Dilbert marketing two drink minimum

Case Study

Performance Management

Third Edition

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

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ISBN 10: 0-13-255638-3 ISBN 13: 978-0-13-255638-5

10 9 8 7 6 5 4 3 2 1

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

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

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

http://www.powergenworldwide.com/index/display/articledisplay/258477/articles/power-engineering/volume-110/issue-6/features/generating-buzzidaho-power-takes-on-performance-management-to-prepare-for-workforce-aging.html
http://www.powergenworldwide.com/index/display/articledisplay/258477/articles/power-engineering/volume-110/issue-6/features/generating-buzzidaho-power-takes-on-performance-management-to-prepare-for-workforce-aging.html
http://www.powergenworldwide.com/index/display/articledisplay/258477/articles/power-engineering/volume-110/issue-6/features/generating-buzzidaho-power-takes-on-performance-management-to-prepare-for-workforce-aging.html
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.3 After 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

5 Aguinis, H., Boyd, B. K., Pierce, C. A., & Short, J. C. (2011). Walking new avenues in management research methods and theories: Bridging micro and macro domains. Journal of Management, 37, 395–403. 6 Cascio, W. F., & Aguinis, H. (2008). Research in industrial and organizational psychology from 1963 to 2007: Changes, choices, and trends. Journal of Applied Psychology, 93, 1062–1081.

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,

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: