Performance management a systematic process can be improved

The performance management system is part of the human resources function today and serves as the means to indicate what is expected of employees and to appraise performance of the employee and the organization as a whole. Such an assessment is not made on-the-fly but is instead developed by the application of a carefully designed system that defines what is expected, measures performance, and makes adjustments in order to improve performance thereafter.

The process of performance management starts with the joining of a new incumbent in a system and ends when an employee quits the organization. Performance management can be regarded as a systematic process by which the overall performance of an organization can be improved by improving the performance of individuals within a team framework.

2.1 Overview of Performance Management

Performance management can be regarded as a proactive system of managing employee performance for driving the individuals and the organizations towards desired performance and results. It’s about striking a harmonious alignment between individual and organizational objectives for accomplishment of excellence in performance

Lawler (2005) notes that performance management is becoming more important for today’s high performance organizations as the relationship between employees and the organizations they work for has changed, and developing a mutually beneficial relationship is important to achieving more in terms of performance.

Armstrong and Baron (1998) concluded that performance management is a process that contributes to the effective management of individuals and teams to achieve high levels of organization performance. As such, it establishes shared understanding about what is to be achieved and an approach to leading and developing people that will ensure it is achieved. They go on to stress that it is ‘a strategy which relates to every activity of the organization set in the context of its human resource policies, culture, style and communications systems. The nature of the strategy depends on the organizational context and can vary from organization to organization.’

“Performance Management is the system through which organizations set work goals, determine performance standards, assign and evaluate work, provide performance feedback, determine training and development needs and distribute rewards.” (Briscoe & Claus 2008)

However, undoubtedly the twenty-first century has seen acceptance that the way forward to organizational performance and growth is to create high-performance, high-commitment work systems that rely on relationships with managers built on trust, understanding and mutual co-operation. Greater preoccupation with employee engagement and commitment has cemented the place of performance management as the centrepiece of communication between manager and individual.

This shift has resulted in performance management being perceived as a continuous process rather than a discrete event, with Latham et al (2007) commenting that:

“A distinguishing feature of performance management relative to performance appraisal is that the former is an ongoing process whereas the latter is done at discrete time intervals…it is therefore owned and driven by line managers rather than HR.”

Sparrow (2008) argues that the rise of HR management (HRM) contributed to the shift towards performance management as it moved the focus to a broader agenda for the management of performance with the emphasis on open and honest communication between managers and individuals and the development of trust-based relationships.

Den Hartog, Boselie and Paauwe (2004) saw performance management as an integrating process in which managers work with their employees to set expectations, measure and review results and reward performance in order to improve employee performance with the ultimate aim of positively affecting organizational success.

DeNisi and Pritchard (2006) distinguished between performance management and performance appraisal as follows:

“Performance management is a broad set of activities aimed at improving employee performance while performance appraisal is a discrete, formal, organizationally sanctioned event, usually not occurring more frequently than once or twice a year, which has clearly stated performance dimensions and/or criteria that are used in the evaluation process.”

London, Mone and Scott (2004) considered that since performance management programmes have such a significant effect on the employee and the organization, human resource practitioners needed to ensure that their organization’s system is grounded in the latest research, in step with best practices and aligned with organizational goals. The most effective method for ensuring that an organization’s performance management system possesses these characteristics was to implement an ongoing, systematic evaluation process.

Lee (2005) believes that any enlightened performance management approach will require employee involvement. All performance management systems should be judged on one standard – how well they create the climate necessary for performance conversations to occur so that the employee and supervisor can diagnose problems and work together to overcome them.

However, the common feature of all definitions lies in the achievement of the organization’s goal or objectives.

2.3 Why manage performance?

A review of the literature identifies a host of reasons for managing performance falling in to the following categories:

Strategy Formulation- determining what the objectives of the organization are and how the organization plans to achieve them.

Manage the strategy implementation process- by examining whether an intended strategy is being put into practice as planned.

Challenge assumptions- by focusing not only on the implementation of an intended strategy but also on making sure that its content is still valid.

