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  1. 1. MANAGING PERFORMANCE: Building Accountability for Organizational Success > Paul R. Bernthal > Robert W. Rogers > Audrey B. Smith
  2. 2. MANAGING PERFORMANCE: Building Accountability for Organizational Success > Paul R. Bernthal > Robert W. Rogers > Audrey B. Smith HR Benchmark Group Volume 4, Issue 2 April 2003
  3. 3. ABOUT THE DDI HR BENCHMARK REPORTS BENCHMARK GROUP Volume 1: 1997–1998 The DDI HR Benchmark Group is an alliance of organizations Issue 1—A Survey of Trust in the Workplace committed to sharing information and benchmarking current Issue 2—Performance Management Practices Survey Report HR practices. These organizations, an international mix of Issue 3—Workforce Development Practices Survey Report DDI clients and non-clients, have agreed to respond to Issue 4—Job/Role Competency Practices Survey Report periodic surveys in order to provide current information in various areas of human resources. The organizations Volume 2: 1998–1999 represent a geographical and industry cross section. Issue 1—Succession Management Practices Survey Report Issue 2—Recruitment and Selection Practices Survey Report ABOUT DDI Volume 3: 2000–2001 Development Dimensions International (DDI) is an Issue 1—The Globalization of Human Resource Practices Survey Report international human resource company that specializes in helping clients improve their business performance by Issue 2—Retaining Talent: A Benchmarking Study aligning people strategies with business strategies. Volume 4: 2002–2003 Issue 1—The State of E-Learning: Developing Soft Skills Special Reports Global High-Performance Work Practices: A Benchmarking Study (1998) The Leadership Forecast: A Benchmarking Study (1999) Leadership Forecast 2001: A Benchmarking Study (2001) © Development Dimensions International, Inc., MMIII. Pittsburgh, Pennsylvania. All rights reserved under U.S., International, and Universal Copyright Conventions. Reproduction in whole or part without written permission from DDI is prohibited. 2 Managing Performance: Building Accountability for Organizational Success
  4. 4. CONTENTS Introduction ............................................................................................................................................................5 Study Objectives ....................................................................................................................................................6 General Profile ......................................................................................................................................................6 Current and Past Practices....................................................................................................................................9 System Qualities..................................................................................................................................................15 Best Qualities and Practices................................................................................................................................16 Links to HR Systems ..........................................................................................................................................19 Barriers to System Effectiveness ........................................................................................................................21 Employee and Manager Perspectives ................................................................................................................22 Impact of Performance Management ..................................................................................................................25 Conclusions ........................................................................................................................................................27 Demographics......................................................................................................................................................30 Participating Organizations..................................................................................................................................32 About the Authors ................................................................................................................................................36 To order previous or additional reports, call: Or contact: 1-800-DDI-1514 (1-800-334-1514) Paul Bernthal, Ph.D., Manager Center for Applied Behavioral Research For more information or to join the HR Benchmark Group, Development Dimensions International visit us at: 1225 Washington Pike, Bridgeville, PA 15017 Phone: 412-257-7533 • Fax: 412-257-3093 E-mail: 3
  5. 5. INTRODUCTION “roll up” to support the overall company strategy. By linking their own performance goals to the organization’s strategic goals, employees develop In today’s economy more and more organizations are focusing their attention meaning and value to their work and are thus stimulated to succeed. When on enhancing performance and increasing profitability. To accomplish these employees understand the impact and meaning of their actions, they find goals, they need to ensure their employees focus their attention on their work more motivating. behaviors that drive organizational success. A recent survey (2003) of 742 Performance management programs also provide a unique mechanism for organizations in DDI’s client base revealed that “establishing a culture of ongoing feedback and development, a critical component of engagement. performance and accountability” was the most frequently selected business After setting goals together, managers and employees can track progress priority (70 percent) out of a list of 12. Clearly, organizations are concerned and ensure that performance stays in alignment with goals and changing with their ability to engage employees and achieve maximized performance. work conditions. Continuous feedback facilitates performance by helping Much of the impact of performance management derives from its ability to employees to refocus their behaviors when they get off track. During engage employees in their work. When employees are engaged, they are performance reviews managers can provide more specific feedback relative given opportunities to capitalize on their strengths, to receive appropriate to goals to help employees identify strengths and areas for development. In support and feedback, and to find their work to be motivating. An this way, new performance goals can be set to leverage employee strengths organization can leverage the power of these engaged employees by and provide opportunities to address developmental or career goals. focusing their efforts on promoting the business strategy. Performance Historically, performance management has been a challenge for managers management offers a mechanism for both increasing employee engagement and employees alike. When poorly positioned or implemented, it can be and focusing employees on the business strategy. seen as a chore or unnecessary paperwork. Some managers and When executing business strategy, an organization will find performance employees also have difficulty setting clear objectives and measures of management to be a powerful tool for creating real goals and objectives for performance progress. In other words, even the most carefully designed all employees. Managers are responsible for translating department goals, system will have little effect unless employees understand the system and which are cascaded down from the organization’s strategic goals, into see its value. The impact of performance management is largely driven by specific objectives that can be addressed by individuals. When creating its practicality. The system must be both useful and usable. a performance plan, managers can show individuals how specific goals 5
