Module 14: Rewarding through Performance Management – Discussion Question

Copyright © 2023 Chicago Business Press
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Part IV: Reward Systems, Legal
Issues, and Team Performance
Management
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Chapter 10: Performance Management, Rewards, and
the Law
Chapter 11: Team Performance Management
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Chapter 10
Performance Management, Rewards, and the
Law
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Overview(1 of 2)
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Definition of Reward Systems
Traditional and Contingent Pay (CP) Plans
Reasons for Introducing CP Plans
Possible Problems Associated with CP Plans
Selecting A CP Plan
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Overview (2 of 2)
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What to Do When Workers Hit the Top of Their Pay Range
Putting Pay in Context
Performance Management and the Law
Some Legal Principles Affecting Performance Management
Laws Affecting Performance Management
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Definition of Reward Systems
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Base Pay
Cost of living adjustments (COLA) and Contingent Pay
Short-Term incentives
Long-Term incentives
Income Protection
Work-Life Focus
Allowances
Intangible Returns
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Company Spotlight
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Colorado Business Group teamed up with multiple
companies to develop a short-term incentive rewards
program
Program rewarded doctors for reducing future expensive
treatments by focusing on preventative measures
Overall, the program used short-term incentives as part of
the performance management system to motivate
physicians to focus on treatments that enhanced patient
health on an ongoing basis
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Traditional Pay
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Salary and salary increases are based on
• Position
• Seniority
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Contingent Pay (CP)
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Salary and salary increases are based on:
• Job performance
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Also called: Pay for Performance
If not added to base pay, called:
• Variable pay
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Reasons for Introducing CP (1 of 3)
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Performance management is more effective when
rewards are tied to results.
CP Plans force organizations to:
• Clearly define effective performance
• Determine what factors are necessary
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Reasons for Introducing CP (2 of 3)
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Supervisors and employees are better able to
understand what really matters.
CP plans enhance employee motivation to
accomplish goals that match organizational needs.
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Reasons for Introducing CP (3 of 3)
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CP plans help to recruit and retain top performers.
CP plans projects good corporate image.
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CP Plans Help Improve Motivation
When:
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Employees see clear link between their efforts and
resulting performance. (Expectancy)
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Employees see clear link between their
performance level and rewards received.
(Instrumentality)
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Employees value the rewards available. (Valence)
motivation =
expectancy x instrumentality x valence
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Reasons Why CP Plans Fail
A poor performance management system is in place
There is the folly of rewarding A while hoping for B
Rewards are not significant
Managers are not accountable
There exists an extrinsic motivation at the expense of
intrinsic motivation
Reward for executives are disproportionately large
compared to rewards for everyone else
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Selecting a CP Plan: Issues to
Consider
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Culture of organization
Strategic direction of organization
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Culture of Organization: Types of
Organizations
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Traditional
• Top-down decision making
• Vertical communication
• Jobs that are clearly defined
Involvement
• Shared decision making
• Lateral communications
• Loosely defined roles
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CP Systems for Different
Organizational Cultures
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Traditional organizations
• Piece rate
• Sales commissions
• Group incentives
Involvement organizations
• Profit sharing
• Skill-based pay
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CP Plans Recommended for Various
Strategic Business Objectives
Strategic Business Objective
CP Plan
Employee development
Skill-based pay
Customer service
Competency-based pay
Gain sharing
Productivity Individual
Piece rate
Sales commissions
Productivity Group
Gain sharing
Group incentives
Teamwork
Team sales commissions
Gain sharing
Competency-based pay
Overall profit
Executive pay
Profit or stock sharing
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Company Spotlight (1 of 2)
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Google has long used contingent pay as part of its
compensation system
Emphasizes “fairness” over “equality”
• Don’t pay everyone the same, but make sure that pay is
commensurate with contribution
Leads to cases where star performers at more junior levels
make far more than average performers at more senior
levels
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What to Do When Workers Hit the Top
of Their Pay Range
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Take a proactive role
Be prepared to explain why pay may be limited
Find other creative solutions
Determine if the employee is still in the right place.
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Key Steps
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Plan
Look for potential solutions
Be aware of unique circumstances that may require an
increase in salary
Analyze the frequency of the cases
Craft a policy
Transparency.
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Putting Pay in Context
A reward increases the chance that:
■ Specific behaviors and results will be repeated, or
■ Employee will engage in new behavior and produce
better results.
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Rewards Can Include:
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Pay
Recognition
• Public
• Private
Status
Time
Sabbaticals
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Trust and Respect
Challenge
Responsibility
Freedom
Relationships
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How to Make Rewards Work
Define and measure performance first and then allocate
rewards
Use only rewards that are available
Make sure all employees are eligible
Make rewards visible
Make rewards contingent
Make rewards timely
Make rewards reversible
Use recognition and other nonfinancial rewards
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Using Recognition and Relational
Incentives as Rewards(1 of 2)
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Non-monetary rewards can be powerful if they enhance
the chances that specific results and behaviors will be
repeated
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Using Recognition and Relational
Incentives as Rewards (2 of 2)
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Formal commendations and awards
Public recognition, including praise, certificate of
accomplishment, and letters of appreciation
Status indicators, such as a new and enhanced job title,
larger work area, improve
Extra time off, with or without pay
More challenging work environment, responsibility, and
freedom
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Company Spotlight (2 of 2)
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Salesforce has a cultural commitment to fostering a
rewarding work environment.
Offers its employees a broad array of both financial and
nonfinancial rewards.
• Mindfulness zones
• Help high performers find new challenges
• Employee philanthropy and community volunteering
• Employee referral bonuses
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Copyright © 2023 Chicago Business Press
Legal Issues: Overview
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Performance Management and the Law
Some Legal Principles Affecting PM
Laws Affecting PM
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Performance Management and the Law
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Performance management systems are usually legally
sound if…
• Procedures are standardized
• Same procedures are used with all employees
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Some Legal Principles Affecting PM:
Overview
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Employment-at-will
Negligence
Defamation
Misrepresentation
Adverse Impact
Illegal Discrimination
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Employment-at-Will
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Employment relationship can be ended at any time by:
• Employer
• Employee
Exceptions:
• Implied contract
• Possible violation of legal rights
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Negligence
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If organization documents describe a system
and
It is not implemented as described,
Employee can challenge evaluation, charging
negligence.
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Defamation
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Disclosure of performance information that is
• Untrue and
• Unfavorable
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Misrepresentation
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Disclosure of performance information that is
• Untrue and
• Favorable
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Adverse Impact / Unintentional
Discrimination
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PM system has unintentional impact on a protected
class.
Organization must demonstrate:
• A specific KSA is a business requirement for the job
• All affected employees are evaluated in the same
way
Organization should review ongoing performance
score data by protected class to implement corrective
action as necessary.
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Illegal Discrimination or Disparate
Treatment
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Raters assign different scores to employees based on
factors that are NOT related to performance.
Employees receive different treatment as result of such
ratings.
Employees can claim they were intentionally and illegally
treated differently due to their status.
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Employee Claim of Illegal
Discrimination
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Direct evidence of discrimination, or
Evidence regarding the following:
• Membership in protected class
• Adverse employment decision
• Performance level deserved reward/different
treatment
• How others were treated (not in protected class)
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Employer Response to Claim of Illegal
Discrimination
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Legitimate and nondiscriminatory reason for action
Related to performance
Note: Good performance management system and
subsequent performance-related decision, used
consistently with all employees, provide defense
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Difference Between
Legal and Illegal Discrimination
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LEGAL discrimination discriminates among employees
based on their level of performance.
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ILLEGAL discrimination is based on variables that
should not usually be related to performance.
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Laws Affecting PM
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During past few decades, several countries have
passed laws prohibiting discrimination based on:
• Race or Ethnicity
• Sex
• Religion
• National Origin
• Age
• Disability status
• Sexual orientation
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Laws in the United States of America
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Equal Pay Act of 1963
Civil Rights Act of 1964
Age Discrimination in Employment Act of 1967 (as
amended in 1986)
Americans with Disabilities Act of 1990
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Laws in Canada
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Canadian Human Rights Code of 1985
Section 15 of the Charter of Rights and Freedoms (1982)
Federal Employment Equity Act (2004)
Federal Contractors Program
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Laws in Australia
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The Crimes Act (1914)
Racial Discrimination Act (1975)
Sex Discrimination Act (1984)
Human Rights and Equal Opportunity Commission Act
(1986)
Disability Discrimination Act (1992)
Workplace Relations Act (1996)
Equal Opportunity for Women in the Workplace Act
(1999)
Age Discrimination Act (2004)
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Characteristics of Legally Sound PM
Systems
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Performance dimensions (including behaviors and results) and standards are clearly defined and
explained to the employee are job-related and are within the control of the employee
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Procedures are standardized and uniform for all employees within a job group
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The system is formally explained and communicated to all employees
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Employees are given timely information on performance deficiencies and opportunities to correct
them
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Employees are given a voice in the review process and are treated with courtesy and civility
throughout the process
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The performance management system includes a format appeals process
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Performance information is gathered from multiple, diverse and unbiased raters
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Supervisors and other raters are provided with formal training and information on how to manage
the performance of their employees
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The system includes thorough and consistent documentation, including specific examples of
performance based on first hand knowledge
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The system includes procedures to detect potentially discriminatory effects or biases and abuses
in the system
Source: Adapted from Exhibits 2.2 and 2.3 in Malos , S. B (1998).Current legal issues in performance
appraisal. In W. Smither(Ed.),Performance appraisal : State of the art in practice(pp.49-94)
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San Francisco,CA:Jossey-Bass
Copyright © 2023 Chicago Business Press
Legal Principles Across Borders
Four questions to ask:
1.What is the work geographic location?
