The Goals of Performance Management - Case Study Example

 Performance Management Introduction In broad terms, performance management can be defined as the process used in organisations of any size to identify, measure, and develop employee performance (Campbell & Garfinkel 1996). For the leaders and managers in a given company, the practical use of performance management is to get the most out of their employees and to mark those employees who have to be rewarded in certain ways. I feel that the best practical example for that comes from GE which has a system for performance management that has been emulated by a large number of Fortune 500 companies (Grote, 2002). Organisations such as GE use their performance management systems and processes in line with the purpose outlined by Rheem (1995) which is to improve the overall performance of the organisation. Organisational performance could be measured in several ways including financial performance, worker productivity, product and service quality, level of customer satisfaction, and employee job satisfaction. However, for our purposes, it would be more important to look at performance management and its associated systems through the eyes of a manager. At the same time, the viewpoint of the employees must also be considered since they are the individuals who are being apprised and it is their performance which is being managed. Most organisations use some semblance of a performance management process to increase organisational performance, but some of the people in those organisations, managers and employees alike, report that they do not think that the process is entirely effective. One of the situations where this could happen is in cases where there is a large time gap between a performance appraisal and the results bringing some fruit to the employees, for example, Kerr (1996) uses the example of giving rewards to a mouse in a cage for pushing a level and says that if a food pellet comes a year after the level was pushed, there would be little to associate the two or connect the act with the reward. Questions about why performance management processes are not effective and how they could be made more effective have generated a substantial body of empirical research and practitioner how-to books and articles. These issues will be investigated in as a part of this research. Cabrera and Bonache (1999) noted that since the early 1980s, human resource literature has suggested that the competitive capacity of organisations could be increased through establishing strong organisational cultures and effectively developing and managing people. As reported by them, “In other words, two key factors for success in today's competitive environment are continuously espoused to be an organisation’s culture and its human resource practices, both of which influence the behaviour of organisational members (Pg. 51)”. The theoretical framework developed by Cabrera and Bonache characterises a strong culture as one that encourages the behaviours that support the organisation's intended strategy. In a similar manner, O'Reilly (1989) found that a strong organisational culture is defined by the intensity and crystallization of organisational norms. Benefits of Performance Management Performance management systems can provide a variety of benefits to companies which include clearly articulated strategic goals, valid evaluation information, and recognition of contributions made by the employees. It is essential for such benefits to be realised that a company maintains an on-going feedback cycle along with and fair and equitable pay (Bretz, Milkovich, & Read, 1992). In a performance management practices survey, Bernthal, Sumlin, Davis, and Rogers (1997) found that the majority of CEOs surveyed, 63 per cent, believed their performance management system drove the key factors associated with business strategy. An even greater majority, approximately 79 per cent, perceived their performance management system as driving the people or the cultural strategies that maximise human assets. This shows that there is a definite connection between theoretical viewpoints on performance management systems and the actual business practices used by various companies. In real world cases, performance management systems seem to link the fields of human resource management and human resource development. Performance management processes promise to enhance the quality of organisational and individual decisions, enhance the relationship between the individual and the organisation, and provide a foundation for organisational development and change efforts (Murphy & Cleveland, 1995). Effective performance management practices also have a role associated with lower employee turnover and greater productivity and corporate performance (Huselid, 1995). Huselid found that performance management systems are a key work practice that can improve the knowledge, skills, and abilities of a company's current and potential employees, increase employee motivation, reduce shirking, and enhance retention of quality employees while encouraging non-performers to leave or to find different departments. GE uses this process to remove the bottom 10% of its employees on a yearly basis (Welch, 2005). Yet, for all this promise, many of the performance management systems implemented in today's organisations often fail to deliver the promised benefits and results despite significant investments in terms of time and money. A national study of current and future practices (Rogers, Miller, & Worklan, 1993) reported that while 89 per cent of organisations in a survey sample used a company sanctioned performance management system or approach