  6. 6. FINDING 1 STUDY OBJECTIVES GENERAL PROFILE Organizations are using This study examines the practices and system qualities A clear majority of the organizations (91 percent) use a a consistent performance associated with performance management. company-sanctioned performance management system. On management system with average, these systems have been in place for about four and The objectives of this study are to: a higher percentage of their a half years (about one year longer than systems were in our > Describe the structure of performance management systems. workforces. 1997 report). > Benchmark practices associated with planning, tracking, and reviewing performance. FINDING 1: Organizations are using a consistent performance management system with a higher FINDING 2 > Identify trends in performance management practices1 percentage of their workforces. > Identify the most common barriers. Many organizations > Measure employee and manager perceptions of effectiveness. Most organizations (74 percent) use their performance (40 percent) intend to make > Identify best practices for system effectiveness. management system with at least 70 percent of their significant changes to their employees. Although performance management systems > Establish the relationship between performance performance management tend to be used by most of the workforce, some employees management and individual and organizational systems in the next two performance. rely on other approaches. The percentage of employees years. using the same system has increased somewhat in the This report is based on responses from 278 organizational past five years. In 1997 less than half (46 percent) of members of DDI’s HR Benchmark Group. A subset of these organizations used the system with 91–100 percent of their FINDING 3 organizations also contributed data from 1,818 employees employees. Today, almost two-thirds (61 percent) do. and 1,814 managers. Although the overall sample was Performance reviews are international, data was reweighted so that members from the occurring more frequently— United States constituted half the sample. Demographics for not just once a year. the sample can be found at the end of this report. 1Bernthal, P.R., Sumlin, R., Davis, P., & Rogers, R. (1997). Performance management practices survey report. Pittsburgh, PA: Development Dimensions International. Rogers, R.W., Miller, L.P., Worklan, J. (1993). Performance management, what’s hot—what’s not. Pittsburgh, PA: Development Dimensions International. 6 Managing Performance: Building Accountability for Organizational Success
  7. 7. FINDING 2: Many organizations (40 percent) intend to make FINDING 3: Performance reviews are occurring more frequently—not significant changes to their performance management systems just once a year. in the next two years. In 1997, 78 percent of organizations conducted yearly performance reviews. Many organizations recognize that they need to make changes in their Today, 58 percent have a yearly review, while 41 percent perform reviews performance management systems. Today, 40 percent of organizations more often than once a year (see Figure 2). By having more than one intend to make significant changes to their system in the next two years performance review each year, employees can better gauge their progress (see Figure 1). Five years ago, the same percentage of organizations toward goals. They benefit from more frequent feedback, and the review (41 percent) expressed their intent to make changes. process provides them with a more formalized assessment of their performance. FIGURE 1: Change System Significantly in Next Two Years? FIGURE 2: Frequency of Reviews 7
  8. 8. FINDING 4 FINDING 4: Few organizations (20 percent) use online or (see Figure 4). An equal number of organizations are software-based performance management systems, but undecided about making the transition. For the majority of Few organizations many plan to introduce them. e-system users, web-based or online delivery is the preferred (20 percent) use online approach. In most cases (59 percent), users of web-based Online or software-based performance management systems or software-based systems rely on performance management software that is are a relatively new development. Few organizations in our performance management independent of any other existing system. sample (20 percent) use these delivery formats (see Figure systems, but many plan to 3), but more than one-third plan to move in that direction introduce them. FINDING 5 Most organizations (68 percent) discuss compensation apart from the performance review meeting. FIGURE 3: Use Software or Online System? FIGURE 4: Plan to Introduce Software or Online System in Next Two Years? 8 Managing Performance: Building Accountability for Organizational Success
  9. 9. FINDING 5: Most organizations (68 percent) discuss compensation CURRENT AND PAST PRACTICES apart from the performance review meeting. Respondents used a 6-point scale to rate how frequently their employees Discussing compensation during the performance review might have an used 15 performance management practices. Included in this list were impact on the quality and focus of the review. Organizations recognize that many conventional practices as well as more progressive approaches that performance reviews are much more than just compensation reviews. Most reflect the changing role of performance management. Many of these organizations in our sample (68 percent) discuss compensation at some practices were assessed in DDI’s past two surveys on performance time other than during the performance review meeting (see Figure 5). management (conducted in 1993 and 1997). An examination of the current most frequently used practices and how extensively they were used in the past reveals trends in performance management over time. Figure 6 lists the percentage of organizations using a practice “fairly often,” “often,” or “extensively” in 1993, 1997, and 2002. For this survey we also asked responding organizations to rate the effectiveness of the practices they use. The frequency of use for a practice may or may not correlate strongly with its effectiveness. Ratings from Observers > Peer Input—Use of input from peers to assess individual performance. > Upward Input—Use of input from direct reports to assess manager’s performance. > Customer Input—Use of input from customers (external and internal) to assess performance of individuals or groups. > 360° Assessment—Use of multi-perspective surveys (i.e., ratings of an individual’s performance by peers, direct reports, manager, customers, or other individuals) to assess an individual’s performance. FIGURE 5: When Managers Discuss Compensation 9
