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PERFORMANCE MANAGEMENT
THIRD EDITION
HERMAN AGUINIS
Third Edition
Performance Management
Herman Aguinis Kelley School of Business Indiana University
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Library of Congress Cataloging-in-Publication Data
Aguinis, Herman
Performance management / Herman Aguinis. — 3rd ed.
p. cm. ISBN-13: 978-0-13-255638-5 (alk. paper) ISBN-10: 0-13-255638-3 (alk. paper) 1. Employees—Rating of. 2. Performance—Management. I. Title.
HF5549.5.R3A38 2013 658.3'125—dc23
2011037274
10 9 8 7 6 5 4 3 2 1
ISBN 10: 0-13-255638-3 ISBN 13: 978-0-13-255638-5
CONTENTS
Preface viii Acknowledgments xiii Dedication xiv About the Author xiv
PART I Strategic and General Considerations 1
Chapter 1 Performance Management and Reward Systems in Context 1
1.1 Definition of Performance Management (PM) 2 1.2 The Performance Management Contribution 4 1.3 Disadvantages/Dangers of Poorly Implemented PM Systems 8 1.4 Definition of Reward Systems 10
1.4.1 Base Pay 10 1.4.2 Cost-of-Living Adjustments and Contingent Pay 11 1.4.3 Short-Term Incentives 11 1.4.4 Long-Term Incentives 11 1.4.5 Income Protection 12 1.4.6 Work/Life Focus 13 1.4.7 Allowances 13 1.4.8 Relational Returns 13 1.5 Aims and Role of PM Systems 14
1.5.1 Strategic Purpose 15 1.5.2 Administrative Purpose 16 1.5.3 Informational Purpose 16 1.5.4 Developmental Purpose 16 1.5.5 Organizational Maintenance Purpose 16 1.5.6 Documentational Purpose 17 1.6 Characteristics of an Ideal PM System 18 1.7 Integration with Other Human Resources and Development
Activities 23 1.8 Performance Management Around the World 24
▶ CASE STUDY 1-1: Reality Check: Ideal Versus Actual Performance
Management System 28 ▶ CASE STUDY 1-2: Performance Management at Network Solutions, Inc. 31 ▶ CASE STUDY 1-3: Distinguishing Performance Management Systems from
Performance Appraisal Systems 32 Chapter 2 Performance Management Process 37
2.1 Prerequisites 38 2.2 Performance Planning 46
2.2.1 Results 46 2.2.2 Behaviors 46 2.2.3 Development Plan 47 iii
iv Contents
2.3 Performance Execution 48 2.4 Performance Assessment 49 2.5 Performance Review 50 2.6 Performance Renewal and Recontracting 52
▶ CASE STUDY 2-1: Job Analysis Exercise 55 ▶ CASE STUDY 2-2: Disrupted Links in the Performance Management Process
at “Omega, Inc.” 55 ▶ CASE STUDY 2-3: Performance Management at the University of Ghana 56
Chapter 3 Performance Management and Strategic Planning 59 3.1 Definition and Purposes of Strategic Planning 60 3.2 Process of Linking Performance Management to the Strategic
Plan 61 3.2.1 Strategic Planning 65 3.2.2 Developing Strategic Plans at the Unit Level 74 3.2.3 Job Descriptions 76 3.2.4 Individual and Team Performance 77 3.3 Building Support 79
▶ CASE STUDY 3-1: Evaluating Vision and Mission
Statements at Pepsico 82 ▶ CASE STUDY 3-2: Dilbert’s Mission Statement Generator 83 ▶ CASE STUDY 3-3: Linking Individual with Unit and Organizational
Priorities 84 ▶ CASE STUDY 3-4: Linking Performance Management to Strategy at
Procter & Gamble 84
PART II System Implementation 87
Chapter 4 Defining Performance and Choosing a Measurement Approach 87
4.1 Defining Performance 88 4.2 Determinants of Performance 89
4.2.1 Implications for Addressing Performance Problems 90 4.2.2 Factors Influencing Determinants of Performance 91 4.3 Performance Dimensions 91 4.4 Approaches to Measuring Performance 95
4.4.1 Behavior Approach 95 4.4.2 Results Approach 96 4.4.3 Trait Approach 99 ▶ CASE STUDY 4-1: Diagnosing the Causes of Poor Performance 101 ▶ CASE STUDY 4-2: Differentiating Task from Contextual Performance 102 ▶ CASE STUDY 4-3: Choosing a Performance Measurement Approach at
Paychex, Inc. 102 ▶ CASE STUDY 4-4: Deliberate Practice Makes Perfect 103
Chapter 5 Measuring Results and Behaviors 106 5.1 Measuring Results 107
5.1.1 Determining Accountabilities 107
Contents v
5.1.2 Determining Objectives 109 5.1.3 Determining Performance Standards 111 5.2 Measuring Behaviors 112
5.2.1 Comparative Systems 115 5.2.2 Absolute Systems 118 ▶ CASE STUDY 5-1: Accountabilities, Objectives, and Standards 126 ▶ CASE STUDY 5-2: Evaluating Objectives and Standards 126 ▶ CASE STUDY 5-3: Measuring Competencies at the Department of
Transportation 127 ▶ CASE STUDY 5-4: Creating BARS-Based Graphic Rating Scales for Evaluating Business Student Performance in Team Projects 128
Chapter 6 Gathering Performance Information 130
6.1 Appraisal Forms 131 6.2 Characteristics of Appraisal Forms 137 6.3 Determining Overall Rating 140 6.4 Appraisal Period and Number of Meetings 143 6.5 Who Should Provide Performance Information? 146
6.5.1 Supervisors 146 6.5.2 Peers 146 6.5.3 Subordinates 147 6.5.4 Self 148 6.5.5 Customers 149 6.5.6 Disagreement Across Sources: Is This a Problem? 149 6.6 A Model of Rater Motivation 150 6.7 Preventing Rating Distortion Through Rater Training
Programs 153 ▶ CASE STUDY 6-1: Evaluating an Appraisal Form Used in Higher Education 157 ▶ CASE STUDY 6-2: Judgmental and Mechanical Methods of Assigning
Overall Performance Score at The Daily Planet 162 ▶ CASE STUDY 6-3: Minimizing Intentional and Unintentional Rating Errors 164 ▶ CASE STUDY 6-4: Minimizing Biases in Performance Evaluation at Expert
Engineering, Inc. 165
Chapter 7 Implementing a Performance Management System 168
7.1 Preparation: Communication, Appeals Process, Training
Programs, and Pilot Testing 169 7.2 Communication Plan 170 7.3 Appeals Process 174 7.4 Training Programs for the Acquisition of Required Skills 176
7.4.1 Rater Error Training 177 7.4.2 Frame of Reference Training 180 7.4.3 Behavioral Observation Training 181 7.4.4 Self-Leadership Training 182 7.5 Pilot Testing 184 7.6 Ongoing Monitoring and Evaluation 185
vi Contents
7.7 Online Implementation 188
▶ CASE STUDY 7-1: Implementing a Performance Management
Communication Plan at Accounting, Inc. 192 ▶ CASE STUDY 7-2: Implementing an Appeals Process at Accounting, Inc. 192 ▶ CASE STUDY 7-3: Evaluation of Performance Management System at
Accounting, Inc. 192 ▶ CASE STUDY 7-4: Training the Raters at Big Quality Care 193
PART III Employee Development 195
Chapter 8 Performance Management and Employee Development 195
8.1 Personal Developmental Plans 196
8.1.1 Developmental Plan Objectives 197 8.1.2 Content of Developmental Plan 199 8.1.3 Developmental Activities 200 8.2 Direct Supervisor’s Role 203 8.3 360-Degree Feedback Systems 206
8.3.1 Advantages of 360-Degree Feedback Systems 213 8.3.2 Risks of Implementing 360-Degree Feedback Systems 215 8.3.3 Characteristics of a Good System 215 ▶ CASE STUDY 8-1: Developmental Plan Form at Old Dominion University 220 ▶ CASE STUDY 8-2: Evaluation of a 360-Degree Feedback System Demo 220 ▶ CASE STUDY 8-3: Implementation of 360-Degree Feedback System at Ridge
Intellectual 221 ▶ CASE STUDY 8-4: Personal Developmental Plan at Brainstorm, Inc.—Part I 221 ▶ CASE STUDY 8-5: Personal Developmental Plan at Brainstorm, Inc.—
Part II 222
Chapter 9 Performance Management Skills 226
9.1 Coaching 227 9.2 Coaching Styles 233 9.3 Coaching Process 233
9.3.1 Observation and Documentation of Developmental Behavior
and Outcomes 235 9.3.2 Giving Feedback 239 9.3.3 Disciplinary Process and Termination 245 9.4 Performance Review Meetings 248
▶ CASE STUDY 9-1: Was Robert Eaton a Good Coach? 256 ▶ CASE STUDY 9-2: What Is Your Coaching Style? 257 ▶ CASE STUDY 9-3: Preventing Defensiveness 259 ▶ CASE STUDY 9-4: Recommendations for Documentation 260
PART IV Reward Systems, Legal Issues, and Team
Performance Management 263 Chapter 10 Reward Systems and Legal Issues 263
10.1 Traditional and Contingent Pay Plans 264 10.2 Reasons for Introducing Contingent Pay Plans 265
Contents vii
10.3 Possible Problems Associated with Contingent Pay Plans 268 10.4 Selecting a Contingent Pay Plan 270 10.5 Putting Pay in Context 272 10.6 Pay Structures 276
10.6.1 Job Evaluation 277 10.6.2 Broad Banding 279 10.7 Performance Management and the Law 280 10.8 Some Legal Principles Affecting Performance
Management 281 10.9 Laws Affecting Performance Management 284
▶ CASE STUDY 10-1: Making the Case for a CP Plan at Architects, Inc. 289 ▶ CASE STUDY 10-2: Selecting a CP Plan at Dow AgroSciences 289 ▶ CASE STUDY 10-3: Contingency Pay Plan at Altenergy LLC 290 ▶ CASE STUDY 10-4: Possible Illegal Discrimination at Tractors, Inc. 291
Chapter 11 Managing Team Performance 294
11.1 Definition and Importance of Teams 295 11.2 Types of Teams and Implications for Performance
Management 296 11.3 Purposes and Challenges of Team Performance
Management 298 11.4 Including Team Performance in the Performance Management
System 299 11.4.1 Prerequisites 300 11.4.2 Performance Planning 302 11.4.3 Performance Execution 303 11.4.4 Performance Assessment 304 11.4.5 Performance Review 305 11.4.6 Performance Renewal and Recontracting 306 11.5 Rewarding Team Performance 307
▶ CASE STUDY 11-1: Not All Teams Are Created Equal 309 ▶ CASE STUDY 11-2: Team Performance Management at Duke University
Health Systems 310 ▶ CASE STUDY 11-3: Team-Based Rewards for the State of Georgia 312 ▶ CASE STUDY 11-4: Team Performance Management at Bose 313
Index 315
PREFACE AND INTRODUCTION
In today’s globalized world, it is relatively easy to gain access to the competition’s technology and products. Thanks to the Internet and the accompanying high speed of communications, technolog- ical and product differentiation is no longer a key competitive advantage in most industries. For example, most banks offer the same types of products (e.g., various types of savings accounts and investment opportunities). If a particular bank decides to offer a new product or service (e.g., online banking), it will not be long until the competitors offer precisely the same product. As noted by James Kelley, performance management project leader at Idaho Power, “technology is a facilitator, but not a guarantor, of effectiveness or efficiency of a company’s workforce.”1
So, what makes some businesses more successful than others? What is today’s key compet- itive advantage? The answer is people. Organizations with motivated and talented employees offering outstanding service to customers are likely to pull ahead of the competition, even if the products offered are similar to those offered by the competitors. This is a key organizational resource that many label “human capital” and gives organizations an advantage over the compe- tition. Customers want to get the right answer at the right time, and they want to receive their products or services promptly and accurately. Only having the right human capital can make these things happen. Only human capital can produce a sustainable competitive advantage. And, performance management systems are the key tools that can be used to transform people’s talent and motivation into a strategic business advantage. Unfortunately, although 96% of human resources (HR) professionals report that performance management is their number 1 concern, fewer than 12% of HR executives and technology managers believe that their organizations have aligned strategic organizational priorities with employee performance.2
This edition includes the following six important changes. More detailed information on each of these issues is provided in the section titled “Changes in This Edition.”
• There is an emphasis on the role of the context within which performance management takes place.
• This edition emphasizes that knowledge generated regarding performance management is essentially multidisciplinary.
• This edition emphasizes the important interplay between science and practice.
• This edition describes the technical aspects of implementing a performance management system in detail and, in addition, it emphasizes the key role that interpersonal dynamics play in the process.
• This new edition includes new cases in almost every chapter. Taken together, this new edition includes a total of 43 case studies.
• Each of the chapters includes new sections.
SOME UNIQUE FEATURES OF THIS BOOK
Performance management is a continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning their performance with the strategic goals of the organization. Performance management is critical to small and large, for-profit and not-for-profit,
viii
1 Generating buzz: Idaho Power takes on performance management to prepare for workforce aging. (2006, June). Power Engineering. Retrieved November 26, 2010 from http://www.powergenworldwide.com/index/ display/articledisplay/258477/articles/power-engineering/volume-110/issue-6/features/generating-buzz- idaho-power-takes-on-performance-management-to-prepare-for-workforce-aging.html 2 Workforce performance is top HR priority. (2005). T+D, 59(7), 16.
Preface and Introduction ix
domestic and global organizations, and to all industries. In fact, the performance management model and processes described in this book have been used to create systems to manage the perform- ance of college students.3After all, the performance of an organization depends on the performance of its people, regardless of the organization’s size, purpose, and other characteristics. As noted by Siemens CEO Heinrich von Pierer, “whether a company measures its workforce in hundreds or hundreds of thousands, its success relies solely on individual performance.” As an example in the not-for-profit sector, the government in England has implemented what is probably the world’s biggest performance management system, and, by statutory force, the performance of teachers and “headteachers” (i.e., school principals) is now evaluated systematically. This particular system includes a massive national effort of approximately 18,000 primary schools, 3,500 secondary schools, 1,100 special schools, 500 nursery schools, 23,000 headteachers, 400,000 teachers, and an unspecified number of support staff.4
Unfortunately, few organizations use their existing performance management systems in productive ways. Performance management is usually vilified as an “HR department require- ment.” In many organizations, performance management means that managers must comply with their HR department’s request and fill out tedious, and often useless, evaluation forms. These evaluation forms are often completed only because it is required by the “HR cops.” Unfortunately, the only tangible consequence of the evaluation process is that the manager has to spend time away from his or her “real” job duties.
This book is about the design and implementation of successful performance management systems. In other words, it focuses on research-based findings and up-to-date applications that help increase an organization’s human capital. Performance management is ongoing and cyclical; however, for pedagogical reasons, the book needs to follow a linear structure. Because performance observation, evaluation, and improvement are ongoing processes, some concepts and practices may be introduced early in a cursory manner but receive more detailed treatment in later sections. Also, this book focuses on best practices and describes the necessary steps to create a top-notch performance management system. As a result of practical constraints and lack of knowledge about system implementation, many organizations cut corners and do not implement systems that follow best practices because of environmental and political issues (e.g., goals of raters may not be aligned with goals of the organization). Because the way in which systems are implemented in practice is often not close to the ideal system, the book includes numerous examples from actual organizations to illustrate how systems are implemented given actual situational constraints.
CHANGES IN THIS EDITION
This edition includes important updates and additional information. In preparation for revising and updating this book, I gathered more than 300 potentially relevant articles and books. About 150 of those were most relevant, and about 50 of those new sources are now included in this edition. These sources have been published since the second edition of the book went into production. This vast literature demonstrates an increased interest in performance management on the part of both academics and practitioners.
This edition includes five important changes throughout the book. First, there is an emphasis on the role of the context within which performance management takes place. Performance manage- ment does not operate in a vacuum. Rather, it takes place within a particular organizational context, and organizations have a particular history, unwritten norms about what is valued and what is not,
3 Gillespie, T. L., & Parry, R. O. (2009). Students as employees: Applying performance management principles in the management classroom. Journal of Management Education, 33, 553–576. 4 Brown, A. (2005). Implementing performance management in England’s primary schools. International Journal of Productivity and Performance Management, 54, 468–481.
x Preface and Introduction
and unwritten norms about communication, trust, interpersonal relations, and many other factors that influence daily activities. Thus, for example, implementing a 360-degree feedback system may be effective in some organizations but not in others (Chapter 8). As a second illustration, some organiza- tions may have a culture that emphasizes results more than behaviors which, in turn, would dictate that the performance management system also emphasize results; instead, other organizations may place an emphasis on long-term goals, which would dictate that performance be measured by empha- sizing employee behaviors rather than results (Chapter 4). Also, we need to understand the contextual reasons why performance ratings may not be accurate—particularly if there is no accountability for raters to provide valid assessments (Chapter 6). As yet another example, cultural factors affect what sources are used for performance information: In a country like Jordan, whose culture determines more hierarchical organizational structures, the almost exclusive source of performance information is supervisors, whereas employees and their peers almost have no input; this situation is different in countries with less hierarchical cultures in which not only performance information is collected from peers, but also supervisors are rated by their subordinates (Chapter 6). To emphasize the role of culture, this edition describes examples and research conducted in organizations in Jordan (Chapter 6); Japan, China, Turkey, Germany, France, South Korea, Mexico, Australia, and the United Kingdom (Chapter 1); Brazil (Chapter 3); Hong Kong and the Pearl River Delta (Chapter 11); Ghana (Chapter 1); South Africa (Chapter 1); Bulgaria and Romania (Chapter 1); and India (Chapters 1 and 3).
Second, this edition emphasizes that knowledge generated regarding performance manage- ment is essentially multidisciplinary. Accordingly, the sources used to support best-practice recommendations offered in this book come from a very diverse set of fields of study ranging from micro-level fields focusing on the study of individual and teams (e.g., organizational behavior, human resource management) to macro-level fields focusing on the study of organizations as a whole (e.g., strategic management). This is consistent with a general movement toward multidis- ciplinary and integrative research in the field of management.5 For example, best-practice recommendations regarding the measurement of performance originate primarily from industrial and organizational psychology (Chapter 5). On the other hand, best-practice recommendations regarding the relationship between performance management and strategic planning were derived primarily from theories and research from strategic management (Chapter 3). In addition, much of the best-practice recommendations regarding team performance management originated from the field of organizational behavior (Chapter 11).
Third, this edition emphasizes the important interplay between science and practice. Unfortunately, there is a great divide in management and related fields between scholars and practitioners. From the perspective of scholars, much of the work conducted by practitioners is seen as relevant but not rigorous. Conversely, from the perspective of practitioners, the work done by scholars is seen as rigorous but mostly not relevant. This “science-practice divide” has been documented by a content analysis of highly prestigious scholarly journals, which regularly pub- lish work that does not seem to be directly relevant to the needs of managers and organizations.6 This edition attempts to bridge this divide by discussing best-practice recommendations based on sound theory and research and, at the same time, by discussing the realities of organizations and how some of these practices have been implemented in actual organizations.
Fourth, this edition, as its predecessor, describes the technical aspects of implementing a performance management system in detail. In addition, this edition emphasizes the key role that interpersonal dynamics play in the process.7 Traditionally, much of the performance appraisal literature has focused almost exclusively on the measurement of performance—for example,
5 Aguinis, H., Boyd, B. K., Pierce, C. A., & Short, J. C. (2011). Walking new avenues in management research methods 6 Cascio, W. and F., theories: & Aguinis, Bridging H. (2008). micro Research and macro in industrial domains. and Journal organizational of Management, psychology 37, 395–403. from 1963 to 2007: Changes, choices, and trends. Journal of Applied Psychology, 93, 1062–1081.
Preface and Introduction xi
whether it is better to use 5-point versus 7-point scales. However, more recent research suggests that, related to the issue of context mentioned earlier, issues such as trust, politics, leadership, nego- tiation, mentorship, communication, and other related topics related to interpersonal dynamics are just as important in determining the success of a performance management system. Accordingly, this edition discusses the need to establish a helping and trusting relationship between supervisors and employees (Chapter 9), the role of an organization’s top management in determining the success of a system (Chapter 3), and the motivation of supervisors to provide accurate performance ratings (Chapter 6), among many other related issues throughout the book.
Fifth, this new edition includes new cases in almost every chapter. Taken together, this new edition includes a total of 43 case studies. In addition, the instructor’s manual includes approximately 4 more cases per chapter, for a total of about 40 additional cases. Thus, depending on an instructor’s preference, a course based on this new edition could be taught entirely follow- ing a case format or using a lecture and case combination format.
In addition to the aforementioned changes that permeate the entire book, each chapter includes new sections. As illustrations, consider the following chapter-by-chapter nonexhaustive additions:
• Performance management around the world (Chapter 1). This material will be useful in terms of understanding that although performance management systems may have similar goals, their implementation and deployment will be affected by cultural and contextual factors depending on where the organization is located.
• Biases in the job analysis process and their effects in the resulting job analysis ratings (Chapter 2). This material will be useful in terms of providing guidelines on how to gather valid job analysis information.
• Relationship between strategies, goals, and firm performance (Chapter 3). This new material will be useful in providing guidelines on the most effective sequence of implementation of the various strategic planning steps as it cascades down and across the various organizational units.
• Voice behavior: Raising constructive challenges with the goal to improve rather than merely criticize, challenge the status quo in a positive way, and make innovative suggestions for change when others, including an employee’s supervisor, disagree (Chapter 4). This material will be useful in terms of understanding the multidimensional nature of performance and how different performance dimensions may be valued differently in different organizations.
• Relative percentile method for measuring performance (Chapter 5). This material will be useful regarding the development of measures to assess performance more accurately.
• Open-ended sections included in most appraisal forms (Chapter 6). This material will be useful in terms of learning how to make the most of this information, which is typically underutilized in most performance management systems.
• Calculation of return on investment of portions of a performance management system (Chapter 7). This material will be useful in terms of learning how to document the relative effectiveness, in tangible and financial terms, of a performance management system.