overall satisfaction with the system or approach was low. Over 40 per cent of the respondents, managers and non-managers indicated that their organisations planned to implement significant changes to their systems or how the systems were implemented. Planned changes included requiring managers to provide essay summary statements to describe employee performance, using measurements and evaluations to hold managers accountable for performance appraisal effectiveness, and providing training to both managers and non-managers in performance management concepts and skills. It is easy to agree with these recommendations and planned changes since steps would only improve how performance management systems are created and used in various companies. Summary details of employee performance reports will give managers a chance to justify their actions or rewarding or reprimanding employees along with associated documentation which can go to show why the action is justified. In many cases, it could prevent a company from facing wrongful termination lawsuits or challenges on other fronts from the employees themselves. In such situations training becomes essential since managers have to take a detached viewpoint when they are evaluating their teams and without having the necessary knowledge and background regarding evaluations, it could be difficult for them to avoid traps such as personal biases. Performance Metrics As reported by Kaplan and Norton (2000), performance management systems are dependent on metrics which are useful for two reasons. First, monitored measurements get high visibility within an organization and the organization strives to achieve high performance with respect to these measures. Such organizational behaviour is positive in terms of achieving strong performance of visible measures. However, this behaviour can create a toxic environment in terms of having a negative impact on other important metrics that could be ignored within a performance measurement system. It is always emphasized that metrics should be aligned with strategy and the vision of the company. This process was firmly established at GE where the long time CEO of the company (Jack Welch) reports that, “We publicly rewarded people who drove the mission and let go of people who couldn’t deal with it for whatever reason (Welch, 2005, Pg. 16).” In another example, the management team of a call centre measured the number of phone rings before a customer call was answered. This measure was made available to the call centre representatives. After making this metric available within the organization, the measure improved because representatives started paying attention to improving this measure. A proper performance measure in this case has identified a shortfall in the process, and has helped in driving positive action. However, the process can be criticised as being too focused on one measure alone and not giving real attention to other issues that the call centre might face such as a positive customer experience which could be far more important than simply picking up a call early. The second usefulness of metrics is that they can help identify alternatives between employees and allow management decisions to be based on preset criteria. The scheduling process illustrates a perfect example for this point. Scheduling is a low level activity within the context of supply chain management. Research in scheduling shows how different policies should be adopted according to the measure of interest. For example, shortest processing time policy appears to be the policy of choice when considering time in system or waiting time measures. However, an earliest due date metric is more favourable when considering order lateness as the measure of interest (Hoque, 2003). An ideal performance management system would therefore depend on the needs of the company or the needs of the particular department within a company in order to drive enterprise performance. The company would also have to define relevant performance metrics at multiple levels of the organization hierarchy. Such a performance measurement system would ensure effectiveness within the organization since employees would know what metrics are being measured in terms of their performance and the proper implementation of the process would ensure organizational efficiency since the company would know that their performance management system is being governed properly. Performance Management at GE The employee performance management and employee rating system used at GE is one of the most imitated and most respected systems around the world and it is acknowledged to be so by experts in the field such as Kerr (1996), Fisher (2006) and Demos (2006). Essentially, GE measures employee performance against preset metrics which may vary from department to department but in other terms such as commitment and value to the company may be same across the board. This system ranks employees in comparison to each other and then places them in three tiers which are divided as the bottom 10%, the middle 70% and the top 20% (Welch, 2005). While ranking employees may be a difficult process, Grote (2002) said that companies which cannot rank their employees in relation to each other are simply wasting their time if they create any performance appraisal system which works otherwise. In fact, even in cases where two people are performing at more or less equal performance levels, Grote recommends going deeper to exactly find out which one is performing better than the other employee. To manage this, a ranking system is used at GE which makes it impossible to say that two employees are of the same rank. As noted by Welch (2005), one