2.What is the employer status (e.g., U.S.-based firm or not)?
3.What is the employee status (e.g., U.S. citizenship status)?
4.Are there international law defenses (i.e., international
treaties)?
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Legal Issues: Summary
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Performance Management and the Law
Some Legal Principles Affecting PM
Laws Affecting PM
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Quick Review
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Definition of Reward Systems
Traditional and Contingent Pay Plans
Problems with Contingent Pay Plans
Selecting Contingent Pay Plans
Putting Pay in Context
Performance Management and the Law
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10-47
Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright © 2023 Chicago Business Press
6-48
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Chapter 11
Team Performance Management
Copyright © 2023 Chicago Business Press
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Overview
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Definition and Importance of Teams
Types of Teams and Implications for PM
Purposes and Challenges of Team PM
Including Team Performance in the PM System
Rewarding Team Performance
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Definition of Team
Two or more people
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Interact
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Dynamically
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Independently
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Share common and valued
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Goal, Objective, or Mission
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Importance of Teams
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Increased pressure, including global competition
Flexibility in flatter organizations
Complexity of products and services
Rapidly changing business environments
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Performance Management and Teams
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PM systems should target:
• Individual performance
• Individual’s contribution to team performance
• Performance of entire team
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General Principles of PM Relating to
Teams
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Design and implement best system possible
Consider dangers of poorly implemented system
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Managing for Improved Team
Performance
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Don’t limit team processes with other task or
organizational requirements
Provide good team design and organizational support
Give feedback only on processes that the team
members can control
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Types of Teams (1 of 2)
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Classified by
• Complexity of task
• Membership configuration
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Company Spotlight (1 of 3)
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Expatriate Teams at Nokia
• Perform based on the standards and expectations of
their home country
• Three different stakeholders: the local client, the home
company, and the other on-site teams
• Team performance is measured relative to these three
stakeholder groups
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Complexity of Task Ranges From:
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Routine
• Well-defined
• Few deviations in how work is done
• Outcomes are easily assessed
– to Non-Routine
• Not defined well
• No clear specifications on how to do the work
• Outcomes are long term and difficult to
assess
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Membership Configuration Includes
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Length of time team expects to work together
Stability of team membership
Static
Dynamic
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Types of Teams Based on
Membership Configuration and Task
Complexity
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Types of Teams (2 of 2)
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Work or Service Teams
Project Teams
Network Teams
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Work or Service Teams
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Intact
Routine tasks
Share similar skill sets
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Project Teams
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Assembled for specific purpose
Tasks outside core product or service
Members from different functional areas
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Network Teams
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Membership not constrained by:
• Time or space
• Organizational boundaries
Teams may include:
• Temporary or full-time workers
• Customers
• Vendors
• Consultants
Work is extremely non-routine
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Examples of PM Approaches by
Type of Team
Type of Team
Type of PM Approach
Work and Service Team
Peer ratings
Project Team
Ongoing measurements
Network Team
Development of competencies
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Benefits of Virtual Teams
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Reduce expenditure on travel
Minimizes personal and professional disruptions due to
travel
Minimizes commuting time by allowing employees to
telecommute
Reduces the need for large brick-and-mortar office space
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Challenges of Virtual Teams
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May lack clear performance standards and team
identity
Lack of training on how to improve performance within
virtual teams
Difficult for team members to keep up with group
developments
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Company Spotlight (2 of 3)
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MySQL adapted their performance management system to
manage their many virtual teams
Changes include:
• Internet Relay Chat for virtual meetings
• Software to mark off completed tasks
• Focus on outputs and results
• Reduced emphasis on chain-of-command structure
• Weekly reviews of performance and accomplishments
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Purposes of Team PM
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Traditional goals of any PM system
Specific to team performance:
• Make all team members accountable
• Motivate all team members to have a stake in team
performance
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Challenges of Team PM
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How do we assess relative individual contribution?
How do we balance individual and team
performance?
How do we identify individual and team measures of
performance?
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Six Basic Principles for Designing a PM
System
That Includes Team Performance
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Make sure your team is really a team
Make the investment to measure
Define measurement goals clearly
Use a multi-method approach to measurement
Focus on process as well as outcomes
Measure long-term changes
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Performance Management Process
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11-25
Prerequisites(1 of 4)
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Knowledge of mission
• Organization
• Team
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Knowledge of job to be performed by the team, including
KSAs
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Prerequisites
Team Charters(2 of 4)
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Summarize job duties, needed KSA s, and working
conditions for a team
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Similar to individual job descriptions, but also include
information on within-team processes such as
communication
Copyright © 2023 Chicago Business Press
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Prerequisites
Team Charters: Components(3 of 4)
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Strategic alignment
Team purpose
Team objectives, goals, and ■
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priorities
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Key stakeholders
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Team customers
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Team leader and sponsor
Team member roles and
responsibilities
Team member time
commitments
Team communication plan
Team ground rules
In/out of scope elements
Key deliverables
Performance analytics
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Prerequisites(3 of 4)
KSAs conducive to high team-performance:
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Communication
Decision-making
Collaboration
Team leadership
Self-control
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Performance Planning(1 of 2)
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Results expected of the team
Behaviors expected of team members
Developmental objectives to be achieved by team and
its members
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11-30
Performance Planning(2 of 2)
■ Facilitate adaptive learning
• Encourage new behaviors
■ Facilitate generative learning
• Provide best practices recommendations
■ Facilitate transformative learning
• Deep learning by, for example, bringing in members of
other teams into the team to work temporarily
🡪 Innovation and change
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11-31
Performance Execution(1 of 2)
Team Responsibilities
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Commit to goal achievement
Seek feedback from
• One another
• Supervisor
Communicate openly and regularly
Conduct regular and realistic peer appraisals
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Performance Execution(2 of 2)
Supervisor Responsibilities
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Observe and document
• Team performance
• Relative contribution of team members
Update team on any changes in goals of the
organization
Provide resources and reinforcement
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KSA needed to build and lead highperforming teams
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Trust, especially in virtual teams
Establish a motivating vision and goals for the team
Provide helpful feedback to team and individual team
members
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How to turn “B players” into a winning
team
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Vision
Performance analytics
Feedback
Morale
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Performance Assessment(1 of 3)
Types of Assessments
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Self-appraisals
Peer evaluations
Supervisor evaluation
Outsider appraisals (if appropriate)
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Performance Assessment(2 of 3)
Kinds of Performance to be Assessed
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Individual task performance
Individual contextual performance
Team performance
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Performance Assessment
Dimensions(3 of 3)
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Effectiveness
Efficiency
Learning and growth
Team member satisfaction
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11-38
Performance Review
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Two meetings with supervisor or review board
• Team meeting
• Individual meeting
Emphasis on past, present, and future
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11-39
Team Meeting
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Discuss overall team
• Performance
• Results
Information comes from:
• Team members
• Other teams/outsiders
• Supervisor’s evaluation
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11-40
Individual Meeting
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Discuss how individual behavior contributed to team
performance
Information comes from:
• Self-appraisal
• Peer ratings
• Supervisor’s evaluation
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11-41
Emphasis on
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Past: performance during review period
Present: any changes in compensation, depending on
results obtained
Future: goals and development plans for team and
individual members
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Company Spotlight (3 of 3)
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Wikipedia is an example of how to manage the
performance of a large, virtual, and volunteer community:
• Volunteers monitor one another
• Policies governing team interactions, along with clearly
spelled out consequences
• Established escalation and dispute-resolution process
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Rewarding Team Performance(1 of 2)
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Consider team rewards and individual rewards together
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Variable Pay System
• Individual is eligible for a bonus if team achieves
specific results
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11-44
Rewarding Team
Performance(2 of 2)
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All employees should be eligible
Rewards should be:
• Visible
• Contingent
• Reversible
Avoid factors which cause reward systems to fail
Copyright © 2023 Chicago Business Press
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Quick Review
■
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■
■
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Definition and Importance of Teams
Types of Teams and Implications for PM
Purposes and Challenges of Team PM
Including Team Performance in the PM System
Rewarding Team Performance
Copyright © 2023Chicago Business
11-46
Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright © 2023 Chicago Business Press
6-47
Module 14: Rewarding through Performance Management
In this module, you will examine how pay and reward structures support and facilitate performance
management. You will also compare traditional and contingent pay plans and explore the concept of
pay as motivation. You will identify how pay and reward systems can be implemented for optimal
results. Finally, you will learn to apply them in both individual employee and team situations to support
team performance management systems.
Discussion Question
Question Requirements:
Effective Reward Systems in Performance Management
Performance management systems and reward systems are essential components of motivating and
driving individual and group performance in organizations.
•
Analyze reward systems and the appropriate application to meet organizational goals.
•
Discuss the different types of reward systems, such as financial and non-financial rewards,
and their impact on employee motivation and performance.
•
Consider the importance of aligning reward systems with organizational goals and values, as
well as the need for fairness and transparency in the reward process
Directions:
• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and
cite any other sources.
• Write a discussion that includes an introduction paragraph, the body, and a conclusion
paragraph to address the assignment’s guide questions.
• Your initial post should address all components of the question with a 600-word limit.
Learning Outcomes
1. Recognize the multiple considerations for effective pay plans.
2. Analyze reward systems and the appropriate application to meet organizational goals.
3. Assess components and principles of team evaluation in performance management systems.
Readings
Required:
• Chapter 10 in Performance Management, Rewards and the Law
• Chapter 11 in Performance Management, Rewards and the Law
• Gardner, H., & Matviak, Ivan. (2022, August 16). Performance management shouldn’t kill
collaboration. Harvard Business Review.
• Mosca, L. (2021, June 7). 6 reasons why pay-for-performance is a game changer. Forbes.
Recommended:
• Chapter 10 & 11 PowerPoint slides from Performance Management
PERFORMANCE MANAGEMENT
Fifth Edition
1
PERFORMANCE MANAGEMENT
Fifth Edition
Herman Aguinis
School of Business The George Washington University
‫ﺑﺎﻟﺘﻮﻓﻴﻖ ﻟﻠﺠﻤﻴﻊ‬
R
2
Performance Management, fifth edition © 2023 Chicago Business Press All rights reserved. No part of this
work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any
means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning,
digitizing, taping, web distribution, information networks, or information storage and retrieval systems,
except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior
written permission of the publisher. This book was previously published by: Pearson Education, Inc.
For product information or assistance, visit www.chicagobusinesspress.com
ISBN-13: 978-1-948426-48-0
3
BRIEF CONTENTS
Preface and Introduction
Acknowledgments
About the Author
Part 1 Strategic and General Considerations
Chapter 1 Performance Management in Context
Chapter 2 Performance Management Process
Chapter 3 Performance Management and Strategic Planning
Part 2 System Implementation
Chapter 4 Defining Performance and Choosing a Measurement Approach
Chapter 5 Measuring Results and Behaviors
Chapter 6 Performance Analytics
Chapter 7 Rolling Out the Performance Management System
Part III Employee and Leadership Development
Chapter 8 Performance Management and Employee Development
Chapter 9 Performance Management Leadership
Part IV Reward Systems, Legal Issues, and Team Performance Management
Chapter 10 Performance Management, Rewards, and the Law
Chapter 11 Team Performance Management
Endnotes
Name and Company Index
Subject Index
4
DEDICATION
To my brother Gerardo, an indefatigable entrepreneur, trouble-shooter, admirable Jack of all trades, and inseparable
companion in all of my adventures since I was three years old
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CONTENTS
Preface and Introduction
Acknowledgments
About the Author
Part 1 Strategic and General Considerations
Chapter 1 Performance Management in Context
Definition of Performance Management
Purposes of Performance Management Systems
Strategic Purpose
Administrative Purpose
Informational Purpose
Developmental Purpose
Organizational Maintenance Purpose
Documentation Purpose
The Performance Management Contribution
When Performance Management Breaks Down: Dangers of Poorly Implemented Systems
Performance Ratings: The Canary in the Coal Mine
Characteristics of an Ideal Performance Management System
Integration with Other Human Resources and Development Activities
The Future is Now: Performance Management and the Nature of Work and Organizations Today
Summary Points
Exercise 1-1 Ideal Versus Actual Performance Management System
Exercise 1-2 Distinguishing Performance Management Systems from Performance Appraisal Systems
Case Study 1-1 Performance Management at Network Solutions, Inc.
Case Study 1-2 Performance Management at CRB, Inc.
Chapter 2 Performance Management Process
Prerequisites
Strategic Planning
Work (Job) Analysis
Performance Planning
Results
Behaviors
Development Plan
Performance Execution
Performance Assessment
Performance Review
Summary Points
Exercise 2-1 Work (Job) Analysis
Exercise 2-2 Performance Review Meeting
Case Study 2-1 Front Range Medical Associates (FRMA)
Case Study 2-2 Performance Management at KS Cleaners
Chapter 3 Performance Management and Strategic Planning
Definition and Purposes of Strategic Planning
Process of Linking Performance Management to the Strategic Plan
Strategic Planning Process
Critical Role of the HR Function
External and Internal Environmental (i.e., SWOT) Analysis
Mission
Vision
Objectives
Strategies
Developing Strategic Plans at the Unit Level
Job Descriptions
Building Support
Summary Points
Exercise 3-1 Linking Individual with Unit and Organizational Priorities
Exercise 3-2 Building Support for a Performance Management System at the Gap, Inc.
Case Study 3-1 Evaluating Vision and Mission Statements at PepsiCo
Case Study 3-2 Linking Performance Management to Strategy at Boeing
Part 2 System Implementation
Chapter 4 Defining Performance and Choosing a Measurement Approach
Defining Performance: Behaviors and Results
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Determinants of Performance: Abilities and Other Traits, Knowledge and Skills, and Context
Abilities and Other Traits and Knowledge and Skills
Context
Implications for Addressing and Anticipating Performance Problems
Performance Dimensions
Task and Contextual Performance
Counterproductive Performance
Adaptive Performance
Competency Architecture
Approaches to Measuring Performance
Behavior Approach
Results Approach
Summary Points
Exercise 4-1 Do You Have What It Takes? Assessing your Own Extreme Ownership
Exercise 4-2 Role Play: Diagnosing Causes of Poor Performance
Case Study 4-1 Differentiating Task from Contextual Performance at Bristol-Myers Squibb
Case Study 4-2 Choosing a Performance Measurement Approach at Show Me the Money
Chapter 5 Measuring Results and Behaviors
Measuring Results
Determining Accountabilities
Determining Objectives
Determining Performance Standards
Measuring Behaviors
Comparative Systems
Absolute Systems
The Role of Context
How Organizations are Using AI to Measure Performance and Identify Talent
Potential Problems
Summary Points
Exercise 5-1 Measuring Competencies at Department of Transportation
Exercise 5-2 Creating Behaviorally Anchored Rating Scales (BARS) for Evaluating Business Student
Performance in Team Projects
Case Study 5-1 Accountabilities, Objectives, and Standards at Disney
Case Study 5-2 Evaluating Objectives and Standards at Disney
Chapter 6 Performance Analytics
Useful Components of Appraisal Forms
Desirable Features of Appraisal Forms
Determining Overall Rating
Appraisal Period and Number of Formal Meetings
Performance Touchpoints: Sources of Performance Data
Supervisors
Peers
Direct Reports
Self
Customers
Employee Performance Monitoring and Big Data
Disagreement Across Sources of Performance Data: Is This Really a Problem?
Understanding Intentional Rating Distortion: A Model of Rater Motivation
Summary Points
Exercise 6-1 Choosing a Performance Appraisal Form Vendor
Exercise 6-2 Employee Performance Monitoring at Tumgo: Good or Bad Idea?
Case Study 6-1 Judgmental and Mechanical Methods of Assigning Overall Performance Score at The Daily
Planet
Case Study 6-2 Minimizing Distortions In Performance Data at Expert Engineering, Inc.
Chapter 7 Rolling Out the Performance Management System
Communication Plan
Dealing with Cognitive Biases and Resistance to Change
Appeals Process
Training Programs for Minimizing Unintentional Rating Errors
Rater Error Training
Frame of Reference Training
Behavioral Observation Training
Pilot Testing
Ongoing Monitoring and Evaluation
Summary Points
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Exercise 7-1 Training Raters at Big Quality Care Center
Exercise 7-2 Proposing an Appeals Process for Nursing Homes
Case Study 7-1 Implementing a Performance Management Communication Plan at Accounting, Inc.
Case Study 7-2 Implementing an Appeals Process at Accounting, Inc.
Part 3 Employee and Leadership Development
Chapter 8 Performance Management and Employee Development
Personal Developmental Plans
Developmental Plan Objectives
Content of Developmental Plan
Developmental Activities
Direct Supervisor’s Role
Multisource Feedback Systems
Benefits of Multisource Feedback Systems
Risks, Contingencies, and Potential Pitfalls in Implementing Multisource Feedback Systems
Characteristics of a Good Multisource Feedback System
Summary Points
Exercise 8-1 Making the Case for a Top-Notch Multisource Feedback System Demo
Exercise 8-2 Obtaining Multisource Feedback on Your Own Performance
Case Study 8-1 Content of a Personal Developmental Plan at Brainstorm, Inc.
Case Study 8-2 Individual Development Plan at F. D. Hamilton, Inc.
Chapter 9 Performance Management Leadership
Coaching
Coaching Styles
Coaching Process
Observation and Documentation of Developmental Behaviors and Results
Giving Feedback
Making the Tough Calls: Disciplinary Process and Organizational Exit
Why and How to Stay Connected with Ex-Employees
Coaching, Development, and Performance Review Meetings
Leaders Also Need Coaching
Summary Points
Exercise 9-1 What Is Your Coaching Style?
Exercise 9-2 Dealing with Defensiveness
Case Study 9-1 Was Robert Eaton a Good Performance Management Leader?
Case Study 9-2 Performance Management Leadership at Henry’s Commercial Sales and Leasing
Part 4 Reward Systems, Legal Issues, and Team Performance Management
Chapter 10 Performance Management, Rewards, and the Law
Definition of Reward Systems
Base Pay
Cost-of-Living Adjustments and Contingent Pay
Short-Term Incentives
Long-Term Incentives
Income Protection
Work-Life Focus
Allowances
Relational (Intangible) Returns
Traditional and Contingent Pay Plans
Reasons for Introducing Contingent Pay Plans
Possible Problems Associated with Contingent Pay Plans
Selecting a Contingent Pay Plan
What to Do When Workers Hit the Top of Their Pay Range
Putting Pay in Context
Turning Recognition and Other Relational Incentives Into Rewards
Performance Management and the Law
Some Legal Principles Affecting Performance Management
Laws Affecting Performance Management
Summary Points
Exercise 10-1 Proposing a Contingent Pay Plan for SOM Architectural Firm
Exercise 10-2 Performance Management Mock Trial
Case Study 10-1 Contingency Pay Plan at Altenergy LLC
Case Study 10-2 Workplace Discrimination Lawsuits at Newcam
Chapter 11 Team Performance Management
Definition and Importance of Teams
Types of Teams and Implications for Team Performance Management
Virtual Teams
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Purposes and Challenges of Team Performance Management
Including Team Performance in the Performance Management System
Prerequisites
Performance Planning
Performance Execution
Performance Assessment
Performance Review
Rewarding Team Performance
Summary Points
Exercise 11-1 Team Performance Management at Bose
Exercise 11-2 Team Performance Review
Case Study 11-1 Team Performance Management at American Electric and Gas
Case Study 11-2 Team-Based Rewards for the State of Georgia
End Notes
Name and Company Index
Subject Index
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PREFACE AND INTRODUCTION
In today’s globalized economy, it is relatively easy to gain access to the competition’s technology and products. Thanks to the
global penetration of the internet, technological and product differentiation is no longer a key competitive advantage in most
industries. For example, most banks offer the same types of products (e.g., different types of savings accounts and
investment opportunities). If a particular bank decides to offer a new product or service such as an improved mobile phone
app to make investment decisions, it will not be long until the competitors offer precisely the same product. As noted by
James Kelley, former performance management project leader at Idaho Power, “technology is a facilitator, but not a guarantor,
of the effectiveness or efficiency of a company’s workforce.”1
So, what makes some businesses more successful than others? What is today’s key competitive advantage? The answer is
people. Organizations with engaged and talented employees offer outstanding service to customers to pull ahead of the
competition, even if the products offered are similar to those offered by the competitors. This is a key organizational resource
that many label “human capital” or “talent” and gives organizations an advantage over the competition.2 Customers want to
get the right answer at the right time, and they want to receive their products and services promptly and accurately. Having
the right human capital can make these things happen. Only human capital can produce a sustainable competitive advantage.
And performance management systems are the key tools that can be used to transform people’s talent and motivation into a
strategic business advantage—an advantage that is difficult to imitate unless the right systems and processes are in place.
Also, organizations that measure and reward performance fairly and accurately have been able to deal with the COVID-19
pandemic more effectively.3
Unfortunately, performance management is not living up to its promise in terms of turning human capital into a source of
competitive advantage. For example, consider Mercer’s Global Performance Management Survey, which gathered data from
more than 1,050 performance management leaders representing 53 countries. These organizations varied in size from about
1,000 to more than 10,000 and represented several types of industries (e.g., for-profit, non-profit, government). A very
troubling result was that only 3% reported that their performance management system delivers exceptional value. Also, many
aspects of organizations’ performance management approach were evaluated as ineffective.4 So there is a big disconnect
between the potential that performance management has in terms of turning human capital into an organization’s source of
competitive advantage and the actual role of performance management in most organizations. As noted in Mercer’s report,
“establishing an effective employee performance management system is a major challenge for most organizations, making
performance management a perennial hot topic … companies around the world are regularly in search of best practices and
new solutions for this core process.” And, hence, the need for this book.
I am delighted to offer this fifth edition in partnership with Chicago Business Press. You will find this edition much updated
and improved in terms of content, as well as easier to read because of its improved layout and design. This fifth edition
includes the following broad changes. More detailed information on each of these improvements is provided in the section
titled “Major Features in This Fifth Edition.”
Each of the chapters includes updated content and material and new sources.
This edition includes new “Company Spotlights” boxes in every other chapter, featuring leading companies such as Nike,
Accenture, Goldman Sachs, Google, Facebook, Netflix, Microsoft, Salesforce, Nokia, and many others.
This new edition also includes a new case study in every other chapter.
Expanding upon improvements in the previous edition, this fifth edition describes the key “strategic partner” and
“internal consultant” role played by the HR function in the design and implementation of the performance management
system.
There is an emphasis on the changing nature of work and organizations, including globalization, technology and Big
Data, teamwork, AI, and demographics (e.g., generational differences), and how these changes affect the design and
implementation of performance management systems.
Similar to its predecessor, this fifth edition emphasizes that knowledge generated regarding performance management
is essentially multidisciplinary.
SOME UNIQUE FEATURES OF THIS BOOK
Performance management is a continuous process of identifying, measuring, and developing the performance of individuals
and teams and aligning their performance with the strategic goals of the organization. Performance management is critical to
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small and large, for-profit and not-for-profit, and domestic and global organizations, and to all industries. In fact, the
performance management model and processes described in this book have been used to create systems to manage the
performance of students in colleges and universities5 and employees in small and medium enterprises (SMEs).6 After all, the
performance of an organization depends on the performance of its people, regardless of the organization’s size, purpose, and
other characteristics. As noted by former Siemens CEO Heinrich von Pierer, “Whether a company measures its workforce in
hundreds or hundreds of thousands, its success relies solely on individual performance.” As an example in the not-for-profit
sector, Youth Villages, a private child welfare provider operating in 12 states and the District of Columbia has gained national
recognition for its evidence-based performance management system. By tracking performance data on children and families
both during and after leaving care, Youth Villages is able to better understand its program outcomes and effectiveness in
delivering social value to the community. The information collected from the performance management system is also used to
manage employee performance, assess the achievement of strategic goals, and help upper management decision-making.
The performance management system provides a detailed description of practices to help guide implementation, the metrics
used to quantify performance, and how employees are scored on whether they adhere to those metrics.7
Unfortunately, however, if they have one, few organizations use their existing performance management systems in effective
ways. Performance management is usually vilified as an “HR department requirement.” In many organizations, performance
management means that managers must comply with their HR department’s request and fill out tedious and often useless
evaluation forms. These evaluation forms are often completed only because it is required by the “HR cops.” Unfortunately, the
only tangible consequence of the evaluation process is that managers have to spend time away from their “real” job duties.
In the latest wave of criticisms of performance management, “performance ratings” are now the target. Also, there is quite a
bit of popular media and business press hype about the “demise” of performance evaluation, performance measurement, and
performance reviews. Currently, many companies, including GE, Microsoft, Google, Yahoo, Adobe, and Accenture, are going
through a similar process of transitioning from a performance appraisal (i.e., a dreaded once-a-year evaluation and review) to
a performance management system (i.e., ongoing evaluation and feedback). However, contrary to the way this trend is
usually described in business publications and the media with such headlines as “Performance Evaluation Is Dead” and “The
End of Performance Reviews,” the evaluation of performance is not going away. In fact, performance assessment and review
are becoming a normal, routine, built-in, and ever-present aspect of work in 21st-century organizations because performance
management systems play a critical role and serve important purposes.
So it is not the case that companies are abandoning ratings and performance measurement and evaluation. They are actually
implementing performance systems more clearly aligned with best practices, as described in this text, that involve a constant
and ongoing evaluation of performance! The companies mentioned above and many others in all industries, including
government agencies like the U.S. National Security Agency (NSA) have eliminated the labels “performance evaluation,”
“performance review,” and even “performance management.” Instead, they use labels such as “performance achievement,”
“growth processes,” “talent evaluation and advancement,” “check-ins,” and “employee development.” They still implement
performance management but use new, more fashionable, and perhaps less threatening labels. It has been extremely
gratifying to see the transition of so many companies from performance appraisal to performance management, as has been
described since the first edition of this text almost 15 years ago. To sum this up, by paraphrasing Mark Twain, we can say
with certainty that the death of performance management has been vastly exaggerated.8
This book is about the design and implementation of effective and successful performance management systems. In other
words, it focuses on research-based findings and up-to-date applications that help increase an organization’s talent pool.
Performance management is ongoing and cyclical; however, for pedagogical reasons, the book needs to follow a linear
structure. Because performance observation, evaluation, and improvement are ongoing processes, some concepts and
practices may be introduced early in a cursory manner but receive more detailed treatment in later sections. In addition,
many issues, such as training of raters and employee development, are discussed in multiple chapters. So you will see that
several chapters may refer to similar issues. When this happens, content included in several chapters will be cross-referenced.
