Chapter 7 | Performance Management

Introduction

• Since employees are part of the organization, they must be properly placed and motivated to ensure they perform to their fullest potential. In this chapter, the discussion focuses on the main process where employees' performance is managed.

What is Performance Management

• A process aligning organizations and employees with expected behaviors and outcomes.

• Involves evaluating performance against expectations and taking appropriate actions.

• Common Misconceptions

  • Often perceived as only assessment and evaluation.

  • While evaluations are periodic, performance management is an ongoing process.

• Core of Performance Management

  • Focuses on daily conversations between managers and employees.

  • Helps build and develop manager-employee relationships.

• Importance of Feedback

  • Receiving feedback in the last six months is crucial for employee engagement.

  • Employees feel fairness when managers discuss performance regularly.

  • Feedback does not need to be formal; casual check-ins are beneficial.

• Positive Effects of Regular Feedback

  • Employees feel valued and may stay longer in the organization.

  • Increases likelihood of recommending the organization as a great workplace.

  • Business units in the upper quartile of feedback engagement have 15% higher productivity (Gallup Q12 study, Wagner & Harter, 2006).

Objectives of Performance Management

• Evolution of Performance Management

  • Initially used for documenting performance discussions to aid personnel decisions (Wendt, 2014).

  • Transitioned from an administrative tool to a driver of high-performance culture.

• Three Main Objectives of Performance Management

  1. Aligning the Organization with Strategies and Objectives

     • Ensures strategies and objectives are clearly translated at all levels (organization, department, team, individual).

     • Facilitates communication and buy-in for strategic alignment.

     • Enables management to track progress and adjust plans for success.

     • Reinforces company values and desired behaviors in performance assessments.

  2. Developing Organizational Capabilities

     • Assesses whether current capabilities align with desired results.

     • Identifies development needs and opportunities for improvement.

     • Encourages performance discussions that lead to career development conversations.

  3. Documenting Group and Individual Performance

     • Provides records that support HR processes such as:

       • Employee regularization or confirmation.

       • Promotions and demotions.

       • Rewards management.

       • Employee discipline.

Theoretical Bases of Performance Management

• Understanding Performance and Motivation

  • Performance management relies on understanding both what makes individuals perform and how they perform.

  • Motivation is at the core of performance.

Key Motivation Theories in Performance Management

1. Goal Setting Theory (Locke & Latham, 1984, 1990)

   • Clear and challenging goals motivate individuals.

   • Goals help individuals develop strategies and direct their efforts.

   • Goals guide the allocation of time and effort until completion.

   • Two types of goals:

     • Performance goals – focus on key organizational results.

     • Developmental goals – focus on skills and knowledge needed to achieve performance goals.

2. Expectancy Theory (Vroom, 1964)

   • Individuals are motivated when they believe:

     • Their effort will lead to performance.

     • Performance will result in valued rewards.

   • There must be a balance between challenging and realistic goals.

   • Overly difficult goals can lower expectations of success and break motivation.

3. Feedback and Performance (Bandura & Cervone, 1983; Higgins, 1987; Locke & Latham, 1990)

   • Feedback helps individuals adjust efforts to achieve goals.

   • Positive feedback boosts confidence and increases goal achievement.

   • Negative feedback highlights performance gaps and helps develop new strategies.

4. Reinforcement Theory (Skinner, 1938)

   • Behaviors that are reinforced tend to be repeated.

   • Positive reinforcement – strengthens behavior by providing rewards (e.g., promotions, salary increases).

   • Negative reinforcement – strengthens behavior by removing negative consequences (e.g., lifting a reprimand).

   • Punishment – weakens behavior by imposing negative consequences (e.g., suspension, deduction from vacation leave).

   • Extinction – behavior weakens when previously reinforced actions no longer receive reinforcement.

• Framework of Performance Management

  • Built on goal setting, performance reviews (feedback), and rewards.

