The aim of this paper is to review the use of performance management within organisations, and to understand the way in which behaviour of appraisers and appraisees impacts on its effectiveness. This paper will therefore combine the worlds of management accounting and strategy with the world of psychology. The paper will firstly define performance management, looking at the aims and processes involved. Secondly it will look at the way in which people behave in the context of performance appraisal processes, and it will conclude by assessing the extent to which psychological factors compromise or enhance performance management systems.
Organisations, be they commercial, charitable or in the public sector, are typically formed or maintained in order to further some purpose. Purpose may be defined by a strong leader, it may be determined by rules, it may be set as targets relative to the competition, or it may be based on providing a supportive environment for employees,
Performance management systems cannot measure everything an organisation does, so a key task is to determine what should be measured. One approach is to create a set of financial and non-financial measures that provide a rounded picture of the organisation and how it meets its strategic objectives. The best-known version of this approach is Kaplan’s and Norton’s balanced scorecard,
How does a performance management system work? Using the example of a balanced scorecard approach a company first needs to set its strategy. A good strategy is more than an exhortation or an ambition, (“Global Leadership” – of what?, how?; “Let’s win together” – win what?, with whom?). A good strategy rather has a logic to it: it is a diagnosis of the challenge, a guiding policy as to how to meet that challenge, and a coherent set of actions. A good strategy not only recognises the strengths and weaknesses of an organisation and its environment, it actually creates strength through its design,
Goal 1: Raise no new capital.
Metric 1: Generate positive cash flow over the course of the period.
Goal 2: Improve profitability.
Metric 2: Increase gross profit margin from 20% to 23% by period end.
Internal business perspective
Goal 1: Improve productivity.
Metric 1: Increase asset utilisation rates by 10%.
Goal 2: Reduce cost of production.
Metric 2: Reduce input costs by 5% by negotiation with suppliers.
Goal 1: Increase range of products.
Metric 1: Develop 5 new products accounting for 15% of total sales.
Goal 2: Increase repeat orders.
Metric 2: generate repeat orders from 40% of all clients.
Goal 1: Technology adaption.
Metric 2: Convert sales data to enterprise CRM software.
Goal 2: Manufacturing innovation.
Metric 2: Time to produce units to reduce by 8%.
The above example is of course simplified, but might be the starting point for a small manufacturer. The next step is to communicate the strategy and the metrics to the relevant department heads and line managers. A set of performance metrics will only work if they become the way in which managers communicate and operate on an interactive basis,
If there seems to be a failure to meet targets there are then two potential responses; single loop or double loop learning.
Organisations, however, are somewhat more complex than domestic heating systems. They operate in many more than one dimension, and rely on people working together to execute a given set of strategies. People do not behave like heating systems – they are autonomous decision-makers subject to emotions, social influences and attitudes that drive their behaviour. At some point every performance management system relies on people making judgements about what to do, and then being rewarded (or not) accordingly. At the heart of this lies the appraisal interview – the Achilles heel of the entire construct,
The appraisal interview is the moment when a manager appraises the performance of an individual in delivering against the organisation’s strategy. It might involve data on financial and non-financial matters, and might include feedback from multiple sources, including, potentially, 360-degree interviews. But whatever is involved the performance appraisal is a moment when a disparate range of motives and actions from the manager, the appraisee and the broader organisation come together,
The role of the appraiser is crucial to the outcome of a performance appraisal interview. Spence and Keeping have created a model using Ajzen’s theory of planned behaviour to analyse a manager’s behaviour in a performance appraisal given his/her attitudes, the effect of subjective norms, and perceived control in four dimensions: the intention to be accurate, the intention to manage impressions, the intention to be benevolent, and the intention to avoid conflict.
