Performance management systems and organizational effectiveness

Performance Management

Performance appraisal is a vehicle to validate and refine organizational actions such as training and performance and to provide feedback to employees with an eye on improving future performance (Billikopf). Most employees, according to Billikopf, want to know how well they are performing. However, actual implementation of performance appraisals may be less than desirable. The evaluations may be biased and cause concerns over compensation fairness. Further, they don't always provide the frequency of feedback and validation that employees need to continually improve. This paper discusses these issues and makes recommendations for eliminating the obstacles to effectively using performance appraisals in an organization.

One of the largest problems in performance reviews is evaluator bias (Losyk, 2002). According to Losyk, positive and negative biases come into play to produce unfair ratings. For example, the author describes the halo effect where an employee has been recognized for excellent work in the past, but follows up with average or poor performance. Yet, the manager gives the employee a high ranking because the lingering impression of the good work. And, there's management bias to favor those who employees who agree with their decisions and never complain. There's also what Losyk calls a manager's blind spot, a situation where managers can't recognizes deficiencies and skill gaps because the managers also have them. Finally, people have a tendency to like people who are just like them, those that look, speak, dress, or act the same way. Negative biases are really the flip side of positive biases. Losyk (2002) describes the halo effect's opposite, the horn effect. This is when an employee has made a mistake during a time close to the review, and that's what the manager remembers even though the employee has had good performance throughout the rest of the review period. Losyk believes that managers have a tendency to hand down poor evaluations to employees who disagree with them or have personality traits the manager doesn't like. Or, perhaps employees are unfairly associated with a poor performing department or the friends they keep. Losyk also describes how managers prefer people to accomplish tasks the same way the managers would. This is a particular issue for employees who have been educated in different cultures.

There are issues with linking performance appraisal results to pay. Many experts believe ties to pay puts employees and managers on opposite sides (Bascal). The employee focuses on getting as much money as possible and the manager tries to keep increases as small as they can; continuous performance improvement gets lost in the shuffle. Employees will not be open about their shortcomings or mistakes when their pay is at stake (Bascal). Generally, traditional reviews identify excellent and very poor employees, but don't differentiate well among the vast majority of middle performers (Alternative performance reviews). This becomes a problem when reviews are used as the basis for salary adjustments and bonuses, unless only the excellent and very poor performances are treated differently with all the middle performers getting the same increase.

Lack of continuous communication is also a huge problem with performance appraisals (Bascal). Although management should discuss employee performance, both positive and negative aspects, throughout the year, Bascal asserts that this is not a common practice. As a result, employees are surprised when they receive a poor review. And, problems that could have been fixed far earlier remain in place for longer than they should have because employees have no ideas where they are at or what they need to change.

To make performance evaluations fair, there are many useful recommendations. Culbert (2003) suggests two-sided accountability as a solution. He describes one-sided accountability as a relationship dominated by a manager where the manager actually has very little accountability for the employee's performance. Culbert doesn't believe this is appropriate because managers should be responsible for the training, guidance and success of the people they hire. In Culbert's two-sided accountability concept, the employee is accountable for the same things that the manager is accountable for and vice versa. This arrangement is more likely to motivate the manager to make sure the employee succeeds, says Culbert. Other experts recommend a 360 degree appraisal to make evaluations more realistic by soliciting feedback from peers, managers, subordinates and the employees being evaluated (Alternative performance reviews). Although this is time-consuming and costly, it generally has high employee involvement and creditability, the strongest impact on behavior and performance and a positive influence on communication and goal sharing. Yet others believe that technology can be used as a tool to eliminate biases (Dutton, 2001). Software-based performance appraisals focus on results and actions rather than personality traits. Thus, they can provide more objective facts that can be used to create plans for individual development and for achieving the organization's major goals.

A worker's morale is determined by his relative pay status. A contract that rewards only individual performance can thereby adversely affect their productivity. On the other hand, competition for relative pay status tends to boost the productivity of highly skilled workers in the firm. The net effect on productivity depends on the composition of the firm's workforce. If the workforce is sufficiently heterogeneous then the inclusion of a profit-sharing component in the pay contract, which reduces the pay differential across workers, can sufficiently boost the morale of the least skilled workers as to improve overall productivity and profitability.

Consultants recommend either changing the way performance is linked to pay during performance reviews or making the compensation review a separate process. Kennedy and Dresser (2001), acknowledge that an employee's morale is determined by relative pay status and that reviews that are accompanied by low wage increases will adversely affect their productivity, producing the exact opposite of the performance appraisal's intentions. At the same time, these authors realize that competition for relative productive boosts productivity, particularly for highly skilled employees. Therefore, Kennedy and Dresser recommend the inclusion of a profit-sharing component and variable pay incentives instead of just trying to give large base-pay increases to high performers and small increases to low performers. Some believe that the performance and compensation review process ought to be separate because they serve completely different purposes and because more than performance affects wage increases. The performance review is to appraise past performance and assess future potential of an employee while a compensation review is to establish the employee's value to the corporation, based on their duties and responsibilities, potential, and their own financial goals (Moulton).