Defining Performance Management and the role it plays

Performance Management can be defined as a strategic and integrated approach to deliver sustained success to organisations by improving the performance of the people who work in them and developing the capabilities of teams and individual contributors (Armstrong and Baron, 1998). According to Walter (1995), performance management is about directing and supporting employees to work as effectively and efficiently as possible in line with the needs of the organisation. Anderson and Evenden (1994) identified that performance management involved directing employees’ effort in the right direction through performance appraisal and it ensures that targets are set with proper planning to influence the future performance of employees.

A rather narrow and linear conception of performance management is ‘a set of deliberate policies and practices designed to maintain or improve the performance of individual, and through them, work groups and organisations’ (People and Strategy, 2001:3). As said by Philpott and Sheppard (1992), performance management aims to improve strategic focus and organisational effectiveness through continuously securing improvements in the performance of individuals and teams. Performance management is thus a broad set of activities aimed at improving employee performance (DeNisi and Pritchard, 2006)

These definitions frequently refer to performance management as a process of aligning or integrating organisational and individual objectives to achieve organisational effectiveness. Yet it can be said that development of employees is the prime purpose of performance management. As Bones (1996) commented: ‘performance does not need managing. It needs encouraging, developing, supporting and sustaining.’ Hence, the overall objective of performance management is to develop and improve performance of individuals and teams and therefore the organisation.

3.2 Difference between Performance Appraisal and Performance Management

According to Tyson and York (2002, pp68), performance appraisal is “an activity designed formally or informally to measure performance of subordinates against their achievement of agreed objectives”. Performance appraisal can be defined as the formal assessment and rating of individuals by their managers at – usually – an annual review meeting (Armstrong, 2000). Langdon and Osborne (2002) justify the importance of performance appraisal as it provides the appraiser the opportunity to review the employee’s work related behaviour and helps exhibiting the strengths and weaknesses of employees.

However, performance appraisal should be distinguished from performance management, which is a much wider, more comprehensive and more natural process of management. Noe et al (2008) emphasises that performance appraisal is only a component of performance management as it involves the administrative and relatively isolated duty of measuring aspects of an employee’s performance. As Armstrong and Murlis (1998) assert, performance appraisal too often degenerates into ‘a dishonest annual ritual’. Many research studied by academics have criticised traditional approaches to performance appraisal. The following are some typical comments:

Appraisal is a system of bureaucratic or management control (Barrow, 1989; Townley, 1993; Newton and Findlay, 1996)

Appraisal implies that rewards and progress are in the hands of a single ‘superordinate’ (Grint, 1993)

Appraisal aims at voluntary compliance (Newton and Findlay, 1996)

In contrast, performance management is a broader concept than performance appraisal in that it provides not only for the measurement of performance but defining of performance according to organisational goals as well as the provision of performance feedback. (Noe et al, 2008).

The differences are summarised in Table 1:

Performance Appraisal

Performance Management

Top-down assessment

Joint process through dialogue

Annual appraisal meeting

Continuous review with one or more formal reviews

Use of ratings

Ratings less common

Monolithic system

Flexible Process

Focus on quantified objectives

Focus on values and behaviours as well as objectives

Often linked to pay

Less likely to be directly linked to pay

Bureaucratic – complex paper work

Documentation kept to a minimum

Owned by the HR department

Owned by line managers

Table 3.1: Performance Appraisal compared to performance management

Source: Armstrong. M, (2006). A handbook of Human Resource management Practice, Tenth Edition. Kogan Page. p.501

Hence, it can be said that performance appraisal is not the same as performance management which is a much broader and continuous process of management.

3.3 Performance Management Process

Performance management is an area of Human Resource management which has the potential to make the most significant contribution to organisational effectiveness and growth (Sparrow and Hiltrop, 1994).

The performance management system is a continuous and flexible process that involves managers and those whom they manage acting as partners within a framework that sets out how they can best work together to achieve the required results. It focuses on future performance planning and improvement (Armstrong, 2000).

According to Lee (2005), the real goals of any performance management system are threefold – to correct poor performance, to sustain good performance and to improve performance… All performance management systems should be designed to generate information and data exchange so that the individuals involved can properly dissect performance, discuss it, understand it, and agree on its character and quality.

