Chapter 1 – Performance Management (PM) in Context
Learning Objectives
1.1   Explain the concept of performance management.

1.2   Distinguish performance management from performance appraisal.

1.3   Explain the many advantages and make a business case for implementing a well-designed performance management system.

1.4   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.

1.5    Understand the concept of a reward system and its relationship to a performance management system.

1.6    Distinguish among the various types of employee rewards including compensation, benefits, and relational returns.

1.7   Describe the multiple purposes of a performance management system including strategic, administrative, information, developmental, organizational maintenance, and documentation purposes.

1.8    Describe and explain the key features of an ideal performance management system.

1.9    Create a presentation providing persuasive arguments in support of why an organization should implement a performance management system, including the purposes that performance management systems serve and the dangers of a poorly implemented system.

1.10  Note the relationship and links between a performance management system and other HR functions including recruitment and selection, training and development, workforce planning, and compensation.

Chapter Outline

Overview
1. Definition of Performance Management (PM)
2. The Performance Management Contribution
3. Disadvantages/Dangers of Poorly-implemented PM Systems
4. Definition of Reward Systems
5. Aims and Role of PM Systems
6. Characteristics of an Ideal PM System
7. Integration with Other Human Resources and Development Activities

1. Definition of Performance Management (PM)
Continuous Process of
Identifying performance of individuals and teams
Measuring performance of individuals and teams
Developing performance of individuals and teams
Aligning performance with the strategic goals of the organization

 How did Sally’s behavior fit this description?

PM is NOT performance appraisal
• PM
– Strategic business considerations
– Ongoing feedback
– So employee can improve performance
– Driven by line manager
• Performance appraisal
– Assesses employee
• Strengths 
• Weaknesses
– Once a year
– Lacks ongoing feedback
– Driven by HR

2. The Performance Management Contribution
For Employees
Clarify definition of job and success criteria
Increase motivation to perform
Increase self-esteem
Enhance self-insight and development
For Managers
Supervisors communicate views of performance more clearly
Managers gain insight about subordinates
There is better, more timely, identification of good and poor performance
Employee performance improves 
For Organization/HR Function
Clarify organizational goals
Facilitate organizational change
Administrative actions are more fair and appropriate
There is better protection from lawsuits

 How did PM help IBM switch to a customer service focus in the 1980s?

3. Disadvantages/Dangers of Poorly-implemented PM Systems
For Employees
Lowered self-esteem
Employee burnout and job dissatisfaction
Damaged relationships
Use of misleading information
For Managers
Increased turnover
Decreased motivation to perform
Unjustified demands on managerial resources
Varying and unfair standards and ratings
For Organization
Wasted time and money
Derivation of ratings is a mystery
Biases can replace standards
Risk of litigation increases

 From the reading so far, give at least two examples of ways in which poorly-implemented PM systems can hurt the organization.

4. Definition of Reward Systems
Set of mechanisms for distributing
o Tangible returns
 Cash compensation
 Benefits
o Intangible or relational returns
As part of an employment relationship

o Tangible returns
 Cash compensation
• Base pay
• Cost-of-living and contingent pay
• Incentives (short- and long-term)
 Benefits, such as
• Income protection
• Allowances
• Work/life focus

 Which of these reward systems are more likely to be based on seniority than on performance?

o Intangible returns
 Relational returns
• Recognition and status
• Employment security
• Challenging work
• Learning opportunities

 What kinds of intangible returns does Sun Microsystems provide its employees?  How would they improve performance?

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)

 Consider returns at an employer you know about; how do they relate to the PM system?