• The feedforward interview (FFI) (Chapter 8). This new material will be useful in terms of understanding how the FFI is a process that leads to uncovering the contextual and per- sonal conditions that lead to success regarding both achievement and job satisfaction.
• Disciplinary process that may lead to termination (Chapter 9). This material will be useful in terms of providing information on what to do when performance problems are identified but employees are unable or unwilling to address them effectively.
• Relationship between new legal regulations and the implementation of performance management systems in China (Chapter 10). This new information will be useful in terms
7Aguinis, H., & Pierce, C. A. (2008). Enhancing the relevance of organizational behavior by embracing performance management research. Journal of Organizational Behavior, 29, 139–145.
xii Preface and Introduction
of understanding how the legal environment has a direct impact on performance management practices worldwide.
• Types of learning that can take place as part of the team development plan in the perform- ance planning stage (Chapter 11). This material will be useful in terms of providing a deeper understanding of specific interventions aimed at improving team learning and performance.
Further, the following is a nonexhaustive list of specific topics that have been updated and expanded in each chapter:
• The discussion of voice behavior (i.e., constructive criticisms that challenge the status quo and promote innovative improvements) as an important contribution of performance management systems, performance management’s contribution to minimizing employee misconduct, an expanded discussion of allowances, an expanded discussion of the four dif- ferent dimensions of fairness (i.e., procedural, distributive, interpersonal, and informa- tional justice), the additional strategic purpose of performance management systems as a catalyst for onboarding (i.e., processes helping new employees to transition from organiza- tional outsiders to organizational insiders), and the importance of implementing a system that is congruent with the cultural norms of the organization as well as the culture of the re- gion and country where the organization is located (Chapter 1).
• An expanded discussion of how rater accountability leads to improved accuracy in perform- ance ratings (Chapter 6).
• An expanded discussion of how to evaluate whether the performance management system is working as intended, and a new section on the implementation of online performance management systems (Chapter 7).
• A description of the performance review meetings as work meetings—each one with spe- cific purposes, the need to separate the performance review meetings to minimize negative surprises, an expanded discussion of how to deal with employee defensiveness during the performance review meeting, and the need to consider an employee’s personality (e.g., core self-evaluations) in the process of giving feedback (Chapter 9).
• An expanded discussion of nonfinancial rewards (Chapter 10).
• New material regarding challenges faced in implementing performance management with expatriate teams (Chapter 11).
PLAN FOR THE BOOK
Part I, which includes Chapters 1 through 3, addresses general as well as strategic considerations regarding performance management. Chapter 1 discusses the advantages of implementing a successful performance management system as well as the negative outcomes associated with deficient systems, including lowered employee motivation and perceptions of unfairness. This chapter also includes what can be described as the features of an ideal system. Chapter 2 describes the performance management process starting with what should be done before a system is implemented and ending with the performance renewal and recontracting phases. Chapter 3 links performance management systems with reward systems and an organization’s strategic plan. This chapter makes it clear that a good performance management system is a critical component of the successful implementation of an organization’s strategy.
Part II, including Chapters 4 through 7, addresses the details of system implementation. This discussion is sufficiently general yet detailed enough so that all managers, not just HR managers, will benefit from this material. Chapters 4 and 5 describe some of the technical aspects associated with the assessment of performance and how to identify and measure both behaviors and results. Chapter 6 discusses appraisal forms and various types of rating schemes, and it discusses the
Preface and Introduction xiii
advantages and disadvantages of using various sources of performance information (e.g., supervisor, peers, and customers). Finally, Chapter 7 describes the steps involved in implementing a performance management system, including a communication plan and pilot testing of the system before it is implemented.
Part III, including Chapters 8 and 9, addresses employee development issues. Chapter 8 includes a description of employee developmental plans and the advantages of using 360-degree systems for developmental purposes. Chapter 9 addresses the skills needed by supervisors to observe and assess performance as well as those needed to provide constructive feedback.
Part IV, including Chapters 10 and 11, concerns the relationship among performance management, rewards, the law, and teams. Chapter 10 includes a discussion of traditional and contingent pay plans, pay structures, and their links to performance management. In addition, this chapter provides a discussion of legal issues to consider when implementing a performance man- agement system. Finally, Chapter 11 addresses the timely topic of how to design and implement performance management systems dealing with team performance.
FACULTY RESOURCES
Each of the chapters includes a list of its learning objectives as well as summary points and cases for discussion. I hope this additional material will allow students to have an enjoyable and productive learning experience that will enhance your own individual human capital. Also, there are several resources available for instructors including PowerPoint slides, exam questions and answers (multiple choice and essay-type), role plays, and approximately 40 additional cases (about 4 per chapter) that can be used for in-class discussions, examination materials, or take-home homework or examinations. These materials will allow instructors to prepare for teaching this course more quickly and help make teaching this course a more enjoyable and interactive experience. These fac- ulty resources can be downloaded by visiting www.pearsonhighered.com/aguinis and clicking on Instructor Resources.
ACKNOWLEDGMENTS
I would like to thank several individuals who were extremely instrumental in allowing me to write the first edition, second, and current third edition of this book. I am indebted to Graeme Martin for encouraging me to start this project. Wendy O’Connell and Jon Dale helped me gather the numerous examples and illustrations that I have used throughout. Barbara Stephens helped me update many of these examples in the second edition. Christine Henle allowed me to use her extremely useful lecture notes. Barbara Stephens, Bonnie Davis, Debra Lammers, and Ray Zammuto gave me excellent and detailed comments that allowed me to improve each of the chapters. Harry Joo, Ryan K. Gottfredson, and Sofia J. Vaschetto assisted me in writing the Instructor’s Manual for this edition. Teaching and giving lectures and workshops on perform- ance management at the Instituto de Empresa (Madrid, Spain), Université Jean Moulin Lyon 3 (Lyon, France), University of Johannesburg (South Africa), University of Salamanca (Spain), and University of Melbourne (Australia) allowed me to test and improve various sections of the book. Finally, this edition benefited from the feedback provided by Lynn K. Bartels, Robyn A. Berkley, Perry A. Barton, Alan Cabelly, and Clifford E. Thermer, who have used the second edition to teach courses at universities throughout the United States and were kind enough to offer their suggestions for improvements and additions. I thank each of you for your time and intellectual investment in this project. Your coaching and feedback certainly helped me improve my performance!
Herman Aguinis Bloomington, Indiana
DEDICATION
To my dear friend Ariel Aisiks, true visionary and global leader who has been teaching me how to be a top performer for more than 30 years.
ABOUT THE AUTHOR
Dr. Herman Aguinis is the Dean’s Research Professor, Professor of Organizational Behavior and Human Resources, and the Founding Director of the Institute for Global Organizational Effectiveness at Indiana University’s Kelley School of Business. He has been a visiting scholar at universities in the People’s Republic of China (Beijing and Hong Kong), Malaysia, Singapore, Australia, Argentina, France, Puerto Rico, South Africa, and Spain. His teaching, research, and consulting activities are in the areas of human capital acquisition, development, and deployment. Dr. Aguinis wrote Applied Psychology in Human Resource Management (with Wayne F. Cascio, 7th ed., 2011, Prentice Hall) and Regression Analysis for Categorical Moderators (2004, Guilford) and edited Test-Score Banding in Human Resource Selection (2004, Praeger) and Opening the Black Box of Editorship (with Y. Baruch, A. M. Konrad, & W. H. Starbuck, 2008, Palgrave-Macmillan). In addi- tion, he has written more than 90 refereed journal articles in Academy of Management Journal, Academy of Management Review, Journal of Applied Psychology, Personnel Psychology, Organizational Behavior and Human Decision Processes, and elsewhere. Dr. Aguinis is a Fellow of the American Psychological Association, the Society for Industrial and Organizational Psychology, and the Association for Psychological Science, and has been inducted into the Society of Organizational Behavior. He has served as Division Chair for the Research Methods Division of the Academy of Management, Program Chair for the Iberoamerican Academy of Management, and editor-in-chief for the journal Organizational Research Methods. He has delivered more than 180 presentations at professional conferences and more than 90 invited presentations at universi- ties in more than 20 countries around the world, and consulted with numerous organizations in the United States, Europe, and Latin America using his English, Spanish, French, Italian, and German language skills. For more information, please visit http://mypage.iu.edu/~haguinis/
xiv
PART I: STRATEGIC AND GENERAL CONSIDERATIONS
Chapter 1
Performance Management and Reward Systems in Context
A manager is responsible for the application
and performance of knowledge.—PETER F. DRUCKER
LEARNING OBJECTIVES
By the end of this chapter, you will be able to do the following:
■ Explain the concept of performance management (PM).
■ Distinguish performance management from performance appraisal.
■ Explain the many advantages and make a business case for implementing a well-designed performance management system.
■ Recognize the multiple negative consequences that can arise from the poor design and implementation of a performance management system. These negative consequences affect all the parties involved: employees, supervisors, and the organization as a whole.
■ Understand the concept of a reward system and its relationship to a performance management system.
■ Distinguish among the various types of employee rewards, including compensation, benefits, and relational returns.
■ Describe the multiple purposes of a performance management system including strategic, administrative, informational, developmental, organizational maintenance, and documentational purposes.
■ Describe and explain the key features of an ideal performance management system.
1
2 Part I • Strategic and General Considerations
■ Create a presentation providing persuasive arguments in support of the reasons that an organization should implement a performance management system, including the purposes that performance management systems serve and the dangers of a poorly implemented system.
■ Note the relationships and links between a performance management system and other human resources functions, including recruitment and selection, training and development, workforce planning, and compensation.
■ Describe and explain contextual and cultural factors that affect the implementation of performance management systems around the world.
1.1 DEFINITION OF PERFORMANCE MANAGEMENT
Consider the following scenario:
Sally is a sales manager at a large pharmaceutical company. The fiscal year will end in one week. She is overwhelmed with end-of-the-year tasks, including reviewing the budget she is likely to be allocated for the following year, responding to customers’ phone calls, and supervising a group of 10 salespeople. It’s a very hectic time, probably the most hectic time of the year. She receives a phone call from the human resources (HR) department: “Sally, we have not received your performance reviews for your 10 employees; they are due by the end of the fiscal year.” Sally thinks, “Oh, those perform- ance reviews. . . .What a waste of my time!” From Sally’s point of view, there is no value in filling out those seemingly meaningless forms. She does not see her subordinates in action because they are in the field visiting customers most of the time. All that she knows about their performance is based on sales figures, which depend more on the products offered and geographic territory covered than the individual effort and motivation of each sales- person. And, nothing happens in terms of rewards, regardless of her ratings. These are lean times in her organization, and salary adjustments are based on seniority rather than on merit. She has less than three days to turn in her forms. What will she do? She decides to follow the path of least resistance: to please her employees and give everyone the maximum possible rating. In this way, Sally believes the employees will be happy with their ratings and she will not have to deal with complaints or follow-up meetings. Sally fills out the forms in less than 20 minutes and gets back to her “real job.”
There is something very wrong with this picture, which unfortunately happens all too frequently in many organizations. Although Sally’s HR department calls this process “performance management,” it is not.
Performance management is a continuous process of identifying, measuring, and devel- oping the performance of individuals and teams and aligning performance with the strategic goals of the organization. Let’s consider each of the definition’s two main components:
1. Continuous process. Performance management is ongoing. It involves a neverending process of setting goals and objectives, observing performance, and giving and receiving ongoing coaching and feedback.1
Chapter 1 • Performance Management and Reward Systems in Context 3
2. Alignment with strategic goals. Performance management requires that managers ensure that employees’ activities and outputs are congruent with the organization’s goals and, consequently, help the organization gain a competitive advantage. Performance management therefore creates a direct link between employee performance and organizational goals and makes the employees’ contri- bution to the organization explicit.
Note that many organizations have what is labeled a “performance management” system. However, we must distinguish between performance management and performance appraisal. A system that involves employee evaluations once a year without an ongoing effort to provide feedback and coaching so that performance can be improved is not a true performance management system. Instead, this is only a performance appraisal system. Performance appraisal is the systematic description of an employee’s strengths and weaknesses. Thus, performance appraisal is an important component of performance management, but it is just a part of a bigger whole because performance management is much more than just performance measurement.2
As an illustration, consider how Merrill Lynch has transitioned from a perform- ance appraisal system to a performance management system. Merrill Lynch is one of the world’s leading financial management and advisory companies, with offices in 37 countries and private client assets of approximately US$ 1.6 trillion (http://ml.com/). As an investment bank, it is a leading global underwriter of debt and equity securities and strategic adviser to corporations, governments, institutions, and individuals world- wide. Recently, Merrill Lynch started the transition from giving employees one per- formance appraisal per year to focusing on one of the important principles of performance management: the conversation between managers and employees in which feedback is exchanged and coaching is given if needed. In January, employees and managers set employee objectives. Mid-year reviews assess what progress has been made toward the goals and how personal development plans are faring. Finally, the end-of-the-year review incorporates feedback from several sources, evaluates progress toward objectives, and identifies areas that need improvement. Managers also get extensive training on how to set objectives and conduct reviews. In addition, there is a Web site that managers can access with information on all aspects of the performance management system. In sharp contrast to its old performance appraisal system, Merrill Lynch’s goal for its newly implemented performance management program is worded as follows: “This is what is expected of you, this is how we’re going to help you in your development, and this is how you’ll be judged relative to compensation.”3
As a second example, consider the performance management system for managers at Germany-based Siemens, which provides mobile phones, computer networks, and wireless technology and employs 475,000 people in 190 countries (www.siemens.com). At Siemens, the performance management system is based on three pillars: setting clear and measurable goals, implementing concrete actions, and imposing rigorous consequences. The performance management at Siemens has helped change people’s mind-set, and the organization is now truly performance oriented. Every manager understands that performance is a critical aspect of working at Siemens, and this guiding philosophy is communicated in many ways throughout the organization.4
Performance management systems that do not make explicit the employee con- tribution to the organizational goals are not true performance management systems. Making an explicit link between an employee’s performance objectives and the
4 Part I • Strategic and General Considerations
organizational goals also serves the purpose of establishing a shared understanding about what is to be achieved and how it is to be achieved. This is painfully clear in Sally’s case described earlier: from her point of view, the performance review forms did not provide any useful information regarding the contribution of each of her subordinates to the organization. Sally’s case is unfortunately more common than we would like. A survey conducted by the consulting firm Watson Wyatt showed that only 3 in 10 employees believe their companies’ performance review systems actually helped them improve their performance.5
In subsequent chapters, we describe best practices on how to design and implement performance management systems. For now, however, let’s say that well-designed and implemented performance management systems make substantial contributions to the organization. This is why a recent survey of almost 1,000 HR management professionals in Australia revealed that 96% of Australian companies currently implement some type of performance management system.6 Similarly, results of a survey of 278 organizations, about two-thirds of which are multinational corporations, from 15 different countries, indicated that about 91% of organizations implement a formal performance management system.7 Moreover, organizations with formal and systematic performance management systems are 51% more likely to perform better than the other organizations in the sample regarding financial outcomes, and 41% more likely to perform better than the other organizations in the sample regarding other outcomes including customer satisfaction, employee retention, and other important metrics. Based on these results, it is not surpris- ing that senior executives of companies listed in the Sunday Times list of best employers in the United Kingdom believe that performance management is one of the top two most important HR management priorities in their organizations.8 Let’s describe these performance management contributions in detail.
1.2 THE PERFORMANCE MANAGEMENT CONTRIBUTION
There are many advantages associated with the implementation of a performance management system.9 A performance management system can make the following important contributions:10
1. Motivation to perform is increased. Receiving feedback about one’s performance increases the motivation for future performance. Knowledge about how one is doing and recognition about one’s past successes provide the fuel for future accomplishments. 2. Self-esteem is increased. Receiving feedback about one’s performance fulfills a basic human need to be recognized and valued at work. This, in turn, is likely to increase employees’ self-esteem. 3. Managers gain insight about subordinates. Direct supervisors and other managers in charge of the appraisal gain new insights into the person being appraised. The importance of knowing your employees is highlighted by the fact that the Management Standards Centre, the government-recognized organization in the United Kingdom for setting standards for the management and leadership areas, has recognized that developing productive relationships with colleagues is a key competency for managers (http://www.management-standards.org, Unit D2). Gaining new insights into a person’s performance and personality will help
Chapter 1 • Performance Management and Reward Systems in Context 5
the manager build a better relationship with that person. Also, supervisors gain a better understanding of each individual’s contribution to the organization. This can be useful for direct supervisors as well as for supervisors once removed. 4. The definitions of job and criteria are clarified. The job of the person being appraised may be clarified and defined more clearly. In other words, employees gain a better understanding of the behaviors and results required of their specific position. Employees also gain a better understanding of what it takes to be a successful performer (i.e., what are the specific criteria that define job success). 5. Self-insight and development are enhanced. The participants in the system are likely to develop a better understanding of themselves and of the kind of development activities that are of value to them as they progress through the organization. Participants in the system also gain a better understanding of their particular strengths and weaknesses that can help them better define future career paths. 6. Administrative actions are more fair and appropriate. Performance management systems provide valid information about performance that can be used for adminis- trative actions such as merit increases, promotions, and transfers as well as termina- tions. In general, a performance management system helps ensure that rewards are distributed on a fair and credible basis. In turn, such decisions based on a sound performance management system lead to improved interpersonal relationships and enhanced supervisor–subordinate trust.11 For example, a good performance man- agement system can help mitigate explicit or implicit emphasis on age as a basis for decisions. This is particularly important given the aging working population in the United States, Europe, and many other countries around the world.12 7. Organizational goals are made clear. The goals of the unit and the organization are made clear, and the employee understands the link between what she does and orga- nizational success. This is a contribution to the communication of what the unit and the organization are all about and how organizational goals cascade down to the unit and the individual employee. Performance management systems can help improve employee acceptance of these wider goals (i.e., organizational and unit levels). 8. Employees become more competent. An obvious contribution is that employee performance is improved. In addition, there is a solid foundation for helping employees become more successful by establishing developmental plans. 9. Employee misconduct is minimized.13 Employee misconduct is an increasingly pervasive phenomenon that has received widespread media coverage. Such misconduct includes accounting irregularities, churning customer accounts, abus- ing overtime policies, giving inappropriate gifts to clients and potential clients hoping to secure their business, and using company resources for personal use. Although some individuals are more likely to engage in misconduct compared to others based on individual differences in personality and other attributes, having a good performance management in place provides the appropriate context so that misconduct is clearly defined and labeled as such and identified early on before it leads to sometimes irreversible negative consequences. 10. There is better protection from lawsuits. Data collected through performance management systems can help document compliance with regulations (e.g., equal treatment of all employees regardless of sex or ethnic background). When performance management systems are not in place, arbitrary performance
6 Part I • Strategic and General Considerations
evaluations are more likely, resulting in an increased exposure to litigation for the organization. 11. There is better and more timely differentiation between good and poor performers. Performance management systems allow for a quicker identification of good and poor performers. Also, they force supervisors to face up to and address performance problems on a timely basis (i.e., before the problem becomes so entrenched that it cannot be easily remedied). 12. Supervisors’ views of performance are communicated more clearly. Performance management systems allow managers to communicate to their subordinates their judgments regarding performance. Thus, there is greater accountability in how man- agers discuss performance expectations and provide feedback. Both assessing and monitoring the performance of others are listed as key competencies for managers by the Management Standards Centre (www.management-standards.org, Units B3, B4, and B7). When managers possess these competencies, subordinates receive useful information about how their performance is seen by their supervisor. 13. Organizational change is facilitated. Performance management systems can be a useful tool to drive organizational change. For example, assume an organi- zation decides to change its culture to give top priority to product quality and customer service. Once this new organizational direction is established, per- formance management is used to align the organizational culture with the goals and objectives of the organization to make change possible. Employees are pro- vided training in the necessary skills and are rewarded for improved perform- ance so that they have both the knowledge and motivation to improve product quality and customer service. This is precisely what IBM did in the 1980s when it wanted to switch focus to customer satisfaction: the performance evaluation of every member in the organization was based, to some extent, on customer satis- faction ratings regardless of function (i.e., accounting, programming, manufac- turing, etc.).14 For IBM as well as numerous other organizations, performance management provides tools and motivation for individuals to change, which, in turn, helps drive organizational change. In short, performance management sys- tems are likely to produce changes in the culture of the organization and, there- fore, the consequences of such cultural changes should be considered carefully before implementing the system.15 As noted by Randy Pennington, president of Pennington Performance Group, “The truth is that the culture change is driven by a change in performance. An organization’s culture cannot be installed. It can be guided and influenced by policies, practices, skills, and procedures that are implemented and reinforced. The only way to change the culture is to change the way individuals perform on a daily basis.”16 14. Motivation, commitment, and intentions to stay in the organization are enhanced. When employees are satisfied with their organization’s perform- ance management system, they are more likely to be motivated to perform well, to be committed to their organization, and not try to leave the organization.17 For example, satisfaction with the performance management system is likely to make employees feel that the organization has a great deal of personal meaning for them. In terms of turnover intentions, satisfaction with the performance management system leads employees to report that they will probably not look for a new job in the next year and that they don’t often think about quitting
Chapter 1 • Performance Management and Reward Systems in Context 7
their present job. As an illustration of this point, results of a study including 93 professors at a university in South Africa suggested that the implementation of a good performance management system would be useful in preventing them from leaving their university jobs.18 15. Voice behavior is encouraged. A well-implemented performance management system allows employees to engage in voice behavior that can lead to improved organizational processes. Voice behavior involves making suggestions for changes and improvements that are innovative, challenge the status quo, are intended to be constructive, and are offered even when others disagree.19 For example, the per- formance review meeting can lead to a conversation during which the employee provides suggestions on how to reduce cost or speed up specific process. 16. Employee engagement is enhanced. A good performance management system leads to enhanced employee engagement. Employees who are engaged feel involved, committed, passionate, and empowered. Moreover, these attitudes and feelings result in behaviors that are innovative and, overall, demonstrate good organizational citizenship and take action in support of the organization. Employee engagement is an important predictor of organizational performance and success and, consequently, engagement is an important contribution of good performance management systems.20
Table 1.1 lists the 16 contributions made by performance management systems. Recall Sally’s situation earlier in the chapter. Which of the contributions included in Table 1.1 result from the system implemented at Sally’s organization? For example, are Sally’s employees more motivated to perform as a consequence of implementing their “performance management” system? Is their self-esteem increased? What about Sally’s
TABLE 1.1
Contributions of Performance Management Systems
Motivation to perform is increased. Self-esteem is increased. Managers gain insight about subordinates. The definitions of job and criteria are clarified. Self-insight and development are enhanced. Administrative actions are more fair and appropriate. Organizational goals are made clear. Employees become more competent. Employee misconduct is minimized. There is better protection from lawsuits. There is better and more timely differentiation between good and poor performers. Supervisors’ views of performance are communicated more clearly. Organizational change is facilitated. Motivation, commitment, and intentions to stay in the organization are enhanced. Voice behavior is encouraged. Employee engagement is enhanced.