Performance management itself is “an integrated process in which managers work with their employees to set their expectations, measure and review results, and reward performance, in order to improve employee performance, with the ultimate aim of positively affecting organisational success” (Den Hartog et al, 2004)

MissionThere is a clear link between the strategic plans of the organisation and the objectives of the individuals and teams integrated together in the process of improving performance to achieve business objectives as shown in Figure 2.1.

Strategies

Values

Objectives

Performance Indicator and Standards

Critical Success Factor

Performance Review

Succession Planning

Identification of Potential

Performance Improvement Programmes

Total Reward System

Better Performance

Figure 3.1: The Performance Management Process

Source: Figure 14.3; The performance management process. Sparrow and Hiltrop (1994), European Human Resource Management in Transition. Prentice Hall. p. 56

According to Armstrong and Baron (2005), performance management processes are largely concerned with interactions between parties involved, but they relate to what individuals do about monitoring and improving their own performance, measuring performance, and documenting the outcomes of performance plans and reviews. The processes can be described under the following headings:

Performance planning

defining expectations

setting objectives

measuring performance

reviewing performance

providing feedback

assessing performance

3.3.1 Performance Planning

Performance planning is concerned with setting the direction, concluding performance agreements and agreeing personal development plans. It covers what has to be done, how it is done and what is to be achieved. It also motivates people by giving them the opportunity to perform and develop by recognising achievements.

3.3.2 Defining Expectations

Expectations are defined and agreed in the form of role profiles. They are also defined as short-to-medium term targets, the extension of knowledge and skills, upholding core values of organisation and meeting behavioural requirements.

3.3.3 Objectives Setting

Objectives or goals describe something that has to be accomplished. Objectives setting that result in an agreement on what the role holder has to be achieved are an important part of performance management process. The different types of objectives are ongoing role, targets, tasks/projects and behavioural. The objectives have to be SMART, that is, specific, measurable, achievable, relevant and time-bound.

3.3.4 Measuring Performance

To improve performance, ones have to know the current performance. Garvin (1993) coined a phrase in the Harvard Business Review that has become paradigmatic for this view: “if you cannot measure, you cannot manage it”. Measuring performance is relatively easy for those who are responsible for achieving quantified targets and more difficult when qualitative measures have to be used.

3.3.5 Review Performance

Although performance management is a continuous process, it is still necessary to have a formal review once or twice a year, as it provides a focal point for consideration of key performance and development issues. The review should be rooted in the reality of the individual’s performance. It allows managers and individuals to take a positive look together at how performance can become better in the future and how problems can be resolved.

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3.3.6 Providing Feedback

Feedback in performance management is positive in the sense that its aim is to point the way to further development and improvement. Feedback can be positive when it recognises success or constructive when it identifies areas for improvement. DeNisi and Kluger (2000) commented that feedback is more likely to be effective if they keep the employee’s attention focused on goals at the task performance level.

3.3.7 Assessing Performance

Most performance management schemes include some form of ration which is carried out during a performance review meeting. The rating indicates the quality of performance achieved by an employee. The rating scale is thus supposed to assist in making judgments and it enables those judgements to be categorised to contribute to pay decision or simply to produce an instant summary for record.

3.4 Approaches to Performance Management

There are six main approaches to performance management. The different approaches to performance management have their own strengths and weaknesses. These approaches are:

The comparative approach

The attribute approach

The behavioural approach

The results approach

The quality approach

The multi-rated approach

3.4.1 The Comparative Approach

The comparative approach measures an individual’s performance by comparing his/her performance to the performance of others. Comparative approach helps in reducing leniency and other errors, which makes them useful for administrative decisions such as determining pay rises. But it does a poor job of linking performance to organisational goals, and they do not provide feedback for improvement (Jackson and Mathis, 2006).

Three techniques adopt the comparative approach:

Ranking

In this technique, the supervisor ranks his subordinates from best performer to worst performer. Straight ranking entails simply the rank ordering of individuals, according to overall merit or according to other performance factors, from the best performer through to the worst performer (Erasmus et al, 2003). It is suggested that its use should be limited to cases where only small numbers of individuals are to be rated and only the “better than” is important and not the “how much better than”. Hence, this approach is not aimed at feedback to employees.

