Design a Performance System for Your Small Business in 5 Easy Steps

Rising inflation, supply chain chaos, labor shortages, and increasing energy bills—what do all these things have in common?

They all keep small business owners awake at night, with a 2022 Goldman Sachs study revealing that 91% of SMEs are struggling with the economic climate's impact on their respective industries. 

So, with so much external disruption, it's understandable that small biz leaders often overlook internal HR topics such as performance management. 

When your headcount is beneath 25 employees, there can be a feeling of "shouldn't everyone just know what they should be doing, and if they're any good at it?" 

But having a performance system in place is a surefire way to ensure everyone's working towards common goals and identifying areas of improvement. 

This guide digs deep into the benefits of setting up performance management systems for SMEs, including tips on how to set up yours from scratch. 

We even include expert insights from small business owners who understand performance management challenges without a dedicated HR team.

📈 What is a performance management system?

A performance management system is a structured approach to developing and managing employee performance within an organization. Once set up, it'll measure how well employees are achieving their objectives and uncover any areas of improvement.

An effective performance management system includes a blend of: 

• strategic feedback; 
• streamlined practices; 
• automated workflows;
• HR tools to support all the above.

➡️ Grab all the details in our comprehensive guide to setting up a performance management system.

🏢 What are the challenges of performance management in small businesses? 

When we think of performance management, we might picture large corporate institutions following strict, bureaucratic procedures to appraise employees for the previous performance appraisal cycle. 

But if your small business employs just a handful of staff, it can be challenging to follow something quite as rigid. 

That's because SMEs often have: 

• No dedicated HR team.
• No resources.
• No documented HR processes.

No dedicated HR team

In startups or SMEs, the responsibility of HR often falls to a founder or business leader that lacks any previous people management experience but wears multiple hats at once. 

Being innovative or highly skilled at raising capital doesn't necessarily equip someone with the chops to handle employee performance. 

And as your organization grows and HR responsibilities are spread across multiple non-HR personnel, there may be huge variations in how each handles people management. 

No resources 

Small businesses typically lack time and money to dedicate to any area of HR, including performance management. 

Sylvain Roy, CEO and Founder of HR tech solution Folks, tells us: 

"Organizing performance appraisals is a time-consuming process, and it's particularly challenging to set up regular performance reviews in SMBs, where we often lack the necessary resources and time to optimize our performance management practices."

If a business lacks in-house skills, the natural step is outsourcing. 

For example, in the case of HR performance management, external training would guide HR representatives on how to deliver effective performance reviews. 

But this strategy relies again on two things that we already know are scarce in SMEs: 

• Time: how many business days will it take to train? 
• Money: what's the cost of the training?

No documented HR processes 

Small businesses are organic by nature, following their instincts, or dare we say it, even flying by the seat of their pants to stay afloat. 

In "Human Resource Management," Brian S Klaas et al. describe how SME HR knowledge tends to be tacit, informal, and not documented. 

In comparison, larger businesses will follow mechanistic processes to rationalize HR decision-making. 

The argument is that small businesses are missing out on a more structured approach that has "the potential to improve the quality of HR decision-making and also how HR decisions are perceived."

🔍 5 Reasons why small businesses need a performance management system 

In a UK Capterra study, 45% of SMEs reveal not using HR software, including organizational performance management tools, to support their processes. 

🤔 Why? 

Budget is certainly a consideration, but there's also a misguided belief that the technology would be overkill for small workforces. 

If you fall into this camp, check out these five compelling reasons why any company size can significantly benefit from using a structured performance management system, including supportive technology. That's right—even if you only have a handful of employees. 

Provide a long-term strategic vision 

An unstructured approach to HR can be quite limiting for SMEs, forcing internal teams to take a reactive stance—stamping out fires and being distracted by the next urgent matter. 

In the "International Journal of Production Research," Fredrickson and Mitchell point out that pursuing short-term priorities leads to short-term vision, preventing them from becoming a future-facing organization. 

