks like
A 5-step framework for managing poor performance
The importance of manager training and continuous feedback
Using technology to streamline process and measure success
Common pitfalls
A simple action plan structure to stimulate improvement.
Why performance management matters more than ever
The statistics paint a stark picture of the challenges and opportunities facing UK businesses:
· Only 10% of UK workers are engaged at work, below the European average of 13% (Gallup 2025 State of the Global Workplace report)
· Companies with highly engaged workforces are 23% more profitable than their competitors (Gallup)
· UK's engagement crisis costs £257 billion annually (11.3% of GDP), highlighting the massive economic impact of poor performance management
· 41% of organisations have shifted away from traditional annual reviews to frequent one-on-one meetings (HR Research Institute)
· Organisations with continuous performance processes are better at attracting and retaining top talent
· Companies with engaged employees achieve 18% higher productivity (Gallup)
For SMEs, the stakes are even higher. With limited resources and fierce competition for talent, every employee's performance directly impacts profits. In a typical SME with 100 employees, even a modest 10% improvement in productivity could translate to hundreds of thousands of pounds in extra annual revenue.
Understanding current performance management practice
Performance management is a management tool that helps employees reach their full potential. It identifies employees’ strengths and weaknesses and areas for training development. Managing performance effectively is essential if you want your team to be at their best and produce high-quality work.
Current performance management covers both 'what' the individual does and 'how' they do it. This approach:
Enables individuals to perform to the best of their ability
Identifies and aligns objectives with business goals
Establishes required behaviours and cultural expectations
Defines clear career progression plans
Sets measurable success criteria
Holds employees accountable for their own performance
Boosts productivity, morale and retention.
The hidden costs of poor performance management
Poor performance management doesn't just affect the motivation, productivity, satisfaction and wellbeing of employees – it creates a ripple effect throughout your organisation. There is growing evidence that traditional, overly formal or inadequate reviews can make performance worse. Plus, the financial impact is staggering. Managers spend an average of 210 hours a year on performance management activities.
A five-step framework for managing poor performance
Managing poor performance can be challenging, but when performance issues arise, it’s important to address them quickly and effectively. Try this structured 5-step approach:
1. Find the root cause
Before you can fix poor performance, you need to understand why it's happening. Poor performance often stems from management and organisational issues, not employee weaknesses. To establish the root cause, take time to have meaningful one-to-ones with your team. Do this consistently, not just when problems arise. Be approachable, trustworthy, and supportive. Common underlying causes of poor performance to look out for include:
Lack of clarity about expectations
Insufficient training or resources
Personal issues
Poor job fit or role design
Absence of recognition or feedback.
2. Set clear expectations
If your team don't understand what you expect from them, performance will suffer.
Ensure you:
Communicate business updates regularly
Provide clear job descriptions and success criteria
Keep employees informed about changes within the business
3. Invest in development opportunities
Your team will feel undervalued if you don't provide a variety of growth, learning and development opportunities.
Consider:
Establishing mentoring programmes
Cross-training opportunities with other team members
External training courses
Stretch assignments on different projects
Job sculpting to better match roles to individual strengths.
4. Work together to address issues
You can't change poor performance overnight. Tackle issues immediately and sensitively to inspire improvement in your team.
Best practices include:
Provide timely, constructive feedback
Allow time for improvement with clear milestones
Offer support throughout the process
Document all conversations and agreed actions
Set regular review dates to monitor progress.
5. Show regular appreciation
Recognition at work is one of the biggest motivating factors for employees, yet so many employees still don’t receive any recognition from their employer.
Simple but effective recognition strategies include:
Acknowledge good work publicly in team meetings
Send personal thank-you messages
Celebrate small wins as much as major achievements
Provide specific feedback about what they did well
Link recognition to your company values.
If you love the idea of having a HR sounding board constantly in your corner full of helpful guidance and advice like this, see how Outsourced HR services could work for your business.
Building a culture of continuous performance management
The most successful companies have moved away from annual appraisals to continuous performance conversations. Embedding the giving and receiving of regular feedback into company culture has several benefits.
The benefits of regular check-ins
Regular check-ins build strong, healthy relationships between managers and their team members. One on one time together provides a safe space for employees to share ideas and discuss professional and personal concerns and helps employees feel listened to, supported, and valued - key factors in employee engagement. Employees can shape their own objectives. Managers can take swift action to resolve issues and keep tasks relevant and aligned.
Asking the right questions
When you meet with your team, think carefully about the words you use. Ask friendly, informal questions, such as:
"How are you feeling about your workload this week?"
"What's working well for you right now?"
"Is there anything you need more support with?"
"Which of your responsibilities do you find most impactful?"
"How can we better set you up for success?"
Supporting employee wellbeing through performance management
Effective performance management must prioritise employee wellbeing and individual performance. Research by Mental Health First Aid England found that 79% of employees experienced moderate-to-high workplace stress in 2024. Feelings of wellbeing are a significant factor in our ability to perform well at work. Managers should assess both in equal measure.
How to focus on employee wellbeing
Normalise conversations about mental health and wellbeing
Monitor workload distribution regularly
Check in on mental health and stress levels
Offer flexible working arrangements where possible
Provide access to wellbeing resources and support
Automate repetitive tasks that add no value
Focus on meaningful work that contributes to business goals.
