V. PERFORMANCE MANAGEMENT
Managers can do a variety of things to enhance employee motivation and performance, including
designing jobs, allowing greater participation and promoting empowerment, considering alternative
work arrangements, and setting goals.
However, they may also fail to do things that might have improved motivation and performance,
and they might even inadvertently do things that reduce motivation and performance.
It is clearly important that managers understand that performance is something that can and should
be managed. Moreover, effective performance management is essential in order for rewards to be
used effectively.
The core of performance management is the actual measurement of the performance of an
individual or group.
Performance appraisal is the process by which someone (1) evaluates an employee’s work
behaviors by measurement and comparison with previously established standards, (2) documents
the results, and (3) communicates the results to the employee.
Performance management comprises the processes and activities involved in performance
appraisals.
A. Purposes of Performance Measurement
Performance appraisal may serve many purposes. The ability to provide valuable feedback is
one critical purpose.
Appraisal results, of course, are also used to decide and justify reward allocations.
Performance evaluations may be used as a starting point for discussions of training,
development, and improvement.
Finally, the data produced by the performance appraisal system can be used to forecast future
human resource needs, to plan management succession, and to guide other human resource
activities such as recruiting, training, and development programs.
Providing job performance feedback is the primary use of appraisal information. Other
purposes of performance appraisal can be grouped into two broad categories, judgment and
development, as shown in Figure 6.5.
Performance appraisals with a judgmental orientation focus on past performance and are
concerned mainly with measuring and comparing performance and with the uses of this
information. Appraisals with a developmental orientation focus on the future and use
information from evaluations to improve performance.
B. Elements of Performance Management
Many issues must be considered in determining how to conduct an appraisal. Three of the most
important issues are who does the appraisals, how often they are done, and how performance is
measured.
1. The Appraiser
In most appraisal systems, the employee’s primary evaluator is the supervisor. Problems
often arise, however, if the supervisor has incomplete or distorted information about the
employee’s performance.
Similar problems may arise when the supervisor has a limited understanding of the
technical knowledge involved in an employee’s job.
One solution to these problems is a multiple-rater system that incorporates the ratings of
several people familiar with the employee’s performance.
One possible alternative, for example, is to use the employee as an evaluator. One of the
more interesting multi-rater approaches being used in some companies today is something
called 360-degree feedback.
This method involves employees receiving performance feedback from those on all “sides”
of them in the organization—their boss, their colleagues and peers, and their own
subordinates. Thus, the feedback comes from all around them, or from 360 degrees.
This form of performance evaluation can be very beneficial to managers because it
typically gives them a much wider range of performance-related feedback than a traditional
evaluation provides.
2. Frequency of the Appraisal
Another important issue is the frequency of appraisals. Annual performance appraisals are
convenient for administrative purposes such as record keeping and maintaining a level of
routine that helps keep everyone comfortable.
Managers in international settings must ensure that they incorporate cultural phenomena
into their performance-appraisal strategies.
3. Measuring Performance
The foundation of good performance management is correctly identifying what should be
measured and the selection of the best method(s) for measuring it.
Accurately defining job performance is critical: measuring the wrong things well is not
good performance management.
Once the critical performance dimensions are known, the best way(s) of assessing them can
be identified.
The courts and Equal Employment Opportunity guidelines have mandated that performance
measurements be based on job-related criteria rather than on some other factor such as
friendship, age, sex, religion, or national origin.
In addition, to provide useful information for the decision maker, performance appraisals
must be valid, reliable, and free of bias.
Some of the most popular methods for evaluating individual performance are graphic rating
scales, checklists, essays or diaries, behaviorally anchored rating scales, and forced choice
systems.
These systems are easy to use and familiar to most managers. However, two major
problems are common to all individual methods: a tendency to rate most individuals at
about the same level, and the inability to discriminate among variable levels of
performance.
Comparative methods evaluate two or more employees by comparing them with each other
on various performance dimensions. The most popular comparative methods are ranking,
forced distribution, paired comparisons, and the use of multiple raters in making
comparisons.
C. The Balanced Scorecard Approach to Performance Management
A relatively new and increasingly popular form of performance management system is the
balanced scorecard approach.
The balanced scorecard, or BSC, is a structured performance management technique that
identifies financial and nonfinancial performance measures and organizes them into a single
model.
The basic BCS is shown in Figure 6.6. At the core of the BSC is organizational vision and
strategy. These must be clearly established and communicated throughout the organization by
the top management team.
Next, managers establish a small number of objective goals and measures to support four key
components of organizational success. These components are customer perceptions, financial
performance, internal business processes, and innovation and learning. All subsequent
performance measures are derived from this framework.
VI. INDIVIDUAL REWARDS IN ORGANIZATIONS
One of the primary purposes of performance management is to provide a basis for rewarding
employees. Rewards are among the most powerful things managers can use to motivate behavior.