  10. 10. FINDING 6 Rating Methods > Non-Manager Training—Use of initial and refresher training to educate non-appraisers in performance > Overall Rating—Use of a single rating to represent the Frequency of manager overall evaluation of an individual’s performance. management/appraisal concepts and to build skills that and non-manager training help them manage their own performance. > Numerical Ratings—Use of numbers as labels for rating has doubled in the past > Manager/Supervisor Accountability—Use of scales. 10 years. Managers also measurements/evaluations to hold managers accountable > Summary Statement—Use of an essay summary are being held more for performance management effectiveness. statement to describe overall performance. accountable for the > Development Planning—Use of a set of development > Forced Ranking—Use of a predetermined percentage of effectiveness of the objectives and a plan for achieving them. ratings distribution. performance management FINDING 6: Frequency of manager and non-manager system. Measuring Performance training has doubled in the past 10 years. Managers also > Competency Guidelines—Use of organizational or job- are being held more accountable for the effectiveness of based competencies to help guide performance planning the performance management system. and tracking. In 1993 respondent organizations predicted a significant > Objective Data—Use of objective, quantifiable metrics increase in the amount of training related to using performance (e.g., profit, sales, customer satisfaction measures) to management systems. Today, this prediction has come true gauge performance. (see Figure 6). Manager training for using performance > Subjective Data—Use of metrics based on the subjective management systems is twice as common as ratings of qualitative outcomes to gauge performance. it was nearly 10 years ago. Similarly, the frequency of non- Supporting the Process manager training has more than doubled. In general, manager > Manager Training—Use of training to educate managers training has met with more success than non-manager training. in performance management/appraisal concepts and to Ratings of manager training effectiveness indicate that 61 build skills in performance planning, managing, and percent find it at least moderately effective; non-manager appraising. training is rated at 44 percent effective (see Table 1). 10 Managing Performance: Building Accountability for Organizational Success
  11. 11. TABLE 1: Percentage of organizations indicating that the practice is at least moderately effective PRACTICE EFFECTIVENESS RATINGS FROM OBSERVERS Peer Input 35.2 Upward Input 35.6 Customer Input 43.7 360° Assessment 41.4 RATING METHODS Overall Rating 58.4 Numerical Ratings 57.8 Summary Statement 62.7 Forced Ranking 32.9 MEASURING PERFORMANCE Competency Guidelines 49.5 Objective Data 74.8 Subjective Data 47.2 SUPPORTING THE PROCESS Manager Training 60.8 Non-Manager Training 43.5 Manager/Supervisor Accountability 51.0 Development Planning 62.8 FIGURE 6: Performance Management Practices Over Time 11
  12. 12. FINDING 7 Organizations are experiencing some difficulty in finding FINDING 7: Relying on input about performance from effective means for training their managers and non- outside perspectives (peers, customers, direct reports, Relying on input about managers to use performance management systems. These etc.) is not common but has increased somewhat. performance from outside problems might derive from the quality of the performance Gathering input about a person’s performance from the perspectives (peers, management system itself or the method of instruction. different perspectives of outside observers can be helpful customers, direct reports, Also, managers are being held more accountable for the when completing a performance review. Coworkers, etc.) is not common but success of the performance management system. Over the customers, and other individuals can provide unique has increased somewhat. past 10 years, manager or supervisor accountability has feedback about employee behavior. About one quarter increased steadily, with 38 percent of organizations using this of the organizations in our sample rely on these outside practice at least “fairly often.” Only about half (51 percent) of perspectives in their performance review process. Since FINDING 8 these organizations feel that their attempts to promote 1993 using peer and customer input has been on a slight Managers rely on a balance accountability have been at least moderately effective (see upward trend. Only 19 percent of our sample actually uses of subjective (66 percent) Table 1). Finding ways to hold managers accountable can be 360-degree assessments in their performance reviews. and objective (71 percent) difficult, but their role in the process is critical. Managers Fewer than half of the organizations report effective use of data in performance must show that they support the system and that they have 360-degree assessments, upward input, or input from peers reviews. faith in the process. If not, employees will be less likely to or customers. Organizations often are unclear about how to support the system and the outputs will be less meaningful. use this information, and there are many methodological considerations associated with its use. Sometimes, ratings FINDING 9 vary depending on the stated use of the data—either for Organizations are evaluation or development. increasing their use of competencies in performance planning and tracking. 12 Managing Performance: Building Accountability for Organizational Success
  13. 13. FINDING 8: Managers rely on a balance of subjective (66 percent) FINDING 9: Organizations are increasing their use of competencies and objective (71 percent) data in performance reviews. in performance planning and tracking. Organizations have many options for documenting performance or An organization determines job competencies by identifying the skills and indicating the degree of performance success. When employees lack knowledge areas (such as decision making) that are necessary for success readily identifiable outputs, managers might find it difficult to gauge true in a specific role. An increasing number of organizations are establishing performance levels. Most managers rely on a combination of subjective and incorporating job competencies and organizational core competencies and objective data; however, they find the objective data to be more in their performance management systems. Compared to five years ago, effective (75 percent) than the subjective data (47 percent) (see Table 1). about 16 percent more organizations are using competencies in Subjectivity in ratings is not necessarily a negative quality because performance management. Linking individual performance management managers must continually balance stated goals with other, sometimes goals, measures, and tracking systems to these competencies maximizes unforeseen, circumstances. Much in the same way that a trial jury weighs performance. all available evidence to deliver a just verdict, managers must balance all data and circumstances to make the best possible judgment about employee performance. 13
  14. 14. FINDING 10 FINDING 10: Numbers-based ratings often are combined FINDING 11: Over the past five years, forced rankings with summary statements. have become more common; however, few managers Numbers-based ratings find them to be effective. often are combined with Organizations continue to use overall ratings of performance (77 percent) and numerical rating scales (65 percent) (see In 1997 only 13 percent of organizations used forced rankings summary statements. Figure 6). These practices have remained relatively stable with high frequency. As shown in Figure 6, this number over the past 10 years and have been found to be effective represented a significant decrease from 1993. However, FINDING 11 by the majority of organizations (58 percent, as shown in in recent years forced ranking has become more common Table 1). Overall and numerical ratings are easy to use and (34 percent). Forced rankings require a predetermined Over the past five years, can be applied to virtually any job; however, numbers can distribution of ratings for employee performance and rarely forced rankings have sometimes cloud the contributions and progress included in consider progress against an individual’s or team’s goals. become more common; an individual’s total performance profile. Often, numerical Forced rankings can be unfair because several people who however, few managers ratings are balanced with summary statements (69 percent, perform equally well must be ranked—often for the purpose find them to be effective. as shown in Figure 6) that require a written interpretation of of distributing compensation increases. Some organizations accomplishments, contributions, key strengths, and facing cutbacks have even relied on forced rankings to developmental needs. Summary statements are usually determine which employees should be eliminated. Numerous FINDING 12 effective (63 percent, as shown in Table 1) and provide a organizations also have run into difficulties with forced The overall quality of good balance to the inflexibility of numbers. ranking (e.g., low morale, discrimination complaints, fairness performance management issues), causing them to redesign their performance systems has improved over management system. the past five years. 14 Managing Performance: Building Accountability for Organizational Success