Equipping your managers for success
For performance management to work effectively, your managers need the right skills and support. The challenge is significant: 4 in 5 (80%) of those moving into UK management positions have no formal management or leadership training. With engagement stagnating in the UK, employees are looking to their managers for much-needed support and direction. Performance management training should mirror employee needs and equip managers with essential skills.
See how our CPID-qualified experts can help with all things training, development and upskilling.
Essential manager skills
Time management: Quality time with every team member requires proper workload management
Feedback: Giving and receiving effective feedback
Goal-setting: Be able to set achievable goals and objectives aligned to business needs
Difficult conversations: Confidence to handle sensitive discussions constructively and resolve conflict when it arises
Questioning techniques: Ability to understand individual motivations and development needs
Active listening and emotional intelligence: Hearing what employees are saying beyond their words
Data interpretation: Understanding engagement scores and performance metrics
Mental health awareness: Recognising signs of stress and knowing how to respond appropriately
Coaching and mentoring: Ability to develop your team and support their growth.
Using technology and data
Technology and data play an increasing role in successful performance management. Online systems streamline processes, gather and record data, and reduce the administrative burden on managers and HR teams.
If you are not already taking advantage of the many efficiencies to be gained through online systems, take a look at what HiBob and MyHR Partner can do.
The benefits of HR technology
Real-time data insights: Understand your workforce, spot trends and identify training needs
Automated processes: Reduce administrative burden on managers
Consistent documentation: Maintain accurate records of performance conversations
Analytics and reporting: Make data-driven decisions about performance interventions
Employee self-service: Allow employees to track their own progress and development
Using AI in performance management processes
While the use of AI applications is becoming more commonplace in UK SMEs, specific benefits for performance management processes are still to be seen, the early signs are that, in time, AI may eventually help to reduce bias and improve the quality of performance feedback. Keep an eye on our resources for updates.
Measuring success: key performance management metrics
For performance management to be effective and successful, you need to track these critical engagement, wellbeing and performance metrics:
Engagement indicators
Employee engagement survey scores
Participation rates in development programmes
Internal promotion rates
Employee Net Promoter Score (eNPS)
Performance outcomes
Goal achievement rates
Quality metrics relevant to your industry
Productivity measures
Customer satisfaction scores
Retention and wellbeing
Voluntary turnover rates
Absenteeism levels
Stress and wellbeing survey results
Exit interview feedback themes
Common performance management pitfalls to avoid
This wouldn’t be the complete guide if we didn’t address frequent manager mistakes to avoid. Learning from others' mistakes can save significant time and resources:
Rating-based systems
Employees should leave their performance review feeling inspired to improve. Blending numerical ratings with descriptive feedback often yields better results.
One-size-fits-all approaches
Different employees respond to different management and communication styles. A personalised approach to performance management is most effective.
Infrequent feedback
Regular, continuous feedback is more valuable than infrequent input. This allows employees to focus on making small, ongoing, manageable improvements.
Surprise performance reviews
When performance conversations and feedback happen regularly, formal reviews should never contain surprises.
How to create a Performance Management Action Plan
Based on the evidence and best practices outlined above, here's how to create an action plan for your organisation in three simple steps.
Immediate actions (next 30 days)
Audit your current approach: Survey employees about their experience.
Train your managers: Arrange training to bridge urgent skills gaps.
Schedule regular one-to-ones: Add monthly manager-employee meetings to your diary.
Create a structure for one-to-ones: Keep them focused, timely and action oriented.
Review job descriptions: Ensure all roles have clear expectations and success criteria.
Short-term changes (next 90 days)
Implement recognition programme: Create simple but effective ways to acknowledge good performance aligned to company values.
Develop wellbeing support: Introduce resources to support employee mental health and stress management.
Create development plans: Work with each employee to identify areas of growth and development.
Establish clear communication channels: Communicate business updates and changes quickly and clearly.
Long-term transformation (next 12 months)
Invest in technology: Investigate performance management software to streamline processes and support decision-making.
Manager development programme: Comprehensive training for all people managers in the areas mentioned above.
Cultural change: Embed continuous performance conversations in company culture.
Measurement and analytics: Implement robust metrics to track the success of your performance management approach.
Next Steps
Performance management isn't about having difficult conversations once a year – it's about creating a consistent feedback culture where every employee understands their role, feels valued for their contributions, and has clear opportunities to develop and grow.
The shift from traditional annual reviews to continuous, people-centred performance management is more than a trend – it's a fundamental change in how successful organisations operate. Those who embrace this change will find themselves with more engaged, productive employees and stronger business results.
Aristotle said it best: "We are what we repeatedly do. Excellence then, is not a habit." Make good performance management a habit in your organisation, and watch your people, and your business, flourish.
Outsourced HR support for UK SMEs
The pressure to get performance management right can feel overwhelming, especially when you're trying to run a business at the same time. If you're struggling with underperformance, need help designing a new approach, or want support with difficult conversations, we are here to help.
CIPD qualified, with 20+ years’ experience, we provide practical, legally compliant HR support that cuts through the noise and focuses on what actually works. Whether you need a one-off consultation or ongoing retainer support, we're here to help you build a performance management approach that drives real results.
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