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C H A P T E R


10 Performance Management and Appraisal


After you have read this chapter, you should be able to: • Identify the components of performance management


systems.


• Distinguish between performance management and performance appraisal.


• Explain the differences between administrative and developmental uses of performance appraisal.


• Describe the advantages and disadvantages of multisource (360-degree) appraisals.


• Discuss the importance of training managers and employees about performance appraisal, and give examples of rater errors.


• Identify several concerns about appraisal feedback and ways to make it more effective.


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319319


HR Headline


Performance Management Does Not Focus Enough on Ethics


(Ryan McVay/Photodisc/Getty Images)


A recent study determined that many organizations do not focus enough on ethics when managing perfor- mance. For instance, only 43% of HR practitio- ners indicated that their employers included measures of ethics on performance evalua- tions. Making matters worse, professionals claimed that they were expected to take an active role in managing ethics, but many felt disconnected from the process. Further, many companies do not have a comprehensive program that raises awareness of ethics, and some companies have developed no ethics policies whatsoever. Such findings are trou- bling considering that problems are common.


Organizations need to develop standards governing how employees are expected to behave.1


Given these realities, HR professionals should be involved in the devel- opment of those standards. Performance management practices such as evaluation forms should include measures that identify positive behav- iors. HR professionals also need to create comprehensive programs that increase the motivation to take appropriate actions. Developing codes of conduct that outline company guidelines, offering training that teaches employees important workplace values, and increasing communication of important job standards can all work together to promote an ethical culture. In additon, reinforcement programs should be developed so that positive behaviors are rewarded and undesirable behaviors are punished. HR managers need to be in the “driver’s seat” when it comes to encourag- ing ethics.


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


SECTION 3 Training and Development320


Employers want employees who perform their jobs well and contribute to the mission and objectives of the organization, but managers have to provide the proper context for such high productivity. Performance management is the primary tool used to identify, communicate, measure, and reward employees so that they can make these contributions, and the process is one that supports a company’s strategic direction. Properly designing the performance manage- ment system is therefore a key method for increasing overall organizational performance.


THE NATURE OF PERFORMANCE MANAGEMENT The performance management process starts by identifying the strategic goals an organization needs to accomplish to remain competitive and profitable. After these ideas are crystallized, managers identify how they and their employees can help support organizational objectives by successfully com- pleting work. In a sense, the sum of the work completed in all jobs should advance the strategic plan. By adopting a “big-picture” quantitative approach, managers can successfully combine individual efforts in a manner that pro- vides practical measures of organizational effectiveness. Performance manage- ment can also provide a unified approach to dealing with individual career development.2


As Figure 10-1 shows, performance management links organizational strategy to ultimate results. Performance management enables a company to convert overall strategy into results that support the mission and objectives. However, just having a strategic plan does not guarantee that results will be achieved and objectives will be satisfied. When organizational strategies have been defined, they must be translated into department- or unit-level actions. Then these actions must be assigned to individuals who are held accountable for efficient and effective goal accomplishment.3


Often performance management is confused with one of its key compo- nents—performance appraisal. Performance management is a series of activi- ties designed to ensure that the organization gets the performance it needs from its employees. Performance appraisal is the process of determining how well employees do their jobs relative to a standard and communicating that information to them.


An effective performance management system should do the following:


• Make clear what the organization expects • Provide performance information to employees • Identify areas of success and needed development • Document performance for personnel records


Performance management starts with the development and understand- ing of organizational strategy, and then dovetails into a series of steps that involves identifying performance expectations, providing performance direc- tion, encouraging employee participation, assessing job performance, and conducting the performance appraisal. As Figure 10-2 suggests, successful per- formance management is a circular process that requires a system of admin- istrative tools that effectively structures the dialogue between managers and their employees, and the motivation to utilize the system in a productive way.4


A successful performance management system allows managers to better prepare employees to tackle their work responsibilities by focusing on


Performance management Series of activities designed to ensure that the organization gets the performance it needs from its employees.


Performance appraisal Process of determining how well employees do their jobs relative to a standard and communicating that information to them.


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CHAPTER 10 Performance Management and Appraisal 321


these activities. For example, the software company CA recently revised its performance review procedures so that the process would better facilitate individual motivation and growth. Employees are rated on standardized job criteria, complete self-evaluations, and are given completed evaluation forms several days ahead of appraisal meetings to consider ratings. “Performance agreements” explicitly connect individual actions to corporate goals, and the whole process of performance management is strengthened through positive communication.5


Even well-intentioned employees do not always know what is expected or how to improve their performance, which also makes performance manage- ment necessary. Additionally, dismissal of an employee may become necessary, and without evidence that the employee has been advised of performance issues, legal problems may result.