Finally, this book focuses on best practices and describes the necessary steps to create a top-notch performance management
system. As a result of practical constraints and lack of knowledge about system design and implementation, many
organizations cut corners and do not have systems that follow best practices. Environmental and political issues (e.g., goals of
raters may not be aligned with goals of the organization) also play a role. Because the way in which systems are implemented
in practice is often not close to the ideal system, the book includes numerous examples from actual organizations to illustrate
how systems are implemented given actual situational constraints.
MAJOR FEATURES IN THIS FIFTH EDITION
First, this edition includes important updates and additional information. In preparation for revising and updating this book, I
gathered about 1,500 potentially relevant articles and books. About 100 of those sources are now included in this fifth
edition. These sources have been published since the fourth edition of the book went into production and demonstrate an
increased interest in performance management on the part of both academics and practitioners.
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Second, there is an emphasis on the role of the context within which performance management takes place. Performance
management does not operate in a vacuum. Rather, it takes place within a particular organizational context and organizations
have a particular history, unwritten norms about what is valued and what is not (i.e., an organization’s culture), and unwritten
norms about communication, trust, interpersonal relations, and many other factors that influence daily activities. Thus, for
example, implementing an upward feedback system may be effective in some organizations but not in others (Chapter 8). As
a second illustration, some organizations may have a culture that emphasizes results more than behaviors which, in turn,
would dictate that the performance management system also emphasize results; instead, other organizations may emphasize
long-term goals, which would dictate that performance be measured by emphasizing employee behaviors rather than results
(Chapter 4). Also, we need to understand the contextual reasons why sometimes performance ratings may not be accurate—
particularly if there is no accountability for raters to provide valid assessments (Chapter 6). As yet another example, cultural
factors affect what sources are used for performance information: In a country like Jordan, whose culture determines more
hierarchical organizational structures, the almost exclusive source of performance information is supervisors, whereas
employees and their peers almost have no input. This situation is different in countries with less hierarchical cultures in which
not only performance information is collected from peers but also supervisors are rated by their direct reports (Chapter 6). To
emphasize the role of national culture, this edition describes research conducted in organizations in the United States and
Canada, but also in Jordan, Japan, China, Turkey, Eritrea, Germany, Spain, South Korea, Mexico, Australia, the United
Kingdom, Brazil, India, and others.
Third, this edition describes two key roles played by the HR function: strategic partner and internal consultant. Regarding the
first role, the HR function is unfortunately often vilified as being merely operational and not able to think or act strategically.
Well, over the past two decades or so, an entire new field of research has emerged and it is called strategic human resource
management. Strategic human resource management is about planning and implementing HR policies and activities with the
goal of enabling an organization to achieve its strategic goals.9 Performance management is an ideal vehicle to demonstrate
the strategic role of the HR function because it allows for explicit and clear linkages between an organization’s mission, vision,
and objectives and individual and team performance. By helping implement a successful performance management system,
the HR function can get a “seat at the table” of the top management team. In fact, the few current or former CEOs with HR
background, including Lisa M. Weber at MetLife, Nigel Travis at Dunkin’ Brands Group, Samuel R. Allen at John Deere, James
C. Smith at Thomson Reuters, Steven L. Newman at Transocean, and Mary Barra at General Motors, have been able to serve
as strategic partners, which is in large part what propelled their trajectory from an HR role to the very top of their
organizations. Second, the HR function serves as an internal consultant for all organizational members participating in the
performance management system. For example, it offers advice on how to measure performance, resources in the form of
training opportunities, and can also lead the strategic planning process. So, although the HR function is certainly not the
“owner” of the performance management system, it adds value by playing a key role in its design and implementation.
Fourth, this edition highlights important changes in the nature of work and organizations and how these changes have a
direct impact on the design and implementation of performance management systems. These changes involve globalization,
technology, and demographics. Regarding globalization, consider the example of a firm that is based in the United States,
does its software programming in Sri Lanka, its engineering in Germany, its manufacturing in China, and has a call center in
Brazil. How do we design a successful performance management system that takes into account the fact that employees work
together across time zones on a daily basis without having ever met in person—although they have regular interactions using
Zoom? Regarding technology, companies are now able to gather employee data that was simply unimaginable just a few
years ago—what is usually called “Big Data.” For example, the use of GPS allows companies to track the location of its
salesforce real-time 24/7. Also, Web and mobile access allow employees to provide and receive feedback on an ongoing basis
from anywhere and at any time. The availability of data as well as AI offers almost unlimited opportunities to measure
different facets of performance but also creates challenges and the need to understand the difference between “Big Data”
and “Smart Data.” Third, regarding team work, there is hardly any job that is done without working with others. These
changes highlight the importance and pervasiveness of teams and the need for a performance management system to
include a formal team management component—as well as consider different types of teams such as virtual teams. Fourth,
regarding demographic changes, because baby boomers are retiring in large numbers, members of Generation X, Generation
Y or Millennials, and Generation Z or Post-Millennials are now entering the workforce in large numbers. Gen X and Gen Y
employees are “digital natives” and are used to immediate feedback—just like when receiving a grade immediately after
completing a Web-based exam in high school and college. A performance management system must consider generational
differences to be successful.
Fifth, this edition emphasizes that knowledge generated regarding performance management is essentially multidisciplinary.
Accordingly, the sources used to support best-practice recommendations offered in this book come from a very diverse set of
fields of study ranging from micro-level fields focusing on the study of individuals and teams (e.g., organizational behavior,
human resource management) to macro-level fields focusing on the study of organizations as a whole (e.g., strategic
management, accounting, information systems, engineering). This is consistent with a general movement toward
multidisciplinary and integrative research in the field of management.10 For example, best-practice recommendations
regarding performance management analytics originate primarily from industrial and organizational psychology (Chapter 5).
On the other hand, best-practice recommendations regarding the relationship between performance management and
strategic planning were derived primarily from theories and research from strategic management studies (Chapter 3). In
addition, much of the best-practice recommendations regarding team performance management originated from the field of
organizational behavior (Chapter 11).
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Sixth, this edition emphasizes the important interplay between science and practice. Unfortunately, there is a great divide in
management and related fields between scholars and practitioners. From the perspective of scholars, much of the work
conducted by practitioners is seen as relevant but not rigorous. Conversely, from the perspective of practitioners, the work
done by scholars is seen as rigorous but mostly not relevant. This “science-practice divide” has been documented by a
content analysis of highly prestigious scholarly journals, which regularly publish research results that do not seem directly
relevant to the needs of managers and organizations.11 This edition attempts to bridge this divide by discussing best-practice
recommendations based on sound theory and research and, at the same time, discussing the realities of organizations and
how some of these practices have been implemented in actual organizations.12
Seventh, this edition, like its predecessor, describes the technical aspects of implementing a performance management
system in detail. In addition, this edition emphasizes the key role that interpersonal dynamics play in the process.13
Traditionally, much of the performance appraisal literature has focused almost exclusively on ratings and the measurement of
performance—for example, whether it is better to use five-point versus seven-point scales. However, more recent research
suggests that issues such as trust, politics, leadership, negotiation, mentorship, communication, and other topics related to
interpersonal dynamics are just as important in determining the success of a performance management system. Accordingly,
this edition discusses the need to establish a helping and trusting relationship between supervisors and employees (Chapter
9), the role of an organization’s top management in determining the success of a system (Chapter 3), and the motivation of
supervisors to provide accurate performance ratings (Chapter 6), among many other related issues throughout the book.
Eighth, this edition includes “company spotlight” boxes in every chapter. These application boxes are important because they
serve the purpose of illustrating the concepts described in each chapter using contemporary examples. Also, these boxes will
allow you to see how performance management is “done in real organizations” as well as allow you to think about some
thorny and, in some cases, unresolved issues. Some of the organizations featured in this fifth edition include The Gap, Sears,
Nike, Adobe, U.S. Department of Defense, Accenture, Goldman Sachs, Google, Airbnb, Facebook, Netflix, Microsoft,
Salesforce, Dollar General, Intermex, BT Global Services, Accenture, Deloitte, GE, Nokia, and many others—including several
less-known SMEs.
Ninth, this fifth edition includes new hands-on “Exercises” at the end of each chapter. These hands-on exercises will make
learning the material more fun and also enhance the pedagogical experience of your course. In total, this edition includes 22
exercises (i.e., two per chapter).
Finally, this new edition includes two case studies in each chapter, also for a total of 22. One case in every other chapter has
been updated. In addition, the instructor’s manual includes several more cases per chapter, for a total of about 40 additional
ones. Thus, depending on an instructor’s preference, a course based on this new edition could be taught entirely following a
case format, experiential format, lecture format, or a combination of the three.
In addition to the aforementioned changes that permeate the entire book, each chapter includes new sections. Consider the
following examples:
Chapter 4: New section on competency architectures. A competency architecture offers a set of rules to guide the
selection of competencies and proficiency levels required for every job profile in a firm. This new section describes four
types of competencies: (1) core, (2) job family, (3) technical or professional, and (4) leadership. The new material
describes the benefits of designing and implementing a competency architecture such as alignment, fairness, and
continuity.
Chapter 5: New material on how AI is increasingly being used to measure performance and identify talent. While the
use of AI is still nascent, this new material describes this increasing trend that is here to stay and how firms are already
delegating several responsibilities to AI. This section describes that the performance management activities that can be
enhanced by AI include identifying high and low performers, recognizing workers’ strengths, hiring, measuring
employee engagement, and retention.