5. Aims and Role of PM Systems

Purposes of PM Systems (Overview)
 Strategic
 Administrative
 Informational
 Developmental
 Organizational maintenance
 Documentation

Strategic Purpose
o Link employee behavior with organization’s goals
o Communicate most crucial business strategic initiatives

Administrative Purpose
o Provide information for making decisions in reference to:
 Salary adjustments
 Promotions
 Retention or termination
 Recognition of individual performance
• Merit increases
• Identification of poor performers
 Layoffs

Information Purpose
o Communicate to Employees
 Expectations
• Organization
• Supervisor
 What is important
 How they are doing
 How to improve

Developmental Purpose
o Performance feedback/coaching
o Identification of individual strengths and weaknesses
o Causes of performance deficiencies
o Tailor development of individual career path

Organizational Maintenance Purpose
o Plan effective workforce
 Anticipate/respond to future needs
 Determine priorities and allocate resources
 Perform talent inventory
o Assess future training needs
o Evaluate performance at organizational level
o Evaluate effectiveness of HR interventions

Documentation Purpose
o Validate selection instruments
o Document administrative decisions
o Help meet legal requirements

Purposes of PM Systems (Summary)
 Strategic
 Administrative
 Informational
 Developmental
 Organizational maintenance
 Documentation

 How well does the PM system at SELCO Credit Union meet these purposes?  What about a system you are familiar with?

6. Characteristics of an Ideal PM System

Overview
 Congruent with organizational strategy
 Thorough
 Practical
 Meaningful
 Specific
 Identifies effective and ineffective performance
 Reliable
 Valid
 Acceptable and Fair
 Inclusive
 Open
 Correctable
 Standardized
 Ethical

Congruent with organizational strategy
o Consistent with organization’s strategy
o Aligned with unit and organizational goals

Thorough
o All employees are evaluated
o All major job responsibilities are evaluated
o Evaluations cover performance for entire review period
o Feedback is given on both positive and negative performance

Practical
o Available
o Easy to use
o Acceptable to decision makers
o Benefits outweigh costs

Meaningful
o Standards are important and relevant
o System measures ONLY what employee can control
o Results have consequences (used for important administrative decisions)
o Evaluations occur regularly and at appropriate times
o System provides for continuing skill development of evaluators

Specific
o Concrete and detailed guidance to employees
 What’s expected
 How to meet the expectations

Identifies effective and ineffective performance
o Distinguish between effective and ineffective
 Behaviors
 Results
o Provide ability to identify employees with various levels of performance

Reliable
o Consistent
o Free of error
o Inter-rater reliability
Valid
o Relevant (measures what is important)
o Not deficient (doesn’t measure unimportant facets of job)
o Not contaminated (only measures what the employee can control)

Acceptable and Fair
o Perception of Distributive Justice
 Work performed  evaluation received  reward
o Perception of Procedural Justice
 Fairness of procedures used to
• Determine ratings
• Link ratings to rewards

Inclusive
o Represents concerns of all involved
 When system is created, employees should help with deciding
• What should be measured
• How it should be measured
 Employee should provide input on performance prior to evaluation meeting

Open (No Secrets)
o Frequent, ongoing evaluations and feedback
o 2-way communications in appraisal meeting
o Clear standards, ongoing communication
o Communications are factual, open, honest

Correctable
o Recognizes that human judgment is fallible
o Appeals process provided

Standardized
o Ongoing training of managers to provide
o Consistent evaluations across
 People
 Time

Ethical
o Supervisor suppresses self-interest
o Supervisor rates only where he or she has sufficient information about the performance dimension
o Supervisor respects employee privacy

 What did the Mercer study show could be the payoff if an ideal PM system were implemented?
 When you think about PM systems you have observed, what characteristics of an ideal system are most common?
 What characteristics of an ideal PM system seem most likely to be absent in systems you have observed?

7. Integration with Other Human Resources and Development Activities
PM provides information for:
o Development of training to meet organizational needs
o Workforce planning
o Recruitment and hiring decisions
o Development of compensation systems

Performance Management (PM) in Context: Summary
1. Definition of Performance Management (PM)
2. The Performance Management Contribution
3. Disadvantages/Dangers of Poorly-implemented PM Systems
4. Definition of Reward Systems
5. Aims and Role of PM Systems
6. Characteristics of an Ideal PM system
7. Integration with Other Human Resources and Development Activities

Worked Solutions for End-of-Chapter Cases
Case Study 1.2 Performance Management at Network Solutions, Inc.
1. Overall, the performance management system at Network Solutions fits the characteristics of an ideal system nicely. 
 (Suggested points: 3, [1.8])

