Performance management and capability are often used interchangeably. Whilst they are often closely linked, they are not the same and understanding the distinction is essential to fairly managing underperformance.
Failing to identify whether an issue is performance or capability can result in procedural failures, and this article explains the differences between performance management and capability, when each process should be used and how employers can minimise legal risk.
What Is Performance Management?
Performance management is the structured approach to reviewing, supporting and improving an employee's performance in their role.
It is designed to help employees meet expected standards. This often achieved through clear objectives and expectations, providing regular feedback, identifying training and development needs, monitoring progress, and addressing performance concerns at an early stage.
Performance management should form part of an organisation's everyday people management practices and should not be viewed as a disciplinary process. Instead, it should focus on improvement to resolve concerns before they have an operational impact.
Examples of Performance Management Issues
There may be instances where an employee’s performance falls below the standards required by the Company. This may include
- Missing deadlines
- Poor quality work
- Failure to meet productivity targets
- Lack of attention to detail
- Inconsistent performance
- Failure to follow procedures correctly
If the above arise and are supported by evidence, informal performance management is often the first step to explore if there are any reasons for the poor performance. From this, targets for improvement and expectations regarding the level of performance can be set.
What Is Capability?
Capability relates to an employee's ability to perform their role to the required standard and often arises where an employee is unable to carry out their duties due to:
- Lack of skill or aptitude
- Insufficient knowledge or experience
- Inability to learn or improve
- Physical ill health
- Mental ill health
Unlike misconduct, capability is not about an employee's choice or behaviour but instead concerns their ability to do the job and is one of the potentially fair reasons for dismissal under the Employment Rights Act 1996.
Performance Management vs Capability - What's the Difference?
The key difference is that performance management is the process, whereas capability is often the underlying reason for the issue.
For example, performance management is often used as an ongoing management tool used at an early stage to focus on developing and improving performance, whether informally or formally. Whereas capability focuses on the individual’s ability to perform their role through a formal process in line with your Handbook, which may include an employee who lacks the technical skills for a role.
When Should Employers Use Performance Management?
Performance management should be the starting point wherever possible and considered where concerns are relatively minor, the employee has not previously been spoken to, expectations may not have been clear, and improvement appears achievable once it has been addressed, and additional training or support has been provided.
For example, the standard of an employee’s work is below the standard expected which can be addressed by managers providing support, setting expectations and agreeing a timescale for improvement.
Documenting these steps is essential as they can prove to be invaluable should they later be needed as part of a formal capability process.
When Does Poor Performance Become a Capability Issue?
Poor performance may become a capability issue where performance does not improve despite support, and training being provided. This may materialise in deadlines continuing to be missed, and there is a significant impact on the business.
There may also be medical considerations having an effect on performance that may need to be assessed and taken into consideration against targets and expectations set. This could be in the form of stress, health or medical diagnosis or personal circumstances.
At this stage, it may be appropriate to initiate a formal capability procedure, but it is recommended the above are assessed and considered on a case by case basis before commencing any formal process to manage risk regarding discrimination under the Equality Act 2010.
Risks of Getting Performance Management Wrong
Employees from 1 January 2027 will only require 6 months’ qualifying service to bring an unfair dismissal claim. Therefore, any dismissal must ensure that it is based on a potentially fair reason, investigation, fair procedure and if appropriate, an opportunity to improve which makes managing performance concerns early and building documentary evidence essential.
However, capability concerns can sometimes stem from an underlying disability and where this may be a factor, employers should consider Occupational Health advice and medical evidence, in addition to any reasonable adjustments, alternative duties and flexible working arrangements.
Unreasonable management of performance concerns can damage trust and confidence in the employment relationship, potentially giving rise to allegations of constructive unfair dismissal.
It is therefore essential that managers act fairly, proportionately and consistently.
How to Manage Performance Issues Fairly
A fair performance management approach should include identifying the problem early, meeting with the employee, providing support, setting realistic and achievable targets and agreeing a timeframe for review.
Managing Capability - Best Practice for Employers
Where performance concerns develop into a capability issue, employers should consistently follow their capability procedure within the Handbook, including thoroughly investigating and seek guidance from a Neathouse HR advisor if unsure on how to proceed.
Common Employer Mistakes to Avoid with Performance Management
Common mistakes include allowing performance concerns to continue unchecked, moving too quickly to formal procedures, failing to distinguish capability issues from misconduct, overlooking potential health related causes, failing to maintain adequate records, and setting unrealistic improvement targets. Employers should intervene early, investigate the underlying causes of underperformance, provide employees with a reasonable opportunity to improve, and ensure any objectives are measurable, achievable and fair.
Frequently Asked Questions
Is poor performance always a capability issue?
No. Many performance issues can be resolved through normal performance management measures without progressing to a formal capability process.
Can an employee be dismissed for poor performance?
Potentially yes. However, employers will normally need to demonstrate that concerns were identified, support was provided, and a fair procedure was followed before dismissal is considered.
Can sickness absence be a capability issue?
Yes. Long-term ill health or repeated absence may amount to a capability issue if it affects the employee's ability to perform their role.
Do employers need to consider reasonable adjustments?
Yes. If a disability may be involved, employers should consider reasonable adjustments before making decisions regarding capability.
Is capability the same as misconduct?
No. Misconduct concerns behaviour or conduct. Capability concerns an employee's ability to perform their role.
Key Takeaways for Employers on Performance Management
- Performance management and capability are related but distinct concepts.
- Performance management is a process aimed at improving employee performance.
- Capability concerns an employee's ability to perform their role to the required standard.
- Employers should address concerns early through informal performance management wherever possible.
- Capability procedures should normally only be used where concerns persist or significant issues arise.
- Medical or disability related factors must be considered before capability action is taken.
- A fair documented and supportive process significantly reduces legal risk.
- Dismissal for capability may be fair, but only where an employer can demonstrate a reasonable process and sufficient evidence to justify the decision.
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