Forced Distribution

In a forced distribution employees are ranked in groups. The use of a forced distribution system makes managers identify high, average and low performers. Thus high performers can be rewarded and developed, while low performers can be “encouraged” to improve (Jackson and Mathis, 2006). Advocates of forced ranking state that forced distribution ensures that compensation increase are truly differentiated by performance. But the forced distribution method suffers from several drawbacks. One of the problem is that a supervisor may resist placing any individual in the lowest (or the highest) group. Difficulties also arise when the rater must explain to an employee why he/she was placed in one group and others were placed in higher groups.

Paired Comparison

Paired comparison is when the supervisor compares “every employee with every other employee in the work group, giving an employee a score of 1 every time he/she is considered to be the higher performer.”

The number of comparisons required may be calculated by the formula:

N (N – 1)

2

Where ‘N’ refers to the number of individuals to be ranked, (Erasmus et al, 2003).

However, this approach has certain limitations. The more workers to be ranked, the more unwieldy the method becomes.

3.4.2 The Attribute Approach

This approach focuses on the identification of employee attributes (knowledge, skills, attitude, and experience) necessary for the organisation’s success. The employee is measured against these attributes.

This approach includes techniques such as:

Graphic Rating Scales

In the graphic rating scales, the supervisor rates the subordinate on particular traits and characteristics. It was designed to elicit ratings of traits relevant to a job. However, one problem with graphic rating scales was that the rating points were not well defined (Elaine Pulakos, 2009). Thus, graphic rating scales were limited because they did not provide sufficiently defined standards that managers could use to systematically and fairly evaluate employees.

Figure 2.2: Example of Graphic Rating Scales

Source: Elaine D. Pulakos (2009). Performance Management: A New Approach for Driving Business Results. First Edition. Wiley-Blackwell

Mixed Standard Scales

Mixed standard scales are when the supervisor rates the subordinate against relevant performance dimensions.

3.4.3 The Behavioural Approach

The behavioural approach defines behaviours necessary for effective performance in a particular job. In assessing performance, managers identify the extent to which subordinate has exhibited the required behaviours.

Behavioural Observation Scale

A behaviour observation scale (BOS) is similar to a behaviour anchored rating scales (BARS) in that they are both based in critical incidents. A BOS is designed to measure how frequently each of the behaviours has been observed (Bohlander and Snell, 2009). The value of a BOS is that this approach allows the appraiser to play the role of observer rather than judge. In this way, he/she can more easily provide constructive feedback to employee, who will be more willing to accept it. Research shows that users of the system frequently prefer it over the BARS or trait scales for:

maintaining objectivity

distinguishing good performers from poor performers

providing feedback, and

identify training needs.

Assessment Centres

An assessment centre is a procedure originally adopted to assess managerial potential. It is an assessment method that consists of a standardised evaluation of behaviour based on multiple raters and multiple measures such as in-basket exercises, paper and pencil ability test, leaderless group discussion, simulation and personality questionnaires (Erasmus et al, 2003).

Vecchio (1996) correctly point out that, an assessment centre is designed to appraise individual’s current managerial ability, rather than their past performance. This future orientation would therefore make the method quite suitable for development purposes.

3.4.4 The Result Approach

This approach is based on the belief that results are the one best indicator of how a subordinate’s performance has contributed to organisational success. Advocate of results appraisals argue that they are more objective and empowering for employees. Looking at results involves less subjectivity and therefore may be less open to bias. Furthermore, this approach gives employees responsibility for their outcomes, while giving them discretion over the methods they use to accomplish them (Bohlander and Snell, 2009)

Results based techniques include:

Management by Objective (MBO)

In this technique, the goal setting is cascaded down throughout the organisation and the goals become the standard against which an employee’s performance s measured. It was introduced by Peter Drucker in 1954. MBO specifies the performance goals that an individual and manager mutually identify. Each manager sets objectives derived from the overall goals and objectives for the organisation (Jackson and Mathis, 2006). The MBO is a four-stage process including job review and agreement, development of performance standards, setting of objectives and finally continuous performance discussion.

Productivity Measurement and Evaluation System (PROMES)

It involves a process of motivating employees to higher productivity.