2. It has strategic congruence; it encourages a thorough and continuous evaluation process; the results will be used to make important decisions; expectations of employees are clearly communicated; the plan discriminates between high, average, and low performers; employee input is gathered before the meeting; and it encourages ongoing communication between manager and employee.  However, there is not enough information presented to know if the standards that employees are rated on are relevant and under the employee’s control, or if there is an appeals process in place.  Furthermore, reliability and validity information of the system will need to be assessed.  Finally, data will be needed (possibly collected by the HR function) to assess whether employees see the system as fair, whether it is being used ethically, and whether the benefits of the system outweigh its costs.  
 (Suggested points: 5, [1.8])

3. Advantages/positive outcomes of successfully implementing this system include:
a. Raising the bar of performance and aggressively managing performance
b. Cascading organizational goals to individual contributors, setting objectives to meet these goals and planning development activities to ensure that objectives are met
c. Ability to track talent profile and compare it to business performance
d. Enhanced communication around employee development
e. Improved employee satisfaction and loyalty
f. Increased risk taking for innovation and technology breakthroughs
g. Increased trust between manager and employee
h. Increased collaboration
 (Suggested points: 3, [1.3])

4. Disadvantages of implementing this system include:
a. Poor performers may be retained to meet the 10% quota
b. Increased risk of discrimination litigation
c. Hiring mediocre talent to satisfy bottom 10% quota
d. Promote internal competition, undermining team collaboration
e. May drive unethical behavior, as employees do whatever it takes to compete
f. Everyone takes a turn being a “token 3”
g. The forced distribution may not reflect actual performance and there may be a penalization of (a) good performers in high performing teams and (b) good managers who hire well and manage all performers actively
 (Suggested points: 3, [1.3])
Additional Cases and Worked Solutions

Case Study:  CRB, Inc.

A very small car restoration business (CRB Inc.) is interviewing you for a position as its human resources manager on a part-time basis, working 20 hours per week, while you complete your degree.  You would be the first HR manager they have ever been able to afford to hire, and the husband/wife owners (Al and Mary Brown) have been operating the business for 10 years.  In addition to you, they recently hired a part-time janitor.  This brought the paid staff to seven full-time employees:  a foreman who is responsible for scheduling and overseeing the work, two autobody repair workers, a person who disassembles and reassembles cars, a painter, and a detail person who assists the painter with getting the car ready to paint and sanding and waxing it afterwards.  Al Brown handles sales and estimating prices, runs errands and chases down parts, and visions the future.  Mary has been doing the bookkeeping and general paperwork.  The owners and employees are very proud of CRB’s reputation for doing high quality work in the restoration of old cars, going back to the 1930s.

CRB pays its employees based on “flagged hours” which are the number of paid hours that were estimated to complete the work.  (For example, the estimate may say that it will take 3 hours to straighten a fender and prepare it for painting.  When the autobody repair worker has completed straightening the fender, he would “flag” completion of 3 hours, whether it took him 2 hours or 6 hours to actually complete the work.  It is to his benefit to be very fast and very good at what he does.)  CRB pays the workers 40% of what it charges the customer for the flagged hours; the other funds are used to pay the employer’s share of the taxes and overhead, with a small margin for profit.  The foreman, who does some “flagged hours” autobody repair himself, is also paid a 5% commission on all the labor hours of the other employees, after the car is accepted as complete by the customer and the customer pays for the completed work.

Employees are given feedback by Al, the foreman, and by customers on an infrequent basis.  Right now, everything is going well and the employees are working as a team.  In the past, the situation was less certain and some employees had to be fired for poor work.  When an employee filed for government paid unemployment compensation saying that he was out of work through no fault of his own, CRB challenged the filing and usually was able to prove that Al had given a memo to the employee requesting improvements in quality or quantity of work.  There has never been a formal planning or appraisal process at CRB.

Mary Brown has read an article about performance management and is wondering whether CRB should implement such a system.  Please answer her questions based on your understanding of this small business.