  15. 15. SYSTEM QUALITIES On an escalating scale from 1 to 10, respondents were asked to rate the overall effectiveness of their performance management systems. Scores ranged from 1 (extremely ineffective) to 10 (extremely effective), with an average score of 5.8 (standard deviation of 1.95). The standard deviation indicates that most systems were rated between 4 and 8. This effectiveness score is only marginally higher than the 5.2 average score from 1997. To gain a better understanding of the effectiveness rating, we asked organizations to rate their performance management systems across a broad range of qualities. These qualities have been addressed in past research and represent many of the critical components of an effective system. Figure 7 lists respondents’ ratings of general system qualities that characterize an effective, integrated performance management system. FINDING 12: The overall quality of performance management systems has improved over the past five years. For every dimension, performance management systems received higher ratings in 2002 than they did in 1997. Significantly more organizations indicated improvements in qualities such as consistency, involvement of managers and senior leaders, and integration. As organizations respond to a tight world economy, they have used performance management as a method to focus their employees on promoting organizational success. FIGURE 7: System Qualities 15
  16. 16. FINDING 13 BEST QUALITIES AND PRACTICES 2. Integration of performance management with other systems in the organization (e.g., training, selection, The most effective The moderate overall rating prompted further analysis to compensation). performance management discover which qualities of a performance management When performance management is linked to other systems are characterized system are most likely to predict overall system systems, it reinforces a singular message and ensures by their consistent use effectiveness—from general qualities to specific practices. that all systems promote the same objectives. For throughout the organization, We used regression analysis to determine which qualities example, the training system should offer programs that were the best predictors. Two analyses were conducted— their integration with help employees address the development areas or one for system qualities and one for specific practices. other systems, senior strengths revealed in their performance reviews. management involvement, FINDING 13: The most effective performance Similarly, the selection system should be structured so management systems are characterized by their that it identifies employees who can meet the employee involvement, and consistent use throughout the organization, their performance objectives of the posted job. Competency their links to organizational integration with other systems, senior management systems allow multiple HR systems to link along a strategy. involvement, employee involvement, and their links common set of employee skills, knowledge areas, and to organizational strategy. abilities. FINDING 14 The first regression analysis revealed five qualities that 3. Involvement of senior management in driving the use of The most effective uniquely predicted the effectiveness of a performance the performance management system. management system (in order of decreasing impact): performance management Senior managers drive the success of many HR practices include 1. Consistency in use of the system across all managers programs. Without their support, programs do not development planning, (i.e., everyone uses the system the same way). receive high priority and might falter in the face of other, manager accountability, Consistency of performance management practices was more demanding needs. When senior managers play a objective data, and the system quality that most accurately predicted overall strong role in driving the performance management effectiveness. Employees perceive greater fairness when system, they model the appropriate behaviors for their competency guidelines. everyone in the organization receives the same treatment direct reports. These direct reports then use the same and uses the same system. Often, organizations rely on approach with their own groups, thus cascading the manager and employee training to ensure that the system system throughout the organization. is well understood and consistently applied. 16 Managing Performance: Building Accountability for Organizational Success
  17. 17. 4. Employee involvement in the performance management process. FINDING 14: The most effective performance management practices include development planning, manager accountability, objective data, Performance management works best when employees feel a sense of and competency guidelines. ownership over their plans and play a role in defining their own measures of success. Research has often shown that high involvement The second regression analysis focused on the specific practices used to breeds support. Employees and managers can work together to create plan, monitor, and review employee performance. The analysis revealed performance plans and, as work unfolds, make adjustments. When that the following four practices uniquely predicted the effectiveness of a employees cannot control the direction of their plans, they might feel performance management system (in order of decreasing impact). that their goals or performance measures are unreasonable or Interestingly, specific rating methods were not important predictors of unrealistic. Their lack of buy-in can greatly reduce the effectiveness of overall success. the system. 1. Development Planning 5. Value of performance management for driving the organization’s One of the primary goals of performance management is to identify strategic goals/vision. areas where employees have performed especially well or poorly. Linking performance management to an organization’s strategic goals Managers can then use this information to create development plans to and vision makes a big difference for success. In a well-designed remedy weaknesses, leverage strengths, or prepare employees for system, the individual plans tend to have direct links to the organization’s future positions. The presence of a development plan was the practice goals. For example, if an organization’s strategic goal is to increase most strongly predictive of overall system effectiveness. Past DDI market share, each employee might have a specific performance research shows that employees place great importance on the objective related to market share for his or her area of the company. opportunity to develop their skills.2 Employees want to know more than whether they have achieved their objectives; they want to know how they can improve and prepare themselves for future challenges. 2Bernthal, P.R., & Rioux, S.R. (2001). Retaining talent: A benchmarking study. Pittsburgh, PA: Development Dimensions International. 17
