Measuring Human Capital: Performance Appraisal EffectivenessDocument Transcript
Measuring Human Capital: Performance Appraisal Effectiveness
Solely Authored Graduate Student Paper for Submission to the:
Human Resource Track
Midwest Academy of Management Conference, 2002
Jonathan R. Anderson
University of Kentucky
Phone (859)245-8439 / Fax (859)257-3577
455 AG Gatton College of Business and Economics
Lexington, KY 40506-0034
October 2, 2002
Measuring Human Capital: Performance Appraisal Effectiveness
Organizations and employees spend a great deal of time in performance management. Managers
consistently work to effectively and efficiently manager the performance of the workforce, but,
how does an organization capture the concept of performance appraisal effectiveness? How do
organizations decide if they are getting what they want from their performance management
system? This paper is an attempt at answering these questions.
Measuring Human Capital: Performance Appraisal Effectiveness
Measuring human performance has long been of interest to researchers and practitioners
(Avery & Murphy, 1998, Bernardin & Beatty, 1984, and Hyde, 2001). One process in measuring
and evaluating human capital that has received much attention in the literature is performance
appraisal (Avery and Murphy, 1998). Performance appraisal research has three general streams
(Bretz, et al. 1992). First, research has focused on developing and honing instruments to more
accurately and objectively measure human performance (for examples see Tznier et al. 2001,
Tznier, et al., 1993). Second, research has focused on supervisor and employee characteristics as
sources of potential and actual bias in the performance appraisal ratings (Cleveland & Murphy,
1992; Dewberry, 2001; Ford et al., 1986; Feldman 1981). And third, research has focused on the
uses and types of performance appraisal systems within organizations (Scott & Einstein, 2001,
and Lam & Schaubroeck, 1999). Literature to date has helped organizations adopt more efficient
and effective performance appraisal systems. It has helped administrators understand the
challenges with objectively measuring behavior as well as some of the pitfalls associated with
employee and supervisor bias in administering performance appraisals. Questions that have yet
to be pursued in the literature include: what leads to performance appraisal system effectiveness
and how can performance appraisal system effectiveness be defined? Research shows that the
measures and systems we now have are not free from bias (Cleveland & Murphy, 1992;
Dewberry, 2001; Scott & Einstein, 2001; and Lam & Schaubroeck, 1999), but, how can
organizations understand if their performance appraisal system is effectively producing their
desired results? This study is an initial attempt at answering these questions.
Human Resources and Competitive Advantage
Resource based view of the firm suggests that in order for a firm to maintain a
competitive advantage the resources that the advantage us built on must be rare, no imitable, no
substitutable, and sustainable (Barney, 1991). Barney (1986) suggests that an organization’s
culture can be a competitive advantage if it meets the above criteria. Because an organization’s
performance appraisal system can play a key role in determining the type and value of an
organization’s culture, it is important for a firm to be able to determine what and how there
performance appraisal system is influencing the culture in the organization.
Typically the dependent variable in performance appraisal and job design studies is
employee satisfaction (Lawler, 1970). But, conceptually and practically satisfaction with a
performance appraisal does not covary with performance appraisal effectiveness (Porter &
Lawler, 1968). Below I will explore why effectiveness should be the dependent variable in
performance appraisal studies rather that employee satisfaction. I will then define and discuss
antecedents to performance appraisal effectiveness, proposing hypotheses in the relationships
between these variables and performance appraisal effectiveness.
The Dependent Variable: Performance Appraisal Effectiveness
Tznier, et. al., (2000) suggest that organizations generally use performance appraisal for
two broad purposes. First performance appraisals are used in administrative decisions such as
promotions, salary allocations, and assignments. And second, performance appraisals are used as
a tool for employee development processes such as offering feedback, critiquing performance,
and setting goals for improvement. With these broad purposes organizations establish their own
often unique performance appraisal systems to evaluate and develop their employees. But, it is
often difficult for organizations to evaluate whether their performance appraisal system is
accomplishing their desired outcomes.
The purpose of the performance appraisal system is set by those in the organization who
establish the performance appraisal system itself. As discussed above there is generally some
type of evaluation portion of the performance appraisal that allows for the results to discriminate
between employees for the purpose of evaluation and reward distribution. There is also a portion
of the performance appraisal intended on helping the employee develop him or herself. The mix
of development and evaluation as well as the areas that are being evaluated and developed is
completely dependent on the intent of the performance appraisal process as established by the
individuals who establish and administer the performance appraisal system.