person is always better than the other in terms of output and even the best person can further improve their performance to raise the bar for all employees. This process of managing performance through employee differentiation has been tested and accepted by some of the biggest names in the business world. This process of ranking employee is used by companies such as Microsoft, HP, Sun, Capital One, Cisco, Intel as well as PepsiCo. Sun copies GE’s system to the letter by saying that 20% of its employees are superior, 70% are Sun Standard while 10% are underperforming employees at Sun. On the whole, more than a fourth of all the companies on the Fortune 500 list have established similar practices of differentiating between employees as a performance management system (Grote, 2002). While GE remains a giant company with operations around the world, it might be said that such systems are for giant companies alone. However, Schmitt (2001) suggests that the example of GE is also applicable to smaller companies and non-profit organisations. The performance of GE and their tremendous growth has been used as perfect examples for many small businesses and non-profit organisations simple because the methods they use have been the best possible tools for any enterprise. The point about the system followed by GE is the nature of the evaluation system and the benefits which companies can get from following such a system. As reported by Welch (2005), while getting appreciation from colleagues can be a useful metric to measure the value that an employee brings to a company, for a more complete performance appraisal a company has to look at a lot more than that. In this regard, the factors as suggested by Domeyer (2005) include several aspects which are important for organisations and include: Strategic Goals: This metric could measure an individual’s personal ability to meet the strategic targets given to them by the company. Direct Responsibility: This element looks as the individual’s ability to dispatch the direct responsibilities assigned to them. This could include a number count of their successes, failures, their pending actions and the level of effort they have put into completing their direct responsibility. Such measures can also be assigned monetary figures to show what value the company has gained from the person being evaluated. Supporting Player: This metric gives an evaluation of a person’s participation while taking supporting roles for certain tasks. It can show the evaluators how the person is managing their additional responsibilities and what the person is doing to meet the secondary goals that they might have been given. For example, promoting the company, getting the community to appreciate the company and taking part in marketing efforts or improving customer service levels. Personal Development: This is a measure of how much has the person grown with the company and how they have matured on their own as a result of the mentoring, training and learning provided by the company. Professional Achievements: This measure judges how the person in question managed to achieve something remarkable which other employees did not. Essentially, it is easy to measure such metrics when it comes to positions in sales, purchase or recruitment but if a person is placed in the HR or administrative departments such metrics can be difficult to quantify. Miscellaneous Factors: Such evaluating factors can include things such as a show of good business ethics, display of social responsibility or any other metrics that are important to the company or to the given department of the employee. It must be understood that such a framework of performance evaluation may not be applicable to every company under the sun. However, it does provide general guidelines under which departments within a company or entire companies can form their own metrics and evaluation criteria for ranking employees. Once such evaluations have been made, it is then possible to rank and separate employees into various groups as it is done by GE and several other reputable companies. Then, as per the information given in Table 1, the organisation can take various actions in order to manage the performance of all the company employees. Evaluation 1st Category 2nd Category 3rd Category Employees are evaluated and ranked Top 20% Middle 70% Bottom 10% Short term process Employees are rewarded with money, given recognition and earmarked for future promotions. This group can be motivated further, given additional training and encouraged to higher levels of individual performance through some rewards. Informed about their poor output and strongly motivated to improve their performance Long term strategic management goals Evaluated for higher leadership positions within the company Moved within the company to different departments or within the same department to find where they can give their best performance Removed from service or transferred out of the department Table 1 While every department within a company can have their own performance management system and every team of a given department can have individual requirements against which they can monitor the progress of their employees, there are certain components of the performance management system itself that need to be present across the board. These factors included elements such as how often a performance review is done to how the end result of the review process returns a reward or punishment for the employee. In GE’s case, the evaluations are done every quarter and the results become obvious for the employees as there is a public declaration of the bonuses and rewards given to the top 20% of the