The reward system consists of all organizational components—including people, processes, rules
and procedures, and decision-making activities—involved in allocating compensation and benefits
to employees in exchange for their contributions to the organization.
Rewards constitute many of the inducements that organizations provide to employees as their part
of the psychological contract. Rewards also satisfy some of the needs employees attempt to meet
through their choice of work-related behaviors.
A. Roles, Purposes, and Meanings of Rewards
The purpose of the reward system in most organizations is to attract, retain, and motivate
qualified employees.
The organization’s compensation structure must be equitable and consistent to ensure equality
of treatment and compliance with the law.
Finally, the system must be competitive in the external labor market for the organization to
attract and retain competent workers in appropriate fields.
An organization must develop its philosophy of compensation based on its own conditions and
needs, and this philosophy must be defined and built into the actual reward system.
The organization needs to decide what types of behaviors or performance it wants to encourage
with a reward system because what is rewarded tends to recur.
A reward system must also take into account volatile economic issues such as inflation, market
conditions, technology, labor union activities, and so forth.
Intrinsic and extrinsic rewards carry both surface and symbolic value.
The surface value of a reward to an employee is its objective meaning or worth.
But managers must recognize that rewards also carry symbolic value or the subjective and
personal meaning or worth of a reward.
Managers need to tune in to the many meanings rewards can convey—not only the surface
messages but the symbolic messages as well.
CASE STUDY: The Whole Truth
Summary: Whole Foods Market started with one store with 19 employees in Austin, Texas. Today, with
370 stores and 54,000 employees, it is the leading natural and organic foods supermarket. WFM’s motto
is “Whole Foods, Whole People, Whole Planet,” and its guiding “core value,” according to co-CEO
Walter Robb, is “customers first, then team members, balanced with what’s good for other stakeholders.”
The structure of the company’s current health care program is that employees pay a deductible before his
or her expenses are covered. Meanwhile, the employer funds a special account (an HAS) for each
employee, who can spend the money to cover health-related expenditures. High-deductible plans save
money for the employer, and more importantly, they also make employees more responsible consumers.
1. How important would benefits like those offered by Whole Foods be to you if you were working
there to put yourself through school or to collect a paycheck while looking for a position in your
chosen field?
Student’s opinions will vary. I would not be as interested in health benefits as I would have youth on
my side. Also, this is a temporary position and I would save my health plan worries for a future
employer who I may stay with for a longer period of time.
2. What negative elements do you see in Whole Foods approach to pay and benefits?
Student’s opinions will vary. I view the use of a high-deductible plan coupled with an HAS as a win-
win opportunity. The company is saving on health insurance premiums and the added responsibility
keeps the employee involved in their own healthcare.
3. Why don’t more companies use the approach to employee health care pioneered by Whole
Foods?
More companies are changing their health care offerings and many may be adopting a plan similar to
the one at Whole Foods.
B. Types of Rewards
Most organizations use several different types of rewards. The most common are base pay
(wages or salary), incentive systems, benefits, perquisites, and awards. These rewards are
combined to create an individual’s compensation package.
1. Base Pay
For most people, the most important reward for work is the pay they receive. Pay is very
important to an organization for a variety of reasons.
For one thing, an effectively planned and managed pay system can improve motivation and
performance.
For another, employee compensation is a major cost of doing business—well over 50
percent in many organizations—so a poorly designed system can be an expensive
proposition.
Finally, since pay is considered a major source of employee dissatisfaction, a poorly
designed system can result in problems in other areas such as turnover and low morale.
2. Incentive Systems
Incentive systems are plans in which employees can earn additional compensation in return
for certain types of performance.
Examples of incentive programs include the following:
a. Piecework programs, which tie a worker’s earnings to the number of units
produced
b. Gain-sharing programs, which grant additional earnings to employees or
workgroups for cost-reduction ideas
c. Bonus systems, which provide managers with lump-sum payments from a special
fund based on the financial performance of the organization or a unit
d. Long-term compensation, which gives managers additional income based on stock
price performance, earnings per share, or return on equity
e. Merit pay plans, which base pay raises on the employee’s performance
f. Profit-sharing plans, which distribute a portion of the firm’s profits to all
employees at a predetermined rate
g. Employee stock option plans, which set aside stock in the company for employees
to purchase at a reduced rate
Plans oriented mainly toward individual employees may cause increased competition for the rewards
and some possibly disruptive behaviors. A group incentive plan, on the other hand, requires that
employees trust one another and work together.
Long-term compensation for executives is particularly controversial because of the large sums of
money involved and the basis for the payments.
When a firm is growing rapidly and its profits are also growing rapidly, relatively few objections can
be raised to paying the CEO well. However, objections arise when an organization is laying off
workers, its financial performance is perhaps less than might be expected, and the CEO is still
earning a huge amount of money.