Check position- by looking at whether the expected performance results are being achieved.

Comply with the non-negotiable parameters- by making sure that the organization is achieving the minimum standards needed, if it is to survive (e.g. legal requirements, environmental parameters, etc.).

Communicate direction- to the rest of the employees, by passing on information about what are the strategic goals individuals are expected to achieve.

Communication with external stakeholders

Provide feedback- by reporting to employees how they are, their group and the organization as a whole is performing against the expected goals.

Evaluate and reward behavior- in order to focus employees’ attention on strategic priorities; and to motivate them to take actions and make decisions, which are consistent with organizational goals.

Benchmark- the performance of different organizations, plants, departments, teams and individuals.

Inform managerial decision-making processes.

Encourage improvement and learning

These PM systems’ roles can be classified into three main categories:

Strategic: comprises the roles of managing strategy implementation and challenging assumptions.

Communication: comprises the role of checking position, complying with the non-negotiable parameters, communicating direction, providing feedback and benchmarking.

Motivational: comprises the role of evaluating and rewarding behavior, and encouraging improvement and learning.

2.4 Performance Management Process

A performance management process sets the platform for rewarding excellence by aligning individual employee accomplishments with the organization’s mission and objectives and making the employee and the organization understand the importance of a specific job in realizing outcomes. By establishing clear performance expectations which includes results, actions and behaviors, it helps the employees in understanding what exactly is expected out of their jobs and setting of standards help in eliminating those jobs which are of no use any longer. Through regular feedback and coaching, it provides an advantage of diagnosing the problems at an early stage and taking corrective actions.

According to Armstrong (2003), performance management 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 measures outputs in the shape of delivered performance compared with expectations expressed as objectives. In this respect, it focuses on targets, standards or performance measures as indicators. But it is also concerned with inputs- the knowledge, skills and competencies required to produce the expected results.

Cave and Thomas (1998) as reported by Armstrong and Stephens (2005) propose a performance management sequence shown in figure 2.1 to illustrate the different steps involved in performance management and the likely outcome:

The Performance Management Sequence

Corporate mission and strategic goals

Formal review, feedback and joint assessment

Continuous monitoring and feedback

Performance measures

Action- work, development and support

Competence evidence

Performance standards

Competence requirements

Performance and development plan

Performance and development agreement

Business and departmental plans and goals.

Financial reward

Rating

Figure 2.1: The performance management sequence

Source: adapted from A Cave and C Thomas (1998) The Reward Portfolio, IPD, London

2.5 Basic steps to implementing a performance management system

1. Review organizational goals to associate preferred organizational results in terms of units of performance, that is, quantity, quality, cost or timeliness (note that the result itself is therefore a measure)

2. Specify desired results for the domain — as guidance, focus on results needed by other domains (e.g., products or services need by internal or external customers)

3. Ensure the domain’s desired results directly contribute to the organization’s results

4. Weight, or prioritize, the domain’s desired results

5. Identify first-level measures to evaluate if and how well the domain’s desired results were achieved

6. Identify more specific measures for each first-level measure if necessary

7. Identify standards for evaluating how well the desired results were achieved (e.g., “below expectations”, “meets expectations” and “exceeds expectations”)

8. Document a performance plan — including desired results, measures and standards

9. Conduct ongoing observations and measurements to track performance

10. Exchange ongoing feedback about performance

11. Conduct a performance appraisal (sometimes called performance review)

12. If performance meets the desired performance standard, then reward for performance (the nature of the reward depends on the domain)

13. If performance does not meet the desired performance standards, then develop or update a performance development plan to address the performance gap

14. Repeat steps 9 to 13 until performance is acceptable, standards are changed, the domain is replaced, management decides to do nothing, etc.