Chapter 9: New section on why and how to stay connected with ex-employees. This new material describes that
whenever managers need to make the tough call, they should ensure they manage the exit of employees properly so
the relationship is not broken and they can stay connected with ex-employees. Some of the long-lasting benefits of
keeping these ties include (1) potential clients, (2) future business partners, (3) brand ambassadors, and (4) rehires.
Chapter 9: New section on the need for leaders to also receive coaching. This new section explains that with an
increase in managers’ workloads, leaders tend to not find the time to develop their own skills. Leaders need training on
hiring the right team members, motivating and developing them, evaluating both individual and team dynamics,
resolving conflicts, and developing partnerships. They must also develop self-awareness and avoid becoming one of the
four types of bad leaders: (1) micromanagers, (2) neglectful managers, (3) bully bosses, and (4) divisive bosses.
Chapter 10: New section on what to do when employees reach the top of their salary bands. This new material
discusses the need for leaders to control salary growth by ensuring that their salary structure is not so rigid that top
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performers are forced to leave the firm if they are offered better compensation elsewhere. To avoid the departure of
critical employees, the new material describes the need for leaders to engage in proactive career discussions. To make
sure these conversations are effective, they should involve good planning, looking for potential solutions, being aware
of unique circumstances, analyzing the frequency of cases, and crafting a policy for the future.
PLAN FOR THE BOOK
Part I, which includes Chapters 1 through 3, addresses general as well as strategic considerations regarding performance
management. Chapter 1 discusses the advantages of implementing a successful performance management system, as well as
the negative outcomes associated with deficient systems, including lowered employee motivation and perceptions of
unfairness. This chapter also includes the features of an ideal system. Chapter 2 describes the performance management
process starting with what should be done before a system is implemented and ending with the performance review stage.
Chapter 3 links performance management systems with an organization’s strategic plan. This chapter makes it clear that a
good performance management system is a critical component of the successful implementation of an organization’s strategy.
Part II, including Chapters 4 through 7, addresses the details of system implementation. This discussion is sufficiently general
yet detailed enough so that all managers, not just HR managers, will benefit from this material. Chapters 4 and 5 describe
some of the technical aspects associated with the assessment of performance and how to identify and measure both
behaviors and results. Chapter 6 discusses performance analytics and the advantages and disadvantages of using various
sources of performance information (e.g., supervisor, peers, and customers). Finally, Chapter 7 describes the steps involved in
rolling out the new performance management system or changes in an existing system, including a communication plan and
pilot testing of the system before it is implemented.
Part III, including Chapters 8 and 9, addresses employee and leadership development issues. Chapter 8 includes a description
of employee developmental plans and the advantages of using multisource feedback systems for developmental purposes.
Chapter 9 addresses the skills needed by supervisors to become true “performance management leaders.”
Part IV, including Chapters 10 and 11, concerns the relationship among performance management, rewards, the law, and
teams. Chapter 10 includes a discussion of different types of rewards (including relational or intangible rewards), traditional
and contingent pay plans, and their links to performance management. In addition, this chapter provides a discussion of legal
issues to consider when implementing a performance management system. Finally, Chapter 11 addresses the timely topic of
how to design and implement performance management systems dealing specifically with team performance.
FACULTY AND STUDENT RESOURCES
Each of the chapters includes a list of actionable learning objectives at the beginning as well as summary points at the end,
two hands-on exercises, and two case studies for discussion. I hope this material will allow students to have an enjoyable and
productive learning experience that will enhance their own individual human capital. Also, there are additional resources
available for instructors, including PowerPoint slides, exam questions and answers (multiple choice and essay-type), and
additional case studies that can be used for in-class discussions or also as examination materials or take-home homework or
examinations. These materials will allow instructors to prepare for teaching this course quicker and make teaching this course
a more enjoyable and interactive experience. To request access the instructor resources, visit
www.chicagobusinesspress.com.
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ACKNOWLEDGMENTS
I would like to thank several individuals who were extremely instrumental in allowing me to write the previous editions and
the current fifth edition. I am indebted to Graeme Martin for encouraging me to start this project about 15 years ago. Isabel
Villamor helped me gather the numerous examples and illustrations that I have used throughout the fifth edition and helped
me update the Instructor’s Manual. Ravi S. Ramani, Nawaf Alabduljader, Wendy O’Connell, Jon Dale, and Barbara Stephens
helped me update many of these examples in the previous editions. Christine Henle allowed me to use her extremely useful
lecture notes in previous editions. Teaching and giving lectures and workshops on performance management at the Instituto
de Empresa (Madrid, Spain), Université Jean Moulin Lyon 3 (Lyon, France), University of Johannesburg (South Africa),
University of Salamanca (Spain), and University of Melbourne (Australia) allowed me to pilot test and improve various sections
of the book. I would like to thank my publisher, Paul Ducham of Chicago Business Press, for his outstanding professionalism. I
am delighted to have Paul again as my partner for this fifth edition.
I thank each of you for your time and intellectual investment in this project. Your coaching and feedback certainly helped me
improve my performance!
Herman Aguinis Washington, D.C.
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ABOUT THE AUTHOR
Dr. Herman Aguinis is the Avram Tucker Distinguished Scholar, Professor of Management, and Chairperson of the
Department of Management at the George Washington University School of Business. He has been elected for the presidency
track of the Academy of Management (AOM), served as program chair for the AOM 2020 Virtual Conference and as AOM
president in 2021–2022. The Web of Science Highly Cited Researchers Reports has ranked him among the world’s 100 most
impactful researchers in economics and business every year since 2018. He has been a visiting scholar at universities in the
People’s Republic of China (Beijing and Hong Kong), Malaysia, Singapore, Argentina, France, Spain, Puerto Rico, Australia,
and South Africa. His research, teaching, and consulting activities focus on the acquisition and deployment of talent in
organizations. Dr. Aguinis has published ten books, including Applied Psychology in Human Resource Management (with
Wayne F. Cascio, 8th ed., 2019, Sage), Performance Management for Dummies (2019, Wiley), and Regression Analysis for
Categorical Moderators (2004, Guilford). In addition, he has written about 200 refereed journal articles. Dr. Aguinis is a Fellow
of the Academy of Management, American Psychological Association, the Society for Industrial and Organizational Psychology,
and the Association for Psychological Science. He has served as president of the Iberoamerican Academy of Management,
division chair for the Research Methods Division of the Academy of Management, and editor-in-chief for the journal
Organizational Research Methods. He has delivered about 300 presentations and keynote addresses at professional
conferences, delivered more than 160 invited presentations in all seven continents except for Antarctica, raised about $5
million for his research and teaching endeavors from private foundations and federal sources (e.g., National Science
Foundation), and consulted with numerous organizations in the United States, Europe, and Latin America. He has received
several career contributions awards, including the Losey Award by the Society for Human Resource Management Foundation
for lifetime achievement in human resource research, Academy of Management Research Methods Division Distinguished
Career Award for lifetime contributions, Society for Industrial and Organizational Psychology Scientific Contributions Award for
lifetime contributions, Academy of Management Practice Theme Committee Scholar Practice Impact Award recognizing
outstanding impact on policy making and managerial and organizational practices, Academy of Management Entrepreneurship
Division IDEA Thought Leader Award, and International Council for Small Business Global Leadership Excellence Award in
Support of MSMEs. His research has been featured by The Economist, Forbes, BusinessWeek, National Public Radio, USA
Today, Univision, and other media. For more information, please visit
16
PART ONE STRATEGIC AND GENERAL
CONSIDERATIONS
17
CHAPTER 1 PERFORMANCE MANAGEMENT IN
CONTEXT
People think they’re too busy for performance management. That’s your number one job
—Jack Welch
Learning Objectives
By the end of this chapter, you will be able to do the following:
Compare and contrast the concepts of performance management and performance appraisal.
Appraise strategic, administrative, informational, developmental, organizational maintenance, and
documentation purposes of performance management
Create a presentation providing persuasive arguments to argue for the business case and benefits for
employees, managers, and organizations of implementing a well-designed performance management
system.
Assess the multiple negative consequences that can arise from the poor design and implementation of a
performance management system.
Judge the extent to which dysfunctional performance ratings may be signs that the performance
management system is broken.
Prepare a list of the key features of an ideal performance management system.
Propose relationships and links between performance management and other human resources functions,
including recruitment and selection, training and development, workforce planning, and compensation.
Assess the impact of globalization and technological and demographic changes on the design and
implementation of performance management systems.
DEFINITION OF PERFORMANCE MANAGEMENT
Consider the following scenario:
Sally is a sales manager at a pharmaceutical company. The fiscal year will end in one week. She is overwhelmed
with end-of-the-year tasks, including reviewing the budget she is likely to be allocated for the following year,
responding to customers’ phone calls, dealing with vendors, and supervising a group of 10 salespeople. It’s a
very hectic time, probably the most hectic time of the year. She receives a phone call from the human resources
(HR) department: “Sally, we have not received your performance reviews for your ten direct reports; they are
due by the end of the fiscal year.” Sally thinks, “Oh, again, those performance reviews. . . . What a waste of my
time!” From Sally’s point of view, there is no value in filling out those seemingly meaningless forms. She does
not see her direct reports in action because they are in the field visiting customers most of the time. All that she
knows about their performance is based on sales figures, which depend more on the products offered and
geographic territory covered than the individual effort and motivation of each salesperson. And, based on her
own experience, she thinks that little will happen in terms of compensation and rewards, regardless of her
ratings. These are lean times in her organization, and salary adjustments are based on seniority rather than on
merit. She has less than three days to turn in her forms. What will she do? In the end, she decides to follow the
path of least resistance: to please her employees and give everyone the maximum possible rating. In this way,
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Sally believes the employees will be happy with their ratings, and she will not have to deal with complaints or
follow-up meetings. Sally fills out the forms in less than 15 minutes and gets back to her “real job.”
