Performance Management MANA 4328 Dennis C. Veit

Why Conduct Performance Appraisals?

Employee Motivation  Feedback is important for continuous improvement.  Assessment and recognition can help motivate workers.  Implement strategic goals and clarify performance expectations. Employee Development  Individual performance makes a difference to company performance.  Identify training and development needs.  Improve focus on teams and teamwork Administrative  Documentation may be needed for legal defense.  Provide a rational basis giving bonuses or merit pay

Developing an Appraisal System GOAL SETTING  What type of work is examined?  Who sets the goals?  How difficult are the goals?  Team vs. individual goals?  What is measured? TYPE OF APPRAISAL  What rating scale is used?  Includes a self-appraisal?  360 degree feedback?  Uses a forced ranking system? ADMINISTRATION  How often?  Who conducts appraisals?  How frequent is feedback?  Is there an appeal process? PERFORMANCE AND PAY  Tied to rewards?  Linked to development?  How are the results used?

Legal Issues Appraisal systems are more defensible if they:  Are based on job analysis (Validity)  Are consistent among multiple raters (Reliability)  Provide written instructions  Allow employees to review appraisal results  Train appraisers in the use of the system

Challenges for Performance Measurement Rater errors and bias  Halo  Contrast effects  Range restriction / Central tendency  The influence of liking  Organizational politics Rater errors can be addressed by training

Acceptability  Performance management systems need to be perceived as fair  Procedural fairness  Interpersonal fairness  Outcome (distributive) fairness  Valid – evaluated based on job related metrics.  Reliable – evaluations should not depend on which manager are conducting the evaluations.

How to Evaluate?  Absolute Measurement  Employees are all measured strictly by absolute performance requirements or standards of their jobs.  Performance compared to set goals  Avoids conflict among workers  May decrease differentiation  Relative (Comparative) Assessment  Employees are measured against other employees.  Ranking allows for comparison of employees but does not shed light on the distribution of employee performance.  “Forced distribution” among workers  May create false distinctions and competition

Forced Ranking Systems  Gained popularity following GE  Up to 20% of companies  Used by:  Conoco  Capital One  Sun Microsystems  Cisco  EDS  Hallmark Cards  Used and abandoned by:  Ford  Goodyear  Microsoft  Hewlett-Packard  Intel  Texas Instruments  Enron

When managers have discretion: 1. They tend to give “Above average” ratings. 2. They prefer to give uniform ratings regardless of performance. 3. They tend not to use the ends of the rating scale.

Comments from Jack Welch “A company that bets its future on its people must remove the lower 10% and keep removing every year – always raising the bar of performance and increasing the quality of leadership.” Jack Welch, former GE CEO

“The bottom 10” “The top 20” “The Vital 70” The “Vitality Curve” Jack Welch “Jack: Straight From the Gut” 2001

Why Conduct Forced Rakings?

 Replacing worst employees improves performance.  Sends a message that poor performance is not tolerated.  Creates a competitive, high performance culture.  Constant improvement of the workforce.  Force managers and supervisors to make the tough decisions.  Creates a compensation distribution that rewards top-performers.  Legal employment practice that may be used as a grounds for promotion, demotion or layoff.

Why NOT Conduct Forced Rankings?

 Turnover and replacement costs  Creates competition among employees  Managers may disown the system and responsibility to develop employees.  Gaming the system  Only fire people after performance appraisals.  Set up people for political reasons.  Horse trading among managers.  Overstaffing for cannon fodder.  Low morale

Evolution of Ford’s Policy January, 2000: Ford begins new performance evaluation policy  Top 20,000 managers  10% of the executives will get A's, 80% will get B's, and 10% will get C's.  C’s are not eligible for bonuses. Two C's in a row are grounds for dismissal.  Quota for C’s later reduced to 5% July, 2001: Ford eliminates the "A," "B," and "C" ratings in favor of "top achiever," "achiever," or "improvement required.” Quotas dropped for employees to be ranked as "achiever" and "needs improvement." December, 2001: Ford agrees to pay $10.5 million to settle lawsuit  620 employees  Mostly older, white men April, 2002: Ford revises its performance review system to “focus on creating bonds between managers and employees”, and will have no ranking quotas.

Appraisal Forms  “Least important elements of the appraisal process”  Appraisal forms are most often contain various styles  Performance focused vs. situation focused appraisal  Approaches to Appraisal Forms  Trait  Behavior  Results / Outcomes  Global / Essay

Trait-Based Appraisals  Characteristics that are enduring and general  e.g. “Leadership” “Communication” “Decisiveness”  Competency models vs. Trait-based appraisal  Are the characteristics really related to performance?  Potential Problems  Focus on person rather than performance  May be ambiguous or arbitrary  Poor feedback and goal setting  Poor reliability and validity

“An employer has no business with a man’s personality. Employment is a specific contract calling for specific performance and nothing else. Any attempt of an employer to go beyond this is usurpation. It is an abuse of power. An employee owes no “loyalty,” he owes no “love,” and no “attitudes” – he owes performance and nothing else.” Peter Drucker Management Tasks, Responsibilities, Practices (1974)

Behavior-Based Appraisal  Focus on specific behaviors with examples 1. Behavioral Frequency / Observation Scale (BOS) 2. Behaviorally Anchored Rating Scales (BARS)  Positives  More valid and reliable  Acceptable to employees  Better for development and improvement

Developing Behavioral Scales 1.Identify critical incidents and behaviors 2.Sort similar behaviors into dimensions 3.Validate sorting 4.Collect data on relationship between behavior and performance 5.Assign a rating scale 6.Validate the scale

Behavior-Based Appraisal Potential Problems  Difficult and expensive to develop  Needs to match jobs closely to be effective  Behaviors may be hard to develop and interpret  Emphasizes behaviors (at the expense of others?)  Focuses on behavior rather than results  May be no more reliable and valid than simple scale Process of developing the rating system is more important than the system itself.

Results-Based Appraisal Uses future results as performance targets Challenge is setting goals and measures  Can the goals be quantified?  Unique goals for every individual Appraisal forms tend to be very simple Still need a rating scale

Results-Based Appraisal “Management by Objectives” or MBO  Linking individual goals with business strategy  Organizational goals flow down to depts. and employees  Focus on planning, action items, and interim reviews  Objectives negotiated and agreed upon by employees

Results-Based Appraisal Focus on results compared to specific goals  Should be clear and unambiguous  Requires alignment of expectations  May promote gaming of the system  Beware of results at any cost and excessive results orientation  Time consuming and needs constant updating

How to Judge Appraisal Types  Leads to desired behaviors  Minimizes negative behaviors  Reliability and validity  Perceived fairness (rater and employee)  Performance improvement and employee development  Flexibility and administrative cost

Comparison of Appraisal Forms Ease of Use Employee Development Legal Defensibility Traits HighLow Behaviors MediumHigh Outcomes LowMedium

Performance Diagnosis