Balanced Score Cards

Balanced score cards may be used to manage performance of individual employees, teams, business units as well as the organisation itself. The appraisal considers four related categories:

Financial

Processes

Customer

Learning

The balanced score card enables managers to translate organisational goals into business unit, team and individual employee goals for each of the above categories.

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3.4.5 The Quality Approach

The focus of the quality approach is on improving customer satisfaction through a customer oriented and the prevention of errors. Performance management is a quality-oriented process. More managers today are adapting the Total Quality Management (TQM) philosophy advocated by management experts like W. Edward Demings.

Basically, Demings argued that if things go wrong, it’s not the employee, it’s the system. Specifically, the latter said an employee’s performance is more a function of training, communication tools and supervision than of his/her motivation. Performance management thus, focuses on using collegial feedback and changes to the management system (training, incentive, procedures and others) to improve performance.

The design of a quality-based performance management system should focus on:

The assessment of employee and system factors.

The relationship between managers and employees in solving performance problems.

Internal and external customers in setting standards and measuring performance.

Using a number of sources to evaluate employee and system factors.

3.4.6 The Multi-Rated Approach

There are numerous authors whose propose definitions of the 360-degree feedback process. Many organisations adopt a 360-degree feedback approach to performance measurement where information on an employee’s performance is not only provided by the employee’s immediate supervisor, but by those people whom he/she deals with on a day-to-day basis (e.g. customers, co-workers, subordinates, suppliers, contractors, consultants), (Snell and Bohlander, 2007). Hoffman (1995) explains that 360-degree is: “… an approach that gathers behavioural observations from many layers within the organisation and includes self-assessment.

This approach allows employees to receive an accurate view of their performance as “different people see different things” (Snell and Bohlander, 2007). This approach involves the administration of a questionnaire to a number of people with whom the employee interacts, in which they indicate how well the employee performs in a number of behavioural areas (Noe et al, 2008).

Figure 2.3: Potential raters in a multi-rated system

Source: Mc Carthy and Garavan (2001). 360-degree feedback processes: performance improvement and career development. Journal of European Industrial Training. Vol. 25/1

DeNisi and Kluger (2000) herald that, for scholars and practitioners in the field of human resource management in general, it is widely accepted that feedback is an essential component of an effective performance improvement strategy.

3.4.6.1 Strengths of the 360-degree Feedback Approach

As the employee is appraised from multiple perspectives, the approach is more comprehensive than other approaches.

There is an emphasis on internal and external customers as well as the team.

Bias and prejudice is lessened as the appraisal is not dependent on one person’s view alone.

Feedback from people other than the manager contributes considerably to an employee’s development.

3.4.6.2 Weaknesses of the 360-degree Feedback Approach

It is a complex system in that numerous appraisals need to be combined.

It can be intimidating, resulting in resentment on the part of the employee being appraised.

Appraisals from different individuals may be different and confusing.

Employees could undermine the reliability of the approach through colluding in terms of the appraisal which they are to give each other.

3.5 Purpose of Performance Management

“Performance management is a means of getting better results from the organisation, teams and individuals by understanding and managing performance within an agreed framework of planned goals, standards and competence requirements. It is a process for establishing shared understanding about what is to be achieved, and an approach to managing and developing people in a way that increases the probability that it will be achieved in the short and long term. It is owned and driven by line management”. (Armstrong, 2001)

Performance management has three essential purposes:

Strategic purpose

Administrative purpose

Developmental purpose

Research indicated that the two most frequent purposes of performance management system are administrative and developmental (Cleveland and Murphy, 1989). There is much to gain if organisations are able to use their performance management systems for all three purposes. Moreover, performance management is about improving and developing performance as well as paying for performance (Brown and Armstrong, 1999). And Armstrong and Baron established in their 1997 research for the IPD that many organisations see its purpose as being primarily developmental.

In addition, and importantly, performance management assists in the communication and integration of the organisation’s core values. It clarifies the values that individuals are expected to uphold and serves as a means of assessing the extent to which they are doing so. Integration is the key to successful performance management which has to be regarded holistically, as an all-embracing approach to the management of performance (Brown and Armstrong, 1999).

3.5.1 Strategic Purpose

A performance management system serves to link employee performance to overall organisational strategy and organisational objectives. However, research has shown that very few organisations utilise performance management in a manner which supports the strategy of the organisation.