F I G U R E 1 0 - 1 Performance Management Linkage


Organizational Results Goals met or not met Employee satisfaction or dissatisfaction strong or weak Coordination between performance and pay


Performance Management Outcomes Pay increases Incentive rewards Promotions/advancement Training and development Career planning Disciplinary actions


Employee Performance


Performance Management Identify expected performance levels Encourage high levels of performance Measure individual performance; then evaluate Provide feedback on individual performance Provide assistance as needed Reward or discipline depending on performance


Organizational Strategies


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


SECTION 3 Training and Development322


Global Cultural Differences in Performance Management Performance management systems and appraisals are very common in the United States and some other countries. However, challenges can be experi- enced when performance management approaches are used in other countries where multinational organizations have operations, or when they are used with employees who have diverse cultural backgrounds with characteristics very different from those of an American background.


In some countries and cultures, it is uncommon for managers to rate employ- ees or to give direct feedback, particularly if some points are negative. For instance, in several countries, including China and Japan, there is a high respect for authority and age. Consequently, expecting younger subordinates to engage in joint discussions with their managers through a performance appraisal pro- cess is uncommon. Use of such programs as multisource/360-degree feedback (discussed later in this chapter) would be culturally inappropriate.


In various other cultures, employees may view criticism from superiors as personally devastating rather than as useful feedback that highlights individual training and development needs. Therefore, many managers do not provide feedback, nor do employees expect it.


Even in the physical settings for appraisal discussions, “cultural customs” associated with formal meetings may need to be observed. For example, in some Eastern European countries, it is common to have coffee and pastries


F I G U R E 1 0 - 2 Components of Performance Management


Developing and Understanding Corporate Strategy


Providing Performance Direction


Encouraging Employee Participation


Conducting Performance Appraisal


Prov


Identifying Performance Expectations


Assessing Job Performance


G L O B A L


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CHAPTER 10 Performance Management and Appraisal 323


or an alcoholic drink before beginning any formal discussion. These examples illustrate that performance management processes may need to be adapted or even dropped in certain global settings.


Performance-Focused Organizational Cultures Organizational cultures vary on many dimensions, and one of these differences involves the degree to which performance is emphasized. Some corporate cultures are based on an entitlement approach, meaning that adequate perfor- mance and stability dominate the organization. Employee rewards vary little from person to person and are not based on individual performance differ- ences. As a result, performance appraisal activities are seen as having few ties to performance and as being primarily a “bureaucratic exercise.”


At the other end of the spectrum is a performance-driven organizational culture focused on results and contributions. In this context, performance appraisals link results to employee compensation and development. This approach is particularly important when evaluating CEO performance because companies want to hold top leaders accountable for corporate outcomes and motivate them to improve operational and financial results. CEO performance evaluations should therefore provide structure to the performance appraisal process (i.e., descriptions and dates), establish CEO roles and responsibilities, and identify important performance objectives.6


Studies have shown the benefits of developing a performance-focused cul- ture throughout the organization. One longitudinal study of 207 companies in 22 industries found that firms with performance-focused cultures had signifi- cantly higher growth in company revenue, employment, net income, and stock prices than did companies with different cultures. Another study also found that firms with strong performance cultures had dramatically better results.7 Figure 10-3 shows the components of a successful performance-focused culture.


However, a pay-for-performance approach can present several challenges to organizations, particularly in educational institutions. The teacher pay-for-per- formance plan recently implemented in the Houston school district has increased perceptions that the system creates inequity, with some teachers getting bonuses and others receiving no extra compensation.8 Denver Public Schools imple- mented a similar plan several years ago that ties bonuses to criteria such as stu- dents’ performance on tests/achievement, teaching evaluations, and professional growth/education, but the plan is being met with harsh criticism because it alleg- edly favors less senior teachers who accept challenging teaching assignments.9


Despite these setbacks, it appears that where possible, a performance-based- pay culture is desirable. One study found that 33% of managers and 43% of nonmanagers felt their company was not doing enough about poor performers. The nonmanagers felt that failure to deal with poor performance was unfair to those who worked hard.10 In one financial services company that did not give poor performance reviews, a new CEO instituted a performance system that gave


star performers raises as high as 20% and poor performers nothing. The tougher performance system encouraged poor performers to leave the company voluntarily, increased the performance of many other employees, and enhanced company profitability.11 Additionally, performance-based pay can strengthen the link between employee and organizational goals, increase individual motivation, and augment worker retention, especially when an organization develops sound compensation, performance, and strategic plans.12


L O G G I N G O NL


Free Management Library This website is an integrated online library with resources for profit and nonprofit entities regarding performance management. Visit the site at www.managementhelp.org.


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


SECTION 3 Training and Development324


IDENTIFYING AND MEASURING EMPLOYEE PERFORMANCE


Performance criteria vary from job to job, but the most common employee performance measures associated with many jobs include the following:


• Quantity of output • Quality of output • Timeliness of output • Presence/attendance on the job • Efficiency of work completed • Effectiveness of work completed


Specific job duties identify the most important elements in a given job. For example, a salesperson must know a company’s products and services, identify the needs of customers, and actively sell in order to be successful at work. Since such actions are so important, duties are identified from job descriptions that contain the most important parts of individual jobs. They help to define what the organization pays employees to do. Therefore, the performance of individu- als on those important job duties should be measured and compared against appropriate standards, and the results should be communicated to the employee.


To complicate matters, multiple job duties are the rule rather than the exception in most jobs. An individual might demonstrate better performance


Job duties Important elements in a given job.