It is clear that in order to get the desired results the organization must develop, evaluate
and reward the desired behaviors. In determining the dependent variable in performance
appraisal research, it is important to view the performance appraisal system through the
intentions of those who established and administer the performance appraisal system. Therefore,
in establishing the dependent variable in a study of performance appraisal system effectiveness,
the dependent variable should be the desired outcome of the performance appraisal process. The
dependent variable should be unique to each performance appraisal system. Examples of
dependent variables include: organizational/employee goal alignment, employee motivation,
performance assessment, rewarding top performers, and developing employees in stated areas.
Regardless of the number or mixture of desired outcomes, it is important to recognize
that the dependent variable will vary between systems and between organizations. But in each
case, the dependent variable should be the intended result of the performance appraisal system as
outlined by those who established and administer the performance appraisal system.
Performance Appraisal Effectiveness
The performance appraisal interview is the crowning event of the performance appraisal
system. It is in the performance appraisal interview that the opinions and attitudes toward the
performance appraisal are capped. All the performance appraisal system facets (e.g. the
instrument, reward structure, ranking system) are typically established prior to the interview and
their distribution and assignment is an outcome of decisions completed and recorded during the
performance appraisal interview.
In order to capture the effectiveness of the performance appraisal process it is important
to look at the performance appraisal interview and those involved. The supervisor and the
employee are typically the two individuals involved in the interview (see Lam & Schaubroeck,
1999 for an exception, also excluding the work on the 360 degree feedback). In capturing what
leads to a successful performance appraisal interview there are supervisor and employee
characteristics that must be taken into consideration. I suggest that there are supervisor and
employee cognitive perceptions that will influence the effectiveness of the performance appraisal
above and beyond the instrument used or the system facets. Below I will first, describe
supervisor perceptions that will have an impact on the performance appraisal effectiveness and
second, describe those employee perceptions that will influence the effectiveness of the
The hypotheses outlined below have two assumptions. First, the characteristics described
will affect the performance appraisal effectiveness above and beyond any instrument or system
facet effects. And second the dependent variable is outlined by the organization itself and is held
constant between performance appraisal interviews. This is critical as any change in the
performance appraisal instrument or the purpose of the appraisal (the dependent variable) will
also affect the strength of the relationships described below.
Vroom (1964) in his fundamental book “Work and Motivation” describes an expectancy
theory of motivation. He defines motivation as “a process governing choices made by persons of
lower organisms among alternative forms of voluntary activity” (p.6). He describes motivation
as an outcome of valence, instrumentality, and expectancy. Valence is the “affective orientations
toward particular outcomes” (p.15), instrumentality is the link between an outcome of the action
performed and the outcomes that stem from the outcome attained by performing the action.
Expectancy is the “momentary belief concerning the likelihood that a particular act will be
followed by a particular outcome” (p.17). Described further this idea is that if a person desires a
given outcome (valence) they will have high motivation to work toward that outcome if the
outcome is associated with other desired outcomes they want (instrumentation) and if they also
perceive that their efforts are likely to bring about the initial outcome (expectancy).
Since its introduction, Vroom’s (1964) expectancy theory has been applied to many
situations including assessing student motivation (Geiger, et al 1998), productivity loss in groups
(Sheppard, 1993) leadership (Isaac, et al. 2001), and job satisfaction (Darboe, 2000). It has been
extended into areas as diverse as managerial ethics (Fudge, R.S. & Schlacter, J.L. 1999), and
personality impression cues of athletic performance (Soloman, G.B., 2001). Vroom’s original
(1964) expectancy theory is still regularly used to explain motivation in work settings and has
been strengthened through 30 years of empirical testing both in within-person and between
person research designs (Mitchell, 1974, Van Earde & Thierry 1996).
Expectancy theory suggests that the motivation behind a supervisor accurately and
effectively completing the performance appraisal process with a given employee is dependent on
the degree of the supervisor perceives that effort put into the performance appraisal process will
result in an accurate performance appraisal rating (expectancy), the degree of the supervisor’s
perception that an accurate performance appraisal rating will produce performance appraisal
effectiveness (Instrumentation), and the value that the supervisor places on an effective
performance appraisal (valence). These three supervisor perceptions, valence, instrumentation,
and expectancy, are discussed below.
Expectancy theory assumes that individuals desire some outcomes over others and that
individuals are able to choose their actions. It is a strong departure from behaviorism and
hedonism (Higgins, 1997; Vroom, 1964) because it assumes that individuals reflect and select
actions not because they are avoiding pain and seeking pleasure, but because they desire
different outcomes and make rational choice on the best methods to achieve those outcomes. In a
performance appraisal setting, a supervisor must make a cognitive decision on how accurately he
or she will complete the performance appraisal process as outlined in the organizations
performance appraisal program. The basis for this decision is the level of importance that the
supervisor views in the performance appraisal. If the supervisor views the performance appraisal
as extremely important (high valence) it is likely that the supervisor will put forth great effort to
complete the performance appraisal accurately. If the supervisor does not value the performance
appraisal (low valence) he or she will likely not put forth much effort in completing the
performance appraisal accurately.