There is something very wrong with this picture, which unfortunately happens all too frequently in many organizations and
across industries. Although Sally’s HR department calls this process “performance management,” it is not.
Performance management is a continuous process of identifying, measuring, and developing the performance of individuals
and teams and aligning performance with the strategic goals of the organization. Let’s consider each of the definition’s two
main components in more detail:
1. Continuous process. Performance management is ongoing. It involves a never-ending process of setting goals and
objectives, observing performance, talking about performance, and giving and receiving ongoing coaching and
feedback.1
2. Alignment with strategic goals. Performance management requires that managers ensure that employees’ activities
and outputs are congruent with the organization’s goals and, consequently, help the organization gain a competitive
advantage.2 Performance management, therefore, creates a direct link between employee and team performance and
organizational goals and makes the employees’ contribution to the organization explicit.
Just like in Sally’s case, many organizations have what is labeled a “performance management” system. However, we must
distinguish between performance management and performance appraisal. A system that involves employee evaluations once
a year without an ongoing effort to provide feedback and coaching so that performance can be improved is not a true
performance management system. Instead, this is only a performance appraisal system. Performance appraisal is the
measurement and description of an employee’s strengths and weaknesses. Thus, while performance appraisal is an important
component of performance management, it is just a part of a bigger whole because performance management is much more
than just performance measurement.3
As an illustration, consider how Bank of America Merrill Lynch has transitioned from a performance appraisal system to a
performance management system. Merrill Lynch was acquired by Bank of America and then merged into Bank of America
Corporation, creating Bank of America Merrill Lynch, which is one of the world’s leading financial management and advisory
companies. Specifically, it employs more than 15,000 financial advisors in offices in about 35 countries and manages private
client assets of approximately US$ 2.2 trillion. As an investment bank, it is a leading global underwriter of debt and equity
securities and strategic adviser to corporations, governments, institutions, and individuals worldwide. Bank of America Merrill
Lynch started the transition from giving employees one performance appraisal per year to focusing on one of the important
principles of performance management: the conversation between managers and employees in which feedback is exchanged
and coaching is given if needed. In January, employees and managers set employee objectives. Mid-year reviews assess what
progress has been made toward the goals and how personal development plans are faring. Finally, the end-of-the-year review
incorporates feedback from several sources, evaluates progress toward objectives, and identifies areas that need
improvement. Managers also get extensive training on how to set objectives and conduct reviews. In addition, there is a Web
site that managers can access with information on all aspects of the performance management system. In sharp contrast to
their old performance appraisal system, Bank of America Merrill Lynch’s goal for its newly implemented performance
management program is worded as follows: “This is what is expected of you, this is how we’re going to help you in your
development, and this is how you’ll be judged relative to compensation.”4
Much like those that focus on performance appraisal only, performance management systems that do not make explicit the
employee contribution to the organizational goals are not true performance management systems. Making an explicit link
between employee and team performance objectives and the organizational goals also serves the purpose of establishing a
shared understanding about what is to be achieved and how it is to be achieved5. This is painfully clear in Sally’s case
described earlier: from her point of view, the performance review forms did not provide any useful information regarding the
contribution to the organization of each of her direct reports. Sally’s case is, unfortunately, more common than we would like.
For example, a survey of 13,000 employees worldwide conducted by the Corporate Executive Board (CEB) found that about
95% of managers are not satisfied with their organization’s performance management system. Moreover, 66% of employees
say that the performance review process not only does not help but actually interferes with their productivity!6
Our discussion thus far makes it clear that performance management systems serve multiple purposes.7 The information
collected by a performance management system is most frequently used for salary administration, performance feedback,
and the identification of employee strengths and weaknesses. In general, however, performance management systems can
serve the following six purposes: strategic, administrative, informational, developmental, organizational maintenance, and
documentation purposes.8 Let’s consider each of these purposes next.
PURPOSES OF PERFORMANCE MANAGEMENT SYSTEMS
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Strategic Purpose
The first purpose of performance management systems is to help top management achieve strategic business objectives. By
linking the organization’s goals with individual and team goals, the performance management system reinforces behaviors
consistent with the attainment of organizational goals. Moreover, even if for some reason individual goals are not achieved,
linking individual and team goals with organizational goals serves as a way to communicate what are the most crucial
business strategic initiatives.
The second strategic purpose of performance management systems is that they play an important role in the onboarding
process.9 Onboarding refers to the processes that lead new employees to transition from being organizational outsiders to
organizational insiders. Performance management serves as a catalyst for onboarding because it allows new employees to
understand the types of behaviors and results that are valued and rewarded, which, in turn, leads to an understanding of the
organization’s culture and its values.
Company Spotlight 1.1: How Sears Uses Performance
Management to Focus on Strategic Business Priorities
The top management team at Sears is utilizing performance management practices and principles to align human
resources with business strategy. Headquartered in Hoffman Estates, Illinois, as of 2018, Sears is the 31st largest
retailing company in the United States. And it is the fifth-largest American department store company by sales
behind Walmart, Target, Best Buy, and the Home Depot), and the third largest broad-line retailer in the United
States, with approximately $22.14 billion in annual revenues and approximately 651 retail stores. Sears is a home
appliance retailer and offers tools, lawn and garden products, home electronics, and automotive repair and
maintenance. Following the merger with Kmart Corp. and Sears, Roebuck & Co., Aylwin B. Lewis was promoted to
chief executive and tasked with a strategic culture change initiative in hopes of reinvigorating the struggling retail
company. A strategic objective is to move from an inward focus to a customer service approach. A second key
objective is to bring about an entrepreneurial spirit where store managers strive for financial literacy and are
challenged to identify opportunities for greater profits. Several aspects of the performance management system
are being utilized to achieve these strategic objectives. For example, employee duties and objectives are being
revised so that employees will spend less time in back rooms and more time interacting with customers to
facilitate purchases and understand customer needs. In addition, leadership communication with employees and
face-to-face interaction are being encouraged. Lewis, who became CEO of Potbelly after leaving Sears, used to
spend three days per week in stores with employees and frequently quizzes managers on their knowledge, such
as asking about profit margins for a given department. The greatest compliment employees receive is to be
referred to as “commercial” or someone who can identify opportunities for profits. All Sears headquarters
employees are also required to spend a day working in a store, which many had never done before. Executive
management has identified 500 employees who are considered potential leaders who are given training and
development opportunities specifically aimed at cultural and strategic changes. In sum, the performance
management system at Sears is used as a strategic tool to change Sears’s culture because senior management
views encouraging key desired behaviors as critical to the company’s success in the marketplace.10
Administrative Purpose
The second function of performance management systems is to furnish valid and useful information for making administrative
decisions about employees. Such administrative decisions include salary adjustments, promotions, employee retention or
termination, recognition of superior individual performance, identification of high-potential employees, identification of poor
performers, layoffs, and merit increases. Therefore, the implementation of reward systems based on information provided by
the performance management system falls within the administrative purpose. For example, the government in Turkey
mandates performance management systems in all public organizations in that country with the aim to prevent favoritism,
corruption, and bribery and to emphasize the importance of impartiality and merit in administrative decisions.11
Informational Purpose
Performance management systems serve as an important communication device. First, they inform employees about how
they are doing and provide them with information on specific areas that may need improvement. Second, related to the
strategic purpose, they provide information regarding expectations of peers, supervisors, customers, and the organization and
what aspects of work are most important.
20
Developmental Purpose
As noted earlier, feedback is an important component of a well-implemented performance management system. This
feedback should be used in a developmental manner. Specifically, managers can use feedback to coach employees and
improve performance on an ongoing basis. This feedback allows for the identification of strengths and weaknesses as well as
the causes for performance deficiencies (which could be due to individual, team, or contextual factors). Of course, feedback is
useful only to the extent that remedial action is taken and concrete steps are implemented to remedy any deficiencies.
Feedback is useful only when employees are willing to receive it. Organizations should strive to create a “feedback culture”
that reflects support for feedback, including feedback that is nonthreatening and is focused on behaviors and coaching to help
interpret the feedback provided.12
Another aspect of the developmental purpose is that employees receive information about themselves that can help them
individualize their career paths. For example, by learning about their strengths, they are better able to chart a more
successful path for their future. Thus, the developmental purpose refers to both short-term and long-term aspects of
development.