8 Part I • Strategic and General ConsiderationsBOX 1.1
What CEOs Say About the Contribution of Performance Management Systems
A study conducted by Development Dimensions International (DDI), a global human resources consulting firm specializing in leadership and selection, found that performance management systems are a key tool that organizations use to translate business strategy into business results. Specifically, performance management systems influence “financial performance, productivity, product or service quality, customer satisfaction, and employee job satisfaction.” In addition, 79% of the CEOs surveyed say that the performance management system implemented in their organizations drives the “cultural strategies that maximize human assets.”21
insight and understanding of her employees’ contributions to the organization? Is Sally’s organization now better protected in the face of potential litigation? Unfortunately, the system implemented at Sally’s organization is not a true perform- ance management system but simply an administrative nuisance. Consequently, many, if not most, of the potential contributions of the performance management system are not realized. In fact, poorly implemented systems, as in the case of Sally’s organization, not only do not make positive contributions but also can be very dangerous and lead to several negative outcomes.
1.3 DISADVANTAGES/DANGERS OF POORLY IMPLEMENTED PM SYSTEMS
What happens when performance management systems do not work as intended, as in the case of Sally’s organization? What are some of the negative consequences associated with low-quality and poorly implemented systems? Consider the following list:
1. Increased turnover. If the process is not seen as fair, employees may become upset and leave the organization. They can leave physically (i.e., quit) or withdraw psychologically (i.e., minimize their effort until they are able to find a job elsewhere). 2. Use of misleading information. If a standardized system is not in place, there are multiple opportunities for fabricating information about an employee’s performance. 3. Lowered self-esteem. Self-esteem may be lowered if feedback is provided in an inappropriate and inaccurate way. This, in turn, can create employee resentment. 4. Wasted time and money. Performance management systems cost money and quite a bit of time. These resources are wasted when systems are poorly designed and implemented. 5. Damaged relationships. As a consequence of a deficient system, the relationship
among the individuals involved may be damaged, often permanently. 6. Decreased motivation to perform. Motivation may be lowered for many reasons, including the feeling that superior performance is not translated into meaningful tangible (e.g., pay increase) or intangible (e.g., personal recognition) rewards.
Chapter 1 • Performance Management and Reward Systems in Context 9
7. Employee burnout and job dissatisfaction. When the performance assessment instrument is not seen as valid and the system is not perceived as fair, employees are likely to feel increased levels of job burnout and job dissatisfaction. As a con- sequence, employees are likely to become increasingly irritated.22 8. Increased risk of litigation. Expensive lawsuits may be filed by individuals who
feel they have been appraised unfairly. 9. Unjustified demands on managers’ and employees’ resources. Poorly imple- mented systems do not provide the benefits provided by well-implemented systems, yet they take up managers’ and employees’ time. Such systems will be resisted because of competing obligations and allocation of resources (e.g., time). What is sometimes worse, managers may simply choose to avoid the system altogether, and employees may feel increased levels of overload.23 10. Varying and unfair standards and ratings. Both standards and individual
ratings may vary across and within units and be unfair. 11. Emerging biases. Personal values, biases, and relationships are likely to replace
organizational standards. 12. Unclear ratings system. Because of poor communication, employees may not know how their ratings are generated and how the ratings are translated into rewards.
Table 1.2 summarizes the list of disadvantages and negative consequences resulting from the careless design and implementation of a performance management system. Once again, consider Sally’s organization. What are some of the consequences of the system implemented by her company? Let’s consider each of the consequences listed in Table 1.2. For example, is it likely that the performance information used is false and misleading? How about the risk of litigation? How about the time and money invested in collecting, compiling, and reporting the data? Unfortunately, an analysis of Sally’s situation, taken with the positive and negative consequences listed in Tables 1.1 and 1.2, leads to the con- clusion that this particular system is more likely to do harm than good. Now think about
TABLE 1.2 Disadvantages/Dangers of Poorly Implemented Performance Management Systems
Increased turnover Use of false or misleading information Lowered self-esteem Wasted time and money Damaged relationships Decreased motivation to perform Employee job burnout and job dissatisfaction Increased risk of litigation Unjustified demands on managers’ and employees’ resources Varying and unfair standards and ratings Emerging biases Unclear ratings system
10 Part I • Strategic and General Considerations
BOX 1.2
What Happens When Performance Management Is Implemented Poorly?
One example of a poorly implemented performance management system resulted in a $1.2 million lawsuit. A female employee was promoted several times and succeeded in the construction industry until she started working under the supervision of a new manager. She stated in her lawsuit that once she was promoted and reported to the new manager, the boss ignored her and did not give her the same support or opportunities for training that her male colleagues received. After eight months of receiving no feedback from her manager, she was called into his office, where the manager told her that she was failing, resulting in a demotion and a $20,000 reduction in her annual salary. When she won her sex-discrimination lawsuit, a jury awarded her $1.2 million in emotional distress and economic damages.24
the system implemented at your current organization or at the organization you have worked for most recently. Take a look at Tables 1.1 and 1.2. Where does the system fit best? Is the system more closely aligned with some of the positive consequences listed in Table 1.1 or more closely aligned with some of the negative consequences listed in Table 1.2?
One of the purposes of a performance management system is to make decisions about employees’ compensation (e.g., pay raises). For many employees, this is perhaps one of the most meaningful consequences of a performance management system. Chapter 10 provides a detailed discussion of how a performance management system is used to allocate rewards. However, here we will discuss some basic features of reward systems and the extent to which the allocation of various types of rewards is dependent on the performance management system.
1.4 DEFINITION OF REWARD SYSTEMS
An employee’s compensation, usually referred to as tangible returns, includes cash compensation (i.e., base pay, cost-of-living and merit pay, short-term incentives, and long-term incentives) and benefits (i.e., income protection, work/life focus, tuition reimbursement, and allowances). However, employees also receive intangible returns, also referred to as relational returns, which include recognition and status, employment security, challenging work, and learning opportunities. A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employ- ment relationship.
It should be noted that not all types of returns are directly related to performance management systems. This is the case because not all types of returns are allocated based on performance. For example, some allocations are based on seniority as opposed to performance. The various types of returns are defined next.25
1.4.1 Base Pay
Base pay is given to employees in exchange for work performed. The base pay, which usually includes a range of values, focuses on the position and duties performed rather than an individual’s contribution. Thus, the base pay is usually the same for all employ- ees performing similar duties and ignores differences across employees. However,
Chapter 1 • Performance Management and Reward Systems in Context 11
differences within the base pay range may exist based on such variables as experience and differential performance. In some countries (e.g., United States), there is a differ- ence between wage and salary. Salary is base cash compensation received by employees who are exempt from regulations of the Fair Labor Standards Act and, in most cases, cannot receive overtime pay. Employees in most professional and managerial jobs (also called salaried employees) are exempt employees. On the other hand, nonexempt employees receive their pay calculated on an hourly wage.
1.4.2 Cost-of-Living Adjustments and Contingent Pay
Cost-of-living adjustments (COLA) imply the same percentage increase for all employees regardless of their individual performance. Cost-of-living adjustments are given to com- bat the effects of inflation in an attempt to preserve the employees’ buying power. For example, in 2003 in the United States, organizations that implemented a COLA used a 2.1% pay increase. In 2001, this same percentage was only 1.4%. Year-by-year COLA percentages can be obtained from such agencies as the Social Security Administration in the United States (http://www.ssa.gov/OACT/COLA/colaseries.html).
Contingent pay, sometimes referred to as merit pay, is given as an addition to the base pay based on past performance. Chapter 10 describes the topic of contingent pay in detail. In a nutshell, contingent pay means that the amount of additional compensa- tion depends on an employee’s level of performance. So, for example, the top 20% of employees in the performance score distribution may receive a 10% annual increase, whereas employees in the middle 70% of the distribution may receive a 4% increase, and employees in the bottom 10% may receive no increase at all.
1.4.3 Short-Term Incentives
Similar to contingent pay, short-term incentives are allocated based on past performance. However, incentives are not added to the base pay and are only temporary pay adjust- ments based on the review period (e.g., quarterly or annual). Incentives are one-time payments and are sometimes referred to as variable pay.
A second difference between incentives and contingent pay is that incentives are known in advance. For example, a salesperson in a pharmaceutical company knows that if she meets her sales quota, she will receive a $3,000 bonus at the end of the quar- ter. She also knows that if she exceeds her sales quota by 10%, her bonus will be $6,000. By contrast, in the case of contingent pay, in most cases, the specific value of the reward is not known in advance.
1.4.4 Long-Term Incentives
Whereas short-term incentives usually involve an attempt to motivate performance in the short term (i.e., quarter, year) and involve cash bonuses or specific prizes (e.g., two extra days off), long-term incentives attempt to influence future performance over a longer period of time. Typically, they involve stock ownership or options to buy stocks at a preestablished and profitable price. The rationale for long-term incentives is that employees will be personally invested in the organization’s success, and this invest- ment is expected to translate into a sustained high level of performance.
Both short-term and long-term incentives are quite popular. Take, for example, the public sector in the United States. A survey administered in late 1998 to 25 state and 400
12 Part I • Strategic and General Considerations
BOX 1.3
Short-Term Incentives for Physicians
Short-term incentives are being used in a test pilot program in Colorado Springs, Colorado. Eight health-care providers and three insurance companies have teamed up with the nonprofit Colorado Business Group on Health to pay physicians up to $100 in cash per patient for providing diabetes care that results in positive outcomes for patients. Doctors in the program receive the additional pay as an incentive without an increase to base salary. The program requires doctors to work closely with patients and focus on preventative medicine, including education, goal-setting, and follow-up meetings. Physical indicators, such as blood pressure, blood sugar, and cholesterol, are measured against goals to determine whether successful outcomes are being achieved. The goals of the program are to provide better disease control for the patient and to cut down on expensive future treatments, such as emergency room visits and inpatient stays in the hospital. Additional savings are expected through reduced medical claims and health insurance premiums paid by employers. In summary, the health providers and insurers are utilizing short-term incentives as part of the performance management systems with the goal of motivating physicians to focus on treatments that will enhance the overall health and well-being of the patient in an ongoing manner.27
local governments employing more than six people showed that all but one of the state governments and 242 (i.e., 85%) of the local governments used some type of incentive.26 Some organizations are taking this idea to what may be called “big pay for big performance.” Contingent pay plans will be discussed in detail in Chapter 10. In the meantime, consider the case of a Denver, Colorado, energy company, Delta Petroleum, which gave four top executives 1.5 million shares the day the stock closed at $21.76, for a total value of $32.6 million.28 However, there is a catch: Delta stock will have to reach $40 per share for the executives to be able to sell theirs. If this value is not reached, the executives’ shares cannot be cashed in. Moreover, the executives will be able to sell only one-sixth of their shares when the price reaches $40. They will be able to sell another one-sixth if and when the stock price reaches $50, and another sixth if and when it reaches $60. And there is yet another restriction: time. The first batch of stock that vests at $40 must reach that value within 13 months of the time the executives received the options. If the value of $40 is not reached within this time frame, the second and third batches of stock cannot be cashed in and they simply disappear.
1.4.5 Income Protection
Income protection programs serve as a backup to employees’ salaries in the event that an employee is sick, disabled, or no longer able to work. Some countries mandate income protection programs by law. For example, Canadian organizations pay into a fund that provides income protection in the case of a disability. Take, for instance, the University of Alberta, which offers a monthly income of 70% of salary to employees who become severely disabled. In the United States, employers pay 50% of an employee’s total contribution to Social Security so that income is protected for family members in case of an employee’s death or a disability that prevents the employee from doing substantial work for one year and for an employee when he or she reaches retirement age. For example, a 40-year-old employee earning an annual salary of
Chapter 1 • Performance Management and Reward Systems in Context 13
$90,000 and expected to continue to earn that salary until retirement age would receive about $1,400 a month if he retired at age 62, about $2,000 a month if he retired at age 67, and about $2,500 if he retired at age 70.
Other types of benefits under the income protection rubric include medical insurance, pension plans, and savings plans. These are optional benefits provided by organizations, but they are becoming increasingly important and often guide an applicant’s decision to accept a job offer. In fact, a recent survey including both employees in general and HR professionals in particular showed that health care/medical insurance is the most important benefit, followed by paid time off and retirement benefits.29
1.4.6 Work/Life Focus
Benefits related to work/life focus include programs that help employees achieve a better balance between work and nonwork activities. These include time away from work (e.g., vacation time), services to meet specific needs (e.g., counseling, financial planning, on-site fitness program), and flexible work schedules (e.g., telecommuting, nonpaid time off). For example, Sun Microsystems actively promotes an equal balance between work and home life and closes its Broomfield, Colorado, campus from late December through early January every year. This benefit (i.e., vacation time for all employees in addition to indi- vidual yearly vacation time) is part of Sun’s culture. Sun believes in a work hard–play hard attitude, as is evidenced by CEO Scott McNealy’s motto: “Kick butt and have fun.”30
1.4.7 Allowances
Benefits in some countries and organizations include allowances covering housing and transportation. These kinds of allowances are typical for expatriate personnel and are popular for high-level managers throughout the world. In South Africa, for example, it is common for a transportation allowance to include one of the following choices:31
• The employer provides a car and the employee has the right to use it both privately and for business.
• The employer provides a car allowance, more correctly referred to as a travel allowance, which means reimbursing the employee for the business use of the employee’s personal car.
Other allowances can include smart phones and their monthly charges, club and gym fees, discount loans, and mortgage subsidies.32 Although these allowances are clearly a benefit for employees, some of them directly or indirectly also produce a benefit for the employer. For example, smart phones means that employees are reachable via phone, text, and e-mail 24/7. Similarly, if employees take advantage of a gym fee allowance, they are likely to stay healthier which in turn may lead to less health-related expenses for the organization.
1.4.8 Relational Returns
Relational returns are intangible in nature. They include recognition and status, employment secu- rity, challenging work, opportunities to learn, and opportunities to form personal relationships at work (including friendships and romances).33For example, Sun Microsystems allows employees to enroll in SunU, which is Sun’s own online education tool. SunU encapsulates a mix of traditional
14 Part I • Strategic and General Considerations
TABLE 1.3 Returns and Their Degree of Dependency
on the Performance Management System
Return Degree of Dependency
Cost-of-living adjustment Low Income protection Low Work/life focus Moderate Allowances Moderate Relational returns Moderate Base pay Moderate Contingent pay High Short-term incentives High Long-term incentives High
classroom courses with online classes that can be accessed anywhere in the world at any time.34 Sun offers its employees enormous scope for development and career progression, and there is a commitment to ensuring that all employees are given the opportunity to develop professionally. The new knowledge and skills acquired by employees can help them not only to further their careers within Sun but also to take this knowledge with them if they seek employment elsewhere. Thus, some types of relational returns can be long-lasting.
Table 1.3 includes a list of the various returns, together with their degree of dependency on the performance management system. As an example of the low end of the dependency continuum, cost-of-living adjustment has a low degree of depend- ency on the performance management system, meaning that the system has no impact on this type of return. In other words, all employees receive this type of return regard- less of past performance. On the other end, short-term incentives have a high degree of dependency, meaning that the performance management system dictates who receives these incentives and who does not. Long-term incentives (e.g., profit sharing and stock options, which are discussed in more detail in Chapter 10) also have a high degree of dependency; although this type of incentive is not specifically tied to individual performance, it does depend on performance measured at the team, unit, or even organizational levels. Between the high and low end, we find some returns with a mod- erate degree of dependency on the performance management system such as base pay, a type of return that may or may not be influenced by the system.
Think about the performance management system of your current employer, the system used by your most recent employer, or the system in place at an organization where someone you know is employed at present. Based on Table 1.3, try to think about the vari- ous types of tangible and intangible returns allocated in this organization. To what extent is each of these returns dependent on the organization’s performance management system?
1.5 AIMS AND ROLE OF PM SYSTEMS
The information collected by a performance management system is most frequently used for salary administration, performance feedback, and the identification of employee strengths and weaknesses. In general, however, performance management systems can
Chapter 1 • Performance Management and Reward Systems in Context 15
serve the following six purposes: strategic, administrative, informational, developmental, organizational maintenance, and documentational purposes.35 Let’s consider each of these purposes in turn.
1.5.1 Strategic Purpose
The first purpose of performance management systems is to help top management achieve strategic business objectives. By linking the organization’s goals with individual goals, the performance management system reinforces behaviors consistent with the attainment of organizational goals. Moreover, even if for some reason individual goals are not achieved, linking individual goals with organizational goals serves as a way to communicate what are the most crucial business strategic initiatives.
A second strategic purpose of performance management systems is that they play an important role in the onboarding process.36 Onboarding refers to the processes that lead new employees to transition from being organizational outsiders to organizational insid- ers. Performance management serves as a catalyst for onboarding because it allows new
BOX 1.4
How Sears Uses Performance Management to Focus on Strategic Business Priorities
New leadership at Sears is utilizing performance management practices and principles to align human resources with business strategy. Headquartered in Hoffman Estates, Illinois, Sears Holdings Corporation is the third largest broad-line retailer in the United States, with approximately $55 billion in annual revenues and with approximately 3,900 retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden products, home electronics, and automotive repair and maintenance. The company is the nation’s largest provider of home services, with more than 13 million service calls made annually. Following the merger with Kmart Corp. and Sears, Roebuck & Co., Aylwin B. Lewis was promoted to chief executive and tasked with a strategic culture change initiative in hopes of reinvigorating the struggling retail company. A strategic objective is to move from an inward focus to a customer service approach. A second key objective is to bring about an entrepreneurial spirit where store managers strive for financial literacy and are challenged to identify opportunities for greater profits. Several aspects of the performance management system are being utilized to achieve these strategic objectives. For example, employee duties and objectives are being revised so that employ- ees will spend less time in back rooms and more time interacting with customers to facilitate pur- chases and understand customer needs. In addition, leadership communication with employees and face-to-face interaction are being encouraged. Lewis spends three days per week in stores with employees and frequently quizzes managers on their knowledge, such as asking about profit margins for a given department. The greatest compliment employees receive is to be referred to as “commercial” or someone who can identify opportunities for profits. All Sears headquarters employees are also required to spend a day working in a store, which many had never done before. Executive management has identified 500 employees who are considered potential leaders and given training and development opportunities specifically aimed at cultural and strategic changes. In sum, the performance management system at Sears is used as a strategic tool to change Sears’ culture because senior management views encouraging key desired behaviors as critical to the company’s success in the marketplace.37
16 Part I • Strategic and General Considerations
employees to understand the types of behaviors and results that are valued and rewarded, which, in turn, lead to an understanding of the organization’s culture and its values.
1.5.2 Administrative Purpose
A second function of performance management systems is to furnish valid and useful information for making administrative decisions about employees. Such administrative decisions include salary adjustments, promotions, employee retention or termination, recognition of superior individual performance, identification of poor performers, layoffs, and merit increases. Therefore, the implementation of reward systems based on information provided by the performance management system falls within the adminis- trative purpose. For example, the government in Turkey mandates performance management systems in all public organizations in that country with the aim to prevent favoritism, corruption, and bribery and to emphasize the importance of impartiality and merit in administrative decisions.38
1.5.3 Informational Purpose
Performance management systems serve as an important communication device. First, they inform employees about how they are doing and provide them with information on specific areas that may need improvement. Second, related to the strategic purpose, they provide information regarding the organization’s and the supervisor’s expecta- tions and what aspects of work the supervisor believes are most important.
1.5.4 Developmental Purpose
As noted earlier, feedback is an important component of a well-implemented per- formance management system. This feedback can be used in a developmental man- ner. Managers can use feedback to coach employees and improve performance on an ongoing basis. This feedback allows for the identification of strengths and weak- nesses as well as the causes for performance deficiencies (which could be due to individual, group, or contextual factors). Of course, feedback is useful only to the extent that remedial action is taken and concrete steps are implemented to remedy any deficiencies. Feedback is useful only when employees are willing to receive it. Organizations should strive to create a “feedback culture” that reflects support for feedback, including feedback that is nonthreatening and is focused on behaviors and coaching to help interpret the feedback provided.39
Another aspect of the developmental purpose is that employees receive information about themselves that can help them individualize their career paths. Thus, the develop- mental purpose refers to both short-term and long-term aspects of development.
1.5.5 Organizational Maintenance Purpose
A fifth purpose of performance management systems is to provide information to be used in workforce planning. Workforce planning comprises a set of systems that allows organizations to anticipate and respond to needs emerging within and outside the organization, to determine priorities, and to allocate human resources where they can do the most good.40 An important component of any workforce planning effort is
Chapter 1 • Performance Management and Reward Systems in Context 17
the talent inventory, which is information on current resources (e.g., skills, abilities, promotional potential, and assignment histories of current employees). Performance management systems are the primary means through which accurate talent invento- ries can be assembled.
Other organizational maintenance purposes served by performance management systems include assessing future training needs, evaluating performance achievements at the organizational level, and evaluating the effectiveness of HR interventions (e.g., whether employees perform at higher levels after participating in a training program). These activities cannot be conducted effectively in the absence of a good performance management system.