Hypothesis 1: the level of importance a supervisor views in the performance appraisal
process will be positively related to the supervisor putting forth effort to perform the
performance appraisal accurately.
In addition to the supervisor’s perception of the importance of the performance appraisal,
the justice the supervisor views in the organizations performance appraisal system will also
affect the effort the supervisor puts into competing the performance appraisal accurately.
Research in organizational justice has been a subject of scholars of organizational science
for some time and has increased in recent years (Cropanzano & Greenberg 1997). Cropanzano &
Greenberg (1997) review much of the theoretical and empirical work on the organizational
justice and identify two areas of justice research. First, distributive justice is the idea that the
rewards in the organization are spread throughout the organization with justice. Rewards, raises,
promotions are all factors that can be perceived by employees as having been distributed with or
without justice. Second, procedural justice is the concept of justice in the processes used in the
organization. Distributive justice deals with the ‘ends’ of a reward system while procedural
justice deals with the ‘means’ (Cropanzano & Greenberg, 1997). These theories have been
tested in many situations including groups (Tyler, 1989), during pay cuts in organizations
(Greenberg, 1990), and in retaliatory situations in the workplace (Skarlicki & Folger, 1997).
Folger and Cropanzano (1998) apply justice theory to the performance evaluation
process. They suggest that academics believe that a ‘test’ metaphor best describes the process of
performance appraisal, but, in reality a political metaphor is what happens in practice. Rather
than use performance appraisal as an instrument, organizations use it politically to get to their
desired ends. Folger and Cropanzano suggest a trial metaphor is the middle ground between the
ideal and what happens in practice. Managers should use the balance of evidence in performance
appraisals to come to conclusions. It is suggested that this trial metaphor will produce the higher
perception of justice than is now observed in many performance appraisal settings.
If a supervisor believes that there is justice in an organization’s performance appraisal
system, it is likely that the supervisor will take the evaluation seriously and put effort into
completing the performance appraisal accurately. Here it is suggested that a violation of
procedural or distributive justice will each have an impact on the supervisor’s perception of
justice in the performance appraisal system. If a supervisor feels that there is a violation of
procedural justice it is likely that the supervisor will not put forth the effort to perform the
performance appraisal accurately. Likewise, if a supervisor does not feel that there is distributive
justice based on the results of the performance appraisal, it is likely that the supervisor will not
put much effort into completing the performance appraisal accurately. For this reason the overall
view of justice in the performance appraisal system will affect the supervisor’s effort put forth
toward completing the performance appraisal accurately.
Hypothesis 2: A supervisor’s perception of justice in the performance appraisal process
will positively correlated with a supervisor accurately completing the performance
Instrumentation is the idea that the direct results of an individual’s actions are linked to
other desired results toward that the individual has a degree a valence (Vroom, 1964). As the
supervisor in a performance evaluation setting decides the level of effort that he or she will put
into completing a performance appraisal accurately, they also must take into account the link
between performance appraisal accuracy and the desired results of the performance appraisal.
This link between performance appraisal accuracy and performance appraisal effectiveness is
highly dependent on the performance appraisal system in the organization. Clearly different
appraisal tools and systems will produce different results (Tziner, et al., 1993, Lam &
Schaubroeck, 1999; Tziner, et al. 2000). But, accuracy in completing the performance appraisal
instrument itself (whatever the desired result) is expected to produce a more effective
performance appraisal than not completing the performance appraisal process accurately.
Hypothesis 3: Accurately completing the performance appraisal process will be positively
related to performance appraisal effectiveness.
The supervisor’s perception of the link between performance appraisal accuracy and
performance appraisal effectiveness is critical. If a supervisor believes that the performance
appraisal process itself is important and that it is just for the employee, it is hypothesized that the
supervisor will put forth effort to complete the performance appraisal accurately (hypotheses 1 &
2). Also, if an accurate performance appraisal positively relates to an effective performance
appraisal, (hypothesis 3), it is likely that the supervisor will put forth effort to complete the
performance appraisal accurately. But, if the supervisor believes that there is justice and
importance in the performance appraisal process, but believes that an accurate performance
appraisal does not positively relate to an effective performance appraisal. It is likely that the
supervisor will not put forth the effort to complete the performance appraisal accurately.
