Ch. 8: Performance management

Chapter 8 deals with performance management (PM), the second HPWP. It covers what PM is, its goals and elements, its history, its relation to HRM and HPWS, and three macro-theoretical frameworks that explain how employee behaviour can be steered towards the business strategy: goal setting theory, expectancy theory and justice (equity) theory with procedural and distributive justice. It ends with PM and the balanced approach.

1. Introduction: what is performance management?

In the work groups, two types of conversation are practised: the performance evaluation interview (a dialogue about how work is going, development and cooperation, looking forward; two-way) and the performance appraisal interview (a formal judgement of past performance by the supervisor, often with consequences for pay or career; more one-way). PM evokes many associations: appraisal forms, rating scales from 'outstanding' to 'below average', bureaucracy, monitoring and 'up or out' (promotion or dismissal). The lecture asks: should it always be 'up or out'?

2. Performance appraisal versus performance management

3. What is included in performance management?

• Goal: improve organizational performance/effectiveness by connecting employee performance with organizational performance.
• Intermediate goal: developing capabilities of teams and individuals.
• Activities or tools: defining, measuring and stimulating employee performance.
• Possible elements: goal setting and evaluation; (bi)annual appraisal; performance evaluation; personal development programmes; self-evaluation; pay for performance; coaching and mentorship; career management; competence management; 180/360-degree feedback systems.

According to Baron and Kreps (1999), PM can have different purposes:

1. an extensive evaluation to improve job matching;
2. communication of corporate values and objectives;
3. providing information for self-improvement, training and development, and career development;
4. linking pay to individual and/or team performance;
5. collecting information for hiring strategies;
6. validating HR practices, including appraisal and rewards, retention and reductions in workforce;
7. input for legal defences (e.g., when an organization wants to fire an employee because of poor job performance).

4. History: management by objectives and the development of PM

360-degree feedback collects ratings from multiple sources (supervisor, peers, subordinates, sometimes customers, and self). It is more reliable because it uses multiple raters. Important elements: anonymity, training of raters, time constraints, data collection and analysis.

5. Performance management and HRM

'An ideal PM system of practices is actually a sort of mini HPWS.' PM is one of the HR practices, but it also consists of elements or micro practices (such as the evaluation interview and the appraisal interview). HRM and PM align HR practices with the overall business strategy (strategic or vertical fit) and align individual practices into HPWS (internal or horizontal fit). The lecture focuses on macro-theoretical frameworks explaining how employee behaviour can be managed towards the business strategy.

6. Goal setting theory (Locke and Latham, 1990)

Goal setting theory is a theory of motivation explaining human action in specific work situations. When individuals are set to achieve goals, this motivates them. Goals are 'the object or aim of an action'. Goal setting affects motivation and behaviour because it:

1. directs one's attention;
2. regulates one's effort;
3. increases one's persistence;
4. encourages the development of goal attainment strategies or action plans.

Not only does setting the goal motivate; achieving the goal gives a feeling of accomplishment and success, which again motivates to set new goals. Empirical findings (Locke, 2003), seven ways how goal setting works:

1. The more difficult the goal, the greater the achievement.
2. The more specific or explicit the goal, the more precisely performance is regulated.
3. Goals that are both specific and difficult lead to the highest performance.
4. Commitment to goals is most critical when goals are specific and difficult.
5. High commitment is attained when the individual is convinced that (a) the goal is important and (b) the goal is attainable.
6. Goal setting is most effective when there is feedback showing progress towards the goal.
7. Goals stimulate planning.

Relation to PM: the role of PM is to translate organizational goals into employee goals. This translation is done by top managers, supervisors and line managers, going down the hierarchy. But what gets lost in translation? And goal setting as the one and only theoretical framework is not enough to cover the complex process of translating goals into motivated employees.

7. Expectancy theory (Vroom, 1964)

Motivation comes from: the effort (E) it costs to perform (P); the outcomes (O) the worker receives from the performance; and the valence (V) the worker attaches to these outcomes. Motivation is a function of E, P, O and V. If these are clearly connected and V is high, the worker is motivated. It is the task of the line manager to make the connections between E, P, O and V as clear as possible.

• Expectancy (E to P): 'Can I?' Skills, belief in one's capacity to perform, and capacity to estimate how well one can perform; also clarity of tasks and job.
• Instrumentality (P to O): will my performance be rewarded?
• Valence (V): do I value the outcome?

Critique and limitations: can this be estimated correctly by a line manager? Getting a good overview of skills, abilities, learning ability and the effort it takes to perform a task is very complicated. It also depends on how confident the employee is in those competences (self-efficacy). Can workers estimate it correctly, and do they do this consciously? Perhaps the theory works especially when an employee becomes aware that expectations have not come true: a breach of the psychological contract. A cartoon illustrates this: an employee is rated 'meets expectations' and gets a 2% raise; she protests that she worked 80 hours a week, donated bone marrow to the biggest customer, twice, and the boss answers that he expected that too, and notes an 'attendance problem'.

8. Outsourcing performance management?

Many consulting organizations provide PM solutions (software, systems) and some help organizations to outsource PM. Arguments for: expertise, standardized and professional tools, efficiency, objectivity from an outside party. Arguments against: PM is about the relationship between employee and line manager, knowledge of the context and daily work is needed, loss of ownership by line managers, and PM is a steering instrument linked to the strategy.

9. Justice: equity theory (Adams, 1963)

Core idea: if employees perceive that they are not treated fairly, this causes an emotional, attitudinal and behavioural reaction. It is not so much a motivational theory but aimed at avoiding perceptions of injustice. This is an issue because PM systems are always based on perceptions, which can be unfair or biased: ratings are never completely objective, always complex and therefore subjective. Two types of justice: procedural (think: process) and distributive (think: outcome).

10. Performance management and balanced approaches

PM is an HPWP that may disturb the balance between the employer's interests (organizational goals) and the employee's interests (individual goals). How can we restore the balance?

• Employee involvement and participation;
• Personal development aligned with organizational development;
• Flexible working: work-life balance;
• Employee security: a permanent contract;
• Example: a performance evaluation interview (more dialogue and interaction) next to the performance appraisal.

Key take-aways

• PM informs, guides, monitors and evaluates employees to achieve organizational goals; hard versus soft models.
• PM is more sophisticated than PA and is a 'mini HPWS'.
• Development: from top-down, HR-owned appraisal to process-oriented, joint, 360-degree, line-owned PM.
• Goal setting: specific and difficult goals with commitment and feedback give the highest performance (SMART).
• Expectancy theory: motivation depends on expectancy, instrumentality and valence.
• Justice: procedural (process) and distributive (outcome) fairness must be guarded.
• Balance PM with involvement, development, flexibility and security.