1. Critically assess whether a performance management system would work for such a small business.
 (Suggested points: 10, [1.1])

2. Discuss benefits that such a system would provide for us as owners and for our employees. 
 (Suggested points: 5, [1.3])

3. Explain any dangers our company faces if we don’t have a performance management system.  What could be a problem if we go with a poorly implemented system?
 (Suggested points: 5, [1.4])
4. What 10 characteristics, at a minimum, should we include in a performance management system?  Explain your answer with 1-3 sentences for each characteristic you recommend. 
 (Suggested points: 5, [1.8])

5. Explain how we could tie our current reward system to a performance management system.
 (Suggested points: 10, .5[1.5], .5[1.6])

Answers:

1. Although some descriptions of performance management might seem too complicated for a small business, the basic principles of performance management are important for every business.    Performance management links an individual’s (and a team’s) performance to the company’s mission and goals by identifying what is important in an individual’s job, measuring that performance, and developing the individual’s (and team’s) ability to provide better performance.  Even when there are only seven employees, it is important to ensure that they are working effectively toward meeting the company’s goals.  A properly implemented performance management system should be very useful to the company.

2. There are a number of benefits that a performance management system can provide to the company and to you as one of the owners, including:
a. You will clarify organizational goals to your employees.
b. You and your foreman will be able to communicate your views of employee performance more clearly.
c. There will be better, more timely identification of good and poor performance.
d. Employee performance will improve.
e. Your administrative actions will be fair and appropriate.
f. You will have better protection from any possible lawsuits from employees.
g. If you decide to make changes, the performance management system will help to make the changes easier to implement.
h. You might gain more insight about your employees.

In addition, the employees would reap the following benefits from the performance management system:
a. Clarified definitions of their jobs and success criteria.
b. Increased motivation to perform.
c. Enhanced self-insight and development.
d. Increased self-esteem.
e. Improvement in pay as their performance improves

3. You may have seen some of these problems already in your company.  They are similar to the problems you can face if you have a poorly implemented system.  For you, as one of the owners, these dangers may exist:
a. You may face litigation at any time.
b. Employees may believe they are treated unfairly.
c. Employee motivation to perform may decrease.
d. Employees may quit (or slow down) when they think they are not treated fairly.
e. You may realize that either you or the foreman is putting too much effort into getting performance out of one or more employees.

Employees may experience a lack of a performance management system (or a badly implemented one) in this fashion:
a. They may gradually burnout and become dissatisfied with their jobs.
b. Relationships among the employees and management may become damaged.
c. They become vulnerable to rumors and false or misleading information about how their performance is viewed.
d. They may develop lower self-esteem.

4. There are 14 characteristics of an ideal performance management system and Mary Brown has requested that you identify at least 10 that would be necessary for her company.  This is a matter of judgment and detailed responses for any of the 14 should be accepted  (example responses follow):
a. Congruent with organizational strategy.  It is very important that the company identifies its goals and ensures that employee goals are aligned with the company goals. 
b. Thorough.  All employees (including the foreman) should be evaluated.  All major job responsibilities should be evaluated and the evaluations should cover performance for the entire review period.  Feedback should be given on both positive and negative performance. 
c. Practical. Since it is a very small company, the system must be easy to use and accepted by the owners and the foreman.  The benefits must outweigh the costs of implementation.
d. Meaningful.  The system must be meaningful to owners and employees, with measurement of important and relevant standards that are within employee control.  The results should have consequences, evaluations should occur regularly and reliably, and there should be continuing skill development for the evaluators.
e. Specific.  Employees should be given concrete and detailed guidance regarding what is expected and how to meet the expectations.
f. Identifies effective and ineffective performance.  The company needs to distinguish between effective and ineffective behaviors and results.  This will also provide the ability to identify employees with various levels of performance.
g. Reliable.  The feedback should be consistent and free of error.  Whether the owner or the foreman is conducting the evaluation, the results should be similar.
h. Valid.  The system should be relevant (measuring what is important).  The system should not be deficient or contaminated; i.e., it should not measure unimportant facets of the job and it should only measure what the employee can control.
i. Acceptable and Fair.  Employees should be able to perceive distributive and procedural justice in the system.  The work performed should lead clearly to the evaluation received and to any rewards that result.  They should see that the procedures to determine the ratings and determine the rewards are fair.
j. Inclusive.  The system needs to represent the concerns of everyone involved.  Employees should be involved in developing the system, providing input on what should be measured and how, as well as providing input on their own performance.
k. Open.  There should be frequent evaluations and feedback.  The employee should be able to feel comfortable sharing in the evaluation meetings.  There should be clear standards and ongoing communication.  Communication should be open, factual, and honest.
l. Correctable.  There needs to be a clear understanding that the system is based on human judgment and humans make mistakes.  There needs to be a process for appealing decisions.
m. Standardized. The system will need ongoing training of the managers to provide consistent evaluations across people and time.
n. Ethical.  The system will need to protect employee privacy.  The raters will need to suppress their own self-interest and rate only where they have sufficient knowledge about performance.