2.5.1 Performance Objectives

Objectives (some organizations prefer to use ‘goals’) describe something to be accomplished by individuals, departments and organizations over a period of time. They can be expressed as targets to be met (such as sales) and tasks to be completed by specified dates. They can be work-related, referring to the results to be attained, or personal, taking the form of developmental objectives for individuals. Objectives need to be defined and agreed. They will relate to the overall purpose of the job and define performance areas – all the aspects of the job that contribute to achieving its overall purpose. Targets then need to be set for each performance area, for example, increase ‘sales by x per cent’, ‘reduce wastage by y per cent’.

2.5.2 Performance Goal

The Performance Management is defined as a target level, against which actual achievement can be compared. Goals should be Specific, Measurable, Achievable, Realistic, Timely (SMART).

2.5.3 Performance Measurement

To management performance effectively, individuals should know on what basis their performance will be measured. Measures should be transparent and applied fairly across the organization. Ideally there should be a mix of individual and team measures, and measures relevant to both the inputs and the outputs of performance.

2.5.4 Performance Standards

Having performance standards is not a new concept; standards exist whether or not they are discussed or put in writing. When you observe an employee’s performance, you usually make a judgment about whether that performance is acceptable. How do you decide what’s acceptable and what’s unacceptable performance? The answer to this question is the first step in establishing written standards.

Standards identify a baseline for measuring performance. From performance standards, supervisors can provide specific feedback describing the gap between expected and actual performance.

2.5.6 Performance review

The appraiser and the appraisee meet to review their appraisals. They discuss the results that were achieved and the performance factors that contributed to their accomplishment. Their discussion includes:

Results achieved (what was done)

Performance or behavioral effectiveness (how it was done)

Overall performance assessment

Development progress (future goals)

At this meeting the appraiser may discuss compensation changes, or this discussion may be held during a separate meeting at a different time.

2.6 Benefits of Performance Management

The implementation of a performance management system requires much investment in terms of resources, time and effort. In turn, the evaluation should bring the benefits to counterbalance such elements.

Benefits to the Employees

Providing the employees feedback on their performance

Enabling employees to express their feelings on their supervisor

Ensuring that people who need personal training are identified

Provides the opportunity to employees to discuss career prospects and promotion

Helping to clear duties of employees and their role in team and organization

Benefits to the line managers

Allows appraisers to express themselves on what has been done well and shortcomings observed

Enables communication of expectations and setting up of individual objectives

Provides opportunity for discussion on the need for training

Identifies skills, talents, strengths, and weaknesses of teams

Provides feedback on approach adopted by line managers while supervising subordinates

Benefits to the Organization

Allows foreseeing causes of staff turnover and counteracting them

Identifying the organization as one which cares for employees’ job satisfaction and career progress

Making staff more committed and productive

Compels managers to devote some amount of time for their employees

Allows integration of individual and organizational training needs

2.6.1 Barriers to effective Performance Management

Engelmann & Roesch (1996) identified the negative consequences of poorly designed and poorly administered schemes (or schemes that lack management commitment) as:

Poor motivation and self esteem because employees receive inadequate feedback on their work performance

Little or no focused communication about performance between managers and employees

Inefficient use of managers’ time

Litigation over alleged discriminatory actions

2.6.2 Overcoming the Barriers to Performance Management

Implementation factors

Authors highlight the importance of approaching the implementation of performance management from a change management perspective (e.g. Bourne et al, 2002; Kaplan and Norton, 2001; Kasurinen, 2002; McCunn, 1998). In this sense, factors such as the following are crucial for an effective PM implementation.

Top manager agreement, commitment and leadership- start with a clear agreement at the top on the strategy, goals, measures and the performance targets to be implemented.

Managers’ participation and accountability- having the agreement, commitment and leadership at the top is insufficient if it does not go along with having the agreement commitment and leadership of the rest of the management team. Furthermore, the involvement of employees is also crucial.

Training and education- employees at all levels need to learn the principles of the system, its measures, tools and procedures (Frigo and Krumwiede, 1999; Maisel, 2001; Kaplan and Norton, 2001). Individuals can distort the information system by smoothing, biasing, focusing, gaming, filtering, “illegal” acts so it is important to train and educate individuals on how to engage rather than bypass the causes of dysfunctional behaviors.

