As a small business owner, every member of your team is a key member whose contributions matter and count. You likely have relationships with each of your employees, so it can get uncomfortable when someone you like as a person is not performing well on the job. Writing up an employee performance contract is one way to equip your employees for success, look out for your business, keep morale up and keep your relationship intact.

Employee Performance Agreement

When employees have been underperforming despite training, clear communication and discussions around the coffee pot, sometimes an employee performance agreement can save the day. In this contract, you outline what is expected of your employees, of you as their employer, what their performance levels need to be and how they can get there. Instead of improvement being a theoretical ideal, it becomes concrete, tangible and achievable.

Benefits of Employee Performance Agreements

An employee accountability contract or performance agreement has many benefits for you and your growing business. Instead of feeling like you are nagging employees, damaging relationships with friends or busting team morale, you can expect to see positive changes like the following:

  • Employee evaluations that feel fair and reasonable
  • Celebration of employee progress
  • Increased unity and alignment with the business's mission and vision
  • Improved trust and communication
  • Career growth and progress
  • Increased accountability and sense of responsibility 

Setting SMART Goals

In a small business, your employees' goals are likely to be different than those working in large corporations. Because every employee makes a big impact on your bottom line for the better or worse, it is especially important to include SMART goals in your employee performance contracts. These goals are:

  • S

– Specific * M


  • A

    Achievable * R

    Relevant  * T


Instead of asking Susan to get more sales, consider a SMART goal like: Improve second quarter sales by 5% through selling more gold packages to repeat customers.

Baby Steps to Performance Success

When someone has SMART goals as part of his employee performance agreement, it becomes easier to break the goal into baby steps that make success feel achievable and realistic. For instance, if David has the SMART goal to increase accuracy in his CAD drawings from 80% to 90% by the end of the calendar year, you might create the following baby steps in the performance agreement:

  • Attend a specialized CAD training day in April
  • Practice CAD accuracy on simulations two hours per week
  • Participate in peer reviews of CAD drawings every two weeks
  • Teach about CAD software at a team meeting in August
  • Take a course for CAD certification in September

Together, You Go Far

As your employee completes her baby steps toward success in reaching her SMART goals, you form a partnership. She is responsible for showing up and giving her best, while you invest in the training and support. Regular accountability meetings should be included in your employee performance agreement so that she can share her progress, and you can encourage her with praise or constructive feedback. These meetings can go a long way toward boosting morale and helping her succeed.

Evaluate Your Results

At the end of your contract period, you will need to evaluate results with your employees, so be sure to include this in your contract. Be specific about what rewards are in store for meeting goals — perhaps maintaining employment or earning the ability to work from home one day per month.

Consequences also need to be specific, even if it means termination of employment, demotion to another position or the opportunity to be involved in your business in some other way.