1.5.6 Documentational Purpose
Finally, performance management systems allow organizations to collect useful information that can be used for several documentation purposes. First, performance data can be used to validate newly proposed selection instruments. For example, a newly developed test of computer literacy can be administered to all administrative personnel. Scores on the test can then be paired with scores collected through the performance management system. If scores on the test and on the performance meas- ure are correlated, then the test can be used with future applicants for the administrative positions. Second, performance management systems allow for the documentation of important administrative decisions. This information can be especially useful in the case of litigation.
Several companies implement performance management systems that allow them to accomplish the multiple objectives described earlier. For an example of one such company, consider the case of SELCO Credit Union (http://selco.org/selco/ about.asp) in Eugene, Oregon, a not-for-profit consumer cooperative that was estab- lished in 1936.41 SELCO’s eight branches serve nearly 80,000 members. SELCO offers many of the same services offered by other banks, including personal check- ing and savings accounts, loans, and credit cards. Being members of the credit union, however, allows individual members a say in how the credit union is run, something a traditional bank does not permit. Recently, SELCO scrapped an old performance appraisal system and replaced it with a new multipurpose and more effective performance management system. First, the timing of the new system is now aligned with the business cycle instead of the employee’s date of hire to ensure that business needs are aligned with individual goals. This alignment serves both strategic and informational purposes. Second, managers are given a pool of money that they can work with to award bonuses and raises as needed, which is more effective than the complex set of matrices that had been in place to calculate bonuses. This improved the way in which the system is used for allocating rewards and therefore serves an administrative purpose. Third, managers are required to sit down and have regular conversations with their employees about their perform- ance and make note of any problems that arise. This gives the employees a clear sense of areas in which they need improvement and provides documentation if disciplinary action is needed. This component serves both informational and docu- mentational purposes. Finally, the time that was previously spent filling out complicated
18 Part I • Strategic and General Considerations
TABLE 1.4
Purposes Served by a Performance Management System
Strategic: To help top management achieve strategic business objectives Administrative: To furnish valid and useful information for making administrative decisions about employees Informational: To inform employees about how they are doing and about the organization’s and the supervisor’s expectations Developmental: To allow managers to provide coaching to their employees Organizational maintenance: To provide information to be used in workplace planning and allocation of human resources Documentational: To collect useful information that can be used for various purposes (e.g., test development, administrative decisions)
matrices and forms is now spent talking with the employees about how they can improve their performance, allowing for progress on an ongoing basis. This serves a developmental purpose.
Although multiple purposes are possible, a survey of industrial and organizational psychologists working in HR departments in more than 100 different organizations reported that the two most frequent purposes are administrative (i.e., salary decisions) and developmental (i.e., to identify employees’ weaknesses and strengths). Overall, in the organizations that participated in this study, performance management served at least two of the purposes mentioned earlier.42 As will be discussed in Chapter 9, these purposes place conflicting demands on the raters because they must be both judges (i.e., make salary decisions) and coaches (i.e., provide useful feedback for performance improvement) at the same time.
Now, think about the performance management system implemented in your organization or the last organization for which you worked. Table 1.4 summarizes the various purposes served by a performance management system. Which of these purposes are being served by the system you are considering?
1.6 CHARACTERISTICS OF AN IDEAL PM SYSTEM
So far, we have defined performance management, described the advantages of implementing good performance management systems, discussed some of the dangers of not doing a good job with the design and implementation of the system, and described the various purposes achieved by a good system. But what does a good system look like? The following characteristics are likely to allow a performance management system to be successful. Practical constraints may not allow for the implementation of all these fea- tures. The reality is that performance management systems are seldom implemented in an ideal way.43 For example, there may not be sufficient funds to deliver training to all people involved, supervisors may have biases in how they provide performance ratings, or peo- ple may be just too busy to pay attention to a new organizational initiative that requires their time and attention. Also, there may be organizational or even country-level con- straints that prevent the implementation of a good performance management system. For example, consider the case of Ghana, which is a country that espouses collectivist values over individual performance, and it is a society that is male-dominated and dominated by
Chapter 1 • Performance Management and Reward Systems in Context 19
political and administrative leaders, where these socio-cultural norms have a clear influence on organizational decision making and practices.44 These institutional constraints that are so pervasive in Ghana and so many other emerging market countries must be taken into consideration in terms of what type of performance management sys- tem will be possible to implement as well as the effectiveness of such a system. However, regardless of the societal, institutional, and practical constraints, we should strive to place a check mark next to each of these characteristics: the more features that are checked, the more likely it will be that the system will live up to its promise.
• Strategic congruence. The system should be congruent with the unit and orga- nization’s strategy. In other words, individual goals must be aligned with unit and organizational goals.
• Context congruence. The system should be congruent with the organization’s culture as well as the broader cultural context of the region or country. The importance of context in implementing highly effective performance manage- ment systems is emphasized throughout the book. However, for now, consider the example of an organization that has a culture in which communication is not fluid and hierarchies are rigid. In such organizations, a 360-degree feedback system in which individuals receive comments on their performance from their subordi- nates, peers, and superiors would be resisted and likely not very effective. Regarding broader cultural issues, consider that performance management research published in scholarly journals has been conducted in about 40 countries around the world.45 Taken together, this body of work suggests that culture plays an important role in the effectiveness of a performance management system. For example, in countries such as Japan, there is an emphasis on the measurement of both behaviors (i.e., how people do the work) and results (i.e., the results of people’s work), whereas in the United States results are typically preferred over behaviors. Thus, implementing a results-only system in Japan is not likely to be effective. As a second illustration, a study including 97 multinational corporations suggested that they have adapted their performance management systems in their subsidiaries in Bulgaria and Romania.46 Specifically, although performance is measured similarly around the world (see standardization criterion below), the interpersonal aspects of the system are adapted and customized to the local culture. For example, performance management systems in the subsidiaries are more likely to differ from those in the headquarters as differences in power distance (i.e., degree to which a society accepts unequal distribution of power) increase between countries.
• Thoroughness. The system should be thorough regarding four dimensions. First, all employees should be evaluated (including managers). Second, all major job responsibilities should be evaluated (including behaviors and results; a detailed discussion of this topic is presented in Chapter 5). Third, the evaluation should include performance spanning the entire review period, not just the few weeks or months before the review. Finally, feedback should be given on positive perform- ance aspects as well as those that are in need of improvement.
• Practicality. Systems that are too expensive, time consuming, and convoluted will obviously not be effective. Good, easy-to-use systems (e.g., performance data are entered via user-friendly software) are available for managers to help
20 Part I • Strategic and General Considerations
them make decisions. Finally, the benefits of using the system (e.g., increased performance and job satisfaction) must be seen as outweighing the costs (e.g., time, effort, expense).
• Meaningfulness. The system must be meaningful in several ways. First, the stan- dards and evaluations conducted for each job function must be considered important and relevant. Second, performance assessment must emphasize only those functions that are under the control of the employee. For example, there is no point in letting an employee know she needs to increase the speed of service delivery when the supplier does not get the product to her on time. Third, evaluations must take place at regular intervals and at appropriate moments. Because one formal evaluation per year is usually not sufficient, informal quarterly reviews are recommended. Fourth, the system should provide for the continuing skill development of evaluators. Finally, the results should be used for important administrative decisions. People will not pay attention to a system that has no consequences in terms of outcomes that they value. For example, a recent study compared performance management systems in the former East versus former West Germany. Results showed that in former West German companies, there was a stronger link between the performance management system and administrative decisions such as promotions. This relation- ship was weaker in former East German companies, and this difference is probably due to the socialist political system in the former German Democratic Republic, which has had a long-lasting effect that is still observed today.47
• Specificity. A good system should be specific: it should provide detailed and concrete guidance to employees about what is expected of them and how they can meet these expectations.
• Identification of effective and ineffective performance. The performance man- agement system should provide information that allows for the identification of effective and ineffective performance. That is, the system should allow for distinguishing between effective and ineffective behaviors and results, thereby also allowing for the identification of employees displaying various levels of performance effectiveness. In terms of decision making, a system that classifies or ranks all levels of performance and all employees similarly is useless.
• Reliability. A good system should include measures of performance that are consistent and free of error. For example, if two supervisors provided ratings of the same employee and performance dimensions, ratings should be similar.
• Validity. The measures of performance should also be valid. In this context, validity refers to the fact that the measures include all relevant performance facets and do not include irrelevant performance facets. In other words, measures are relevant (i.e., include all critical performance facets), not deficient (i.e., do not leave any important aspects out), and are not contaminated (i.e., do not include factors outside of the control of the employee or factors unrelated to performance). In short, measures include what is important and do not assess what is not important and outside of the control of the employee. For example, the gondolieri in the city of Venice (Italy) have had a performance management system for about 1,000 years. Among other relevant performance dimensions, older versions of the performance management system required gondolieri to demonstrate their level of rowing skills and their ability to transport people and goods safely. These are clearly relevant dimensions. However, the system was contaminated because it included the
Chapter 1 • Performance Management and Reward Systems in Context 21
following requirement: “Every brother shall be obliged to confess twice a year, or at least once and if after a warning, he remains impenitent, he shall be expelled . . . [from the gondolieri guild].”48
• Acceptability and fairness. A good system is acceptable and is perceived as fair by all participants. Perceptions of fairness are subjective and the only way to know if a system is seen as fair is to ask the participants about the system. Such percep- tions include four distinct components. First, we can ask about distributive justice, which includes perceptions of the performance evaluation received relative to the work performed, and perceptions of the rewards received relative to the evaluation received, particularly when the system is implemented across countries. For exam- ple, differences in perceptions may be found in comparing employees from more individualistic (e.g., United States) to more collectivistic (e.g., Korea) cultures.49 If a discrepancy is perceived between work and evaluation or between evaluation and rewards, then the system is likely to be seen as unfair.50 Second, we can ask about procedural justice, which includes perceptions of the procedures used to determine the ratings as well as the procedures used to link ratings with rewards. Third, we can assess perceptions regarding interpersonal justice, which refers to the quality of the design and implementation of the performance management system. For ex- ample, what are employees’ perceptions regarding how they are treated by their supervisors during the performance review meeting? Do they feel that supervisors are empathic and helpful? Finally, informational justice refers to fairness perceptions about performance expectations and goals, feedback received, and the information given to justify administrative decisions. For example, are explanations perceived to be honest, sincere, and logical? Because a good system is inherently discrimina- tory, some employees will receive ratings that are lower than those received by other employees. However, we should strive to develop systems that are regarded as fair from the distributive, procedural, interpersonal, and informational perspec- tives because each type of justice perception leads to different outcomes.51 For example, a perception that the system is not fair from a distributive point of view is likely to lead to a poor relationship between employee and supervisor and lowered satisfaction of the employee with the supervisor. On the other hand, a perception that the system is unfair from a procedural point of view is likely to lead to de- creased employee commitment toward the organization and increased intentions to leave.52 One way to improve all four justice dimensions is to set clear rules that are applied consistently by all supervisors.
• Inclusiveness. Good systems include input from multiple sources on an ongoing basis. First, the evaluation process must represent the concerns of all the people who will be affected by the outcome. Consequently, employees must participate in the process of creating the system by providing input regarding what behaviors or results will be measured and how. This is particularly important in today’s diverse and global organizations including individuals from different cultural backgrounds, which may lead to different views regarding what is performance and how it should be measured.53 Second, input about employee performance should be gathered from the employees themselves before the appraisal meeting.54 In short, all participants must be given a voice in the process of designing and implementing the system. Such inclusive systems are likely to lead to more successful systems including less employee resistance, improved performance, and fewer legal challenges.55
22 Part I • Strategic and General Considerations
• Openness. Good systems have no secrets. First, performance is evaluated frequently and performance feedback is provided on an ongoing basis. Therefore, employees are continually informed of the quality of their performance. Second, the appraisal meeting consists of a two-way communication process during which information is exchanged, not delivered from the supervisor to the employee without his or her input. Third, standards should be clear and communicated on an ongoing basis. Finally, communications are factual, open, and honest.
• Correctability. The process of assigning ratings should minimize subjective aspects; however, it is virtually impossible to create a system that is completely objective because human judgment is an important component of the evalua- tion process. When employees perceive an error has been made, there should be a mechanism through which this error can be corrected. Establishing an appeals process, through which employees can challenge what may be unjust decisions, is an important aspect of a good performance management system.
• Standardization. As noted earlier, good systems are standardized. This means that performance is evaluated consistently across people and time. To achieve this goal, the ongoing training of the individuals in charge of appraisals, usually man- agers, is a must.
• Ethicality. Good systems comply with ethical standards. This means that the su- pervisor suppresses her personal self-interest in providing evaluations. In addi- tion, the supervisor evaluates only performance dimensions for which she has sufficient information, and the privacy of the employee is respected.56
Table 1.5 lists the characteristics of an ideal performance management system. Think about the performance management system implemented in your organization or the last organization for which you worked. Which of the features listed in Table 1.5 included in the system you are considering? How far is your system from the ideal?
TABLE 1.5 Characteristics of an Ideal
Performance Management System
Strategic congruence Context congruence Thoroughness Practicality Meaningfulness Specificity Identification of effective and ineffective performance Reliability Validity Acceptability and fairness Inclusiveness Openness Correctability Standardization Ethicality
Chapter 1 • Performance Management and Reward Systems in Context 23
BOX 1.5
Good Performance Management Implementation Pays Off
Implementing a performance management system that includes the characteristics just described will pay off. A study conducted for Mercer, a global diversified consulting company, revealed that the 1,200 workers surveyed stated that they could improve their productivity by an average of 26% if they were not held back by a lack of “direction, support, training, and equipment.” Successfully implementing a performance management system can give workers the direction and support that they need to improve their productivity.57
1.7 INTEGRATION WITH OTHER HUMAN RESOURCES AND DEVELOPMENT ACTIVITIES
Performance management systems serve as important “feeders” to other human resources and development activities. For example, consider the relationship between performance management and training. Performance management provides informa- tion on developmental needs for employees. In the absence of a good performance management system, it is not clear that organizations will use their training resources in the most efficient way (i.e., to train those who most need it in the most critical areas). One organization that is able to link its performance management system to training initiatives is Kimberly-Clark.58 Kimberly-Clark’s global performance management sys- tem includes about 57,000 employees across 36 countries (http://www.kimberly-clark. com/ourcompany/overview.aspx). This system makes a clear link between perform- ance and training, allows employees to understand areas that need to be improved, and directs them to appropriate opportunities to enable improvements in performance. For example, in Peru, Kimberly-Clark has partnered with the National Service of Occupational Training in Industry (Senati), a local technical institute, to provide train- ing on manufacturing skills. Kimberly-Clark reached a similar agreement in Malaysia with the University College of Tun Hussein Onn. Similarly, there is a training partner in Korea. The beneficial link between performance management and training became evi- denced recently in the Korean operations, where the newspaper Dong-A Ilbo named Yuhan-Kimberly one of “the 30 most respected companies in Korea.”
Unfortunately, despite the successful Kimberly-Clark example, most organizations do not use performance management systems to determine training content and waste an opportunity to use the performance management system as the needs assessment phase of their training efforts.59 Specifically, a recent survey including 218 HR leaders at companies with at least 2,500 employees revealed that there is tight integration between performance management and learning/development activities in only 15.3% of the organizations surveyed.60
Performance management also provides key information for workforce planning. Specifically, an organization’s talent inventory is based on information collected through the performance management system. Development plans provide informa- tion on what skills will be acquired in the near future. This information is also used in making recruitment and hiring decisions. Knowledge of an organization’s current and future talent is important when deciding what types of skills need to be acquired externally and what types of skills can be found within the organization.
24 Part I • Strategic and General Considerations
Finally, there is an obvious relationship between performance management and compensation systems. Compensation and reward decisions are likely to be arbitrary in the absence of a good performance management system.
In short, performance management is a key component of talent management in organizations. It allows for assessing the current talent and making predictions about future needs both at the individual and organizational levels. Implementing a successful performance management system is a requirement for the successful implementation of other HR functions, including training, workforce planning, recruitment and selection, and compensation.
1.8 PERFORMANCE MANAGEMENT AROUND THE WORLD
Performance management is a global phenomenon and organizations all over the world are implementing various types of performance management systems. We will discuss examples of how systems are implemented in different countries. As a preview and to highlight the increasing importance of performance management globally, consider the following results from recent research relating to 10 specific countries:61
• Performance management in Mexico. Performance management has become increasingly popular since the 1970s. For the most part, systems in Mexico are similar to those implemented in the United States. For example, the measurement of results (as discussed in Chapter 5) is quite pervasive. However, more research is needed for us to gain a better understanding of what types of systems would work best in Mexico.
• Performance management in the United Kingdom. Performance management in the United Kingdom has been affected by several factors, including an emphasis on cost effectiveness and the developmental purpose of performance manage- ment. Performance management is gaining increased stature and significance given the more recent emphasis on talent management and total rewards manage- ment. As noted earlier, performance management provides critical information regarding the identification of top performers, which helps talent management, and critical information to be used in administrative decisions, including the allocation of rewards. Performance management in the United Kingdom is an established organizational practice and is clearly influenced by broader societal issues such as socioeconomic, political, and legal trends.
• Performance management in France. Performance management in France faces unique contextual issues such as legal requirements to invest in employee training and development and the need to emphasize individual accountability. Once again, performance management systems are not implemented in a vacuum, and it is important to consider the broader environment when designing and imple- menting a system.
• Performance management in Germany. Performance management in Germany has been affected by the established practice of long-term employment relation- ships. Thus, performance management systems emphasize long-term goals and usually do not have a short-term focus. In spite of this unique feature, systems share some similarities with France given their membership in the European Union, which provides a common legal framework for many labor-related issues.
Chapter 1 • Performance Management and Reward Systems in Context 25
• Performance management in Turkey. Performance management in Turkey is evolving rapidly given its official candidacy for European Union membership. Negotiations began in 2005, and it is likely that Turkey will become a European Union member by around 2015. Turkey’s unique contextual issues involve being a democratic and secular state—yet ruled by a single-party government. Performance management is a fairly novel issue in Turkey, but almost 80% of firms in Turkey are using some type of system. Because personal relation- ships play an important role in Turkish culture, an important challenge is the implementation of systems that ensure valid, reliable, and fair performance measurement.
• Performance management in India. The India economy has been on “overdrive” since the early 1990s and there is intense international business activity, including a significant increase in foreign direct investment going into India as well as India firms going abroad. The intense international business activity is leading to a change in traditional values, at least in work environment, from more collectivistic to more individualistic and short-term. Nevertheless, the traditional paternalistic values do not seem to be changing, and they pose a challenge for the implementa- tion of performance management systems in which the supervisor serves as a coach instead of as a “boss” (see Chapter 9).
• Performance management in China. From the founding of the socialist state in 1949 until the 1980s, performance management systems in China emphasized mostly attendance and skills. However, since the 1980s, the view of performance management has expanded to consider broader sets of behaviors as well as the relationship between performance management and other organizational systems (e.g., compensation). Important issues to consider for successful implementation of performance management systems in China include respect for age and senior- ity and the emphasis on social harmony.
• Performance management in South Korea. Work relationships in South Korea are hierarchical in nature and emphasize the importance of groups over individuals. More recently, the establishment of a democratic government in 1987 and the Asian financial crisis of 1997 affected organizational practices substantially. Specifically, the financial crisis led many organizations to adopt what in Korean is called Yunbongje (i.e., merit-based systems). The current challenge is how to reconcile a merit-based approach with more traditional cultural values.
• Performance management in Japan. Although Japanese firms relied on lifetime employment and seniority as key organizational practices, more recently firms also consider the importance of new knowledge acquisition. For example, com- petency modeling, which is discussed in Chapter 8, has become increasingly popular. In general performance management systems in Japan tend to empha- size behaviors to the detriment of results (this distinction is discussed in detail in Chapter 4).
• Performance management in Australia. The Australian economy has made an important shift from manufacturing to service, and there are important demo- graphic changes in the workforce including an increased presence of women and members of ethnic minority groups. The legal framework in Australia is similar to that in the United States and the United Kingdom (see Chapter 10). So, much like
26 Part I • Strategic and General Considerations
the United States and the United Kingdom, performance management systems tend to include documentation of performance, considerations regarding equal opportunity, and due process issues.
This brief overview provides us with some information regarding performance management systems around the world. Although there is a common challenge to align individual and organizational goals and enhance the performance of individuals and groups, the way these goals are achieved is influenced by both organizational and societal contextual issues. Thus, these issues should not be ignored when implementing performance management systems.
Summary Points
• Performance management is a continu- ous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization.
•Although many organizations have systems labeled “performance manage- ment,” they usually are only perform- ance appraisal systems. Performance appraisal emphasizes the assessment of an employee’s strengths and weaknesses and does not include strategic business considerations. Also, performance appraisal systems usually do not include extensive and ongoing feedback that an employee can use to improve her per- formance in the future. Finally, perform- ance appraisal is a once-a-year event that is often driven by the HR department, whereas performance management is a year-round way of managing business that is driven by managers.
• Implementing a well-designed perform- ance management system has many advantages. From the perspective of employees, a good system increases motivation and self-esteem, helps improve performance, clarifies job tasks and duties, provides self-insight and development opportunities, and clarifies supervisors’ expectations. From the
perspective of managers, good systems allow them to gain insight into employ- ees’ activities and goals, allow for more fair and appropriate administrative actions, allow them to communicate organizational goals more clearly, let them differentiate good and poor per- formers, help drive organizational change, encourage voice behavior, and improve employee engagement. Finally, from the perspective of the HR function, a good system provides protection from litigation and can also help minimize employee misconduct which can have so many negative consequences for the organization.
• Poorly designed and implemented per- formance management systems can have disastrous consequences for all involved. For example, employees may quit, those who stay may be less moti- vated, and relationships (e.g., supervi- sor–subordinate) can suffer irreparable damage. Also, poorly designed systems can be biased, resulting in costly law- suits and wasted time and resources. In the end, low-quality or poorly imple- mented systems can be a source of enormous frustration and cynicism for all involved.