Communication and feedback – The factor “communication” is one of the most cited in the literature. When most authors stress its importance, they tend to focus on the reported feedback of measurement results to the employees (e.g. Forza and Salvador, 2000, 2001; Howell and Soucy, 1988; Keasy et al., 2000). Even so, there are other aspects related to communication that can affect the effectiveness of performance management. The change management literature highlights the relevance of verbal and non-verbal communication (e.g. presentations, manuals, conversations, newsletters, reports, etc.) used to clarify all aspects related to the measures, in particular and performance management in general; and to facilitate the buy-in from the people in the organization (Bourne et al. 2002b; Kaplan and Nor ton, 2001; Quinn, 1996; Schreuder, 1995).

PM system information infrastructure – an information system should be designed for collecting, analyzing and reporting the data efficiently. If data is flawed, the data integration process is flawed, or its communication is flawed, then decisions based on that data are more likely to be flawed. Using an IT system to support these tasks seems to be critical. However, some caution is needed in relation to the use of IT since the capabilities of technology, in terms of data capture and manipulation, provide a great temptation for senior management to introduce new measures (Wilson, 2000).

2.7 Use of Appraisal in Performance Management

Performance appraisal systems include the processes and procedures involved in implementing, managing, and communicating the events involved in performance appraisal. In many cases it is a formal process and is a part of the personnel management policy.

Carroll & Schneier (1982), state that numerous organizations employ a formal or informal assessment system that measures employee performance and contribution. Coens and Jenkins (2000) suggest that performance appraisal is a mandated process in which, for a specified period of time, all or a group of an employee’s work behaviors or traits are individually rated, judged, or described by a rater and the results are kept by the organization.

Karol (1996) considered performance appraisal to include a communication event scheduled between a manager and an employee expressly for the purposes of evaluating that employee’s past job performance and discussing relevant areas for future job performance.

2.7.1 Methods of Performance Appraisal

The performance appraisal methods may be classified into two categories, as shown in the figure below.

PERFORMANCE APPRAISAL

Traditional Methods Modern Method

Essay Evaluation Method Management by Objectives (MBO)

Straight Ranking Method 360o Feedback

Paired Comparison Behaviorally Anchored Rating Scales

Critical Incidents Methods

Field Review

Weighted Checklists

Graphic Rating Scales

Forced Distribution

Fig 2.2. Source: http://appraisals.naukrihub.com/

2.7.2 Management by Objectives

Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. The principle behind Management by Objectives (MBO) is to make sure that everybody within the organization has a clear understanding of the aims, or objectives, of that organization, as well as awareness of their own roles and responsibilities in achieving those aims. The complete MBO system is to get managers and empowered employees acting to implement and achieve their plans, which automatically achieve those of the organization.

2.7.3 360 Degree Feedback

360-degree feedback, is feedback that comes from all around an employee. “360” refers to the 360 degrees in a circle, with an individual figuratively in the center of the circle. Feedback is provided by subordinates, peers, and supervisors. It also includes a self-assessment and, in some cases, feedback from external sources such as customers and suppliers or other interested stakeholders. It may be contrasted with “upward feedback,” where managers are given feedback by their direct reports, or a “traditional performance appraisal,” where the employees are most often reviewed only by their managers.

The results from 360-degree feedback are often used by the person receiving the feedback to plan training and development. Results are also used by some organizations in making administrative decisions, such as pay or promotion. When this is the case, the 360 assessment is for evaluation purposes, and is sometimes called a “360-degree review.” However, there is a great deal of controversy as to whether 360-degree feedback should be used exclusively for development purposes, or should be used for appraisal purposes as well (Waldman et al., 1998). There is also controversy regarding whether 360-degree feedback improves employee performance, and it has even been suggested that it may decrease shareholder value (Pfau & Kay, 2002).

2.7.3 BARS – Behaviorally Anchored Rating Scales

Behaviorally anchored rating scales (BARS) are rating scales whose scale points are defined by statements of effective and ineffective behaviors. They are said to be behaviorally anchored in that the scales represent a continuum of descriptive statements of behaviors ranging from least to most effective. An evaluator must indicate which behavior on each scale best describes an employee’s performance.