employees as well as the bottom 10% of the company. This way, every one remains in the loop about what is happening within the company. The components and properties of such as system were given by Welch (2005) and these are outlined in Table 2. System Component Purpose Expected Result Quarterly evaluations Provides frequent and measureable results to company members on their output and performance. Individuals will know where they stand in the company and those who are going to be promoted or even those who are going to be let go are not surprised by the decisions of the company. Open and frank discussion of employee performance This permits the employees to give his/her viewpoint on the performance they had done and they can voice what can be done from the company’s side to help improve their work situation. The evaluators can use the process as a goal setting tool for both the company and the employees. They can also give rewards for excellent performance or punishments for poor performance. Covers a variety of performance metrics To allow a variety of ways in which employees can improve their future performance for the company and to take an overall look at their individual performance. To let the employees know that they can improve their performance in various aspects than to make them focus on one aspect alone. Rewards for good performance. Punishments for poor performance. By rewarding good performance in a timely and significantly measureable fashion, a company can reinforce high performance behaviour while removing those individuals that need to be removed from the company. Individuals at all positions in the company are motivated to meet given goals and to seek out for more rewards, promotions or personal/professional benefits. Table 2 Throughout the evaluation process, employees should be kept fully involved. Individuals might feel less nervous about their appraisal meetings if they know that the company management is ready to take their views into consideration. During the process, it would be useful to have employees complete a form for self appraisal before their discussion with the managers of the company to see what the employee thinks about his/her own performance (Domeyer, 2005). Such steps would also show the employees that the management cares about their perspective on the evaluation process and it could also be a chance for the employee to remind the company of some of their accomplishments that might have been overlooked. Both Kerr (1996) and Welch (2005) give little heed to the actual theories behind motivation and the academic side of performance management. Kerr is cynical enough to say that we already know how to motivate and manage the performance of others and we do it all the time when we are dealing with anyone who is giving us a service. Knowing the theory or frameworks behind performance management systems is not important according to him and he explains this by using the example of children: “When it comes to our jobs, though, we tend to get distracted by a blizzard of ideas with jargony names, offered by high-priced consultants. Does your daughter Jenny want to ride her bike with her new friend Claire? If you tell her she can, but only after she cleans her room, you've just put into place an "operationally defined, cost-neutral, performance-contingent reward system." Got it?” (Kerr, 1996, Pg 94) However, this does not stop people from being cynical about the system and the review process for performance management may come with cynical employees not engaging themselves fully in the process. In such situations, managers should do all they can to remove the cynicism in the company and to create awareness about the positive sides of the system. The cynicism associated with the process was mentioned by Grote (2002) who reports that, “One cynical survivor of many years of the forced-ranking process put it bluntly: The A's all think they're B's, the B's are scared they'll be ranked as C's, and all the C's are confident that they're unquestionably A players (Grote, 2002, Pg. 45)”. I feel that once employees are made or motivated enough to actively participate in the ranking and differentiation process, they will certainly see how it could benefit all concerned parties. Critical Evaluation It has been noted by Welch (2005) that he has been often told that the differentiation system created by him not a very efficient system for managing performance of employees and is even more ineffective at managing the process of rewarding the right persons. He reports that the system has been called cruel, inefficient, impractical, unfair and Darwinian (Welch, 2005). However, this criticism is not focused on GE’s policy of giving rewards to their employees but rather their policy of terminating the bottom 10% of their company strength on a yearly basis. Welch (2005) insists that this step is a very critical part of the overall reward management and performance management system. In his last letter to the company’s share holders he wrote that, “A company that bets its future on its people must remove that lower 10 percent, and keep removing it every year, always raising the bar of performance and increasing the quality of its leadership (Grote, 2002, Pg. 41)”. At least for GE, the performance management system is directly connected to the company’s action of removing the bottom ten percent in order to make room for fresh blood within the company. If the system seems cruel, then so be it since managers have to make tough decisions and can not be a better friend to their employees than to the company. It can also be said that such as a system would create hostility between employees who know that they