•Reward systems include all mecha- nisms for determining and distributing
Chapter 1 • Performance Management and Reward Systems in Context 27
tangible and intangible returns as part of an employment relationship. Tangible returns, collectively referred to as compensation, include both cash and benefits. Intangible returns, also referred to as relational returns, include recognition and status, employment security, challenging work, and learn- ing opportunities. Not all types of returns are directly related to perform- ance management systems because not all types of returns are allocated based on past performance.
• Performance management systems serve multiple purposes. First, they serve a strategic purpose because they help link employee activities with the organiza- tion’s mission and goals, they identify results and behaviors needed to carry out strategy, and they maximize the extent to which employees exhibit the desired behaviors and produce the desired results. Second, they serve an administrative purpose in that they pro- duce information used by the reward system and other HR decision making (e.g., promotions, termination, discipli- nary actions). Third, they serve an infor- mational purpose because they enable employees to learn about their perform- ance in relation to the organization’s expectations. Fourth, they serve a devel- opmental purpose in that performance feedback allows individuals to learn about their strengths and weaknesses, to identify training needs, and to make better decisions regarding job assign- ments. Fifth, performance management systems serve an organizational mainte- nance purpose because they provide useful information for workforce plan- ning and for evaluating the effectiveness of other HR systems (e.g., comparing per- formance before and after an expensive training program to determine whether training made a difference). Finally,
performance management systems also serve a documentational purpose; for example, they support HR decisions and help meet legal requirements.
• Ideal performance management sys- tems are rare. Such ideal systems are
• congruent with strategy (i.e., there is a clear link among individual, unit, and organizational goals)
• congruent with context (i.e., the sys- tem is consistent with norms based on the culture of the organization and the region and country in which the organization is located)
• thorough (i.e., they include all rele- vant performance dimensions)
•practical (i.e., they do not require excessive time and resources)
• meaningful (i.e., they have impor- tant consequences)
• specific (i.e., they provide a concrete employee improvement agenda)
• able to identify effective and inef- fective performance (i.e., they help distinguish employees at different performance levels)
•reliable (i.e., the measurement of performance is consistent)
•valid (i.e., the measures of per- formance are not contaminated or deficient)
• fair (i.e., people participating in the system believe the processes and outcomes are just)
•inclusive (i.e., they include input from multiple sources on an ongo- ing basis)
• open (i.e., they are transparent and there are no secrets)
• correctable (i.e., they include mecha- nisms so that errors can be corrected)
•standardized (i.e., performance is evaluated consistently across people and time)
• ethical (i.e., they comply with ethical standards)
28 Part I • Strategic and General Considerations
• Many trade-offs take place in the real- world implementation of performance management systems; however, the closer the system is to the ideal charac- teristics, the greater the return will be for the employees, supervisors, and the organization as a whole.
• A performance management system is the key factor used in determining whether an organization can manage its human resources and talent effectively. Performance management provides information on who should be trained and in what areas, which employees should be rewarded, and what type of skills are lacking at the organization or unit level. Therefore, performance man- agement also provides information on the type of employees that should be hired. When implemented well, performance management systems pro- vide critical information that allows organizations to make sound decisions regarding their people resources.
•Given the globalized and hyper- competitive nature of business in the
twenty-first century, there is a common worldwide challenge to align individ- ual and organizational goals and enhance the performance of individu- als and groups. However, the way these goals are achieved is influenced by both organizational and societal contextual issues. A performance man- agement system in China may not be the same as a performance manage- ment system in Mexico or France. Although the system’s main objectives may be the same, the way the system is implemented and deployed must take contextual considerations into account.
As should be evident by now, imple- menting an ideal performance management system requires a substantial amount of work; however, this does not start when the system is put into place. The process starts much earlier because unless specific conditions are present before the system is implemented, the system will not achieve its multiple purposes. Chapter 2 provides a description of the entire performance management process.
CASE STUDY 1-1
Reality Check: Ideal versus Actual Performance Management System
The table here summarizes the key characteristics of an ideal performance management system as discussed in this chap- ter. Think about a performance management system you know. This could be the one implemented at your current (or most recent) job. If you don’t have information about such a system, talk to a friend or acquaintance who is currently working, and gather information about the system used in his or her organi- zation. Use the Y/N column in the table to indicate whether each of the features is present (Y: yes) or not (N: no) in the system you are considering. In some cases, some elements may be present to a matter of degree and may require that you include some additional information in the Comments column. Next, prepare a brief report addressing the following issues:
1. How many of the 14 characteristics of an ideal system
are present in the system you are evaluating? 2. Identify two characteristics that are not present at all, or barely present, in your system. Discuss the implications that the lack of these characteristics has on the effectiveness of the system. 3. Identify one characteristic that is clearly present in your system. Discuss the implications of the presence of this characteristic on the effectiveness of the system. 4. Identify the characteristic in your system that is furthest from the ideal. What can be done to produce a better alignment between your system and the ideal? Who should be responsible for doing what so that your system becomes “ideal” regarding this characteristic? ■
Chapter 1 • Performance Management and Reward Systems in Context 29
Characteristics Y/N Definition Comments
Strategic congruence Individual goals are aligned with unit and
organizational goals. Context congruence The system is congruent with norms based
on the organization’s culture. The system is congruent with norms based on the culture of the region and country where the organization is located. Thoroughness All employees are evaluated.
Evaluations include performance spanning
the entire review period. All major job responsibilities are evaluated. Feedback is provided on both positive and
negative performance. Practicality It is readily available for use.
It is easy to use. It is acceptable to those who use it for
decisions. Benefits of the system outweigh the costs. Standards and evaluations for each job function are important and relevant. Only the functions that are under the
control of the employee are measured. Meaningfulness Evaluations take place at regular intervals
and at appropriate moments. System provides for continuing skill
development of evaluators. Results are used for important
administrative decisions. Specificity Detailed guidance is provided to employees about what is expected of them and how they can meet these expectations. Identification of
effective and ineffective performance
The system distinguishes between effective
and ineffective behaviors and results, thereby also identifying employees displaying various levels of performance effectiveness. Reliability Measures of performance are consistent.
Measures of performance are free of error. Validity Measures include all critical performance
facets. Measures do not leave out any important
performance facets. Measures do not include factors outside
employee control.
30 Part I • Strategic and General Considerations
Characteristics Y/N Definition Comments
Acceptability and fairness
Employees perceive the performance
evaluation and rewards received relative to the work performed as fair (distributive justice). Employees perceive the procedures used to determine the ratings and subsequent rewards as fair (procedural justice). Employees perceive the way they are treated
in the course of designing and implementing the system as fair (interpersonal justice). Employees perceive the information and
explanations they receive as part of the performance management system as fair (informational justice). Inclusiveness Employee input about their performance is gathered from the employees before the appraisal meeting. Employees participate in the process of
creating the system by providing input on how performance should be measured. Openness Performance is evaluated frequently and
feedback is provided on an ongoing basis. Appraisal meeting is a two-way
communication process and not one-way communication delivered from the supervisor to the employee. Standards are clear and communicated on
an ongoing basis. Communications are factual, open, and
honest. Correctability There is an appeals process, through which
employees can challenge unjust or incorrect decisions. Standardization Performance is evaluated consistently across
people and time. Ethicality Supervisors suppress their personal
self-interest in providing evaluations. Supervisors evaluate performance
dimensions only for which they have sufficient information. Employee privacy is respected.
Chapter 1 • Performance Management and Reward Systems in Context 31
CASE STUDY 1-2
Performance Management at Network Solutions, Inc.
Network Solutions, Inc.,* is a worldwide leader in hardware, software, and services essential to computer networking. Until recently, Network Solutions, Inc., used more than 50 different systems to measure performance within the company, many employees did not receive a review, fewer than 5% of all em- ployees received the lowest category of rating, and there was no recognition program in place to reward high achievers. Overall, it was recognized that performance problems were not being addressed, and tough pressure from competitors was increasing the costs of managing human performance ineffec- tively. In addition, quality initiatives were driving change in several areas of the business, and Network Solutions decided that these initiatives should also apply to “people quality.” Finally, Network Solutions wanted to improve its ability to meet its organizational goals and realized that one way of doing this would be to ensure that they were linked to each employee’s goals.
Given this situation, in 2001, Network Solutions’ CEO announced that he wanted to implement a forced distribution performance management system in which a set percentage of employees were classified in each of several categories (e.g., a rating of 1 to the top 20% of performers; a rating of 2 to the middle 70% of performers; and a rating of 3 to the bot- tom 10% of performers). A global cross-divisional HR team was put in place to design and implement the new system. The first task for the design team was to build a business case of the new system by showing that if organizational strategy was carried down to team contributions and team contribu- tions were translated into individual goals, then business goals would be met. Initially the program was rolled out as a year-round people management system that would raise the bar on performance management at Network Solutions by aligning individual performance objectives with organizational goals by focusing on the development of all employees. The desired outcomes of the new system included raising the per- formance level of all employees, identifying and retaining top talent, and identifying low performers and improving their per- formance. Network Solutions also wanted the performance expectations for all employees to be clear.
Before implementing the program, the design team received the support of senior leadership by communicating that the performance management system was the future of
Network Solutions and by encouraging all senior leaders to ensure that those reporting directly to them understood the process and accepted it. In addition, they encouraged senior leaders to use the system with all of their direct subordinates and to demand and utilize output from the new system. Next, the design team encouraged the senior leaders to stop the development and use of any other performance management system and explained the need for standardization of performance management across all divisions. Finally, the team asked senior leaders to promote the new program by involving employees in training of talent management and by assessing any needs in their divisions that would not be addressed by the new system. The Network Solutions global performance management cycle consisted of the following process:
1. Goal cascading and team building 2. Performance planning 3. Development planning 4. Ongoing discussions and updates between managers
and employees 5. Annual performance summary
Training resources were made available on Network Solutions’ intranet for managers and individual contributors, including access to all necessary forms. In addition to the training available on the intranet, 1- to 2-hour conference calls took place before each phase of the program was begun.
Today, part of the training associated with the perform- ance management system revolves around the idea that the development planning phase of the system is the joint year- round responsibility of managers and employees. Managers are responsible for scheduling meetings, guiding employees on preparing for meetings, and finalizing all development plans. Individual contributors are responsible for documenting the developmental plans. Both managers and employees are responsible for preparing for the meeting, filling out the development planning preparation forms, and attending the meeting.With forced distribution systems, there is a set number of employees that have to fall into set rating classifications. As noted, in the Network Solutions system employees are given a rating of 1, 2, or 3. Individual ratings are determined by
* This case study is based, in part, on actual information. Network Solutions, Inc., is a pseudonym which is being used to protect the identity of the actual company in question.
32 Part I • Strategic and General Considerations
the execution of annual objectives and job requirements as well as by a comparison rating of others at a similar level at Network Solutions. Employees receiving a 3, the lowest rating, have a specified time period to improve their perform- ance. If their performance does improve, then they are released from the plan, but they are not eligible for stock options or salary increases. If performance does not improve, they can take a severance package and leave the company or they can start on a performance improvement plan, which has more rigorous expectations and time lines than did the origi- nal action plan. If performance does not improve after the second period, they are terminated without a severance pack- age. Individuals with a rating of 2 receive average to high salary increases, stock options, and bonuses. Individuals receiving the highest rating of 1 receive the highest salary increases, stock options, and bonuses. These individuals are also treated as “high potential” employees and given extra development opportunities by their managers. The company also makes significant efforts to retain all individuals who receive a rating of 1.
Looking to the future, Network Solutions plans to con- tinue reinforcing the needed cultural change to support forced distribution ratings. HR Centers of Expertise of Network Solutions continue to educate employees about the system to ensure that they understand that Network Solutions still rewards good performance; they are just measuring it in a different way
than in the past. There is also a plan to monitor for and correct any unproductive practices and implement correcting policies and practices. To do this, Network Solutions plans on continued checks with all stakeholders to ensure that the performance management system is serving its intended purpose.
Consider Network Solutions’ performance manage- ment system in light of what we discussed as an ideal system. Then answer the following questions:
1. Overall, what is the overlap between Network
Solutions’ system and an ideal system? 2. What are the features of the system implemented at Network Solutions that correspond to the features described in the chapter as ideal characteristics? Which of the ideal characteristics are missing? For which of the ideal characteristics do we need additional information to evaluate whether they are part of the system at Network Solutions? 3. Based on the description of the system at Network Solutions, what do you anticipate will be some advantages and positive outcomes resulting from the implementation of the system? 4. Based on the description of the system at Network Solutions, what do you anticipate will be some disad- vantages and negative outcomes resulting from the implementation of the system? ■
CASE STUDY 1-3
Distinguishing Performance Management Systems from Performance Appraisal Systems
What are the differences between a performance appraisal system and a performance management system? How are the two systems related to each other? After answering these questions, consider the following 11 criticisms. Which of the following criticisms pertain to performance appraisal systems but not to performance management systems? Which criti- cisms pertain to both performance appraisal and performance management systems? Use Xs on the table below to denote answers. Then, provide an explanation for categorizing the 11 criticisms in the way you did.
Criticism 1: “[There can be] inconsistency between comments and scores on an employee’s evaluation.” Criticism 2: “The annual performance review is a bad management tool. To start with, it is not timely. If your subordinate is deficient in some ways, you wait 11
months to say something about it. How does that help next week’s performance?” Criticism 3: “Never make the evaluation a hit-and-run. It should take the form of a dialogue between the supervi- sor and subordinate, not an isolated event but rather a part of performance/career management more generally.” Criticism 4: “A number of years ago, the U.S. Equal Employment Opportunity Commission (EEOC) created a ‘Like Me’ task force. Its general conclusion—there was a human tendency to favor employees who are like the managers making the employment assessment.”
Criticism 5: “Few managers jump with glee at appraisal time. When they triage workplace demands, many times appraisals end up at the bottom. As a result, late appraisals are often the norm and not the exception.”
Chapter 1 • Performance Management and Reward Systems in Context 33
Criticism 6: “Because performance is ultimately measured on a nonstop, continuous basis, managers may become overwhelmed with cognitive load, paper- work, and generally more work to do.” Criticism 7: “What’s left is the more important strategic role of raising the reputational and intellec- tual capital of the company—but HR is, it turns out, uniquely unsuited for that.” Criticism 8: “Goal-setting, when done wrong, gives the employee the wrong goals—those, for instance, which are not aligned with the organization’s strategic orientation.”
Criticisms
Criticism 9: “Often an employee with substandard performance is evaluated as meeting expectations or even better, and the average employee receives an above-average evaluation.” Criticism 10: “[The process does not involve helping or making employees] set goals for the future.” Criticism 11: “Coaching can be tricky. When done wrong, it can be devastating. For example, a coach’s feedback can have detrimental effects if it focuses on the employee as a whole as opposed to specific work behaviors at work.” ■
Endnotes
1. DeNisi, A. S., & Kluger, A. N. (2000). Feedback effectiveness: Can 360-degree appraisals be improved? Academy of Management Executive, 14, 129–139. 2. Halachmi, A. (2005). Performance measure- ment is only one way of managing performance. International Journal of Productivity and Performance Management, 54, 502–516.
Pertains to performance appraisal systems only
Pertains to performance management systems only
Pertains to both performance appraisal and management systems
1234567891011
Source: Some of these criticisms were derived from the following sources: (a) Ryan, Liz. (2009, June 30). CEOs should skip performance reviews in 2009. Bloomberg Businessweek. Available online at http://www.businessweek.com/managing/content/ jun2009/ca20090630_736385.htm. Retrieval date: March 3, 2011; (b) Segal, Jonathan, A. (2011, January 14). The dirty dozen performance appraisal errors. Bloomberg Businessweek. Available online at http://www.businessweek.com/managing/content/ jan2011/ca20110114_156455.htm. Retrieval date: March 3, 2011; and (c) Hammonds, Keith H. (2005, August 1). Why we hate HR. Fast Company. Available online at from http://www.fastcompany.com/magazine/97/open_hr.html?page=0%2C0. Retrieval date: March 3, 2011.
3. Fandray, D. (2001, May). Managing perform- ance the Merrill Lynch way. Workforce Online. Available online at http://www.workforce. com/archive/feature/ 22/28/68/223512.php. Retrieval date: August 25, 2011. 4. Bisoux, T. (2004). Man, one business. BizEd,
3(4), 18–25. 5. Holland, K. (2006, September 10). Performance reviews: Many need improvement. The New
34 Part I • Strategic and General Considerations
York Times, Section 3, Column 1, Money and Business/Financial Desk, 3. 6. Nankervis, A. R., & Compton, R. (2006). Perfor- mance management: Theory in practice? Asia Pacific Journal of Human Resources, 44, 83–101. 7. Cascio, W. F. (2006). Global performance man- agement systems. In I. Bjorkman & G. Stahl (Eds.), Handbook of research in international human resources management (pp. 176–196). London, UK: Edward Elgar Ltd. 8. Maxwell, G., & Farquharson, L. (2008). Senior managers’ perceptions of the practice of human resource management. Employee Relations, 30, 304–322. 9. Aguinis, H., Joo, H., & Gottfredson, R. K. (in press). Why we hate performance manage- ment—and why we should love it. Business Horizons. 10. Thomas, S. L., & Bretz, R. D. (1994). Research and practice in performance appraisal: Evaluating employee performance in America’s largest companies. SAM Advanced Management Journal, 59(2), 28–34. 11. Keeping, L. M., & Levy, P. E. (2000). Performance appraisal reactions: Measure- ment, modeling, and method bias. Journal of Applied Psychology, 85, 708–723. 12. Hedge, J. W., Borman, W. C., & Lammlein, S. E. (2006). Training, performance manage- ment, and career management. In The aging workforce: Realities, myths, and implications for organizations (pp. 137–154). Washington, DC: American Psychological Association. 13. Werbel, J., & Balkin, D. B. (2010). Are human resource practices linked to employee mis- conduct? A rational choice perspective. Human Resource Management Review, 20, 317–326. 14. Peters, T. (1987). The new masters of excellence.
Niles, IL: Nightingale Conant Corp. 15. Bititci, U. S., Memdibil, K., Nudurupati, S., Turner, T., & Garengo, P. (2004). The interplay between performance measurement, organi- zational culture and management styles. Measuring Business Excellence, 8, 28–41. 16. Pennington, R. G. (2003). Change performance to change the culture. Industrial and Commercial Training, 35, 251. 17. Kuvaas, B. (2006). Performance appraisal satisfaction and employee outcomes: Mediating and moderating roles of work motivation. International Journal of Human Resource Management, 17, 504–522.
18. Pienaar, C., & Bester, C. (2009). Addressing career obstacles within a changing higher education work environment: Perspectives of academics. South African Journal of Psychology, 39, 376–385. 19. Whiting, S. W., Podsakoff, P. M., & Pierce, J. R. (2008). Effects of task performance, help- ing, voice, and organizational loyalty on per- formance appraisal ratings. Journal of Applied Psychology, 93, 125–139. 20. Mone, E. M., & London, M. (2010). Employee engagement through effective performance man- agement. New York: Routledge. 21. Sumlin, R. (2011). Performance management: Impacts and trends. DDI white paper. Available online at http:// www.exinfm.com/pdffiles/ pm.pdf. Retrieval date: August 25, 2011. 22. Gabris, G. T., & Ihrke, D. M. (2001). Does per- formance appraisal contribute to heightened levels of employee burnout? The results of one study. Public Personnel Management, 30, 157–172. 23. Brown, M., & Benson, J. (2005). Managing to overload? Work overload and performance appraisal processes. Group & Organization Management, 30, 99–124. 24. FMI Corporation. (2000, November 15). Using performance reviews to improve employee retention: Contractor’s business management report, 2. Denver, CO: FMI Corporation. 25. The following discussion is based in large part on Chapter 1 from G. T. Milcovich and J. M. Newman, Compensation management. (7th ed). New York: McGraw-Hill, 2002. 26. Lewin, D. (2002, January). Incentive compen- sation in the U.S. public sector: A study of usage, perceptions, and preferences. Paper pre- sented at the annual meeting of the Industrial Relations Research Association, Atlanta, GA. 27. Kelley, D. Doctors test pay-for-performance program. The Gazette, Colorado Springs, CO. http://www.redorbit.com/news/health/483 516/colorado_springs_colo_doctors_test_pay- forperformance_program. 28. Milstead, D. (2007, February 28). Delta Petroleum sets a high bar in execs’ perform- ance award. Rocky Mountain News, Business Section, 3. 29. Esen, E. (2003). Job benefits survey. Alexandria, VA: Society for Human Resource Management.
Chapter 1 • Performance Management and Reward Systems in Context 35
30. Why choose Sun? Available online at http://au. sun.com/employment/student/whysun. html. Retrieval date: August 25, 2011. 31. Company car or allowance? Available online at http://www.cartoday.com/content/car_mag- azine/booklets/ 2005/buyingcar/10.asp. Retrieval date: August 25, 2011. 32. Shields, J. (2007). Managing employee perform- ance and reward. New York: Cambridge University Press. 33. Pierce, C. A., Aguinis, H., & Adams, S. K. R. (2000). Effects of a dissolved workplace romance and rater characteristics on responses to a sexual harassment accusation. Academy of Management Journal, 43, 869–880. 34. Why choose Sun? Available online at http://au. sun.com/employment/student/whysun. html. Retrieval date: August 25, 2011. 35. Cleveland, J. N., & Murphy, R. E. (1989). Multiple uses of performance appraisal: Prevalence and correlates. Journal of Applied Psychology, 74, 130–135. 36. Bauer, T. N., & Erdogan. B. (2011). Organizational socialization: The effective onboarding of new employees. In Zedeck, S. (Ed.), APA handbook of industrial and organiza- tional psychology (Vol. 3, pp. 51–64). Washington, DC: American Psychological Association. 37. Berner, R. (October 31, 2005). At Sears, a great communicator. Business Week. http:/ /www.businessweek.com/magazine/con- tent/05_44/b3957103.htm. Retrieval date: August 25, 2011. 38. Bilgin, K. U. (2007). Performance manage- ment for public personnel: Multi-analysis approach toward personnel. Public Personnel Management, 36, 93–113. 39. London, M., & Smither, J. W. (2002). Feedback orientation, feedback culture, and the longitudinal performance management process. Human Resource Management Review, 12, 81–100. 40. Cascio, W. F., & Aguinis, H. (2005). Applied psychology in human resources management (6th ed). Upper Saddle River, NJ: Prentice Hall. 41. Fandray, D. (2001, May). The new thinking in performance appraisals. Workforce Online. Available online at http://www.workforce .com/archive/feature/22/28/68/index.php ?ht=selco%20selco. Retrieval date: August 25, 2011.
