Research paper: Performance Management

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, (Kleiner & Reyes, 1990). But whatever the origin, organisations will be interested in how effectively they move towards achieving that purpose by looking at current performance compared to the desired level, and then taking corrective action, (Melnyk, Bititci, Platts, Tobias, & Andersen, 2014). Secondly, organisations will want to communicate to their staff the strategic direction they are taking to fulfil their purpose by setting out what is important and what is being measured, (Magretta & Stone, 2002). Thirdly, organisations want to appraise and motivate employees in their pursuit of the organisation’s purpose, (Centre for Business Performance, 2004). A performance management system aims to achieve all three: strategic formulation and implementation, communication and motivation. Thus, a performance management system will use both financial and non-financial data to operationalise strategic objectives, (Franco-Santos, Lucianetti, & Bourne, 2012). They are ubiquitous; in the United Kingdom, for instance, the CIPD (Chartered Institute of Personnel and Development) reported that 89% of organisations surveyed in 2009 had some formal process of performance management in place, (Bach & Edwards, 2013).

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, (Centre for Business Performance, 2004). In effect, the balanced scorecard prompts managers to look across four dimensions asking how customers see the organisation (the customer perspective), in what areas the organisation needs to excel (the internal business perspective), how and where it can innovate in order to improve (the learning perspective), and whether it is delivering value to its stakeholders (the financial perspective), (Kaplan & Norton, 2005). Neely, Adams and Kennerley provide an alternative formulation; responding to some criticisms of the balanced scorecard they came up with the performance prism. This suggests metrics to capture stakeholder satisfaction, strategies, processes and capabilities, (Neely, Adams, & Kennerley, 2002). But whatever the strategy, and whichever metrics are used to try to manage performance, the organisation needs to develop a system to capture the relevant data and then to respond.

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, (Rumelt, 2011). Almost by definition a badly framed, incoherent strategy cannot be expressed as a balanced scorecard, because a balanced scorecard shows how results will be achieved across the four dimensions. (Kaplan & Norton, 2005). Performance goals and their related metrics across the balanced scorecard may be set along the following lines:

Financial perspective

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.

Customer perspective

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.

Learning perspective

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, (Centre for Business Performance, 2004). This means that, for instance, for those in charge of production, manufacturing innovation is constantly on the agenda, and is something that they feel ownership of. One of the ways in which an organisation will try to ensure that it responds is to link the rewards, (pay, bonuses, promotions) of departments, teams and individuals to their performance using the performance management system. There is an intuitive appeal to the idea that “you get what you measure”, especially if you reward it. The consultants, William Mercer, surveyed 214 large and medium-sized firms in the US in 1999 and found that 88% used a balanced scorecard-based performance management system to determine pay, (Centre for Business Performance, 2004).

If there seems to be a failure to meet targets there are then two potential responses; single loop or double loop learning. (Van Dooren, 2011). Single loop learning is to try harder at achieving the given target, where double loop is to question whether the target itself is valid. A domestic thermostat is a single loop learning process; if the house is colder than the target temperature, the heating comes on. A double loop is when the householder realises that keeping a house at, say, 25 degrees centigrade is uncomfortable, impractical and expensive, so adjusts it down to 19 degrees.

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, (Kikoski, 1999).

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, (Fletcher, 2002).

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. (Spence & Keeping, 2013). Through the lens of planned behaviour it is possible to understand the various ways managers behave in connection with the appraisal process. The theory, in outline, states that the best predictor of actual behaviour is the intention to perform that behaviour. The intention to perform a behaviour is itself a function of the strength of response to the following three questions that an individual explicitly or implicitly considers, (Ajzen & Fishbein, 2005):

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, (The Industrial Society, 1997), so avoidance does not appear to be uncommon.

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, (Cleveland & Murphy, 1992). With this array of potential attitudes, norms and constraints jostling for supremacy, the manager has multiple and potentially conflicting intentions in mind before even commencing the process.

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, (Fletcher, 2002). How a manager will approach a given appraisal process, let alone a given appraisee will depend upon many factors: the relationship with the appraisee, the manager’s confidence in their own position, the manager’s personality and attributional style, (Fletcher, 2002).

