1. Performance Management
Dennis C. Veit 1

2. Why Conduct Performance Appraisals?

3. 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

4. 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

5. 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

6. 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.

7. 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

8. 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

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

10. 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

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

12. Why Conduct Forced Rakings?

13. 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.

14. Why NOT Conduct Forced Rankings?

15. 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

16. 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.

17. “An employer has no business with a man’s personality
“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)

18. 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

19. Comparison of Appraisal Forms
Ease of Use
Employee Development
Legal Defensibility
Traits
High
Low
Behaviors
Medium
Outcomes