Poor Performance Management: How it Could Cost Your Business

Poor Performance Management: How it Could Cost Your Business

There are many advantages to a strong continuous performance management system.

  1. It helps align and track measurable goals
  2. It creates an ongoing feedback loop for coaching
  3. It boosts engagement through recognition

On the other hand, a poor performance management system can cost your company in many ways. Dr. Herman Aguinis, the author of Performance Management, identified some of these critical consequences in his book.

Here we examine what a poor performance management system looks like, the impact such a system could have on your business, and cover off any further questions you may have.

In this performance management guide you will discover,

What does poor performance management look like?

Not to be confused with managing those performing below their expected standards, poor performance management here refers to inadequate methods for managing employee performances. Poor performance management in this sense can manifest itself in various ways, such as through:

All these factors and the following six examples of poor performance management can lead to unhappy employees, especially those who feel they’re going above and beyond. The effects of poor management can have a long-lasting impact on the wider business and over time it could severely damage your organization if not addressed in a timely manner.


98% of businesses consider performance management vital. But only 64% of companies believe their approach is effective, according to Pavestep1.

6 examples of poor performance management.

Take stock of your business — do you see any of the warning signs below? If so, you may have a poor performance management system in place that needs improving.

1. Biases become more prevalent.

Without data and metrics to rely on to gauge the performances of their team, managers are more likely to give biased reviews based on how they feel about employees. Where this is prevalent, performance management more closely resembles a popularity contest in which the boss unintentionally (or even intentionally) rewards according to personal taste or similar personal values.

2. Unclear reward systems.

Rewards are a great way to increase morale and motivation levels, but if the ask and reward aren’t clear, a rewards system might not work effectively. Signs of an unclear rewards system include:

3. Unfair performance ratings.

If employees receive performance ratings that don’t match the reality of their effectiveness within an organization, it’s a clear sign of poor performance management. Staff will likely resent this and complain of unfair treatment, which can become serious over time.

4. Failure to set standards.

A lack of clear standards for performance in employees’ roles means they won’t know what’s expected of them and what to aim for. Employees may not understand what justifies poor vs excellent performance.

5. Lack of personalized objectives.

When specific objectives tailored to expanding the skillsets of individuals are ignored, and blanket objectives fail to identify the needs of certain employees, and/or areas in which they can grow, performance levels may fall.


Employees who feel they are thriving at work are four times more likely than ‘non-thriving’ colleagues to work for a firm they feel understands their interests and abilities, according to HRDrive2.

6. Increased legal risks.

Giving negative appraisals with no data or proof to back up such claims of poor performance risks unhappy employees deciding to take legal action against your company. Litigation can be costly and damaging to your business’ reputation.

6 potential consequences of poor performance management.

The six points above are clear signs you might have a poor performance management system in place. Identifying these and addressing them is essential to avoid any of the following six effects of poor performance in the workplace appearing in your business if you fail to improve your system.

1. Employees could quit based on unfair results.

If an employee performs well and then feels that they were assessed unfairly, there’s little motivation left for him/her to stay with the company. This could lead to the following:

2. Employee morale may drop.

Employees who feel they were evaluated unfairly will become withdrawn and disengaged. Then, they will likely lose self-esteem, which can create resentment towards management at the organization as a whole — ultimately damaging employee morale across the company and leading to reduced engagement and lower performance rates.

If your system is unfair and invalid, employees are much more likely to become dissatisfied and burnt out in their roles.

3. Resources are wasted.

Preparing for an annual review takes up a great deal of time — Deloitte found that the average manager spends 210 hours on performance review activities. Can you spare an extra month of time to prepare for an annual review?

Ongoing performance management is much more time and cost-efficient. It produces optimal results because issues can be detected and dealt with in a timelier manner. If the performance management system is poor and staff leave, you’ve wasted time on employees that may have to be replaced anyway.

In addition to the additional time and costs, managers may also have to allow their employees to work on peer reviews to prepare for annual appraisals. Basically, an entire department — or even the whole organization — will be forced to go into shut-down mode and put priority work on the backburner until yearly reviews are completed.


According to Betterworks, companies that adopt continuous performance feedback significantly outperformed their competition at a 24% higher rate3.

4. Fabricated or misleading information can affect the review.

Without performance data to back up the appraisal, there’s no way to determine what’s true. A manager or peer could provide information about performance that’s either false or misleading, thereby skewing the assessment unfairly.

5. Managers are frustrated.

As well as trickling down to staff, poor performance management can leave managers frustrated. If they’re unable to see what’s causing a lack of employee motivation, complaints and/or staff eventually leaving, management can become unhappy and frustrated at the performance of their business. They may also be unsure as to how to improve the issue.

6. Compliance risks.

If employees feel a poor performance management system means they can take legal action, it could be that a judge decides your business has failed to adhere to employment laws. This could result in a fine, or worse.

When it comes to compliance risk, the following must be considered:

Performance management systems that are poorly designed and/or implemented can have serious repercussions for any business. It would be wise to invest considerable time and effort into a robust approach to manage performance. This may feel like a long-term investment, but it’s one that will reap rewards for your business for years to come.

Frequently asked questions.

Can a poor performance management system result in business failure?

Eventually, yes. Organizations can permanently shut due to poor decisions based on bad performance management. If staff turnover is large due to unclear rewards, unfair performance ratings, biases, a lack of standards, goals and more, the cost of constant recruitment and training may prove too much.

What are the best ways to discuss poor performance with an employee?

It’s not easy to discuss an employee’s poor performance with them. Nobody likes confrontation, but these tips can hopefully make for a productive conversation.

What other ways are there to deal with a lack of motivation in employees?

Improving your performance management isn’t the only way to make your team feel more motivated and perform better. Make team members feel their contribution is valuable. Try to foster a sense of trust too, by following through on assurances you make about their future. Make yourself accountable.