42. Cleveland, J. N., & Murphy, R. E. (1989). Multiple uses of performance appraisal: Prevalence and correlates. Journal of Applied Psychology, 74, 130–135. 43. McAdam, R., Hazlett, S., & Casey, C. (2005). Performance management in the UK public sector: Addressing multiple stakeholder complexity. International Journal of Public Sector Management, 18, 256–273. 44. Kwaku Ohemeng, F. L. (2009). Constraints in the implementation of performance manage- ment systems in developing countries: The Ghanaian case. International Journal of Cross Cultural Management, 9, 109–132. 45. Claus, L., & Briscoe, D. (2009). Employee performance management across borders: A review of relevant academic literature. International Journal of Management Reviews, 11, 175–196. 46. Claus, L., & Hand, M. L. (2009). Customization decisions regarding performance management systems of multinational companies: An em- pirical view of Eastern European firms. International Journal of Cross Cultural Management, 9, 237–258. 47. Grund, C., & Sliwka, D. (2009). The anatomy of performance appraisals in Germany. International Journal of Human Resource Management, 20, 2049–2065. 48. Johnston, J. (2005). Performance measure- ment uncertainty on the Grand Canal: Ethical and productivity conflicts between social and economic agency? International Journal of Productivity and Performance Management, 54, 595–612. 49. Chang, E., & Hahn, J. (2006). Does pay-for- performance enhance perceived distributive justice for collectivistic employees? Personnel Review, 35, 397–412. 50. Taylor, M. S., Masterson, S. S., Renard, M. K., & Tracy, K. B. (1998). Managers’ reactions to procedurally just performance management systems. Academy of Management Journal, 41, 568–579. 51. Thurston, P. W., Jr., & McNall, L. (2010). Justice perceptions of performance appraisal practices. Journal of Managerial Psychology, 25, 201–228. 52. Erdogan, B. (2002). Antecedents and conse- quences of justice perceptions in performance appraisals. Human Resource Management Review, 12, 555–578.
36 Part I • Strategic and General Considerations
53. Taormina, R. J., & Gao, J. H. (2009).
privacy and procedural justice perspectives. Identifying acceptable performance app-
Personnel Psychology, 52, 335–358. raisal criteria: An international perspective.
57. Sumlin, R. (2011). Performance management: Asia Pacific Journal of Human Resources, 47,
Impacts and trends. DDI white paper. Available 102–125.
online at http:// www.exinfm.com/pdffiles/ 54. Cawley, B. D., Keeping, L. M., & Levy, P. E.
pm.pdf. Retrieval date: August 25, 2011. (1998). Participation in the performance
58. Ruiz, G. (2006). Kimberly-Clark: Developing appraisal process and employee reactions: A
talent in developing world markets. Work- meta-analytic review of field investigations.
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Chapter 2
Performance Management Process
In theory, the Performance Review process can be thought of as a positive interaction between a “coach” and an employee, working together to achieve maximum performance. In reality, it’s more like finding a dead squirrel in your backyard and realizing the best solution is to fling it onto your neighbor’s roof.
—SCOTT ADAMS (THE DILBERT PRINCIPLE)
LEARNING OBJECTIVES
By the end of this chapter, you will be able to do the following:
■ Understand that performance management is an ongoing process that includes the interrelated components of prerequisites, performance planning, performance execution, performance assessment, performance review, and performance renewal and recontracting.
■ Conduct a job analysis to determine the job duties, knowledge, skills, and abilities (KSAs), and working conditions of a particular job.
■ Write a job description that incorporates the KSAs of the job and information on the organization and unit mission and strategic goals.
■ Understand that the poor implementation of any of the performance management process components has a negative impact on the system as a whole.
■ Understand that a dysfunctional or disrupted link between any two of the performance management process components has a negative impact on the system as a whole.
■ Understand important prerequisites needed before a performance management system is implemented, including knowledge of the organization’s mission and strategic goals and knowledge of the job in question.
37
38 Part I • Strategic and General Considerations
■ Distinguish results from behaviors, and understand the need to consider both in performance management systems.
■ Describe the employee’s role in performance execution, and distinguish areas over which the employee has primary responsibility from areas over which the manager has primary responsibility.
■ Understand the employee’s and the manager’s responsibility in the performance assessment phase.
■ Understand that the appraisal meeting involves the past, the present, and the future.
■ Understand the similarities between performance planning and performance renewal and recontracting.
■ Create results- and behavior-oriented performance standards.
As described in Chapter 1, performance management is an ongoing process. Performance management does not take place just once a year. Performance manage- ment is a continuous process including several components.1 These components are closely related to each other, and the poor implementation of any of them has a negative impact on the performance management system as a whole. The components in the per- formance management process are shown in Figure 2.1. This chapter provides a brief description of each of these components. Subsequent chapters address each of the components in greater detail. Let’s start with the prerequisites.
2.1 PREREQUISITES
There are two important prerequisites that are required before a performance manage- ment system is implemented: (1) knowledge of the organization’s mission and strategic goals and (2) knowledge of the job in question.2 As described in detail in Chapter 3, knowledge of the organization’s mission and strategic goals is a result of strategic plan- ning (as also discussed in detail in Chapter 3, the strategic planning process may take place after the mission and vision statements are created; thus, there is a constant inter- play between mission and vision and strategic planning). Strategic planning allows an organization to clearly define its purpose or reason for existing, where it wants to be in the future, the goals it wants to achieve, and the strategies it will use to attain these goals. Once the goals for the entire organization have been established, similar goals cascade downward, with departments setting objectives to support the organization’s overall mission and objectives. The cascading continues downward until each employee has a set of goals compatible with those of the organization.
Unfortunately, it is often the case that many organizational units are not in tune with the organization’s strategic direction. However, there seems to be a trend in the pos- itive direction. For example, a study including public sector organizations in Queensland, Australia, showed a fairly high level of strategic integration of the human resources (HR) function. Specifically, approximately 80% of the organizations that participated in the study were categorized as having achieved the highest level of strate- gic integration. This level is characterized by a dynamic and multifaceted linkage based on an “integrative relationship between people management and strategic management process.”3 Recall that an important objective of any performance management system is to enhance each employee’s contribution to the goals of the organization. If there is a lack
Chapter 2 • Performance Management Process 39
Prerequisites
Performance Planning
Performance Execution
Performance Assessment
Performance Review
Performance Renewal & Recontracting
FIGURE 2.1 Performance Management Process
of clarity regarding where the organization wants to go, or if the relationship between the organization’s mission and strategies and the unit’s mission and strategies is not clear, there will be a lack of clarity regarding what each employee needs to do and achieve to help the organization get there.
40 Part I • Strategic and General Considerations
The second important prerequisite before a performance management system is implemented is to understand the job in question. This is done through job analysis. Job analysis is a process of determining the key components of a particular job, including activ- ities, tasks, products, services, and processes. A job analysis is a fundamental prerequisite of any performance management system. Without a job analysis, it is difficult to understand what constitutes the required duties for a particular job. If we don’t know what an employee is supposed to do on the job, we won’t know what needs to be evaluated and how to do so.
As a result of a job analysis, we obtain information regarding the tasks carried out and the knowledge, skills, and abilities (KSAs) required of a particular job. Knowledge includes having the information needed to perform the work, but not necessarily having done it. Skills refer to required attributes that are usually acquired by having done the work in the past. Ability refers to having the physical, emotional, intellectual, and psychological aptitude to perform the work, but neither having done the job nor having been trained to do the work is required.4
The tasks and KSAs needed for the various jobs are typically presented in the form of a job description, which summarizes the job duties, needed KSAs, and working conditions for a particular job. As an illustration, see the box “Job Description for Trailer Truck Driver.” This job description includes information about what tasks are performed (e.g., operation of a specific type of truck). It also includes information about the needed knowledge (e.g., manifests, bills of lading), skills (e.g., keeping the truck and trailer under control, particularly in difficult weather conditions), and abilities (e.g., physical and spatial abilities needed to turn narrow corners).
Job analysis can be conducted using observation, off-the-shelf questionnaires, or interviews. Data are collected from job incumbents (i.e., those doing the job at pres- ent) and their supervisors. Alternatively, if the job is yet to be created, data can be gathered from the individual(s) responsible for creating the new position and those who will supervise individuals in the new position. Observation methods include job analysts watching incumbents do the job, or even trying to do the work themselves, and then producing a description of what they have observed. This method can be subject to biases because job analysts may not be able to distinguish important from unimportant tasks. Such analysis may not be suitable for many jobs. For example, a job analyst could not do the work of a police officer for safety reasons or the work of a software programmer for the lack of knowledge and skills to do the work. Off-the- shelf methods involve distributing questionnaires, including a common list of tasks or KSAs, and asking individuals to fill them out, indicating the extent to which each task or KSA is required for a particular job in question. These generic off-the-shelf tools can be practical, but they might not capture the nuances and idiosyncrasies of jobs out of the mainstream.
Interviews are a very popular job analysis method. During a job analysis inter- view, the job analyst asks the interviewee to describe what he or she does (or what indi- viduals in the position do) during a typical day at the job from start to finish (i.e., in chronological order). Alternatively, the job analyst can ask the interviewee to describe the major duties involved in the job and then ask him or her to break down these duties into specific tasks. Once a list of tasks has been compiled, all incumbents should have
Chapter 2 • Performance Management Process 41
BOX 2.1
Job Description for Trailer Truck Driver: Civilian Personnel Management Service, U.S. Department of Defense
Operates gasoline- or diesel-powered truck or truck tractor equipped with two or more driving wheels and with four or more forward speed transmissions, which may include two or more gear ranges. These vehicles are coupled to a trailer or semitrailer by use of a turntable (fifth wheel) or pintle (pivot) hook. Drives over public roads to transport materials, merchandise, or equipment. Performs difficult driving tasks such as backing truck to loading platform, turning narrow corners, negotiating narrow passageways, and keeping truck and trailer under control, particularly on wet or icy highways. May assist in loading and unloading truck. May also handle manifest, bills of lading, expense accounts, and other papers pertinent to the shipment.
an opportunity to review the information and rate each task in terms of frequency and criticality. The frequency and criticality scales may be the following:5
Frequency Criticality
0: not performed 0: not critical 1: every few months to yearly 1: low level of criticality 2: every few weeks to monthly 2: below average level of criticality 3: every few days to weekly 3: average level of criticality 4: every few hours to daily 4: above average level of criticality 5: hourly to many times each hour 5: extremely critical
Rating both frequency and criticality is necessary because some tasks may be performed regularly (e.g., making coffee several times a day) but may not be very critical. The job analyst can then multiply the frequency scores by the criticality scores to obtain an overall score for each task. So, if making coffee receives a frequency score of 4 (i.e., “every few hours to daily”) and a criticality score of 0 (i.e., “not critical”), the overall score would be 4 × 0 = 0. Considering frequency scores alone would have given us the wrong impression that making coffee is a task that deserved a prominent role in the job description. Overall scores for all tasks can be ranked from highest to lowest to obtain a final list of tasks.
Numerous job analysis questionnaires are available on the Internet. These questionnaires, which can be administered online, with a paper survey or in interview format, can be used for a variety of positions. For example, the state of Delaware uses a job analysis questionnaire available at http://www.delawarepersonnel.com/class/ forms/jaq/jaq.shtml or http://www.delawarepersonnel.com/class/forms/jaq/jaq .htm. This questionnaire includes 18 multiple-choice job content questions. Job content information is assessed through three factors: (1) knowledge and skills, (2) problem solving, and (3) accountability and end results. As a second example, the city of
42 Part I • Strategic and General Considerations
Alexandria, Virginia, uses a job analysis questionnaire available at http://alexandriava .gov/class_comp/job_analysis.html. This instrument does not include multiple-choice questions. Instead, employees answer more general questions about their jobs together with the allocation of the percentage of time employees spend performing each duty. In addition, respondents are encouraged to attach forms, work schedules, reports, memoranda, and other materials that may help explain the responses provided. Conducting a Google search for the phrase “job analysis questionnaire” leads to several other instruments. Be aware that some of these instruments may have been created for specific types of jobs and industries (e.g., service jobs, nonsupervisory jobs). Make sure you check the suitability of the instrument before using it in a different organizational context. Combining items and formats from various instruments already available may be the most effective way to proceed.
An important component of a good job analysis is rater training. In other words, there are several biases that can affect the accuracy of the information provided by individuals regarding KSAs needed for a job.6 Consider the following biasing factors:
1. Self-serving bias: This bias leads people to report that their own behaviors and personality traits are more needed for successful job performance compared to behaviors and personality traits of others. This is because people tend to attribute success to themselves and failure to external causes (i.e., factors outside of their control). 2. Social projection and false consensus bias: Social projection bias leads people to believe that others behave similarly to themselves and, hence, lead people to think about themselves when reporting KSAs for their job instead of people in general. False consensus bias is similar in that it leads people to believe that others share the same beliefs and attitudes as themselves.
Taken together, self-serving, social projection, and false consensus biases affect job analysis ratings because they lead people to believe that their own KSAs are those driving success on their jobs. So, these lead to an exaggerated view regarding the KSAs needed—and this exaggeration is based on precisely the KSAs that job incumbents have.How do we address these biases? A recent experimental study involving two independent samples of 96 administrative support assistants and 95 supervisors working for a large city government implemented a successful Web-based training program that succeeded in mitigating these biases.7 Specifically, across the five job characteristics rated in that study, individuals who did not participate in the Web-based training program were 62% (administrative support assistants) and 68% (supervisors) more likely to provide a higher rating than if the same individual provided the job analysis ratings after participating in the training program. The Web-based training program, which takes about 15 minutes to administer, provides a common frame of reference for all raters and includes the following five steps:
1. provide raters with a definition of each rating dimension 2. define the scale anchors 3. describe what behaviors were indicative of each dimension 4. allow raters to practice their rating skills, and 5. provide feedback on the practice
Chapter 2 • Performance Management Process 43
The information obtained from a job analysis is used for writing a job description. Writing a job description may seem like a daunting task; however, it does not have to be difficult. Generic job descriptions can be obtained from the Occupational Informational Network (O*NET) (http://online.onetcenter.org/find/). O*NET is a comprehensive database of worker attributes and job characteristics that provides a common language for defining and describing occupations. The descriptions available via O*NET can serve as a foundation for a job description. O*NET descriptions can be easily adapted and changed to accommodate specific local characteristics. For example, see O*NET’s generic description for truck drivers in the box “Summary Report for Tractor-Trailer Truck Drivers” (from O*NET). First, the summary description can be checked for accu- racy and relevance by supervisors. Then, the list of KSAs provided by O*NET can be readily rated by incumbents (and additional KSAs may be added if needed).
O*NET can also be a very useful resource for small businesses because, for most of them, conducting a job analysis may not be feasible simply because there are not suffi- cient numbers of people from whom to collect data. In addition, O*NET can be used when organizations expand and new positions are created. One thing needs to be clear, however: jobs change. Thus, job descriptions must be checked for accuracy and updated as needed.
Job descriptions are a key prerequisite for any performance management system because they provide the criteria (i.e., yardsticks) that will be used in meas- uring performance. Such criteria may concern behaviors (i.e., how to perform) or results (i.e., what outcomes should result from performance). In our truck driver example, a behavioral criterion could involve the skill “equipment maintenance.” For example, a supervisor may rate the extent to which the employee “performs routine maintenance on equipment and determines when and what kind of mainte- nance is needed.” Regarding results, these criteria usually fall into one of the fol- lowing categories: (1) quality, (2) quantity, (3) cost-effectiveness, and (4) timeliness.8 In the truck driver example, results-oriented criteria can include number of acci- dents (i.e., quality) and amount of load transported over a specific period of time (i.e., quantity).
Some organizations are becoming aware of the importance of considering pre- requisites before implementing a performance management system. Take the case of Deaconess Hospital in Oklahoma City, Oklahoma, which includes a workforce of 650 physicians and a total of 1,400 employees (http://www.deaconessokc.org/). Deaconess Hospital has been able to effectively integrate employees’ job descriptions within their performance management system. The need for this integration was rein- forced by results from an employee survey revealing that employees did not know what they were being evaluated on. Therefore, with the input of employees, the hospital updated each of the 260 job descriptions. At present, each employee’s job description is part of the performance review form. The new forms incorporate task performance standards as well as behaviors specific to individual jobs. For example, a nurse may be evaluated on “how well he or she safely, timely, and respectfully administers patient med- ication and on his or her planning and organization skills.” In addition, Deaconess Hospital has been able to link each employee’s performance to the strategy and goals of the organization. Specifically, all employees are rated on the following core behaviors con- sidered to be of top strategic importance for this particular organization: (1) adaptability, (2) building customer loyalty, (3) building trust, and (4) contributing to team success.9
44 Part I • Strategic and General ConsiderationsBOX 2.2
Summary Report for Tractor-Trailer Truck Drivers (from O*NET)
Description Drive a tractor-trailer combination or a truck with a capacity of at least 26,000 gross vehicle weight (GVW) to transport and deliver goods, livestock, or materials in liquid, loose, or packaged form. May be required to unload truck. May require use of automated routing equipment. Requires commercial driver’s license.
Tasks• Follow appropriate safety procedures when transporting dangerous goods.
• Check vehicles before driving them to ensure that mechanical, safety, and emergency equipment is in good working order.
• Maintain logs of working hours and of vehicle service and repair status, following applica- ble state and federal regulations.
• Obtain receipts or signatures when loads are delivered, and collect payment for services when required.
• Check all load-related documentation to ensure that it is complete and accurate.
• Maneuver trucks into loading or unloading positions, following signals from loading crew as needed; check that vehicle position is correct and any special loading equipment is properly positioned.
• Drive trucks with capacities greater than 3 tons, including tractor-trailer combinations, in order to transport and deliver products, livestock, or other materials.
• Secure cargo for transport, using ropes, blocks, chain, binders, and/or covers.
• Read bills of lading to determine assignment details.
• Report vehicle defects, accidents, traffic violations, or damage to the vehicles.
Knowledge
• Transportation—Knowledge of principles and methods for moving people or goods by air, rail, sea, or road, including the relative costs and benefits.
• Public Safety and Security—Knowledge of relevant equipment, policies, procedures, and strategies to promote effective local, state, or national security operations for the protection of people, data, property, and institutions.
• English Language—Knowledge of the structure and content of the English language including the meaning and spelling of words, rules of composition, and grammar.
• Law and Government—Knowledge of laws, legal codes, court procedures, precedents, government regulations, executive orders, agency rules, and the democratic political process.
• Mathematics—Knowledge of arithmetic, algebra, geometry, calculus, statistics, and their applications.
Skills• Equipment Maintenance—Performing routine maintenance on equipment and determining
when and what kind of maintenance is needed.
• Active Listening—Giving full attention to what other people are saying, taking time to understand the points being made, asking questions as appropriate, and not interrupting at inappropriate times.
(continued)
Chapter 2 • Performance Management Process 45
Box 2.2 (Continued)
• Time Management—Managing one’s own time and the time of others.
• Coordination—Adjusting actions in relation to others’ actions.
• Judgment and Decision Making—Considering the relative costs and benefits of potential actions to choose the most appropriate one.
• Reading Comprehension—Understanding written sentences and paragraphs in work- related documents.
• Troubleshooting—Determining causes of operating errors and deciding what to do about it.
• Speaking—Talking to others to convey information effectively.
• Mathematics—Using mathematics to solve problems.
• Critical Thinking—Using logic and reasoning to identify the strengths and weaknesses of alternative solutions, conclusions, or approaches to problems.
Abilities
• Far Vision—The ability to see details at a distance.
• Reaction Time—The ability to quickly respond (with the hand, finger, or foot) to a signal (sound, light, picture) when it appears.
• Static Strength—The ability to exert maximum muscle force to lift, push, pull, or carry objects.
• Response Orientation—The ability to choose quickly between two or more movements in response to two or more different signals (lights, sounds, pictures). It includes the speed with which the correct response is started with the hand, foot, or other body part.
• Spatial Orientation—The ability to know your location in relation to the environment or to know where other objects are in relation to you.
• Near Vision—The ability to see details at close range (within a few feet of the observer).
• Depth Perception—The ability to judge which of several objects is closer or farther away from you, or to judge the distance between you and an object.
• Extent Flexibility—The ability to bend, stretch, twist, or reach with your body, arms, and/or legs.
• Multilimb Coordination—The ability to coordinate two or more limbs (e.g., two arms, two legs, or one leg and one arm) while sitting, standing, or lying down. It does not involve per- forming the activities while the whole body is in motion.
• Manual Dexterity—The ability to quickly move your hand, your hand together with your arm, or your two hands to grasp, manipulate, or assemble objects.
In summary, there are two important prerequisites that must exist before the implementation of a successful performance management system. First, there is a need to have good knowledge of the organization’s mission and strategic goals. This knowledge, combined with knowledge regarding the mission and strategic goals of their unit, allows employees to make contributions that will have a positive impact on the unit and on the organization as a whole. Second, there is a need to have good knowledge of the job in question: what tasks need to be done, how they should be done, and what KSAs are needed. Such knowledge is obtained through a job analysis. If we have good information regarding a job, then it is easier to establish criteria for job success.
46 Part I • Strategic and General Considerations
2.2 PERFORMANCE PLANNING
Employees should have a thorough knowledge of the performance management system. In fact, at the beginning of each performance cycle, the supervisor and the employee meet to discuss and agree upon what needs to be done and how it should be done. This performance planning discussion includes a consideration of both results and behaviors as well as a development plan.
2.2.1 Results
Results refer to what needs to be done or the outcomes an employee must produce. A consideration of results needs to include the key accountabilities, or broad areas of a job for which the employee is responsible for producing results. This information is typi- cally obtained from the job description. A discussion of results also includes specific objectives that the employee will achieve as part of each accountability. Objectives are statements of important and measurable outcomes. Finally, discussing results also means discussing performance standards. A performance standard is a yardstick used to evaluate how well employees have achieved each objective. Performance standards provide information about acceptable and unacceptable performance (e.g., quality, quantity, cost, and time).