  18. 18. 2. Manager/Supervisor Accountability 4. Competency Guidelines The support and accountability of management ensure More and more organizations are linking their that the performance management system is performance management systems to competencies. implemented appropriately. Many organizations have Competencies clearly delineate the requirements for a good plans, but they are never executed. Other job and allow employees to evaluate their performance organizations hold managers accountable for the relative to those requirements. Competencies also help success of the performance management system by remove any doubt about what knowledge, skills, and linking employee compliance to compensation or other abilities an employee should be demonstrating for a outcomes. When managers perceive consequences for particular job. Some organizations use core completing their planning and review meetings, they are competencies, which indicate the knowledge, skills, and much more likely to comply. Management support abilities required of all their employees. Using core makes the system work on a daily basis. competencies ensures that all employees have the minimum requirements for success in the organization. 3. Objective Data Not all employees have readily identifiable, objective outcomes that can be linked to their individual performance. In the absence of such hard results (e.g., sales revenue), managers can instead set specific goals, such as meeting completion dates or achieving specific steps that lead to an outcome. In this way, goal accomplishment is less subject to interpretation. Employees appreciate objective data because it gives them clear goals for monitoring their progress; managers value the reliable data available for measuring success. 18 Managing Performance: Building Accountability for Organizational Success
  19. 19. LINKS TO HR SYSTEMS We asked respondents to indicate how closely their performance management system linked to the following HR systems: Performance management systems often have close ties with other HR > Succession planning—Data used to identify and develop leaders for systems. For instance, performance management data can be used to future openings in the organization. make succession decisions, facilitate career planning, or guide training > Promotion decisions—Data used to help make decisions about who selection. Ideally, this data can be closely linked to all these systems. By making use of competencies, organizations should be able to improve the should be promoted. quality of these links. > Career planning—Data used to identify and plan career paths for employees. TABLE 2: Closeness of the link between performance management > Compensation—Data used to determine levels of pay, pay increases, data and HR systems or other compensation. Not at All Somewhat Very Doesn’t > Training—Data used to determine what type of training employees Much Apply should pursue. Succession planning 15.5 36.2 40.4 7.9 > Selection—Data from the selection process (strengths, weaknesses) Promotion decisions 4.3 37.8 56.6 1.4 used to help establish an individual’s performance plan. Career planning 15.5 52.2 29.1 3.3 Compensation 3.0 21.6 74.0 1.4 Training 10.3 58.7 28.7 2.3 Selection 36.1 43.0 15.7 5.3 19
  20. 20. FINDING 15 FINDING 15: Most organizations (74 percent) make a Much” and zero points for ratings of “Not at All” and strong link between their performance management data “Somewhat.” Thus, an organization could have a score as Most organizations and compensation. high as six (i.e., all systems strongly linked) or as low as zero (74 percent) make a (i.e., no systems strongly linked). By far, compensation was the HR system most strongly linked strong link between their to performance management data. Although most of the As shown in Figure 8, the more systems that are linked to the performance management organizations conduct compensation discussions separately performance management data, the more effective the overall data and compensation. from performance management discussions, the links are system. Conversely, one could argue that only those obvious. When determining who should receive a small or performance management systems considered to be effective FINDING 16 large increase, management must consider all objective data and make recommendations based on those results. are linked to other systems. Still, there is a clear correlation between the two measures: The best performance Performance management Because performance management systems document management systems are better integrated with other HR systems are most effective employees’ specific goal accomplishments, it makes sense to systems. when linked to other HR drive compensation decisions based on performance data. systems. Thus, organizations must ensure their systems are fair and accurate in this regard. FINDING 17 FINDING 16: Performance management systems are most effective when linked to other HR systems. Poor compliance or usage We conducted a special analysis to determine if the number is the greatest barrier to of HR systems linked to performance management data system effectiveness. had any implications on the overall effectiveness of the performance management system (which, as mentioned in the System Qualities section, was rated on a 1–10 scale). We recoded the responses presented in Table 2 such that an organization received one point for indicating a rating of “Very FIGURE 8: System Links and Effectiveness 20 Managing Performance: Building Accountability for Organizational Success
  21. 21. BARRIERS TO SYSTEM EFFECTIVENESS FINDING 17: Poor compliance or usage is the greatest barrier to system effectiveness. Every HR system encounters unique barriers that interfere with the system’s Most of the organizations experienced at least some level of challenge overall effectiveness. We asked respondents to indicate which of 10 regarding their ability to make sure their performance management system possible barriers were currently affecting their ability to provide a high-quality was operating properly. About four-fifths (80 percent) felt that it was difficult performance management system. By using a principle components to determine if managers and employees were using the system correctly analysis, we were able to identify three classes of barriers: (see Figure 9). Because performance management is largely defined by Poor Compliance or Usage (60 percent selected overall) the relationship between managers and their employees, objectively tracking > Difficult to ensure that all managers and employees are using the and measuring the quality of that relationship can be difficult. Organizations system correctly. > No measures available to see how well the system is working. > Users are not held accountable for completing reviews. Lack of Value (38 percent selected overall) > Performance management plan has low relationship to employees’ daily work objectives. > Employees do not find the system useful (i.e., they have little use for the process and data). > Ratings do not reflect actual performance. Lack of System Direction (26 percent selected overall) > Unclear or changing business strategy makes it difficult to set individual goals. > Poor link between performance reviews and compensation. > Lack of clarity for how the system should be used (i.e., system objectives). > The performance management process keeps changing. FIGURE 9: Barriers to Performance Management Effectiveness 21