The strategic purpose may be achieved through designing evaluation mechanism which defines employee performance in terms of organisation’s strategy and goals. By linking the organisational goals with individual goals, the performance management system reinforces behaviours consistent with the attainment of organisational goals (Smither and London, 2009). Moreover, even if for some reason individual goals are not achieved, linking individual goals with organisational goals serves as a way to communicate what are the most crucial business strategic initiatives.

Also, as a process for managing expectations, performance management acts as an integrating force. It helps to integrate corporate and individual objectives so that what individuals and teams are expected to do flow from and supports what the organisation is aiming to do. It can integrate the core competencies of the organisation with the skills and behaviours teams and individuals need to display, so that, again, people understand what the organisation has to be good at doing and therefore, what they have to be good at doing. Furthermore, performance management provides a basis for managing expectations. These are defined and agreed mutually, covering what managers expect the members of teams to do and the guidance, development and support the latter expect from the managers. It therefore serves as a means of clarifying the psychological contract and of building a climate of trust (Brown and Armstrong, 1999).

3.5.1.1 Performance Management and Motivation.

Performance management can motivate. It strikes at the heart of the employment relationship, not only defining expectations but also providing a means for encouraging people to meet those expectations. Performance management encourages positive feedback, reinforcement, recognition and commitment. It can identify the scope for growth and empowerment. It shows the way to improve and extend skill and competence through personal development plans. All these can act as powerful and long-lasting, non-financial motivators. It can be argued that the motivational impact of properly conducted performance management can be deeper than those provided by purely financial rewards.

Commentators argue that performance feedback increases job satisfaction and motivation (Hackman and Oldham, 1980). Moreover, research shows that if people know what they are aiming for, they are motivated to exert more effort, which increases performance (Latham, 2001; Locke and Latham, 1990, 2002).

3.5.1.2 Performance Management and Job Satisfaction.

Performance management approach can lead to enhanced organisational commitment and job satisfaction (Fletcher and William, 1996). But research has not established any strongly positive connection between satisfaction and performance. A satisfied worker is not necessarily a high producer, and a high producer is not necessarily a satisfied worker. The claim that good performance results in satisfaction rather than rather than vice versa has not been proved (Armstrong, 2007).

However, Patterson et al (1997) found out that there was a significant positive relationship between employee attitudes (job satisfaction and commitment) and performance with a recommendation that organisations should focus more on human resources than on competitor strategy. Also a number of studies have suggested and indicated that employee attitudes make significant and positive contributions to employee performance (Fletcher and Williams, 1996).

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Some benefits if improved employee job satisfaction are reduced turnover, absenteeism, and accidents and better job performance.

3.5.2 Administrative Purpose

Performance management systems provide information which assists organisations with administrative decisions relating to issues such as salary administration (pay rise), lay-off and promotion (Noe et al, 2008). The administrative purpose encompasses staffing, compensation, promotion, and reward (Silverman, 1989). In other words, the implementation of reward systems based on information provided by performance management system falls within the administrative purpose. If an organisation does not have a good performance management system in place, administrative decisions are more likely to be based on personal preferences, politics and otherwise biased decisions (Smither and London, 2009).

Having a good system in place is particularly relevant for the implementation of contingent pay plans, also called pay-for-performance. Contingent pay means that individuals are rewarded based on how well they perform on the job. Thus, employees receive increases in pay based wholly or partly on job performance (Smither and London, 2009). Currently, contingent pay plans are pervasive and more than 70 percent of workers in the United States and the United Kingdom are employed by organisations implementing some type of variable pay plan (for example, bonus, commission, cash award, lump sum) directly to performance (Baty, 2006). Research supports that contingent reward and recognition are effective means for improving performance (Cooke, 1994).

3.5.2.1 Performance and Pay

The management of performance related pay is perhaps the most difficult task HR people have to undertake (Wright, Hay Management Consultants). According to Swabe (1989), Performance-Related Pay (PRP) is defined as “a system in which individual increase in salary is solely or mainly dependent on his/her appraisal or merit rating”. The growth in the use of performance-related pay systems is undoubtedly due to its appearance of fairness. Unlike other pay systems which reward each individual in the same grade category equally, irrespective of their contribution, PRP appears to accord with widely supported concepts of distributive justice.