In contrast, performance management systems create the potential to be more efficient, structured, and purposeful, with far-reaching benefits.

Align employees with company objectives 

Some bad news for business owners: 54% of leaders believe that 0-40% of their employees don't know their company's core values by heart. 

Employees without a "north star" mentality won't be able to align their personal goals with the core business objectives. 

Performance management systems can provide that framework, ensuring everyone is on the same page.

Enable employee communication 

Performance evaluations allow employees to participate in a two-way open dialogue where they provide valuable feedback to their manager and explain any roadblocks they're up against. 

Matthew Ramirez, Founder and CEO of Rephrasely, describes why this is critical for SMEs:

"Many employees in small businesses are reluctant to express their dissatisfaction out of fear that they will be viewed as disloyal or that their managers will take their complaints as a sign that they are not fully committed to the organization.

A performance management system can help address these issues by giving employees a safe space to express their concerns and allowing managers to take action to address their dissatisfaction." 

Drive employee engagement 

Regular check-ins stimulate employee growth and provide an opportunity to tie rewards and compensation to performance. 

Setting clear performance targets motivates employees to bring their best selves to their work and boosts retention rates. 

Workday's Employee Expectations Report 2022 clearly links growth conversations and retention decisions. 

The report clarifies: "with many people leaving their organizations to find new opportunities, it appears that those who decided to stay showed a renewed interest in discussing their own growth plans."  

Lucjan Suski, CEO & Co-founder of Surfer SEO, outlines their objective-based approach to performance reviews to drive employee engagement and productivity. 

"As the co-founder of a successful startup, I understand the importance of performance management for employee appraisals. Ours is based on the OKR framework. This ensures that each employee has clear and measurable objectives and key results for their role.

Employees are expected to update their progress against these goals at least once a month. The one-on-one meetings take place every two weeks, which allows us to provide feedback on progress and help set achievable goals for the future.

This approach has been hugely beneficial for our team – not only has it helped us ensure high levels of productivity across the board, but it's also given employees greater clarity on what is expected of them, allowing them to take ownership of their own development plans and better manage their own career progression within the company."

Promote clarity around performance issues 

If your employees don't understand what you expect of them, how can you expect them to hit the mark? 

Perhaps they need to understand what they must achieve to gain a promotion or pay raise.

Or that you now view their persistent tardiness as a performance issue because it's impacting team morale. 

Performance management systems provide managers with clear and consistent standards around performance, making it easier to identify areas for improvement and for employees to understand their goals.

Michael Nemeroff, CEO and Co-founder of Rush Order Tees, a family-run apparel business, tells us performance management has been "equally helpful for employees who were underperforming, performing at expected levels, or high performers.

This system allows us to track employee performance over longer periods with data to support it. This has helped us to provide employees with better support based on their performance reviews." 

➡️ Check out more tips on how to boost performance management.

🪜 5 Steps to building an employee performance system for your small business

Ready to launch your performance management system? 

Here are five steps to creating a high-performing team for your small biz. 

Clarify roles and competencies 

Before you start reviewing your employees, it pays to clarify their roles and responsibilities. 

Use career pathing software to build crystal-clear requirements for every role on your team. Connecting role-specific competencies to each ensures: 

• Clarity: there's no room for misinterpretation about task duties or accountability. 
• Progression: give your employees a reason to stay by offering transparency. Your team will understand how to move forward in their career from junior to mid-level to senior levels. 
• Engagement: watch motivation skyrocket as you guide your team toward their professional goals.
• Meaning: link role cards to growth plans and performance reviews. 

No career framework yet? No worries. Zavvy offers competency templates for inspiration.

Decide who will provide objective input 

Now we're getting into the nitty-gritty of setting up a performance review. You'll need to decide who's leading the appraisal. 

Will it be a stuffy annual performance review where the manager talks and the direct report listens? 

Or are you looking for something more modern and actionable, involving rich feedback from multiple perspectives? 