  22. 22. FINDING 18 might measure compliance by asking their employees to EMPLOYEE AND MANAGER Some organizations submit their performance plans and reviews to the HR department, but this documentation cannot tell the whole PERSPECTIVES (26 percent) experience Although HR is usually responsible for establishing an story. These components are only specific checkpoints in the problems with determining entire performance management process. organization’s performance management system, employees the role of performance and managers are the real users. So, they have a unique FINDING 18: Some organizations (26 percent) experience management and its links perspective on how well the system is working. We asked problems with determining the role of performance to other systems. employees and managers at the participating organizations to management and its links to other systems. provide ratings for the three stages of the performance Organizations sometimes have trouble finding direction and management process: FINDING 19 determining the role of performance management. These > Planning—Coming to consensus about performance goals problems can arise from internal HR strategy issues (e.g., About half of managers and and how performance will be tracked. role of performance management and how it operates) or employees agree that their > Performing—Ongoing monitoring of performance, external factors (e.g., links to company objectives or organization’s performance providing feedback, coaching, and promoting development. compensation). In both of these situations, organizations management system is are experiencing difficulty in determining how performance > Reviewing—Reviewing performance and assessing effective. management “fits” in the organization and what it should progress. accomplish. One of the most common problems is keeping individual performance goals current in the face of frequently FINDING 20 changing business strategies. As a result, the actual Compared to employees, performance management process and practices also might managers are much more require changes to keep pace with the business. With so positive about the many changes occurring, organizations also have trouble performance management using performance management data for one of its most process. common purposes—determining compensation. 22 Managing Performance: Building Accountability for Organizational Success
  23. 23. FINDING 19: About half of managers and employees agree that their FINDING 20: Compared to employees, managers are much more organization’s performance management system is effective. positive about the performance management process. When asked if they were satisfied with their organization’s system for When asked about the three phases of performance management, the managing performance, only 55 percent of managers and 46 percent percentage of favorable ratings by managers was consistently higher than of employees indicated agreement. Similarly, only 54 percent of managers the employee ratings (see Table 3). This trend can partly be explained agree that the system for managing their direct reports’ performance is as the managers possibly rating their own behaviors when they were asked to effective (see Figure 10). For employees, only 47 percent agree that their rate the performance management process. Self-ratings of behavior tend to organization’s system for managing their performance is effective (see be higher than observers’ ratings. Nevertheless, most managers do agree that Figure 11). These results show that both employees and managers do many of the critical behaviors in the performance management process are not view performance management very favorably. taking place. The only manager rating that was below 80 percent agreement is for the item “The performance management system supplies employees with data they can use to understand and improve their performance.” FIGURE 10: Is the System Effective? Manager Ratings FIGURE 11: Is the System Effective? Employee Ratings 23
  24. 24. FINDING 21 TABLE 3: Manager and employee ratings of performance management phases Employees and managers AGREEMENT are most satisfied with the Employees Managers Agree Ratio* performance management PLANNING 83% 91% system when it provides Employee performance goals are linked to organizational goals or objectives. 84% 93% .29/.47 data to improve Manager and direct reports are jointly responsible for planning performance. 86% 93% .31/.42 performance and when Overall, employees have a good understanding of what they are supposed its reviews reflect actual to be doing in their jobs. 92% 92% .42/.39 performance. Manager and employee equally share the responsibility for making the performance plan work. 68% 85% .27/.32 PERFORMING 58% 85% Employees get sufficient feedback about how well they are doing. 58% 87% .25/.25 Job provides employees with chances to grow and develop. 67% 92% .30/.40 Employees get the support and guidance they need to achieve performance goals. 60% 93% .20/.33 Employees get sufficient feedback or advice on areas in which they need to improve. 57% 89% .17/.27 Employees get sufficient feedback or advice on how they can maximize their strengths. 49% 82% .16/.24 The performance management system supplies employees with data they can use to understand and improve their performance. 54% 65% .18/.20 REVIEWING 65% 82% Results of the performance review accurately reflect employees’ actual performance levels. 60% 82% .23/.31 Performance reviews focus on the behaviors and skills employees need to do their jobs. 69% 81% .18/.24 * Indicates the proportion of the total agreement score that is “strongly agree.” Higher proportions indicate a higher degree of “strongly agree” responses. The first value represents the ratio for employees; the second, for managers. 24 Managing Performance: Building Accountability for Organizational Success
  25. 25. FINDING 21: Employees and managers are most satisfied with the IMPACT OF PERFORMANCE MANAGEMENT performance management system when it provides data to improve performance and when its reviews reflect actual performance. When a performance management system is successful, employees should be able to attain close to all their stated performance goals. And Some discrepancies exist between the high level of agreement for many of achievement of performance goals translates into successful business the behaviors associated with the performance management process (see outcomes. Table 3) and the overall ratings of system effectiveness. How can a system be ineffective when many of the necessary behaviors are in place? We Estimating the impact of a performance management system is possible conducted a special regression analysis to determine, from the managers’ by converting human performance into dollar values. One way to estimate and employees’ perspectives, which behaviors in the process were the value of an individual employee is to use the person’s overall salary. predictive of overall effectiveness. We found several behaviors to be Employees can be viewed as organizational assets that return value to the predictive of managers’ and employees’ effectiveness ratings. Two of these organization in proportion to what they are paid. If an organization pays an were significant for both managers and employees; one was significant for average employee $35,000 a year, that employee should bring back at least employees only: that amount of value to the organization; otherwise, the person could be considered a losing investment. Ideally, employees return more than what > The performance management system supplies employees with data they their organization pays them, thus producing profit. In our example, can use to understand and improve their performance. one percentage point improvement in performance is worth $350 (i.e., > Results of the performance review accurately reflect employees’ actual $35,000 X .01). When an organization has an effective performance performance levels. management system, it increases its employees’ ability to achieve their > Employees get sufficient feedback about how well they are doing goals. Essentially, employees who achieve more goals are more valuable (employees only). for the organization (i.e., an improvement in human capital). Apparently, managers and employees are most concerned with the system’s We asked both managers and employees to estimate the percentage utility and accuracy. They are much more likely to perceive the system as of goals that employees achieved each year (0% = no goals achieved; effective when it generates data that can be used to make changes. 