5. Your current reward system includes both tangible returns (money and benefits) and intangible or relational returns.  The contingent pay or commission that you pay the foreman has a direct relationship to performance; the 40% of labor hours charged to the customer also relate to performance, although this could lead to employee dissatisfaction if estimated hours are consistently inaccurate.  Of course, the employer costs for benefits, such as social security, medicare, and unemployment insurance, are not related to performance; however, the law requires these benefits. 

You mentioned that the employees are working well as a team; this would imply that they are getting relational returns from their work.  It is important to keep them working well, because performance suffers when there are interrelational conflicts. 

You could establish an additional reward system to recognize “the employee of the month” or something similar to recognize exceptional performance or an employee’s additional contributions, over and above what is expected.  Whether it is a plaque on the wall or a restaurant gift certificate, it would be appreciated and contribute relational returns, and possible tangible returns.
Case Study:  Our Civil Service

A state civil service hires a wide variety of employees, ranging in pay and educational levels from janitors and truck drivers to clerical staff at various levels and professionals in a wide variety of fields (such as engineering, law enforcement, social work, etc.).  These entry-level people report to supervisors, who report to program managers, who report to division directors, who report to department directors, who report to the governor. The department directors serve at the pleasure of the governor; the other employees take standardized tests and are hired and promoted on a civil service, merit-based plan. 

During their first year in their positions, these employees are employed on a probationary basis, with evaluations every 90 days.  After the first year, supervisors evaluate employee performance once a year.  The appraisal process is standardized, with the supervisor grading performance in five categories:  Quantity of work, Quality of work, Effort, Teamwork, and Adherence to Procedure. 

Due to a constitutional requirement that government employees be paid the same as comparable private sector employees, these civil service employees are paid at the mid- range for similar positions in the private sector.  There is a seven-step pay system.  Employees are hired at step one and they receive a 5% step increase every year until they reach step six.  They remain in step six for 5 years and then are moved to step seven as a seniority bonus.  In addition, every year, if there is an increase in the cost of living, salaries are adjusted to match the cost of living increase.  The civil service matches the mid-range of private sector insurance and retirement benefits.  Some employees complain that they could probably get paid better in the private sector and often leave after a few years.  Other employees care about the programs they are involved with and still other employees are grateful for the security of a government job.

The primary purpose of the entire civil service is to administer and enforce the laws of the state.  You have been hired by the governor to examine the civil service institution and make recommendations to improve its responsiveness to the public.  You want to recommend implementation of a performance management system and have requested a meeting to discuss your recommendations.  You are anticipating that the following questions will be asked, and you need to draft some good responses before the meeting. 

1. Critically assess whether the state needs a performance management system. Discuss the purposes such a system serves and explain whether it would be better than the current system.  Explain advantages of implementing a performance management system for the employees and for our state. 
 (Suggested points: 10, .3[1.3], .2[1.1], .2[1.2], .3[1.7])

2. Explain any dangers of poorly implementing such a system. Evaluate the potential effect of such a system on the Human Resources department.
 (Suggested points: 5, .7[1.3], .3[1.10])

3. How much would something like this cost?  Assess whether there might be some cost savings from implementation of a performance management system.
 (Suggested points: 10, .5[1.3], .5[1.5])

4. Evaluate whether implementation of a performance management system would have any impact on employee rewards, considering the constitutional mandate that employees be paid comparably to private sector positions. 
 (Suggested points: 5, [1.5])

Answers:

1. A performance management system would provide a continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization.  Although the civil service system is designed to administer and enforce the laws of the state, as the governor, you have goals that you have pledged to achieve for your constituents.  A performance management system would assist you in linking employee performance to the overall goals of your administration.  

