More organizations are saying good-bye to the outdated performance appraisal system and embracing a new method for managing employee performance: coaching and development.

Performance management is shifting with the times. The traditional competitive assessment model, which documents employee performance and is used to make compensation and succession decisions, is being replaced by a new approach, according to the August 2011 Bersin and Associates report, High-Impact Performance Management: Part 1Designing a Strategy for Effectiveness.

The research from 214 organizations spanning a variety of geographies and industries shows that more companies are strategically integrating their talent management processes to lead, manage, develop, reward, and assess employees using a coaching and development model. Seventy percent of survey respondents say that they are already using a coaching and development model, while 30 percent still use a competitive assessment approach. Comparative Bersin research from 2008 revealed that 60 percent of organizations use the new model and 40 percent use the outdated approach.

Despite the growing number of organizations devoting themselves to coaching, the study found that managers inability to coach is the number one performance management challenge. The severity of the challenge of coaching was surprising to us, says Stacia Sherman Garr, senior analyst at Bersin. We often hear that the performance process is broken, and if we can just fix the process, things will get better. But it seems the real problem is coaching effectiveness.

The study found that only 11 percent of senior leaders coach their employees and 15 percent very frequently discuss the importance of coaching and development. Therefore, although many organizations say that they manage employee performance through coaching and development, few do it well.

Additionally, four of the top five most critical performance management challenges are related to poor executive engagement. Organizations have better business results when senior leaders hold direct reports responsible for supporting their employees.

Coaching often is focused on developing only executive-level or critical talent, says Sherman Garr. This study is telling us that effectively coaching employees at all levels makes a big difference.

As more high-performing organizations manage performance through coaching and development, those that currently use this approach will lose some of their competitive pull in the marketplace. In todays increasingly globalized workforce where talent demand is greater than supply, organizations must use new strategies to fill their talent pipelines.

When you look at the pull in emerging markets, a lot of organizations are trying to attract and retain talent through coaching and development, Sherman Garr says. These companies will have to show metrics up front to prove that their coaching efforts are effective.

This report is the first in a five-part series designed to identify the components of an effective performance management strategy. The subsequent reports will focus on setting and revising goals for relevancy, maximizing coaching and development planning, rewarding and recognizing for impact, and using appraisal to drive implementation.