Consider the job of university professors. Two key accountabilities are (1) teach- ing (preparation and delivery of instructional materials to students) and (2) research (creation and dissemination of new knowledge). An objective for teaching could be “to obtain a student evaluation of teaching performance of 3 on a 4-point scale.” An objective for research could be “to publish two articles in scholarly refereed jour- nals per year.” Performance standards could be “to obtain a student evaluation of teaching performance of at least 2 on a 4-point scale” and “to publish at least one article in scholarly referred journals per year.” Thus, the objective is the desired level of performance, whereas the standard is usually a minimum acceptable level of performance.
2.2.2 Behaviors
Although it is important to measure results, an exclusive emphasis on results can give a skewed or incomplete picture of employee performance. For example, for some jobs it may be difficult to establish precise objectives and standards. For other jobs, employees may have control over how they do their jobs but not over the results of their behaviors. For example, the sales figures of a salesperson could be affected more by the assigned sales territory than by the salesperson’s ability and performance. Behaviors, or how a job is done, thus constitute an important component of the planning phase. This is prob- ably why results from a survey indicated that, in addition to sales figures, salespeople would like to be appraised on such behavioral criteria as communications skills and product knowledge.10
A consideration of behaviors includes discussing competencies, which are measur- able clusters of KSAs that are critical in determining how results will be achieved. Examples of competencies are customer service, written or oral communication, creative thinking, and dependability. Returning to the example of the professor, assume that teaching is done online and numerous technology-related problems exist, so that
Chapter 2 • Performance Management Process 47
BOX 2.3
Performance Planning at Discover
At Discover (http://www.discoverfinancial.com/data/corporate/), steps are being taken to ensure that performance planning and employee development support the organization’s business goals. Discover Financial Services is a business unit of Morgan Stanley, and operates the Discover® Card brands. The business offers a variety of cards including the Discover Classic Card, the Discover Gold Card, the Discover Platinum Card, the Miles Card from Discover Card, and an array of affinity cards. Additional services include Discover CDs and Money Market Accounts, auto insurance, and home loans. Discover is headquartered in Riverwoods, Illinois, and employs approximately 14,000 people. Discover has initiated an approach that addresses the development needs of specific business units by assigning human resources professionals to attend business meetings regularly to gain an understanding of what knowledge, skills, and abilities are required. The company asks managers to go through the same curriculum with classroom and online learning opportunities. These managers form discussion groups to discuss what they’ve learned and how it applies to the challenges of their specific role. In addition, part of the strategy includes meeting with employees to agree upon metrics in the performance planning stage, creating an action plan, and following up with evaluations and ratings to determine to what degree the learning experience was successful. In summary, Discover utilizes the various stages of the performance management process to ensure that employee development is a focus that matches the mission of providing a workplace that supports high performance.11
the resulting teaching evaluations are deficient (i.e., lower than the standard of 2). This is an example of a situation in which behaviors should be given more importance than results. In this situation, the evaluation could include competencies such as online communication skills (e.g., in the chat room).
2.2.3 Development Plan
An important step before the review cycle begins is for the supervisor and employee to agree on a development plan. At a minimum, this plan should include identifying areas that need improvement and setting goals to be achieved in each area. Development plans usually include both results and behaviors. The topic of development plans is addressed in detail in Chapter 8.
In summary, performance planning includes the consideration of results and behaviors and the development plan. A discussion of results needs to include key accountabilities (i.e., broad areas for which an employee is responsible), specific objectives for each key accountability (i.e., goals to be reached), and performance standards (i.e., what constitutes acceptable and unacceptable levels of performance). A discussion of behaviors needs to include competencies (i.e., clusters of KSAs). Finally, the development plan includes a description of areas that need improving and goals to be achieved in each area.
Once the prerequisites are met and the planning phase has been completed, we are ready to begin the implementation of the performance management system. This includes performance execution, assessment, review, and renewal and recontracting.
48 Part I • Strategic and General Considerations
2.3 PERFORMANCE EXECUTION
Once the review cycle begins, the employee strives to produce the results and display the behaviors agreed upon earlier as well as to work on developmental needs. The employee has primary responsibility and ownership of this process. Employee participation does not begin at the performance execution stage, however. As noted earlier, employees need to have active input in the development of job descriptions, performance standards, and the creation of the rating form. In addition, at later stages, employees are active participants in the evaluation process in that they provide a self- assessment and the performance review interview is a two-way communication process. At the performance execution stage, the following factors must be present:12
1. Commitment to goal achievement. The employee must be committed to the goals that were set. One way to enhance commitment is to allow the employee to be an active participant in the process of setting the goals. 2. Ongoing performance feedback and coaching. The employee should not wait until the review cycle is over to solicit performance feedback. Also, the employee should not wait until a serious problem develops to ask for coaching. The employee needs to take a proactive role in soliciting performance feedback and coaching from her supervisor.13 3. Communication with supervisor. Supervisors are busy with multiple obliga- tions. The burden is on the employee to communicate openly and regularly with the supervisor. 4. Collecting and sharing performance data. The employee should provide the supervisor with regular updates on progress toward goal achievement, in terms of both behaviors and results. 5. Preparing for performance reviews. The employee should not wait until the end of the review cycle approaches to prepare for the review. On the contrary, the employee should engage in an ongoing and realistic self-appraisal so that immedi- ate corrective action can be taken if necessary. The usefulness of the self-appraisal process can be enhanced by gathering informal performance information from peers and customers (both internal and external).
Although the employee has primary responsibilities for performance execution, the supervisor also needs to do his or her share of the work. In fact, monitoring the performance of colleagues has been identified as a key competency by the Management Standards Centre (www.management-standards.com, Unit B5). Supervisors have primary responsibility over the following issues:14
1. Observation and documentation. Supervisors must observe and document performance on a daily basis. It is important to keep track of examples of both good and poor performance. 2. Updates. As the organization’s goals may change, it is important to update and revise initial objectives, standards, and key accountabilities (in the case of results) and competency areas (in the case of behaviors). 3. Feedback. Feedback on progression toward goals and coaching to improve performance should be provided on a regular basis certainly before the review cycle is over.
Chapter 2 • Performance Management Process 49
TABLE 2.1 Performance Execution Stage: Areas for Which Employees and
Managers Have Primary Responsibility
Employees Managers
Commitment to goal achievement Observation and documentation Ongoing performance feedback and coaching Updates Communication with supervisor Feedback Collecting and sharing performance data Resources Preparing for performance reviews Reinforcement
4. Resources. Supervisors should provide employees with resources and opportu- nities to participate in developmental activities. Thus, they should encourage (and sponsor) participation in training, classes, and special assignments. Overall, supervisors have a responsibility to ensure that the employee has the necessary supplies and funding to perform the job properly. 5. Reinforcement. Supervisors must let employees know that their outstanding performance is noticed by reinforcing effective behaviors and progress toward goals. Also, supervisors should provide feedback regarding negative performance and how to remedy the observed problem. Observation and communication are not sufficient. Performance problems must be diagnosed early, and appropriate steps must be taken as soon as the problem is discovered.
The summary list included in Table 2.1 makes it clear that both the employee and the manager are responsible for performance execution. As an example of this shared responsibility in an actual organization, consider the case of Lockheed Martin Corporation. Lockheed Martin Corporation, an advanced technology company, was formed in March 1995 with the merger of two of the world’s premier technology companies: Lockheed Corporation and Martin Marietta Corporation. Lockheed Martin has approximately 140,000 employees worldwide. They are engaged in the research, design, development, manufacture, and integration of advanced technology systems, products, and services (www.lockheedmartin.com). Lockheed Martin’s performance management system includes the active participation of both employees and their supervisors. Specifically, employees write their own performance management objectives based on organization and unit objectives. Then, managers approve the objectives and are encouraged to give ongoing feedback about the progress toward meeting the objectives. The actual per- formance appraisal form is an electronic, one-page computer screen. The program was designed to “involve employees in setting their own goals, to make those goals clear and to provide regular feedback on their progress toward achieving those goals.”15
2.4 PERFORMANCE ASSESSMENT
In the assessment phase, both the employee and the manager are responsible for evalu- ating the extent to which the desired behaviors have been displayed, and whether the desired results have been achieved. Although many sources can be used to collect performance information (e.g., peers, subordinates), in most cases the direct supervisor
50 Part I • Strategic and General Considerations
provides the information. This also includes an evaluation of the extent to which the goals stated in the development plan have been achieved.
It is important that both the employee and the manager take ownership of the assessment process. The manager fills out her appraisal form, and the employee should also fill out his form. The fact that both parties are involved in the assessment provides good information to be used in the review phase. When both the employee and the supervisor are active participants in the evaluation process, there is a greater likelihood that the information will be used productively in the future. Specifically, the inclusion of self-ratings helps emphasize possible discrepancies between self-views and the views that important others (i.e., supervisors) have of our behavior. It is the discrepancy between these two views that is most likely to trigger development efforts, particularly when feed- back from the supervisor is more negative than are employee self-evaluations.16
The inclusion of self-appraisals is also beneficial regarding important additional factors. Self-appraisals can reduce an employee’s defensiveness during an appraisal meeting and increase the employee’s satisfaction with the performance management system as well as enhance perceptions of accuracy and fairness and therefore accept- ance of the system.17 This point is addressed in more detail in later chapters.
In sum, both the employee and the supervisor must evaluate employee per- formance. Employee involvement in the process increases employee ownership and commitment to the system. In addition, it provides important information to be discussed during the performance review, which is discussed next.
2.5 PERFORMANCE REVIEW
The performance review stage involves the meeting between the employee and the manager to review their assessments. This meeting is usually called the appraisal meeting or discussion. The appraisal meeting is important because it provides a formal setting in which the employee receives feedback on his or her performance. In spite of its importance in performance management, the appraisal meeting is often regarded as the “Achilles’ heel of the entire process.”18 This is because many managers are uncom- fortable providing performance feedback, particularly when performance is deficient.19 This high level of discomfort, which often translates into anxiety and the avoidance of the appraisal interview, can be mitigated through training those responsible for pro- viding feedback. As will be discussed in detail in Chapters 6 and 9, providing feedback in an effective manner is extremely important because it leads not only to performance improvement but also to employee satisfaction with the system. For example, a study involving more than 200 teachers in Malaysia, including individuals with distinct Chinese, Malay, and Indian cultural backgrounds, found that when they received effective feedback, they reported greater satisfaction with the system even when they received low performance ratings.20 At this point, however, let’s emphasize that people are apprehensive about both receiving and giving performance information, and this apprehension reinforces the importance of a formal performance review as part of any performance management system.21 For example, Jack Welch, former CEO of GE, has addressed this issue in many of his public appearances since he retired.22 At an appear- ance in front of an audience of about 2,000 managers, he asked them if their organiza- tions had integrity. As was expected, a vast majority of managers, about 95%, raised their hands. Then, he asked the same audience if their organization’s leaders provide
Chapter 2 • Performance Management Process 51
BOX 2.4
Performance Assessment at ENSR
ENSR (http://www.ensr.aecom.com) is a full-service global provider of environmental and energy development services to industry and government. ENSR’s 2,000 professionals provide clients with consulting, engineering, remediation, and related services from more than 70 worldwide locations, including 45 in the United States. ENSR has created and utilizes a scorecard with six categories that are directly linked to its five-year vision: health and safety, employee engage- ment, client loyalty, cost management, profitability, and revenue growth. This information is used in the company’s evaluation of current performance for individuals and groups with a scorecard that shows current performance against “average” internal performance and “top 25 percent performance.” Managers are expected to utilize the scorecard in discussions about performance and to discuss the relationship between the metrics and the directives and initiatives from senior management. The scorecard is a tool used to motivate employees to achieve top performance and to provide a clear link between each individual and team activity to the strategic objectives of the organization. In summary, ENSR utilizes a balanced scorecard tool to assist managers in assessing and reviewing performance and ensuring a close link to the objectives of the organization.23
subordinates with honest and straightforward performance feedback. Only about 5% of the people raised their hands. Avoiding giving negative feedback is very dangerous because it conveys the message that mediocrity is acceptable and damages the morale of the top performers who are about four times as productive as the poor performers. In most cases, the appraisal meeting is regarded as a review of the past, that is, what was done (i.e., results) and how it was done (i.e., behaviors). For example, a survey including more than 150 organizations in Scotland showed that performance management systems in more than 80% of organizations emphasize the past.24 The appraisal meeting should also include a discussion of the employee’s developmental progress as well as plans for the future. The conversation should include a discussion of goals and development plans that the employee will be expected to achieve over the period before the next review session. In addition, a good appraisal meeting includes information on what new compensation, if any, the employee may be receiving as a result of his performance. In short, the appraisal discussion focuses on the past (what has been done and how), the present (what compensation is received or denied as a result), and the future (goals to be attained before the upcoming review session).
As noted earlier, the discussion about past performance can be challenging, partic- ularly when performance levels have not reached acceptable levels. Following is a script reflecting what the first few seconds of the appraisal meeting can be like.25
Good afternoon, Lucy, please have seat. As you know, we take performance very seriously, and we scheduled our meeting today to talk about the work you have done over the past year. Because we believe in the importance of talking about performance issues, I blocked an hour of my time during which I won’t take any phone calls and I also won’t be texting or emailing with any- one. I want to be able to focus 100% on our conversation because talking
52 Part I • Strategic and General Considerations
about performance will be helpful to both of us. Let’s go through this process step by step. First, I would like you to tell me about your own views about your performance during the past year. Specifically, please share with me the things you believe you did particularly well and areas in which you think you may have been able to do better. As a second step, I will tell you about the performance evaluation I prepared. As a third step, we will talk about the issues on which you and I agree. As a fourth step, we can talk about issues for which we may have different perspectives. I will explain the reasoning behind my views and I want to hear the reasoning behind yours. In terms of my evaluation of your work, I want to first make sure we agree on the specific goals and objectives of your job. Then, we will talk about the results you achieved this year and the section on the evaluation form about job skills and competencies. After we talk about that, I will tell you what my overall rating is and why I believe this is an appropriate score. Ok, let’s go ahead and start. Please tell me about how things went this past year.
We discuss performance reviews in more detail in Chapter 9. For now, however, consider the centrality of the performance review stage in the performance manage- ment process by reading the box “Six Recommended Steps for Conducting Productive Performance Reviews.”26
2.6 PERFORMANCE RENEWAL AND RECONTRACTING
The final stage in the performance process is renewal and recontracting. Essentially, this is identical to the performance planning component. The main difference is that the renewal and recontracting stage uses the insights and information gained from the other phases. For example, some of the goals may have been set unrealistically high given an unexpected economic downturn. This would lead to setting less ambitious goals for the upcoming review period.
BOX 2.5
Six Recommended Steps for Conducting Productive Performance Reviews
1. Identify what the employee has done well and poorly by citing specific positive and negative
behaviors. 2. Solicit feedback from your employee about these behaviors. Listen for reactions and
explanations. 3. Discuss the implications of changing, or not changing, the behaviors. Positive feedback is best, but an employee must be made aware of what will happen if any poor performance continues. 4. Explain to the employee how skills used in past achievements can help him overcome any
current performance problems. 5. Agree on an action plan. Encourage the employee to invest in improving his performance by asking questions such as “What ideas do you have for ______?” and “What suggestions do you have for ______?” 6. Set up a meeting to follow up and agree on the behaviors, actions, and attitudes to be
evaluated.
Chapter 2 • Performance Management Process 53
The performance management process includes a cycle which starts with pre- requisites and ends with performance renewal and recontracting. The cycle is not over after the renewal and recontracting stage. In fact, the process starts all over again: there needs to be a discussion of prerequisites, including the organization’s mission and strategic goals and the job’s KSAs. Because markets change, customers’ preferences and needs change, and products change, there is a need to continuously monitor the pre- requisites so that performance planning and all the subsequent stages are consistent with the organization’s strategic objectives. Recall that, in the end, one of the main goals of any performance management system is to promote the achievement of organization- wide goals. Obviously, if managers and employees are not aware of these strategic goals, it is unlikely that the performance management system will be instrumental in accomplishing the strategic goals.
Summary Points
• Performance management is an ongoing process. It never ends. Once established in an organization, it becomes part of an organization’s culture. The performance management process includes six closely related components: (1) prerequisites, (2) per- formance planning, (3) performance execution, (4) performance assessment, (5) performance review, and (6) per- formance renewal and recontracting.
• Job analysis can be conducted using interviews, observation, or off-the-shelf questionnaires. It is important to train individuals to fill out job analysis instruments so as to minimize biases (i.e., self-serving bias, social projection, and false consensus) in the resulting ratings. Once a list of tasks has been compiled, all incumbents should have an opportunity to review the infor- mation and rate each task in terms of its frequency and criticality.
•Each of the six components of the performance management process plays an important role. If any of these com- ponents is implemented poorly, then the entire performance management system suffers. For example, the lack of knowledge of the organization’s
mission and strategic goals and the job in question (i.e., prerequisites) will not allow performance planning (i.e., per- formance road map) to be aligned with organizational goals, which in turn will lead to poor performance execu- tion. In short, a performance manage- ment system is only as good as its weakest component.
• The links between the various compo- nents must be clearly established. For example, performance planning needs to be closely related to performance execution. Performance planning is a futile exercise if execution does not follow from it. The same applies to all the arrows linking the various compo- nents, as shown in Figure 2.1.
• The first component of the perform- ance management process involves two prerequisites. First, there is a need to have good knowledge of the organi- zation’s mission and strategic goals. This knowledge, combined with knowledge regarding the mission and strategic goals of one’s unit, allows employees to make contributions that will have a positive impact on their units and on the organization as a whole. Second, there is a need to have
54 Part I • Strategic and General Considerations
good knowledge of the job in question. A job analysis allows for the determi- nation of the key components of a par- ticular job: what tasks need to be done, how they should be done, and what KSAs are needed. If we have good information regarding a job, then it is easier to establish criteria for job success.
• The second component of the perform- ance management process involves performance planning. Performance planning includes the consideration of results and behavior as well as a dev- elopment plan. A discussion of results needs to include key accountabilities (i.e., broad areas for which an employee is responsible), specific objectives for each key accountability (i.e., goals to be reached), and performance standards (i.e., what are acceptable and unaccept- able levels of performance). A discussion of behaviors needs to include compe- tencies (i.e., clusters of KSAs). Finally, the development plan includes a description of areas that need improve- ment and goals to be achieved in each area.
•The third component involves per- formance execution. Both the employee and the manager are responsible for performance execution. For example, the employee needs to be committed to goal achievement and should take a proactive role in seeking feedback from his or her supervisor. The burden is on the employee to communicate openly and regularly with the supervisor. Also, the employee has a responsibility to be prepared for the performance review by conducting regular and realistic self- appraisals. On the other hand, the supervisor also has important responsi- bilities. These include observing and documenting performance, updating the employee on any changes in the
goals of the organization, and provid- ing resources and reinforcement so that the employee can succeed and continue to be motivated.
• The fourth component involves per- formance assessment. Both the employee and the supervisor must eval- uate employee performance. Involve- ment of the employee in the process increases his or her ownership and com- mitment to the system. In addition, it provides important information to be discussed during the performance review. In the absence of self-appraisals, it is often not clear to supervisors if employees have a real understanding of what is expected of them.
• The fifth component involves perform- ance review when the employee and manager meet to discuss employee performance. This meeting is usually called the appraisal meeting. This meeting typically emphasizes the past: what the employee has done and how it was done. An effective appraisal meeting also focuses on the present and the future. The present involves the changes in compensation that may result from the results obtained. The future involves a discussion of goals and development plans that the employee will be expected to achieve during the period before the next review session.
•The final component involves per- formance renewal and recontracting. Although this component is identical to the performance planning stage, this component uses information gathered during the review period to make adjustments as needed. For example, some new key accountabili- ties and competencies may be included. Conversely, some goals may have to be adjusted either upward or downward.
Chapter 2 • Performance Management Process 55
CASE STUDY 2-1
Job Analysis Exercise
Please conduct a job analysis for the position “graduate student enrolled in a master’s program in the general field of business.” This job analysis may benefit from interviewing incumbents (i.e., other students) as well as supervisors (i.e., faculty). In addition, of course, you can rely on your own knowledge of the “job.” By the end of your job analysis, follow the O*NET format to create a summary description for the position as well as a list of tasks, knowledge, skills, and abilities needed for successful performance. Use the box “Summary Report for Tractor-Trailer Truck Drivers (from O*NET)” as a template.
Your job description should include four lists—one for tasks, one for knowledge, one for skills, and one for abilities. For each of the four lists, rate the corresponding elements in terms of frequency and criticality. Use the scales provided below to rate each element. Then, multiply the frequency and criticality scores for each of the elements in each list to obtain its overall score. Then, arrange the list of elements in order of importance from high to low.
Have one or more people (who are knowledgeable about the position “graduate student enrolled in a master’s program
Frequency and Criticality Scales
Frequency Criticality
0: not performed 0: not critical 1: every few months to yearly 1: low level of criticality 2: every few weeks to monthly 2: below average level of criticality 3: every few days to weekly 3: average level of criticality 4: every few hours to daily 4: above average level of criticality 5: hourly to many times each hour 5: extremely critical
in the general field of business) do the same rating task with the same job description. Then, answer the following questions.
1. Are there any disagreements between or among the res- ulting orderings? If so, why do you think that is the case? 2. What can be done to mitigate any observed disagree- ment between or among the resulting orderings? After discussing some possible techniques to reducing dis- agreement, if there were indeed any disagreements, apply some of those techniques until 100% agreement is reached.
CASE STUDY 2-2
Disrupted Links in the Performance Management Process at “Omega, Inc.”
Omega, Inc., is a small manufacturing company whose sales success or failure rests in the hands of sales representatives employed by franchised dealers operating independently.