Therefore it is hypothesized that performance appraisal accuracy will mediate the relationship
between performance the supervisor’s perception of importance in the performance appraisal
process and performance appraisal accuracy. Additionally performance appraisal accuracy will
mediate the relationship between the supervisor’s perception of justice in the performance
appraisal process and performance appraisal effectiveness.
Hypotheses 4: Performance appraisal accuracy will mediate the relationship between the
supervisor’s perception of the importance of the performance appraisal and the
supervisor’s accuracy in completing the performance appraisal process.
Hypotheses 4a: Performance appraisal accuracy will mediate the relationship between the
supervisor’s perception of justice in the performance appraisal process and the supervisor
effort in completing the performance appraisal process.
The discussion to this point suggests that as a supervisor enters a performance appraisal
interview, the supervisor brings with him or herself certain motivations that will impact the
effectiveness of the performance appraisal process. These include the supervisor’s perception of
the importance of the performance appraisal, the supervisor’s perception of justice in the
performance appraisal process, the supervisor’s perception of a link between performance
appraisal accuracy and performance appraisal effectiveness. A discussion of expectancy theory
(Vroom, 1964) hypothesized how these variables are projected to be related to performance
appraisal effectiveness as outlined by the organization.
Like the supervisor, the employee brings certain characteristics to the performance
appraisal process. Social learning theory (Bandura, 1977) argues that an individual’s behavior is
based on a balance between “Organizational Behavior Modification” and traditional motivation
theories” (Kreitner & Luthans, 1984). Social learning theory suggests that an individual’s
behavior is a result of an interaction among situations, persons, and consequence components of
the environment. This theory finds the middle ground between extrinsic motivation theories
such as behaviorism (Skinner, 1953) and intrinsic motivation theories such as expectancy theory
Social Learning theory suggests that an employee enters an organization with individual
traits and characteristics that may change or adapt depending on the work environment. The
employee’s motivations, behaviors and the environment all have an impact on how the employee
acts. Particular to performance appraisal, individual employees develop attitudes about the
performance appraisal process based on their own motivations as well as their work
environment. Two learned employee behaviors that will impact the effectiveness of an
employee’s performance appraisal are the employee’s organizational commitment and the justice
the employee perceives in the performance appraisal process.
The literature defines organizational commitment in two ways: first as manifestation of
organizational commitment behaviors, and second as a cognitive commitment to the organization
(Mowday, et al, 1979). Mowday, et al. (1979) state that organizational commitment can be
identified in three ways, “(1) a strong belief in and acceptance of the organization’s goals and
values; (2) a willingness to exert considerable effort on behalf of the organization; and (3) a
strong desire to maintain membership in the organization” (p.226).
If an employee cognitively believes that he or she is tied to the organization and meets
the three criteria above, it is likely that the employee will have a more positive perception of the
performance appraisal process. If the performance appraisal system in an organization intends to
produce certain outcomes in employees (organizational commitment, organizational goal
alignment, etc) it is likely that employees who have high organizational commitment will accept
the performance appraisal system of the organization and fully participate in the performance
appraisal process. The employee’s level of organizational commitment will therefore positively
correlate with the effectiveness of the performance appraisal process.
Hypotheses 5: An employee’s level of organizational commitment will positively
correlate with the effectiveness of the performance appraisal
An employee’s perception of justice in the performance appraisal process will also affect
the effectiveness of the performance appraisal process. As discussed in above in the supervisors
section, the literature explores justice deeply. Justice is thought to have three categories,
procedural, distributive, and interactional justice. In a performance appraisal setting, a lack of
justice in one area is predicted to have the same affect as a violation of justice in all areas. If an
employee perceives that the system processes are fair, the supervisor’s efforts to distribute
rewards and punishments based on outcomes of the process, and that the employee is treated
fairly, the employee’s perception of justice will be high. I suggest that if an employee perceives
that there is justice in the performance appraisal system, the performance appraisal will be more
effective in achieving the goals of the organization.
Hypotheses 6: An employee’s perception of justice in the performance appraisal system
will positively correlate with the effectiveness of the performance appraisal.
Insert Chart 1 Here
The supervisor and the employee each have perceptions of the organization in that they
work. They each have perceptions of the systems that the organization implements to control
and manage human performance in the organization. The above model is an attempt to identify
some the cognitive characteristics of supervisors and employees that will explain some of the
variance in performance appraisal effectiveness within an organization. It is suggested that
organizations and researchers think more deeply about measuring the outcomes of their
performance management systems.
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Performance Appraisal Effectiveness
Importance of PA
Accuracy of Performance
Performance Appraisal Appraisal