100% = all goals achieved). Then we asked them to estimate the Additionally, reviews need to demonstrate fairness by showing that the percentage of goals that would be achieved if the current performance results are true indicators of employees’ long-term performance. For management system were not in place. By noting the difference in the employees, the presence of ongoing feedback also makes a major scores, we were able to estimate the overall value of the performance difference in perceptions of effectiveness. management system. 25
  26. 26. FINDING 22 FINDING 22: The average performance management average salary levels in the United States3, we were able to system improves the ability of employees to achieve estimate an overall benefit for performance management The average performance their goals by 10 percent. In an organization of 10,000 systems: For one employee the benefit works out to $3,410 management system employees, this equates to a benefit of approximately attributable to the presence of the performance management improves the ability of $34 million. system. For 10,000 employees this benefit exceeds $34 million. employees to achieve their With their organization’s current performance management FINDING 23: The best performance management goals by 10 percent. In an system, managers estimate that their direct reports achieve systems yield up to twice the benefit of the lowest organization of 10,000 14 percent more of their stated goals than if the system were rated systems. employees, this equates to not in place (see Figure 12). Employees estimate that they When comparing the strongest and weakest performance a benefit of approximately achieve 6.2 percent more of their stated goals because of the management systems, there is a large difference in $34 million. performance management system. By using these scores performance improvements (see Figure 13). We divided the (average of 10.1 percent) and combining the results with performance management effectiveness ratings of managers FINDING 23 The best performance management systems yield up to twice the benefit of the lowest rated systems. FINDING 24 Depending on the type of result, organizations with strong performance management systems are FIGURE 12: Impact of Performance Management on FIGURE 13: Quality of Performance Management and Employee Productivity Employee Productivity 41–51 percent more likely to 3 The average hourly salary for employees in the United States is $16.23. outperform their competitors. This information is drawn from the National Compensation Survey (2001). 26 Managing Performance: Building Accountability for Organizational Success
  27. 27. and employees into three groups of effectiveness: low, moderate, and high. CONCLUSIONS Then, we computed the average impact of the system based on percentage of goals achieved. From the employee perspective, results show that the 1. Performance management is becoming more dynamic. best systems produce twice the benefit in performance than the low systems. Since we conducted our 1997 survey, performance management has Managers indicate that, in terms of employee goal attainment, the most unquestionably evolved and become more dynamic. Virtually all effective systems are about 33 percent better than the least effective systems. system qualities and practices have become stronger or more prevalent. FINDING 24: Depending on the type of result, organizations with Organizations indicate more consistent usage, more frequent reviews, strong performance management systems are 41–51 percent more increased use of software, and more training of managers and employees. likely to outperform their competitors. We also observed an increase in the diversity and use of practices such as observer input and competency guidelines. And managers and employees We asked organizations to indicate their performance in the past year are talking more frequently about goals and progress. Unlike the previous relative to their competition. Data was gathered for eight outcomes. These stereotype of a static, once-a-year review event, performance management outcomes were submitted to a principle component analysis, yielding two is becoming a daily process with a real influence on performance. primary factors: Additionally, as managers and employees receive more training, systems are Hard Results Soft Results becoming more consistent. Training promotes effectiveness by ensuring that > Growth in revenue > Customer satisfaction all users understand the system and apply it using the same rules and > Productivity > Employee satisfaction procedures. > Profitability > Retention Despite the improvements, many organizations continue to indicate that > Market value > Quality of products or services they will change their systems in the next two years. This indicates that Then, we split the organizations evenly into two groups: those with the organizations are still learning about performance management and fine- most effective performance management systems and those with the least tuning their processes. However, ongoing changes make adapting to a effective. Results showed that when the performance management system particular system difficult for users. At least one quarter of our sample was more effective, organizations were 51 percent more likely to indicate organizations find that changes in the system interfere with its effectiveness. that they outperformed their competitors during the past year in terms of “hard results.” A similar result was found for the “soft results” category (41 percent more likely to indicate superior performance). 27