F I G U R E 1 0 - 3 Components of a Performance-Focused Culture


Clear Expectations, Goals, and Deadlines


Detailed Appraisal of Employee Performance


Clear Feedback on Performance


Manager and Employee Training as Needed


Consequences for


Performance


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Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CHAPTER 10 Performance Management and Appraisal 325


on some duties than others, and some duties might be more important than others to the organization. For example, professors are broadly required to conduct research, teach classes, and provide service to important university stakeholders. Some professors focus heavily on one area of work over the oth- ers, which can cause performance management issues when their universities value all the different parts of the job.


Weights can be used to show the relative importance of several duties in one job. For example, in a management job at a company that wants to improve customer service feedback, control operational costs, and encourage quality improvements, weights might be assigned as follows:


Weighting of Management Duties at Sample Firm Weight


Improve customer feedback 50%


Control operational costs 30%


Encourage quality improvements 20%


Total Management Performance 100%


Types of Performance Information Managers can use three different types of information about employee perfor- mance, as Figure 10-4 shows. Trait-based information identifies a character trait of the employee—such as attitude, initiative, or creativity—and may or may not be job related. For example, one study concluded that conscientious- ness was an important determinant of job performance.13 Because traits tend to be ambiguous, and favoritism of raters can affect how traits are viewed, court decisions generally have held that trait-based performance appraisals are too vague to use when making performance-based HR decisions such as promotions or terminations. Also, fixating too much on characteristics such as “potential” can lead managers to ignore the important behaviors and out- comes that help organizations reach their objectives.14


F I G U R E 1 0 - 4 Types of Performance Information


RESULTS-BASED INFORMATION


Sales volume Cost reduction Units produced Improved quality


Less Useful More Useful


BEHAVIOR-BASED INFORMATION


Customer satisfaction Verbal persuasion Timeliness of response Citizenship/ethics


TRAIT-BASED INFORMATION


Attitude Teamwork Initiative Effective communication Creativity Values Dispositions


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SECTION 3 Training and Development326


Behavior-based information focuses on specific behaviors that lead to job success. For a waitperson, the behavior “menu up-selling” can be observed and used as performance information. Additionally, a human resource director who institutes an “open-door policy” behaves in a manner that likely increases communication with employees. Behavioral information clearly specifies the behaviors management wants to see. A potential problem arises when any of several behaviors can lead to successful performance, and employees rely on these different behaviors to complete work. For example, salespeople might use different verbal persuasion strategies with customers because no one approach can be utilized successfully by all individuals.


Results-based information considers employee accomplishments. For jobs in which measurement is easy and obvious, a results-based approach works well. For instance, a professor might receive extra compensation for securing grants or publishing papers in academic journals, or a salesperson in a retail outlet might receive extra commission pay based on how many products are sold. However, in this approach, that which is measured tends to be empha- sized, which may leave out equally important but difficult-to-measure parts of work. For example, a car salesperson who gets paid only for sales may be unwilling to do paperwork and other work not directly related to selling cars. Further, ethical or even legal issues may arise when only results are empha- sized, and how the results were achieved is not considered, so care should be taken to balance the different types of information. For a study on behavior- based and results-based information, see the HR Perspective.


A study of human resource professionals con- ducted by Human Resource Executive determined that a majority of organizations focused on a bal- ance of behavioral and results criteria when man- aging individual performance.15 A smaller number (34%) focused on objectives and results, and even fewer professionals (11%) stated that their com- panies relied just on behaviors. The percentage breakdowns were similar for assessments of top managers, and a majority of professionals reported that corporate performance objectives originated from the top organizational ranks. According to Scott Cohen, a leader at Watson Wyatt Worldwide in Boston, even though results are extremely important, it is important for a business to focus on the kinds of actions and employee behaviors that ensure sustained viability from a long-range perspective, with a particular eye toward the


promotion of behaviors that are considered to be ethical in nature.


Companies should therefore consider developing a performance management process that takes into consideration the many different employee behaviors that bring about high levels of organizational per- formance. For instance, recognizing members of the organization for ethical conduct (i.e., helping others, doing the right thing, complying with the company’s codes of conduct), particularly when such conduct results in positive outcomes for the company, would serve to reinforce the notion that both behaviors and results are important employee considerations. Many of these behaviors can be emphasized in the com- pany’s value statements so that employees realize the importance of positive action on the job, making them more likely to function in a manner consistent with the company’s expectations.


Behaviors or Results . . . Why Not Both?


HR perspective


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CHAPTER 10 Performance Management and Appraisal 327


Performance measures can be viewed as objective or subjective. The objec- tive measures can be observed—for example, the number of cars sold or the number of invoices processed can be counted. Subjective measures require judgment on the part of the evaluator and are more difficult to determine. One example of a subjective measure is a supervisor’s ratings of an employee’s “attitude,” which cannot be seen directly. Consequently, both objective and subjective measures should be used carefully.


Relevance of Performance Criteria Measuring performance requires focusing on the most important aspects of employees’ jobs. For example, measuring the initiative of customer

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