Here is a brief excerpt from an article written by Sabrin Chowdhury and Elizabeth Hioe for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Nobody likes annual performance reviews. Even high performing employees can be demoralized by rigid or arbitrary goals. But what if you could find a way to flip it – turning the annual performance review process into a positive moment where employees feel empowered to learn and grow?

While goals have long been used as a quantitative measure for employee performance, many organizations find that the goal-setting process takes a huge amount of time and is, frankly, not very effective. However, when done correctly, goal-setting can help improve employee engagement in a way which elevates performance and benefits organizations overall, according to recent McKinsey research.

Setting goals can be as challenging as meeting them. Here are three things to keep in mind when establishing effective employee goals:

Involve employees from start-to-finish

The purpose of goals is to help employees improve – naturally, it makes sense to include them in the entire process. Securing employee buy-in allows you to help develop their short- and long-term goals, and increases the likelihood that they will be achieved. Managers should jointly develop goals that are SMART (specific, measurable, actionable, results oriented and time bound). Doing so inspires commitment and allows individuals a sense of ownership in achieving their goals. Encouraging employees to set stretch goals also helps push performance and serves as a motivator for ongoing development.

Link individual goals to business objectives

Of companies who have effective performance management systems, 91% say that employees’ goals are linked to business priorities. The explanation is simple: employees will be more effective if they can see how their individual goals fit into the big picture. In recent years, there has been an uptick in the number of companies linking organizational business goals to functional business objectives, and converting those into team-performance goals. This encourages accountability and better performance as individuals grasp the direct impact of their performance.

Adapt goals in real-time

Goals should never be seen as stagnant, but dynamic and evolving. One common mistake is setting goals at the beginning of the year and forgetting about them until review season. As realities fluctuate throughout the year, failing to revisit goals can be demotivating. That’s not to say goals should become moving targets, but rather that they should be adapted as the environment changes. At one multinational company McKinsey works with, for example, targets are updated if the assumptions used to set them change unexpectedly. This has helped establish a performance-management system that helps motivate performance.

Goals don’t have to be the bane of your employees’ existence. When done properly, setting goals can improve commitment materially and help clarify an employee’s role – the single biggest driver of organizational health.

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Here is a direct link to the complete article.

Sabrin Chowdhury is an Engagement Manager at McKinsey & Company, where she has served clients on strategy and organizational transformations. She has led teams of consultants to serve clients in the retail and consumer goods, healthcare, and social sectors. She has also been a thought leader on capability building and leadership development.

Elizabeth Hioe is a Partner in McKinsey’s New Jersey office. She is a leader in the Organization Practice and her client work focuses on leadership development and transformational change. She advises clients across a range of industries on how to design and lead large scale change programs, with particular emphasis on building the personal leadership skills required to successfully lead an organization through change.