You currently have an appraisal system, which assesses employee strengths and weaknesses once a year.  Employees do not have a way of improving their performance through ongoing feedback that is linked through management directly to the strategy of your administration.

In contrast to an appraisal system, a performance management system serves six basic purposes: strategic, administrative, informational, developmental, organizational maintenance, and documentation. 
• You need a way to communicate your most important strategic initiatives and link employee behavior directly to your goals. 
• You need a system that can link information about employee performance to the hard decisions that are made about salary, promotions, retention and termination, and layoffs.  In addition, you need solid information to use for employee recognition, as well as ways to identify poor performers. 
• You need a consistent way to inform all the employees about your expectations of their performance, both in terms of what is important and in terms of how they are doing and how to improve their performance. 
• Your department directors need to have tools for identifying causes of poor performance and ways to assist employees to move forward on individual career paths through identification of individual strengths and weaknesses, followed by individualized feedback and coaching from their direct supervisors. 
• At a macro level, you need to be able to plan for future strategic directions of the government, which requires an anticipation of priorities, resources, and future workforce and training needs.  You need a way to evaluate the overall performance of your government and determine how effective your HR department is being in helping you to get where you need to go.
• Finally, you need a way to document administrative decisions and meet legal requirements.  Validation of selection instruments could also help you determine whether you are getting the most qualified workforce in this merit system.

Thus, with a performance management system, you would have a more effective tool to help your administration meet its goals.

There would be advantages to both employees and to management in implementing a performance management system.  In addition, the citizens of the state would benefit from the fact that government service would be more closely aligned to their vision of what they would get when they elected you to administer and enforce the law.  The advantages to the employees would include:
• Clarification of their job duties and success criteria, as they align their duties with the overall strategy of your administration
• Increased motivation to perform as they better understand how their jobs fit with the overall scheme
• Increased self-esteem as their performance improves
• Enhanced self-insight and development as they receive feedback and coaching

The advantages to the state would come from the following advantages that management would see:
• There would be clearer organizational goals
• You would be better able to facilitate organizational change to meet your strategic goals
• Administrative actions would be fairer and more appropriate
• There would be better, more timely identification of good and poor performance
• Supervisors would be able to communicate their views of performance more clearly
• Employee performance would improve

2. There are dangers to the overall civil service system, managers, and employees from a poorly implemented performance management system.  For the overall system, the dangers include:
• A waste of time and money
• Derivation of employee performance ratings are considered a mystery
• Biases can replace standards
• There is an increased risk of litigation

For managers, the dangers are:
• Employees may quit or slow down
• Employee motivation to perform decreases
• Standards and ratings vary and are unfair
• Managers may find themselves spending an unjustified amount of time and resources dealing with the system

Employees face the following dangers:
• They are vulnerable to false or misleading information about their performance
• Relationships can be damaged
• They face job burnout and dissatisfaction
• Their self-esteem may be lower

Some of these dangers may already exist in your current performance appraisal system. 

A performance management system is management directed, rather than HR directed, although HR can be very helpful in developing the structure and training to implement the system.  The performance management system would provide information to HR so that HR can develop training to develop your workforce for future needs.  A good performance management system would help HR to anticipate upcoming recruitment and hiring needs; it could also assist with development of a more effective compensation system.

3. It is possible that implementation of a good performance management system would reduce the overall amount of time that managers spend dealing with citizen complaints and employee grievances.  In addition, if you develop a reward system that is performance-based, there may be some budget savings.  Initially, of course, there would be a substantial investment in structuring the system and providing management and employee training, to ensure that the system is implemented successfully.

4. A large number of private sector businesses are beginning to implement performance-based pay systems.  Since contingent pay and incentives have a high relationship to a performance management system, it is possible that a performance management system could impact tangible rewards.  In addition, and far easier to implement in the civil service, it is possible to develop a number of intangible rewards where relationships and the work/life focus are impacted based on performance.