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, (Kikoski, 1999). And just as the manager has a variety of potential motives so may the appraisee. He/she may be focussed on preserving self-esteem in the face of any criticism, or may discount poor feedback as being biased or ill-judged. He/she may use the interview as a way of drawing attention to grievances, or as a way of managing upwards to try to create a favourable impression, (Fletcher, 2002). The appraisee’s “need for achievement”, is also significant. An individual’s need for achievement can be parsed into dimensions which include work ethic, the pursuit of excellence, the need for status as a leader, the desire to compete and win, the desire to earn money, and the drive to overcome obstacles, (Cassidy & Lynn, 1989). An appraisee who, for instance, has a strong desire to compete and win may treat the appraisal process as a forum for demonstrating performance versus peers, whereas one who is motivated more by work ethic may want to concentrate on effort rather than results.

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, (Beer, 1981). Ideally, of course, the manager provides coaching, support and feedback throughout the year. But practice is frequently different. The relationship may be distant, hostile and mistrustful. In such a circumstance it does not matter how clear the strategy, how complete the performance metrics, how well structured the appraisal interview – the process will likely fail.

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. (Franco-Santos, Lucianetti, & Bourne, 2012).

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, (Scullen, Goff, & Mount, 2000). So perhaps it is no wonder that results are mixed.

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, (Buckingham & Goodall, 2015).

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.

References

Ajzen, I., & Fishbein, M. (2005). The influence of attitudes on behavior. In D. Albarracin, B. Johnson, & M. Zanna (Eds.), The handbook of attitudes (pp. 173-221). New York: Psychology Press.

Bach, S., & Edwards, M. (Eds.). (2013). Managing Human Resources. London: John Wiley & Sons Ltd.

Cassidy, T., & Lynn, R. (1989). A multifactorial approach to achievement motivation: The development of a comprehensive measure. Journal of Occupational Psychology , 62, 301-312.

Centre for Business Performance. (2004). Literature Review of Performance Measurement and Management. Cranfield School of Management.

Cleveland, J. N., & Murphy, K. R. (1992). Analyzing performance appraisal as goal-directed behavior. Research in Personnel and Human Resources Management , 10, 121-185.

Fletcher, C. (2002). Appraisal: An individual psychological perspective. In S. Sonnentag (Ed.), Psychological Management of Individual Performance (p. Ch 6.). London: John Wiley & Sons.

Franco-Santos, M., Lucianetti, L., & Bourne, M. (2012). Contemporary performance measurement systems: A review of their consequences and a framework for research. Management Accounting Research (23), 79-119.

Kaplan, R., & Norton, D. (2005, July/August). The Balanced Scorecard: Measures that drive performance. Harvard Business Review , 83, pp. 172-180.

Kikoski, J. F. (1999). Effective communication in the performance appraisal interview: Face-to-face comminication for public managers in the culturally diverse workplace. Publi Personnel Management , 28 (2), 301-322.

Kleiner, B. H., & Reyes, J. R. (1990). How to Establish an Organisational Purpose. Management Decision , 28 (7), 51-54.

Magretta, J., & Stone, N. (2002). What is Management? New York: The Free Press.

Melnyk, S. A., Bititci, U., Platts, K., Tobias, J., & Andersen, B. (2014). Is performance measurement and management fit for the future? Management Accounting Research , 25, 173-186.

Neely, A., Adams, C., & Kennerley, M. (2002). The Performance Prism: The Scorecard for Measuring and Managing Business. London: Financial Times Prentice Hall.

Rumelt, R. (2011). Good Strategy / Bad Strategy: The difference and why it matters. London: Profile Books Ltd.

Spence, J. R., & Keeping, L. M. (2013). The road to performance ratings is paved with intentions: A framework for understanding managers’ intentions when rating employee performance. Organizational Psychology Review , 3 (4), 360-383.

The Industrial Society. (1997). Appraisal: Report no.37.

Van Dooren, W. (2011). Better Performance Management. Public Performance and Managment Review , 34 (3), 420-433.