Organizational Maintenance Purpose
The fifth purpose of performance management systems is to provide information to be used in workforce planning. Workforce
planning comprises a set of systems that allows organizations to anticipate and respond to needs emerging within and
outside the organization, to determine priorities, and to allocate human resources where they can do the most good.13 An
important component of any workforce planning effort is the talent inventory, which is information on current resources (e.g.,
skills, abilities, promotional potential, and assignment histories of current employees). Buying talent is extremely expensive,
and top performers know their worth in the market through social media and career sites. In the case of executives, the stock
market is a good metric.14 For example, when Kasper Rørsted left his position of CEO at packaged-goods company Henkel to
become CEO of Adidas, Adidas gained $1 billion. Performance management systems are the primary means through which
accurate talent inventories can be assembled. Moreover, as we will describe later, these are critical in terms of keeping track
of high-potential employees.15
Other organizational maintenance purposes served by performance management systems include assessing future training
needs, evaluating performance achievements at the organizational level, and evaluating the effectiveness of HR interventions.
For example, accurate data on employee performance can be used to evaluate whether employees perform at higher levels
after participating in a training program. These activities cannot be conducted effectively in the absence of a good
performance management system.
Documentation Purpose
Finally, performance management systems allow organizations to collect useful information that can be used for several
necessary and sometimes legally mandated (as described in Chapter 10) documentation purposes. First, performance data
can be used to validate newly proposed selection instruments. For example, a newly developed test of computer literacy can
be administered to all administrative personnel. Scores on the test can then be paired with scores collected through the
performance management system. If scores on the test and on the performance measure are correlated, then the test can be
used with future applicants for administrative positions. Second, performance management systems allow for the
documentation of important administrative decisions such as terminations and promotions. This information can be especially
useful in the case of litigation.
Several companies implement performance management systems that allow them to accomplish the multiple objectives
described earlier. For an example of one such company, consider the case of SELCO Community Credit Union in Eugene,
Oregon, a not-for-profit consumer cooperative that was established in 1936.16 SELCO serves more than 127,000 members. In
2016, SELCO closed with a record $1.4 billion in assets, $1.1 billion in loans, and $1.3 billion in deposits. SELCO offers many
of the same services offered by other banks, including personal checking and savings accounts, loans, and credit cards. Being
members of the credit union, however, allows individual members a say in how the credit union is run, something a traditional
bank does not permit. Recently, SELCO scrapped an old performance appraisal system and replaced it with a new
multipurpose and more effective performance management system. First, the timing of the new system is now aligned with
the business cycle, instead of the employee’s date of hire, to ensure that business needs are aligned with individual goals.
This alignment serves both strategic and informational purposes. Second, managers are given a pool of money that they can
work with to award bonuses and raises as needed, which is more effective than the complex set of matrices that had been in
place to calculate bonuses. This improved the way in which the system is used for allocating rewards and therefore serves an
administrative purpose. Third, managers are required to sit down and have regular conversations with their employees about
their performance and make note of any problems that arise. This gives the employees a clear sense of areas in which they
need improvement and provides documentation if disciplinary action is needed. This component serves both informational
and documentation purposes. Finally, the time that was previously spent filling out complicated matrices and forms is now
21
spent talking with the employees about how they can improve their performance, allowing for progress on an ongoing basis.
This serves a developmental purpose.
Although multiple purposes are desirable, 62% of HR executives from Fortune 500 companies say that their performance
management system serves mostly administrative (e.g., salary decisions) and developmental (e.g., to identify employees’
weaknesses and strengths) purposes.17 As will be discussed in Chapter 9, these purposes place conflicting demands on those
providing ratings because they must be both judges (i.e., make salary decisions) and coaches (i.e., provide useful feedback
for performance improvement) at the same time.
Now, think about the performance management system implemented in your organization or the last organization for which
you worked. Table 1.1 summarizes the various purposes served by a performance management system. Which of these
purposes is being served by the system you are considering? Which is not? What are some of the barriers that prevent
achieving all size purposes?
Table 1.1 Purposes Served by a Performance Management System
1. Strategic: To help top management achieve strategic business objectives
2. Administrative: To furnish valid and useful information for making administrative decisions about employees
3. Informational: To inform employees about how they are doing and about the expectations of the organization,
customers, and supervisor
4. Developmental: To allow managers and peers to provide coaching to their employees
5. Organizational maintenance: To create a talent inventory and provide information to be used in workplace planning
and allocation of human resources
6. Documentation: To collect useful information that can be used for various purposes (e.g., test development,
administrative decisions)
Subsequent chapters describe best practices on how to design and implement performance management systems. For now,
however, let’s say that well-designed and implemented performance management systems achieve all six purposes and make
substantial contributions to the organization. This is why a survey of almost 1,000 HR management professionals in Australia
revealed that 96% of Australian companies currently implement some type of performance management system.18 Similarly,
results of a survey of 278 organizations, about two-thirds of which are multinational corporations from 15 different countries
indicated that about 91% of organizations implement a formal performance management system.19 Moreover, organizations
with formal and systematic performance management systems are 51% more likely to perform better than the other
organizations in the sample regarding financial outcomes and 41% more likely to perform better than the other organizations
in the sample regarding other outcomes, including customer satisfaction, employee retention, and other important metrics. In
fact, a study conducted by Development Dimensions International (DDI), a global human resources consulting firm
specializing in leadership and selection, found that performance management systems are a key tool that organizations use to
translate business strategy into business results. Specifically, performance management systems influence “financial
performance, productivity, product or service quality, customer satisfaction, and employee job satisfaction.” In addition, 79%
of the CEOs surveyed say that the performance management system implemented in their organizations drives the “cultural
strategies that maximize human assets.”20 Based on these results, it is not surprising that senior executives of companies
listed in the Sunday Times’ list of best employers in the United Kingdom believe that performance management is one of the
top two most important HR management priorities in their organizations.21 Let’s describe these performance management
contributions in detail.
THE PERFORMANCE MANAGEMENT CONTRIBUTION
There are many advantages associated with the implementation of a performance management system.22 A performance
management system can make the following important contributions for employees, managers, the HR function, and the
entire organization:23
1. Self-insight and development are enhanced. The participants in the system are likely to develop a better
understanding of themselves and of the kind of development activities that are of value to them as they progress
through the organization. Participants in the system also gain a better understanding of their particular strengths and
weaknesses that can help them better define future career paths.
2. Self-esteem is increased. Receiving feedback about one’s performance fulfills a basic human need to be recognized
and valued at work. This, in turn, is likely to increase employees’ self-esteem.
3. Motivation to perform is increased. Receiving feedback about one’s performance increases the motivation for future
performance. Knowledge about how one is doing and recognition about one’s past successes provide the fuel for
22
future accomplishments. Also, motivation is increased when performance management satisfies employees’ need for
relatedness, competence, and autonomy, which all lead to improved work meaningfulness—and motivation.24
4. Employee engagement is enhanced. A good performance management system leads to enhanced employee
engagement. Employees who are engaged feel involved, committed, passionate, and empowered. Moreover, these
attitudes and feelings result in behaviors that are innovative and, overall, demonstrate good organizational citizenship
and take action in support of the organization. Employee engagement is an important predictor of organizational
performance and success and, consequently, engagement is an important contribution of good performance
management systems.25
5. Employees become more competent. An obvious contribution is that employee performance is improved. This
particular benefit of a performance management system is global. For instance, a recent analysis based on 120 human
resource officers and managers from Tanzania found that the implementation of a performance management system
translated into better employee performance, which ultimately improved organizational performance. The performance
management system allowed leaders to determine the training needs of their employees and was a motivational
strategy that led to better performance of both employees and organizations.26 Thus, it is not surprising that
performance management systems serve as a solid foundation for helping employees become more successful by
establishing developmental plans.
6. Voice behavior is encouraged. A well-implemented performance management system allows employees to engage in
voice behavior that can lead to improved organizational processes. Voice behavior involves making suggestions for
changes and improvements that are innovative, challenge the status quo, are intended to be constructive, and are
offered even when others disagree.27 For example, the performance review meeting can lead to a conversation
during which the employee provides suggestions on how to reduce cost or speed up a specific process.
7. The definitions of job and criteria are clarified. The job of the person being appraised may be clarified and defined
more clearly. In other words, employees gain a better understanding of the behaviors and results required of their
specific position. Employees also gain a better understanding of what it takes to be a successful performer (i.e., what
are the specific criteria that define job success).
8. Employee misconduct is minimized.28 Employee misconduct is an increasingly pervasive phenomenon that has
received widespread media coverage. Such misconduct includes accounting irregularities, churning customer accounts,
abusing overtime policies, giving inappropriate gifts to clients and potential clients hoping to secure their business,
and using company resources for personal use. Although some individuals are more likely to engage in misconduct
compared to others based on individual differences in personality and other attributes, having a good performance
management system in place provides the appropriate context so that misconduct is clearly defined and labeled as
such and identified early on before it leads to sometimes irreversible negative consequences.
9. Declines in performance can be addressed early on. Because good performance management systems include ongoing
performance measurement, declines in performance can be noticed, which allows for immediate feedback and
continuous coaching. When such declines are observed, remedial action can be taken immediately and before the
problem becomes so entrenched that it cannot be easily remedied.
10. Motivation, commitment, and intentions to stay in the organization are enhanced. When employees are satisfied with
their organization’s performance management system, they are more likely to be motivated to perform well, be
committed to their organization, and not try to leave the organiz…
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