3. Indirect Compensation
Another major component of the compensation package is indirect compensation, also
commonly referred to as the employee benefits plan.
Benefits are rewards and incentives provided to employees in addition to their wages or
salaries.
Typical benefits provided by businesses include the following:
a. Payment for time not worked, both on and off the job. On-the-job free time
includes lunch and breaks. Off-the-job time includes vacation and sick leave.
b. Social Security contributions, the employer contributes half the money paid into
the system, the employee pays the other half.
c. Unemployment compensation, for those who have lost their jobs get a percentage of
their wages from an insurance-like program.
d. Disability and workers’ compensation benefits, employers contribute funds to help
workers unable to work due to occupational injury or ailment.
e. Life and health insurance programs, most organizations offer insurance at a cost
far below what individuals would pay on their own.
f. Pension or retirement plans, most organizations offer plans to provide
supplementary income to employees after they retire.
A company’s Social Security, unemployment, and workers’ unemployment compensation
contributions are set by law. But deciding how much to contribute for other kinds of
benefits is up to each company.
4. Perquisites
Perquisites are special privileges awarded to selected members of an organization, usually
top managers.
In the United States, the Internal Revenue Service has ruled that some “perks” constitute a
form of income and thus can be taxed.
Today, however, many perks tend to be more job-related. More than anything else, though,
perquisites seem to add to the status of their recipients and thus may increase job
satisfaction and reduce turnover.
5. Awards
At many companies, employees receive awards for everything from seniority to perfect
attendance, from zero defects (quality work) to cost reduction suggestions.
Award programs can be costly in the time required to run them and in money if cash awards
are given, but award systems can improve performance under the right conditions.
C. Related Issues in Rewarding Performance
Much of our discussion on reward systems has focused on general issues. As Table 6.1 shows,
however, the organization must address other issues when developing organizational reward
systems.
The organization must consider its ability to pay employees at certain levels, economic and
labor market conditions, and the impact of the pay system on organizational financial
performance.
In addition, the organization must consider the relationship between performance and rewards
as well as the issues of reward system flexibility, employee participation in the reward system,
pay secrecy, and expatriate compensation
1. Linking Performance and Rewards
For managers to take full advantage of the symbolic value of pay, there must be a
perception on the part of employees that their rewards are linked to their performance.
Organizations must ensure that pay differences are based strictly on performance (including
seniority), and not on factors that do not relate to performance (such as gender, ethnicity, or
other discriminatory factors).
Because it is really quite difficult to differentiate among all the employees, most firms use
some basic compensation level for everyone.
They might also work to provide reasonable incentives and other inducements for high
performers while making sure that they don’t ignore the average employees.
The key fact for managers to remember is simply that if they expect rewards to motivate
performance, employees must see a clear, direct link between their own job-related
behaviors and the attainment of those rewards.
2. Flexible Reward Systems
Flexible, or cafeteria-style, reward systems are a recent and increasingly popular variation
on the standard compensation system.
A flexible reward system allows employees, within specified ranges, to choose the
combination of benefits that best suits their needs.
Some organizations are starting to apply the flexible approach to pay. Obviously, the
administrative costs of providing a flexible pay system are greater, many employees value
this flexibility and may develop strong loyalty and attachment to an employer who offers
flexible compensation packages.
3. Participative Pay Systems
A participative pay system may involve the employee in the system’s design,
administration, or both.
Employee participation in administering the pay system is a natural extension of having
employees participate in its design.
4. Pay Secrecy
When a company has a policy of open salary information, the exact salary amounts for
employees are public knowledge. State governments, for instance, make public the salaries
of everyone on their payrolls.
A policy of complete secrecy means that no information is available to employees
regarding other employees’ salaries, average or percentage raises, or salary ranges.
Although a few organizations have completely public or completely secret systems, most
have systems somewhere in the middle.
5. Expatriate Compensation
Expatriate compensation is yet another important issue in managing reward systems.
Developing rewards for expatriates is a complicated process.
Figure 6.7 illustrates the approach to expatriate compensation used by one major
multinational corporation. The left side of the figure shows how a U.S. employee currently
uses her or his salary—part of it goes for taxes, part is saved, and the rest is consumed.
As shown on the right side of the figure, the individual’s compensation package will
potentially consist of six components.
First, the individual will receive income to cover what his or her taxes and Social Security
payments in the United States will be.
Next, the firm also pays an amount adequate to the employee’s current consumption levels
in the United States.
Finally, if the employee faces a hardship because of the assignment, an additional foreign
service premium or hardship allowance is added by the firm.
At the end of Chapter 5 we presented Table 5.1 to illustrate how the various theories of
motivation discussed in that chapter could be used to address several representative
managerial challenges. Table 6.2 shows how the various motivational tools and techniques
discussed in this chapter might be used for those same challenges.