- 1.What are the good or bad outcomes likely to be from behaving in a given way? (Attitude)
- 2.How do the people around me whose opinions I respect expect me to behave? (Social Norm)
- 3.What might help or prevent me from behaving in a given way? (Perceived Behavioural Control)
Firstly, will the manager conduct an appraisal at all? If other managers in the organisation typically ignore appraisals (Social Norm), and they seem hard to conduct because of, say, complex form filling and data collection requirements (Perceived Behavioural Control), the chances are managers will avoid them. Only two-thirds of UK organisations surveyed in 1997 with the Industrial Society, (now the Work Foundation), reported better than 67% completion,
Secondly, what may a manager want to achieve as a result of conducting performance appraisals, (Attitude)? Cleveland and Murphy suggest that managers may wish to make the performance of their staff look good so as to enhance their own reputation as a manager, and/or they may see performance appraisal as a means of getting hold of resources such as bonus money or promotion slots, and/or creating an image of themselves as a caring and conscientious manager, and/or avoiding conflict, and/or avoiding censure from colleagues or their own manager,
Thirdly, the manager may choose to over or under-rate an individual’s performance, (assuming that he/she actually has an idea of what the performance has actually been, which is not a given; the manager may have bad or incomplete data, may not know the subordinate well, or may have had his/her view corrupted by a competing colleague). Fletcher summarises a body of work conducted by Longenecker identifying a number of reasons why managers may intentionally under-rate the performance of appraisees: the belief that accurate (i.e. poorer than the appraisee wants) ratings may demotivate the appraisee and damage the relationship; a wish to increase the likelihood of the appraisee getting a pay rise or bonus; an unwillingness to record poor performance in a formal process; a wish to reward hard work even if unaccompanied by good results; a lack of confidence in handling confrontation; and, finally, hoping to promote out underperformers to other departments or roles. Reasons why a manager may under-rate an appraisee include: the desire to frighten appraisees into (even) better performance; punishing appraisees whom are disliked; reducing the need to promote or pay bonuses; and, finally, meeting institutional requirements to have a certain number or proportion of low ratings,
The appraisee’s approach to the process is also significant. Most appraisal processes involve a degree of self-disclosure, and this can engender a sense of vulnerability,
An alternative way of thinking about the interaction of appraiser and appraisee is to use the lens of leadership / followership styles to understand the relationship, and how it may play out in a performance appraisal. Michael Beer argues that the difficulties appraisers and appraisees face can be traced back to the appraisal system itself, to the way in which the interview is conducted, and to the quality of the relationship,
So, do performance management systems work? What are their consequences? In theory a business sets a clear strategy and develops a coherent set of performance targets that will guide execution. The strategy and targets are then cascaded through the organisation to department heads and line managers who adopt and adapt them to their particular environments. Using single loop and double loop feedback and learning, the business navigates its way to success, rewarding and promoting those who deliver, and coaching those who struggle. Appraisal interviews between managers and subordinates lie at the heart of the process – the transmission mechanism in which strategy is communicated and performance is appraised at an individual level.
Performance measurement systems are pervasive in their impact on people and the organisations they work in affecting three broad areas: people’s behaviour (including cooperation, coordination and participation; motivation, leadership culture, citizenship, role understanding, job satisfaction, trust, tension and conflict); an organisation’s capabilities (including strategy process, communication, innovation, learning, management practice and corporate control); and lastly an organisation’s performance. It is this last that is surely the most important, but research is mixed. One set of studies finds a positive effect of performance measurement on accounting results, share price performance and customer response. But a second set finds no relationship. A third set finds mixed results.
Maybe it’s just that managing performance is hard. However clear and well-articulated a strategy, however comprehensive and balanced a scorecard of metrics, and however easy-to-use a system, at the end of the day, (or year), it all depends on line managers and their subordinates responding well in an appraisal process. In an organisation with, say 37,000 employees with five layers of management and an average span of control of eight, there will be around 4,600 managers conducting (and being subject to) appraisals. Given the differing personalities, relationships, attitudes, social norms and perceived behavioural control of each of those managers in 37,000 annual appraisals, there is plenty of room for all sorts of outcomes. In fact, a study in 2000 showed that 62% of the variance in performance ratings could be explained by the idiosyncrasies of the individual appraiser,
So what of the future? The Harvard Business Review of March 2015 reported that Deloitte was redesigning its performance management system, getting rid of cascading objectives, annual appraisals and 360-degree feedback. They had found that 58% of their managers believed that the extant system drove neither employee motivation nor business performance. They also found that their ratings process, (for 65,000 people) was consuming around two million hours. Deloitte chose to replace their appraisal and rating approach with one where managers were aske four simple questions about what they would do with a person on their team: reward them (on a 1-5 scale), keep them on their team (on a 1-5 scale), promote them (yes or no), identify them as a risk (yes or no). These four questions can rapidly be answered at multiple points and can then become the basis of future decisions,
In conclusion, performance management is here to stay – there is perhaps no alternative. But the way in which performance management is deployed both top-down and bottom-up can make a significant difference. It is important to recognise that the psychology of manager and subordinate can derail even a perfect system, and no system is perfect. So perhaps the way forward is to better understand the limitations of performance management systems and not expect too much of them. A simple system with the aim of merely encouraging good day-to-day management in line with clear strategic objectives is the perhaps best an organisation should hope for.
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