3. Recall that tasks listed in a job description can largely be divided into behaviors (i.e. how to per- form) and results (i.e. what outcomes should result from performance). In the job description you cre- ated, which of the tasks are behaviors and which tasks are outcomes? Are there more behaviors or more outcomes? Or, is there a strong balance between the two types of tasks? Whether there is such an imbalance or balance, do you think the observed (im)balance is justified? Explain. ■
Omega faces a challenging situation because it does not have control over the people working for the independent dealer- ships. It is the performance of these individuals that dictates
56 Part I • Strategic and General Considerations
Omega’s sales success. To make things more complicated, until recently there was no clear understanding of the role of the sales representatives and there were no formal sales processes in place. Sales representatives varied greatly in terms of their level of skill and knowledge; most put out little effort beyond taking orders, and they did not feel motivated to make addi- tional sales. Finally, franchises varied greatly regarding their management strategies and follow-up with Omega.
Recently, understanding the need to improve the per- formance of sales representatives, Omega agreed to partially fund and support a training program for them. The network of franchise owners in turn agreed to work together to imple- ment a performance management system. As a first step in creating the performance management system, the franchise owners conducted a job analysis of the role of the sale repre- sentatives, wrote a job description, and distributed it to all sales representatives. The franchise owners also adopted a franchise-wide mission statement based primarily on the need to provide high-quality customer service. This mission state- ment was posted in all franchise offices, and each franchise owner spoke with his employees about the contribution made by individual sales on achieving their mission. As a second step, the managers set performance goals (i.e., sales quotas) for each employee. Then, all sales representatives attended extensive training sessions. The employees received feedback based on their performance in the training course and then were reminded once again of their sales quotas.
Back on the job, managers gave feedback to their employees regarding their standing in relation to their sales quotas. Since the employees had no way of monitoring their own progress toward their quotas, the performance feedback consisted of little more than a reiteration of monthly sales goals. There was no performance appraisal form in place, so
CASE STUDY 2-3
Performance Management at the University of Ghana
The University of Ghana in Legon, Ghana, was established in 1948 as an affiliate college of the University of London called University College of the Gold Coast. In 1961, the university was reorganized by an act of Parliament into what it is today: the independent, degree-granting University of Ghana (http:// www.ug.edu.gh/).
The Balme Library is the main library in the University of Ghana library system. Situated on the main Legon campus, it coordinates a large number of libraries attached to the university’s various schools, institutes, faculties, departments, and halls of residence, most of which are autonomous. The
discussions were not documented. This lack of feedback continued, and although sales quotas were being met for the first few months, franchise owners received complaints from customers about the low quality of customer service they were receiving. Subsequently, sales began to decline. Furthermore, many orders were often incorrect, forcing customers to return items to Omega.
While the new performance management process was an improvement over no performance management (at least initially), the franchise owners were still far from having a system that included a smooth transition between each of the components of the performance management process. Based on Omega’s situation, please answer the following questions.
1. Consider each of the links of the performance manage-
ment process as shown in Figure 2.1: a. prerequisites : performance planning b. performance planning : performance execution c. performance execution : performance assessment d. performance assessment : performance review e. performance review : performance renewal and
recontracting f. performance renewal and recontracting :
prerequisites Discuss whether each of the links is present, and in what form, in the performance management system described. 2. Given your answers to question 1, what can be done to
fix each of the disrupted links in the process?
Source: This case study is loosely based on J. Swinney and B. Couch, Sales Performance Improvement Getting Results Through a Franchise Sales Organization. International Society for Performance Improvement Case Studies (2003). Available online at http:// www.ispi.org/services/gotResults/ 2003/GotResults_Swinney.pdf. Retrieval date: March 6, 2007. ■
library was started as the College Library in 1948 and was then situated in Achimota College, which was about 8 kilome- ters from the present Legon campus. In 1959, the College Library moved into its brand-new buildings at the Legon campus and was named after the University College of the Gold Coast’s first principal, David Mowbrary Balme.
As in the case of many other modern university libraries worldwide that face resources challenges and the need to serve an increasingly diverse customer base, the Balme Library has implemented numerous initiatives. One such initiative is a performance management system. However, several of the
Chapter 2 • Performance Management Process 57
components of the performance management process at the Balme Library are in need of improvement. First, there is no evidence that a systematic job analysis was conducted for any of the jobs at the library. Second, the forms that the employees are rated on contain vague items such as “general behavior.” The forms include no specific definition of what “general behavior” is or examples explaining to employees (or managers) what would lead to a high or a low rating in this category. In addition, all library employees are rated on the same form, regardless of their job responsibilities. Third, there is no evidence that managers have worked with employees in setting mutually agreed-upon goals. Fourth, there is no formal or informal discussion of results and needed follow-up steps after the subordinates and managers complete their form. Not surprisingly, an employee survey revealed that more than 60% of the employees have never discussed their performance with their managers. Finally, employees are often rated by different people. For example, sometimes the head of the library rates
an employee, even though he may not be in direct contact with that employee.
Based on the above description, please answer the following questions.
1. Please identify one component in the performance management process at the Balme Library that has not been implemented effectively (there are several; choose only one). 2. Describe how the poor implementation of the specific component you have chosen has a negative impact on the flow of the performance management process as a whole. 3. Discuss what should be done to improve the implemen- tation of the component you have chosen in question 1.
Source: This case study is loosely based on Martey, A. K. (2002). “Appraising the performance of library staff in a Ghanaian Academic Library.” Library Management, 23, 403–416. ■
End notes
1. The general framework and labels for these components are based on Grote, D. (1996). The performance management system. In The complete guide to performance appraisal. New York: American Management Association. 2. Aguinis, H. (2009). An expanded view of performance management. In J. W. Smither and M. London (Eds.), Performance manage- ment: Putting research into practice (pp. 1–43). San Francisco, CA: Wiley. 3. Teo, S. (2000). Evidence of strategic HRM linkages in eleven Australian corporatized public sector organizations. Public Personnel Management, 29, 557–574. 4. Clifford, J. P. (1994). Job analysis: Why do it, and how should it be done? Public Personnel Management, 23, 321–340. 5. Rodriguez, D., Patel, R., Bright, A., Gregory, D., & Gowing, M. K. (2002). Developing competency models to promote integrated human-resource practices. Human Resource Management, 41, 309–324. 6. Aguinis, H., Mazurkiewicz, M. D., & Heggestad, E. D. (2009). Using web-based frame-of-reference training to decrease biases in personality-based job analysis: An experimental field study. Personnel Psychology, 62, 405–438.
7. Aguinis, H., Mazurkiewicz, M. D., & Heggestad, E. D. (2009). Using web-based frame-of-reference training to decrease biases in personality-based job analysis: An experimental field study. Personnel Psychology, 62, 405–438. 8. Banner, D. K., & Graber, J. M. (1985). Critical issues in performance appraisal. Journal of Management Development, 4, 27–35. 9. Erickson, P. B. (2002, March 24). Performance feedback boosts employee morale, experts in Oklahoma City say. The Daily Oklahoman, OK-Worker-Reviews section. 10. Pettijohn, L. S., Parker, R. S., Pettijohn, C. E., & Kent, J. L. (2001). Performance appraisals: Usage, criteria and observations. Journal of Management Development, 20, 754–781. 11. Whitney, K. (2005, August). Discover: It pays to develop leaders. Chief Learning Officer, 48. 12. Grote, D. (1996). The complete guide to per- formance appraisal (pp. 22–24). New York: American Management Association. 13. VandeWalle, D., Ganesan, S., Challagalla, G. N., & Brown, S. P. (2000). An integrated model of feedback-seeking behavior: Disposition, context, and cognition. Journal of Applied Psychology, 85, 996–1003.
58 Part I • Strategic and General Considerations
14. Grote, D. (1996). The complete guide to per- formance appraisal (pp. 27–32). New York: American Management Association. 15. The best appraisals of workers can be simple; objectivity, feedback are important features. (2003, December 14). The Baltimore Sun, p. D6. 16. Brutus, S., London, M., & Martineau, J. (1999). The impact of 360-degree feedback on planning for career development. Journal of Management Development, 18, 676–693. 17. Shore, T. H., Adams, J. S., & Tashchian, A. (1998). Effects of self-appraisal information, appraisal purpose, and feedback target on performance appraisal ratings. Journal of Business and Psychology, 12, 283–298. 18. Kikoski, J. F. (1999). Effective communica- tion in the performance appraisal interview: Face-to-face communication for public man- agers in the culturally diverse workplace. Public Personnel Management, 28, 301–322. 19. Ghorpade, J., & Chen, M. M. (1995). Creating quality-driven performance appraisal systems. Academy of Management Executive, 9, 32–39.
20. Rahman, S. A. (2006). Attitudes of Malaysian teachers toward a performance-appraisal system. Journal of Applied Social Psychology, 36, 3031–3042. 21. London, M. (2003). Job feedback: Giving, seek- ing, and using feedback for performance improve- ment (2nd ed.) Mahwah, NJ: Lawrence Erlbaum. 22. Rogers, B. (2006). High performance is more than a dream—it’s a culture. T+D, 60(1), 12. 23. LaChance, S. (2006). Applying the balanced
scorecard. Strategic HR Review, 5(2), 5. 24. Soltani, E. (2003). Towards a TQM-driven HR performance evaluation: An empirical study. Employee Relations, 25, 347–370. 25. This material is based on Grote, D. (1998). Painless performance appraisals focus on results, behaviors. HR Magazine, 43(11), 52–56. 26. Grossman, J. H., & Parkinson, J. R. (2002). Becoming a successful manager: How to make a smooth transition from managing yourself to managing others (pp. 142–145). Chicago: McGraw-Hill Professional.
Chapter 3
Performance Management and Strategic Planning
Strategy is a style of thinking, a conscious and deliberate process, an intensive implementation system, the science of insuring future success.
—PETE JOHNSON
LEARNING OBJECTIVES
By the end of this chapter, you will be able to do the following:
■ Define strategic planning and its overall goal.
■ Describe the various specific purposes of a strategic plan.
■ Explain why the usefulness of a performance management system relies to a large degree on its relationship with the organization’s and the unit’s strategic plans.
■ Understand how to create an organization’s strategic plan, including an environmental analysis resulting in a mission statement, vision statement, goals, and strategies.
■ Conduct an environmental analysis that includes a consideration of both internal (strengths and weaknesses) and external (opportunities and threats) trends.
■ Understand how a gap analysis resulting from a consideration of internal and external trends dictates an organization’s mission.
■ Define the concept of a mission statement and describe the necessary components of a good mission statement.
■ Define the concept of a vision statement and understand its relationship to the mission statement.
59
60 Part I • Strategic and General Considerations
■ Describe the basic components of a good vision statement.
■ Create organizational- and unit-level mission and vision statements.
■ Understand the relationship between mission and vision statements, goals, and strategies.
■ Understand the relationship between an organization’s vision, mission, goals, and strategies and the vision, mission, goals, and strategies of each of its divisions or units.
■ Understand the relationship between a unit’s vision, mission, goals, and strategies and individual job descriptions.
■ Explain why job descriptions must be linked to the organization’s and the unit’s strategic plans.
■ Understand how a strategic plan determines various choices regarding performance management system design.
■ Explain why a consideration of strategic issues is a building block for creating support for a performance management system.
In Chapters 1 and 2 we discussed the fact that good performance management systems encourage employees to make tangible and important contributions toward the organization’s strategic objectives. When these contributions to the top organiza- tional and unit priorities are made clear, performance management systems are likely to receive crucial top management support. Without this support, it is unlikely that a performance management system will be successful. How, then, are these strategic organizational objectives identified? How does an organization know what the “target” should be, what it is trying to accomplish, and how to do it? These questions are answered by considering an organization’s strategic plan.
3.1 DEFINITION AND PURPOSES OF STRATEGIC PLANNING
Strategic planning is a process that involves describing the organization’s destination, assessing barriers that stand in the way of that destination, and selecting approaches for moving forward. The main goal of strategic planning is to allocate resources in a way that provides organizations with a competitive advantage.1 Overall, a strategic plan serves as a blueprint that defines how the organization will allocate its resources in pursuit of its goals.
Strategic planning serves the following purposes: First and foremost, strategic planning allows organizations to define their identities. In other words, it provides organizations with a clearer sense of who they are and what their purposes are. Second, strategic planning helps organizations prepare for the future because it clarifies the desired destination. Knowing where the organization wants to go is a key first step in planning how to get there. Third, strategic planning allows organizations to analyze their environment, and doing so enhances their ability to adapt to environmental changes and even anticipate future changes. Although knowledge of the environment does not guarantee that an organization will be more likely to change and adapt, knowl- edge is the first step toward possible adaptation. Fourth, strategic planning provides organizations with focus and allows them to allocate resources to what matters most.
Chapter 3 • Performance Management and Strategic Planning 61
TABLE 3.1 Strategic Plan: Purposes
Helps define the organization’s identity Helps organizations prepare the future Enhances ability to adapt to environmental changes Provides focus and allows better allocation of resources Produces an organizational culture of cooperation Allows for the consideration of new options and opportunities Provides employees with information to direct daily activities
In turn, the improved allocation of resources is likely to stimulate growth and improve profitability. Fifth, strategic planning can produce a culture of cooperation within the organization given that a common set of goals is created. Such a culture of cooperation can gain organizations a key competitive advantage. Sixth, strategic planning can be a good corporate eye-opener because it generates new options and opportunities to be considered. New opportunities to be considered may include expanding to new markets or offering new products. Finally, strategic planning can be a powerful tool to guide employees’ daily activities because it identifies the behaviors and results that really matter. A strategic plan provides critical information to be used in the performance man- agement system. To summarize, Table 3.1 lists key purposes of a strategic plan.
3.2 PROCESS OF LINKING PERFORMANCE MANAGEMENT TO THE STRATEGIC PLAN
The mere presence of a strategic plan does not guarantee that this information will be used effectively as part of the performance management system. In fact, countless organizations spend thousands of hours creating strategic plans that lead to no tangible actions. Many organizations spend too much time and effort crafting their mission and vision statements without undertaking any concrete follow-up actions. The process then ends up being a huge waste of time and a source of frustration and long-lasting cynicism. For example, consider a recent study including more than 350 individuals in firms in India in the following eight sectors: textiles, staple fiber, chemicals, cement, insulators, aluminum, mining, and services. Examples of companies included in this study are Grasim Cement, Jayashree Textiles, Birla NGK Insulators, Essel Mining Industries, and INDAL (Indian Aluminum Industries). Results indicated that although there was a good strategic planning process in place in most firms, there was no clear relationship between firm-level and individual-level goals.2 Thus, to ensure that strat- egy cascades down the organization and leads to concrete actions, a conscious effort must be made to link the strategic plan with individual performance.
Figure 3.1 provides a useful framework for understanding the relationship among an organization’s strategic plan, a unit’s strategic plan, job descriptions, and individual and team performance. The organization’s strategic plan includes a mission statement and a vision statement as well as goals and strategies that will allow for the fulfillment of the mission and vision. The strategies are created with the participation of managers at all
62 Part I • Strategic and General Considerations
Organization’s Strategic Plan
• Mission
• Vision
• Goals
• Strategies
Unit’s Strategic Plan
• Mission
• Vision
• Goals
• Strategies
Job Description
• Tasks
• Knowledge
• Skills
• Abilities
Individual and Team Performance
• Results
• Behaviors
• Developmental Plan
FIGURE 3.1 Link Among Organization and Unit Strategic Plans, Job Descriptions, and Individual and Team Performance
levels. The higher the level of involvement, the more likely it is that managers will see the resulting strategies favorably.3As soon as the organizational strategies have been defined, senior management proceeds to meet with department or unit managers, who in turn solicit input from all people within their units to create unit-level mission and vision state- ments, goals, and strategies. A critical issue is to ensure that each unit’s or department’s mission and vision statements, goals, and strategies are consistent with those at the orga- nizational level. Job descriptions are then revised to make sure they are consistent with unit and organizational priorities. Finally, the performance management system includes
Chapter 3 • Performance Management and Strategic Planning 63
results, behaviors, and developmental plans consistent with the organizational- and department-level priorities as well as the individual job descriptions.
Does the process of aligning organizational, unit, and individual priorities actually work in practice? Is this doable? The answer to these questions is “yes” and the benefits of doing so are widely documented. Performance management systems have a critical role in translating strategy into action.4 In fact, a recent study including 338 organizations in 42 countries found that performance management is the third most important factor affecting the success of a strategic plan. This is particularly true for larger organizations and for organizations that operate in rapidly changing environments.
As a concrete example, consider the case of Key Bank USA, a financial services company with assets of $92 billion that provides investment management, retail and commercial banking, consumer finance, and investment banking products and services. Key Bank of Utah successfully developed a performance management system that is aligned with the strategic plan of the organization.5 To do this, the bank first involved managers at all hierarchical levels to develop an organization mission statement. Next, it developed goals and strategies that would help achieve Key Bank’s mission. The mission statement, goals, and strategies at the organizational level served as the founda- tion for developing the strategies for individual departments and units. To develop these, senior managers met with each department manager to discuss the organization’s goals and strategies and to explain the importance of having similar items in place in each department. Subsequently, each of the departmental managers met with his or her employees to develop the department’s mission statement and goals. One important premise in this exercise was that each department’s mission statement and objectives had to be aligned with the corporate mission statement, goals, and strategies. After organizational and departmental goals and strategies were aligned, managers and employees reviewed individual job descriptions. Each job description was tailored so that individual job responsibilities were clear and contributed to meeting the depart- ment’s and the organization’s objectives. Involving employees in this process helped them to gain a clear understanding of how their performance affected the department and, in turn, the organization.
Finally, based on the key responsibilities identified, the performance manage- ment system included behaviors, results, and developmental plans. For example, each employee record included information on various responsibilities, standards expected, goals to be reached, and actions to be taken to improve performance in the future. A summary of the entire process implemented at Key Bank of Utah is shown in Figure 3.2.
What happened after Key Bank of Utah implemented this system? In general terms, Key Bank was able to enjoy several positive consequences of aligning corporate, depart- mental, and individual goals. After the implementation of its new performance manage- ment system, Key Bank found several meaningful benefits, including the following:
• Managers knew that employees were focused on meeting important goals.
• Employees had more decision-making power.
• Lower-level managers had a better understanding of higher-level managers’ decisions.
• Communication increased and improved (among managers, between managers and employees, etc.).
64 Part I • Strategic and General Considerations
• Mission statement: The mission of the corporation is to operate as a high- performing financial institution providing a wide range of profitable, competitive, and superior financial services in our market.
• Goals: To attract and retain an outstanding staff who are highly motivated and productive and who vigorously pursue revenue-generating and cost-reduction strategies.
• Strategy: Critically review our existing branches and departments to ensure that all branches are consistent in their goals, strategies, and profit objectives.
• Mission (Department Level): Increase the knowledge, management skills, and decision-making abilities of our branch managers so that we will minimize losses and other operating expenses while maximizing the profitability of our branching systems.
• Position Description for HR Manager: Administers a comprehensive human resources program in the division to ensure the expertise, effectiveness, motivation, and depth (including providing appropriate management succession) to the division’s staff members.
• Individual Performance: Information on various responsibilities, standards expected, goals to be reached, and actions to be taken to improve performance in the future.
FIGURE 3.2 Summary of Alignment of Performance Management and Strategic Plan at Key Bank of Utah
In sum, to be most useful, organizations’ performance management systems must rely on their strategic plans. The behaviors, results, and developmental plans of all employees must be aligned with the vision, mission, goals, and strategies of the organization and unit. Organizations can expect greater returns from implementing a per- formance management system when such alignment is in place.
Chapter 3 • Performance Management and Strategic Planning 65
3.2.1 Strategic Planning
The development of an organization’s strategic plan requires a careful analysis of the organization’s competitive situation, the organization’s current position and destination, the development of the organization’s strategic goals, the design of a plan of action and implementation, and the allocation of resources (human, organizational, physical) that will increase the likelihood of achieving the stated goals.6
There are several steps that must be considered in the creation of a successful strategic plan. These include (1) the conduct of an environmental analysis (i.e., the iden- tification of the internal and external parameters of the environment in which the organization operates); (2) the creation of an organizational mission (i.e., statement of what the organization is all about); (3) the creation of an organizational vision (i.e., statement of where the organization intends to be in the long term, say, about 10 years); (4) setting goals (i.e., what the organization intends to do in the short term, say, one to three years); and (5) the creation of strategies that will allow the organization to fulfill its mission and vision and achieve its goals (i.e., descriptions of game plans or how-to procedures to reach the stated objectives). After each of these issues has been defined, organizational strategies are created so that the mission and vision are fulfilled and the stated goals are met.
The strategic planning process is not linear, however. For example, there may first be a rough draft of the organization’s mission and vision and then the conduct of an environmental analysis may follow to help define the mission and vision more clearly. In other words, the mission and vision may be drafted first and the environmental analysis may follow second. The important point is that there is a constant interplay among these issues: the vision and mission affect the type of environmental analysis to be conducted, and the results of an environmental analysis are used to revise the mission and vision. By necessity, we need to discuss them one by one; however, keep in mind that they affect and inform each other on an ongoing basis. Let’s begin with a discussion of environmental analysis.
3.2.1.1 ENVIRONMENTAL ANALYSIS The first step in conducting a strategic plan is to step back to take in the “big picture.” This is accomplished through what is called an environmental analysis. An environmental analysis identifies external and internal parameters with the purpose of understanding broad issues related to the industry where the organization operates so that decisions can be made against the backdrop of a broader context.7
An examination of the external environment includes a consideration of opportu- nities and threats. Opportunities are characteristics of the environment that can help the organization succeed. Examples of such opportunities might be markets not currently being served, untapped labor pools, and new technological advances. On the other hand, threats are characteristics of the external environment that can prevent the organization from being successful. Examples of such threats range from economic recession to the innovative products of competitors. For example, consider the case of Frontier, which is currently the second largest jet carrier at Denver International Airport with an average of 250 daily departures and arrivals. Frontier is an affordable-fare airline which provides service to 60 cities, 50 in the United States, 8 in Mexico, and 2 in Canada. Frontier commenced operations in July 1994 given two key opportunities in the external environment. First, a major
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