  • Organizations must define key behaviors and results to align performance management with their goals.

The Performance Management Process

Step 1: Expectation Setting and Development Planning

• Occurs at the start of the performance management year.

• Employees and managers discuss expectations regarding:

  • Objectives

  • Competencies

  • Values

  • Behaviors

• Development and succession planning are also addressed.

• Helps managers understand employees' career aspirations.

• A joint plan is created to support employee growth.

• Provides clarity on expectations and available support.

• Sets a motivating tone for the year.

Step 2: Performance Reviews

• Periodic reviews support employees in achieving objectives and desired results.

• Review frequency varies by organization:

  • Some conduct reviews twice a year (semiannual).

  • Others do quarterly reviews for more frequent feedback.

• Purpose of Performance Reviews:

  • Assess progress toward expectations.

  • Identify necessary support for goal achievement.

  • Discuss development opportunities.

• Review Meetings:

  • Focus on performance discussions, not just ratings.

  • Evaluate results and measures to ensure progress.

  • Adjust strategies to meet year-end goals.

  • Midyear reviews may focus on competencies for development rather than just performance outcomes.

• Annual Reviews:

  • Assess final performance results against objectives.

  • Reflect on successful and unsuccessful strategies.

  • Apply learnings to improve performance in the next year.

  • Discuss both results and behaviors/values demonstrated.

• Integration of Values and Ethics:

  • Organizations incorporate values and ethical behaviors into performance assessments.

  • Ensures alignment with company culture and expected ways of working.

Step 3: Rewards

• The annual review differs from midyear or quarterly reviews as it includes performance ratings.

• Ratings determine various outcomes, such as:

  • Salary increment

  • Bonus

  • Incentives

  • Promotion

  • Succession plan inclusion

• Calibration Process for Ratings:

  • Ensures alignment with standards and organizational equity.

  • Involves multiple levels of management:

    • Employee’s direct manager.

    • Department or division managers.

    • Human Resource Management (HRM) unit.

    • Sometimes country heads or regional/global leadership (for multinational corporations).

• Calibration Meetings:

  • Compare individual results with group performance to ensure fairness.

  • Norming: Analyzing ratings within a normal distribution curve.

  • Consider external factors and overall organizational performance.

  • If company-wide performance exceeds expectations, individual ratings may skew positively.

What Is Evaluated?

• Organizations evaluate different dimensions based on their priorities.

• Common evaluation dimensions include:

  • Results in relation to objectives – measuring goal achievement.

  • Competencies – assessing skills and capabilities.

  • Values and behaviors displayed – ensuring alignment with company culture.

  • Development plan – tracking growth and improvement efforts.

1. Results in Relation to Objectives

• Organizations using the "management by objective" framework set objectives at the start of the performance year.

• Objectives are based on Key Result Areas (KRAs) such as:

  • Revenue

  • Market share

  • Other business-critical metrics.

  • Specific objectives are set.

• Key Performance Indicators (KPIs) are established to measure success.

• At year-end, individual results are evaluated by comparing outputs to objectives:

  • Example: How much revenue was achieved?

  • Was the result above or below the target?

2. Competencies

• Competencies include skills, knowledge, and behaviors needed for successful task performance.

• Some organizations incorporate competency evaluation in performance management.

• Methods of Evaluating Competencies:

  • Standardized tools – structured assessments with predefined criteria.

  • Narrative assessments – employees document their competency demonstration and compare it with a rating scale.

• Example of Competency Assessment:

  • Evaluating customer orientation using a scale-based questionnaire.

  • Sample question: “The employee greets customers immediately upon entering the store.”

  • Rating scale:

    • 5 – Always

    • 3 – Sometimes

    • 0 – Never

• Use of Competency Scores:

  • Some organizations include competency scores in overall performance ratings.

  • Others use competency assessments solely for feedback and training needs analysis, without affecting final performance scores.