As said by Armstrong (2001), Performance-related pay is more likely to work as a motivator if:

the reward is clearly and closely linked to the effort of the individual or team;

employees are in a position to influence their performance by changing their behaviour;

they are clear about the targets and standards if performance required;

employees expect that effective performance will certainly lead to worthwhile rewards

Performance pay covers incentives paid on the basis of performance delivered by employees either individually or collectively. An incentive is a payment made on the basis of past performance in order to reinforce and enhance future performance (Shields, 2007). However, as the IPD’s research on performance pay found, many performance related reward schemes are designed to motivate the small group of already high performing individuals and therefore ignore the bulk of an organisation’s employees.

3.5.3 Development Purpose

Performance management systems provide information about employee strengths and weaknesses and in so doing employee development needs (Noe et al, 2008). The developmental purpose seeks to ‘identify and develop potential for future performance, linked to succession and personal development planning’ (Goss, 1994). Performance management establishes learning needs and outcomes. And it indicates how needs can be satisfied and the outcomes achieved (Brown and Armstrong, 1999).

Feedback is an important component of a well-implemented performance management system. Managers can use feedback to coach employees and improve performance on an ongoing basis (Smither and London, 2009). Of course, feedback is useful only to the extent that remedial action is taken and concrete steps are implemented to remedy any deficiencies (Aguinis and Kraiger, 2009). Another aspect of the developmental purpose is that employees receive information about themselves that can help them individualise their career paths. Thus, the development purpose refers to both short-term and long-term aspects of development.

The developmental approach generally considers employee deficiencies and attempts to improve them through further training and development (Williams, 1997). Although some argue against the effectiveness and efficiency of this approach to assess this approach (Lang, 1983), it can be a useful tool to assess the training needs of individual employees (Herbert and Doverspike, 1990). Armstrong (1996) defined that training is learning which takes place through education, development or pre-planned experiences, which alters behaviour of the employees to enable them to perform better. Training is designed with a view to help employees to improve their short and long term performance (Langdon and Osborne, 2001).

3.5.3.1 Training Needs

Armstrong (1996) defined that training is learning which takes place through education, development or pre-planned experiences, which alters behaviour of the employees to enable them to perform better. Training is designed with a view to help employees to improve their short and long term performance (Langdon and Osborne, 2001).

Training activities help employees to learn from change and to take more responsibility, and these activities are documented in a Personal Development Plan (PDP), which outlines existing and future improvement goals. According to Ballantyne and Povah (2004), there are two advantages derived from the use of the PDP:

it leads to greater participation of employees

it results in greater commitment of employees

Training is sometimes seen in a narrow way, involving only the acquisition and improvement of practical skills in the use of job-related techniques and methods. More often, however, this term is used in a broader sense and embraces other developmental activities as well (Kubr. M and Prokopenko. J, 1989). Training methods and techniques can be on-the-job training or off-job training. On-the-job-training can take form of delegation and job rotation whereas off-job training takes forms like classroom lectures, simulation techniques such as role playing and business games.

Thus, the main purposes of training are to:

develop the skills and competence of employees and improve their performance

prepare employees for future assignments

reduce the learning time for employees starting in new jobs, transfer and promotion.

3.6 Benefits and Drawbacks of Performance Management System

Performance management is designed to get better results from an organisation by measuring and managing performance against an agreed framework of objectives to assess and improve management (Armstrong, 1996). Moreover, in comparison to performance appraisal which treats performance as a yearly event, performance management addresses performance on an ongoing process in an organisation where there is an ongoing communication and feedback of goals in an organisation between supervisors and employees. This in turn helps employees and supervisors to develop and maintain good understanding and relationship (Mc Namara, 1999). Furthermore, performance management provides significant measurements which may be used for the progress and betterment of the organisation.

However, along with the advantages there exist certain drawbacks of performance management. According to Stiles et al, (1997) the objectives were generally set by the employee’s boss, not as the result of joint negotiation, which are tended to be viewed as imposed. Consequently, there was difficulty in employees being motivated by them. While, Winstanley and Stuart-Smith (1996) criticised performance management as being lack of conclusive evidence that it leads to improved performance, reinforces modes of ‘intrusive control’, not enough time given to the process and can produce undesirable side-effects such as demotivation and over-bureaucratisation.

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