BARS differ from other rating scales in that scale points are specifically defined behaviors. Also, BARS are constructed by the evaluators who will use them. There are four steps in the BARS construction process:

1. Listing of all the important dimensions of performance for a job or jobs

2. Collection of critical incidents of effective and ineffective behavior

3. Classification of effective and ineffective behaviors to appropriate performance dimensions

4. Assignment of numerical values to each behavior within each dimension (i.e., scaling of behavioral anchors)

2.7.4 The Balanced Scorecard

The balanced scorecard (BSC) was developed during the early 1990’s by Robert Kaplan and David Norton (Kaplan & Norton, 1996) to address some of the vagueness and weaknesses of previous management approaches, and to provide a strategic management approach that did not focus solely on financial measures of performance.

The BSC is a set of four perspectives to measure an organization’s performance and is set out as a table which also shows the relationship between the different perspectives as shown in the Figure below.

Financial Perspective

Goals Measures

Initiatives Targets

The balanced scorecard

Innovation/Learning Perspective

Goals Measures

Initiatives Targets

Internal Business Perspective

Goals Measures

Initiatives Targets

Customer Perspective

Goals Measures

Initiatives Targets

Source: Kaplan & Norton (1992)

2.8 Linking performance to pay

Research (Bannister & Balkin, 1990) has reported that appraisees seem to have greater acceptance of the appraisal process, and feel more satisfied with it, when the process is directly linked to rewards. Such findings are a serious challenge to those who feel that appraisal results and reward outcomes must be strictly isolated from each other.

There is also a group who argues that the evaluation of employees for reward purposes, and frank communication with them about their performance, are part of the basic responsibilities of management. The practice of not discussing reward issues while appraising performance is, say critics, based on inconsistent and muddled ideas of motivation.

Guest and Conway (1998) argued strongly that most people do believe that their pay is linked to their performance. The discretion as to which people are rewarded for their performance will give line managers more authority to enforce managerial prerogative. Subsequently, they are going to appraise their subordinates and thus give reasons of why they are rewarding their employees on particular ratings. Still some ratings are often contaminated by various factors such as personal bias, halo, favoritism, central tendency, and leniency. But it should not be the case as these may lead to organisational ineffectiveness. In fact, every attempt should be made to base pay decisions on objective criteria such as sales, attendance, complaints, quality, and productivity.

2.8.1 Definition of Performance Related Pay

Since the early 1950s appraisal has been used by companies to evaluate the value of the individual employee. Such schemes have a tendency to concentrate on personal qualities including commitment, cooperation, initiative, dependability and intelligence.

Alternatively PRP schemes simply categorized employees’ performance into one of generalization such as ‘outstanding’, ‘satisfactory’, and ‘unacceptable’ (Fowler, 1988).

For Swabe (1989), performance related pay is as a system in which an individual’s increase in salary is solely dependent on his or her appraisal. This rating may take into account not only individual output but also other indicators’ of performance such as quality, flexibility, contribution on team working and ability to hit targets (Kinnie and Lowe, 1990).

According to Vallely (1994), performance related pay is money paid to someone relating to how well he or she works at the workplace. This concept is attractive to many employees since there is a direct link between their compensation and the work-related skills that they may learn and use (Dantico, 1994).

2.9 Criticism of performance management

A recent survey in January 25 2007 conducted by the Institute for Corporate Productivity (i4cp, formerly the Human Resource Institute) in conjunction with HR.com suggests that it is futile for an organization to seek the ‘one silver bullet’ that will revitalize its performance management system.

Mark Vickers, senior analyst with i4cp said:

“That bullet doesn’t exist. That is, there is no single PM practice that can transform an ineffective system into a good one. Performance management systems are just that – systems. They require the coordination of multiple key practices. The more of these practices that are in place, the more likely a performance management system is to be seen as effective.”