3. Values and Behaviors Displayed

• Organizations that prioritize values and behaviors integrate them into performance evaluations.

• Evaluation Methods:

  • Narrative form – employees document examples of how they demonstrated values and behaviors.

  • Critical incident method – specific events showcasing values and behaviors are recorded.

  • Evaluations are done using a predefined rating scale.

• Impact on Performance Ratings:

  • Ratings for values and behaviors contribute to the overall performance rating of an employee.

4. Development Plan

• Discussed during year-end reviews to evaluate how well both the individual and manager achieved the plan.

• Helps in development planning for the next year.

• Does not contribute to the overall rating of the individual.

• May be part of the objective to maintain focus for both the individual and manager.

Rating Scales

• Used to standardize the evaluation of performance:

• Not Achieved (1):

  • The individual did not achieve any of the objective’s parameters.

  • Performance is 49% or lower.

• Substantially Achieved (2):

  • The individual completed a substantial amount of work.

  • Did not fully reach the goal.

  • Performance falls between 50-99%.

• Achieved (3):

  • The individual fully achieved the goal.

  • Performance is 100%.

• Exceeded (4):

  • The individual exceeded expectations.

  • Performance is above 100% (101% +).

Competencies & Values Rating Scales

• May be worded differently to reflect their meaning.

• Competencies: Rated based on expertise level.

• Values: Rated based on role modeling.

Who Evaluates?

• Organizations involve different evaluators based on knowledge of employee performance and organizational direction.

• Possible Evaluators:

  • Self-Appraisal – Employee assesses their own performance.

  • Direct Supervisor/Manager – Responsible for assignments and execution.

  • One-Up Manager (Manager’s Manager) – Provides broader context and alignment.

  • Higher-Level Managers (Division, Department, CEO, Country Manager, etc.) – Ensure strategic alignment and rating calibration.

  • Regional or Functional Leadership – Evaluates performance on region-wide or cross-functional objectives.

  • Stakeholders, Customers, and Peers – Provide external perspectives (used in 360-degree appraisals).

• Self-Appraisal Importance:

  • Allows employees to highlight achievements and challenges.

  • Provides insights into what supports or hinders performance.

  • Helps clarify differences in ratings between employees and managers.

• Higher-Level Management Involvement:

  • Ensures performance evaluation aligns with organizational goals.

  • Challenges ratings and provides a wider perspective.

  • Particularly relevant during annual reviews.

• Multinational & Large Organizations:

  • Functional leadership evaluates employees on specific objectives relevant to their regional or cross-functional roles.

  • Example: A finance manager may be evaluated by both a country manager and a regional project leader.

• 360-Degree Appraisal:

  • Gathers feedback from stakeholders, customers, and peers.

  • Provides well-rounded insights but may lack a holistic and objective view.

  • Requires careful implementation due to complexity.

Common Problems in Performance Management:

• Not a foolproof system – Contains gray areas and potential inaccuracies.

• Problems arise from:

  • Performance appraisal phase – Issues with the instrument and managers applying it.

  • The process itself – Can be biased or inconsistent.

• Key Issues in Appraisal (Laird & Clampitt, 1985):

  • Purpose-driven rating bias

    • If the appraisal is for feedback, ratings may be honest and detailed.

    • If it affects promotions/salary, managers may inflate or generalize ratings to avoid negative consequences.

  • Subjectivity in ratings – Managers apply ratings inconsistently.

  • Rating scales are not fully objective – Raters simplify or use shortcuts in evaluations.

• Judgment Errors in Performance Management (Riggio, 2008):

  • Halo effect – A positive trait influences overall performance ratings, even if other aspects are weak.

    • Example: An employee’s punctuality results in an overly positive assessment, despite poor performance in other areas.

  • Horn effect – A negative trait unfairly influences the overall rating.

    • Example: An employee’s tardiness causes a manager to rate all performance areas negatively, even if some are strong.