  28. 28. 2. Performance reviews need a balance and a diversity 3. Integration with strategy and involvement at multiple of data sources. levels drives effectiveness. In the absence of hard outputs, human performance can be Performance management is one of the primary systems very difficult to define. Even when objectives have been set, for creating accountability in groups and with individuals. managers and employees might need to take other factors Organizations with well-planned business strategies and a vision into consideration when gauging progress toward goals. for success need to cascade accountabilities to all organizational Having a variety of data sources can help to develop a levels. Compared to five years ago, performance management complete understanding of the circumstances surrounding is better linked to business strategies and other organization performance. Our results show that organizations make systems. This development is especially critical because system almost equal use of objective and subjective data to measure effectiveness is significantly predicted by links to an organization’s performance. While some might consider it less valid, strategy and the strength of its links to other systems. subjective data is not necessarily inaccurate data. Numbers Better integration also is reflected in the involvement of senior do not tell the whole story. Human interpretation and leaders and employees in the performance management perspective add real value by looking beyond the numbers process. Senior leaders drive system effectiveness by to assess and weigh all the circumstances surrounding becoming articulate advocates and ensuring consistent performance. Similarly, data from outside observers, such as use of the system at all levels. Similarly, employees drive peers, customers, or direct reports, can provide even more effectiveness by becoming involved in the management of depth and understanding. The end result of all these their performance and developing a sense of ownership. perspectives is a more accurate performance management Senior leader and employee involvement are both significant process. The error inherent in any given data source can be predictors of system effectiveness. balanced by information from other sources. Organizations often use competencies as the basis for many of Our results show that when data from performance reviews is their HR systems. A common set of competencies ties systems more accurate and useful, employees and managers view the together and ensures that employees receive a consistent system as more effective. The use of practices such as message about what behaviors are important. Our results show numerical ratings, summary statements, and observer input that more organizations are relying on competencies in ensure that all parties feel confident about the quality of the performance management. Competencies have been found to information received. be a significant predictor of overall system effectiveness. 28 Managing Performance: Building Accountability for Organizational Success
  29. 29. 4. Manager accountability is on the rise. 6. Performance management predicts employee and business success. Uncertainty about the correct use of a performance management system is the largest barrier to system effectiveness. A human resources department Research has repeatedly shown the importance of goal setting as a method cannot monitor every review and daily interaction to ensure success. The for guiding performance. When the performance management system is responsibility for ensuring system success must rest with the managers. more effective, employees are able to achieve a significantly greater Their role is critical. For example, they provide coaching, link individual proportion of their goals. Some systems are not realizing their maximum goals to the business strategy, create development plans, track objectives, potential for impact, but even minor attempts to set goals and monitor and conduct reviews. Results show that manager accountability for system progress can enhance performance. Enhanced goal achievement also can effectiveness has increased. Both increased accountability and manager be seen in the performance of the organization. Across both soft and hard training predict overall system effectiveness. business outcomes, better performance management systems predict superior performance relative to the competition. 5. Development planning has become a critical component of performance management. Performance management has become increasingly important as a method for promoting employee development. Development planning is a natural extension of the performance management process. When employees receive performance feedback, they often identify opportunities to develop or to leverage their skills. Many employees have a natural desire to learn and grow; thus, the strength of development planning is one of the strongest predictors of a performance management system’s effectiveness. 29
  30. 30. DEMOGRAPHICS Number of Employees at Your Percentage of Employees Working in Individual Location/Facility Management/Supervisory Positions PERCENT NUMBER AVERAGE PERCENT 2.9 1–10 21.4 5.9 11–50 7.0 51–100 14.0 101–200 16.9 201–500 17.3 501–1,000 26.8 1,001–5,000 9.2 5,001 or more Number of Employees in the Entire Business Classification Organization PERCENT PERCENT NUMBER 0.4 Agriculture/Forestry/Fishing 0.4 1–10 3.3 Mining 0.7 11–50 2.2 Construction 3.3 51–100 29.0 Manufacturing 4.4 101–200 1.9 Government 7.3 201–500 10.0 Health Care 10.6 501–1,000 1.5 Wholesale Trade 30.4 1,001–5,000 5.6 Retail Trade 11.4 5,001–10,000 16.0 Finance/Insurance/Real Estate 8.4 10,001–20,000 6.7 Services 12.5 20,001–50,000 10.4 Transportation/Communications/Utilities 10.6 More than 50,000 13.0 Other 30 Managing Performance: Building Accountability for Organizational Success
  31. 31. Approximate Revenue for Your Most Recently Public or Private Completed Fiscal Year PERCENT PERCENT 51.1 Public 26.0 I cannot provide this information 48.9 Private 0.8 Less than $1 million 14.0 $1 million up to $50 million 7.2 $50 million up to $100 million 17.0 $100 million up to $500 million 9.1 $500 million up to $1 billion 13.6 $1 billion up to $5 billion 4.2 $5 billion up to $10 billion Country 4.9 $10 billion up to $25 billion PERCENT 3.4 $25 billion or more 7.9 Australia The above revenue is for 8.9 Canada PERCENT 0.4 Colombia 0.4 France 18.6 Your location/facility only 0.4 Germany 81.4 The entire organization 7.1 Indonesia 0.7 Ireland 0.4 Mexico 11.4 Philippines Presence in the Global Market 1.8 South Africa PERCENT 16.1 Taiwan 2.1 Thailand 37.1 National company—we do not own, 6.1 United Kingdom operate, or have affiliate offices outside 0.4 United Arab Emirates our country. 36.1 United States 62.9 Multinational company—we own, operate, or have affiliate offices in Note: Final results were weighted so that U.S. multiple countries. organizations comprised half of the sample. 31
  32. 32. PARTICIPATING ORGANIZATIONS* All Organizations Listed Completed the Astra Credit Companies (ACC) § ‡ Bunnings Building Supplies Pty. Ltd. HR Survey Astra Zeneca Cable & Wireless PLC ‡ = Leader Survey Astra Zeneca Canada Canon Marketing (Taiwan) Co., Ltd. § ‡ § = Associate Survey AT&T Canada, Inc. Capital One Financial Corporation AT&T Canada LDS CARE USA 3Com Corporation AT&T Wireless Services, Inc. CCL Industries Inc. A. Epstein & Sons International Inc. AU Optronics Corporation § ‡ Centrica plc ABB Industry Pty Ltd. B & Q International Co., Ltd § ‡ Centro Escolar University Advance Auto Parts, Inc. Ball Corporation Cerebos Pacific Ltd. Ahold Ballina Beverages § ‡ CGU Insurance (Thai) Co., Ltd. AIM Trimark Bank of Montreal—Technology and Chailease Finance Co., Ltd. Air Canada Jazz Solutions § ‡ Chi Mei Environmental § Alaska Air Group, Inc. Bank of Thailand China American Petrochemical Co., Ltd. Alaska Regional Hospital Bank Sinopac Chunghwa Picture Tubes, Ltd. ‡ Alliance Technology Ventures Baptist Health System CIBC-Canadian Imperial Bank Alpha Microelectronics Corp. Baptist Health Systems of of Commerce Aluma Systems Inc. South Florida Cingular Wireless AmerUS Group Co. Barclays Bank PLC Citigroup (Previously SSSB) AMIC Technology (Taiwan) Bayer Thai Co., Ltd. Cleveland-Cliffs Inc Corporation § ‡ BCE Corporate Services CN Rail Amkor Technology Philippines Bic Corporation Coats Manila Bay, Inc. § ‡ ARAMARK Corporation BMW Manufacturing Cocoplans, Inc. Asian Terminals, Inc. Brown-Forman Corporation § ‡ Coles Myer Limited AsPac Oil Brunner-Mond (U.K.) Ltd. Communications Data Services, Inc. Astec International Ltd—Regional Brunswick Corporation CSR Operating Headquarters Brush Wellman, Inc. Dairy Farmers 32 Managing Performance: Building Accountability for Organizational Success