are being ranked in comparison to each other and some people may say that two or more employees are in fact equals. However, Grote (2002) who worked for both GE and PepsiCo where such a system was used says that this method creates and sustains a company culture which promotes talent and high levels of output. Even though the critics may say that such a performance management system could give the company a toxic environment which is ruthless and political, Grote says that he never saw that happen at either of the two companies where he spent extensive periods of time. Schmitt (2001) is one of the more stringent supporters of this system and says that more than the bottom 10% of the workforce can be removed since no company in the world is big enough or has enough resources to keep investing in low performing employees. He notes that by keeping such employees, corporate gangrene can take place since the hard working top performers may see it as favouritism and lose their motivation to perform. Another criticism which comes to mind is that employees who are removed from the company may bring legal cases in terms of wrongful termination. However, GE prevents this from happening by making sure that the evaluation process is documented and employees have sufficient warning before a termination (Welch, 2005). Finally, Welch summarises the differentiation process of performance management by saying: When all is said and done, differentiation is just resource allocation, which is what good leaders do and in fact, is one of the chief jobs they are paid to do. A company has only so much money and managerial time. Winning leaders invest where the payback is the highest. They cut their losses everywhere else. (Welch, 2005, Pg. 38) Conclusions I believe that the system used by GE and the framework under which the differentiation process is established at GE and other companies is the best way to manage the performance of employees. Essentially, this approach allows a company to retain the best human resource given to it and to remove those who have been hired as a mistake. The managers need to ask their employees during the evaluation process what they would value getting most from the company other than more cash. If career development, advancement and learning opportunities are demanded, they should be given first to those who have shown what performance they can give to the company. During and after the evaluation process, the company needs to stay in touch with all employees with formal and informal channels of communications. Continual feedback between the parties is essential when performance reviews are taking place and things such as staff surveys, group discussions or outreach programmes can all be used. A performance appraisal is a fundamental part of the employee/manager connection since it shows the importance of teamwork to create achievable goals for both the manager and the employee. Most importantly, it lets all employees of the company know how well they're doing in comparison to others (Osborne, 2005). Lastly, the company managers need to listen to the ideas being tabled by the employees since that will lead to them being more engaged in the process. It would also confirm the belief of the workers that their input is valuable to the company and is a positive contribution to the overall objectives of the firm. With effective performance appraisal systems, a company can expect better growth for the organisation and make it star for the industry like GE has become. Works Cited Bernthal, P., Sumlin, R., Davis, P., and Rogers, B. (1997). Performance management practices survey. Bridgeville, PA: Development Dimensions International. Bretz, R D., Mikovich, G. T., & Read, W. (1992). The current state of performance appraisal research and practice: Concerns, directions, and implications. Journal of Management, 18(2), 321-352. Cabrera, E. & Bonache, J. (1999). An expert HR system for aligning organizational culture and strategy. Human Resource Planning, 22(1), 51-60. Campbell, R B., & Garfinkel, L. M. (1996). Strategies for measuring performance. HR Magazine, 41(6), 98-104. Demos, T. (2006). The World’s Most Admired Companies. Fortune, 153(4), 72-73. Domeyer, D. (2005). Planning for Performance Reviews. Women in Business, 57(2), 24-25. Fisher, A. (2006). America’s most admired companies. Fortune. 153(4), 65-76. Grote, D. (2002). Forced Ranking: Behind the Scenes. Across the Board, 39(6), 40-46. Hoque, Z. (2003). Total Quality Management and the Balanced Scorecard Approach. Critical Perspectives on Accounting, 14(1), 553-566. Huselid, M. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38(3), 635-672. Kaplan, R. and Norton, D. (2000). Having Trouble with your strategy? Then map it. Harvard Business Review. Sept- Oct, 166-176. Kerr, S. (1996). Risky business: The new pay game. Fortune, 134(2), pp. 94-97. Murphy, K. & Cleveland, J. (1995). Understanding performance appraisal: Social. organizational, and goal -based perspectives. SAGE Publications. O'Reilly, C. (1989). Corporations, culture, and commitment: Motivation and social control in organizations. California Management Review. 31(1), 9-25. Osborne, G. (2005). How to treat your staff. Caterer & Hotelkeeper, 195(4398), 60-61. Rheem, H. (1995). Performance management: A progress report. Harvard Business Review. 73(3), 11-12. Rogers, R. Miller, L. & Worklan, J. (1993). Performance management: What's hot - what's not : A national study of current and future practices. International Society for Human Resource Management. Schmitt, J. (2001). Welch has a lesson, even for small shops. Contractor Magazine. 48(10), 16-18. Welch, J. 2005, Winning, HarperCollins Read More