In his book, "Work Rules," Laszlo Bock, former Senior Vice President of People Operations at Google, relays his views: 

"Even if you're a small company you'll have better results, and happier employees if assessments are based on a group discussion rather than the whims of a single manager."

Here at Zavvy, we also recommend conducting a 360-degree performance review incorporating meaningful feedback from a variety of sources, including the following (as appropriate): 

• managers;
• peers;
• direct reports; 
• self-assessment;
• business partners; 
• customers. 

With Zavvy's 360 feedback software, you can collect meaningful, objective insights from nominated reviewers. Plus, your managers and administrators fully control question types, timelines, and visibility settings. 

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For example, you might prefer to collect feedback anonymously. Although, depending on the size of your team, it could make more sense to gather open feedback and discuss it transparently.

Train reviewers and reviewees

If performance management is entirely new to your people and leaders, everyone must be on the same page supporting your new approach. Zavvy simplifies this alignment by offering training journeys. 

Our manager training program uses a series of automatic triggers, tips, and nudges, delivered "just in time" to aid managers in the run-up to, during, and post-performance reviews.

Similarly, our learning management system enables small businesses to launch engaging training programs and run them on autopilot. 

🤖 The automation feature ensures you deliver your innovative course format to the right people at the right time.

Identify skills gaps 

Futureproof your organization and save money on external recruitment by regularly upskilling your workforce. 

Tip #1: Start by identifying the skills gaps in your lineup.

Tip #2: A LinkedIn report highlights the top skills in demand that will strengthen your human capital, including communication and problem-solving skills. 

The thing about skills, though, is that they're constantly changing, and you'll need to adapt your in-house skills to keep up. 

That's where Zavvy's skills matrix software gives you a competitive advantage. 

It provides a complete visual overview of your skills matrices for roles, departments, or the whole company to better understand strengths and opportunities.

Implement continuous growth plans 

Effective performance reviews don't just reflect; they look forward. Zavvy's performance review software helps you create individual and group growth plans that build on your employee strengths while staying aligned with your organization's strategy. 

Not only can you track performance trends and success stories, but you'll allow everyone to reach their full potential. You'll put your employees in the driving seat of their development and give them the keys. 

➡️ Partner with Zavvy to set up a performance system for your small business

If you're ready to create a modern, interactive system for your small business, contact our team at Zavvy to learn more about the performance review software we offer. We can help you get started by creating innovative: 

• 📈 Performance reviews
• 🧭 Career paths 
• 🧰 Skills matrices
• 💪 Training journeys 

Sign up for a free Zavvy demo today to explore our comprehensive suite of tools and create an engaging performance system you can be proud of!

❓ FAQs

Still got burning questions about how to set up a performance management system for your small biz? Or even if you should? We've got you covered. 

Does a performance management system work for a small business?

Yes, absolutely. A well-designed performance management system can help businesses of all sizes maximize their team's performance. Depending on the size of your business, you'll need to adjust the scope of your performance management system; for example, smaller businesses may prefer regular check-ins and 1:1 meetings over more formal reviews.

What are some performance appraisal methods for SMEs and startups?

Performance appraisals come in many shapes and sizes, so finding the right approach for your business is important. Some popular methods for small to medium enterprises include: 

• 360-degree feedback: involving multi-source feedback from managers, peers, and direct reports. 
• Employee self-evaluation: allow reviewees to assess their own performance and share their thoughts with their reviewing manager. 
• Performance checklists: use a predefined list of criteria and questions to measure performance.

How can small business leaders ensure the uptake of their performance management process? 

Worried that your small business employees are too busy to fully commit to your performance management system? 

Tomek Mlodzi, CEO of PhotoAiD, reveals the importance of communicating your expectations with your workforce. 

"One of the key things that I have found to be important when implementing such a system is to make sure that it is clear and easy to understand. When employees understand the process and what is expected of them, they are more likely to buy into it and to actively work to improve their performance." 

Finally, remember that performance management is never a set-it-and-forget-it process. 

Set targets for your process and regularly review to ensure you're hitting your goals.