PM system

1. PERFORMANCE
MANAGEMENT
Herman Aguinis
Herman Aguinis, University of Colorado at Denver
PERFORMANCE
MANAGEMENT
Herman Aguinis

2. Herman Aguinis, University of Colorado at Denver
Performance management and rewards system
in context
• Dr. Ghulam Dastgeer
• 0333-5111469
• hellodastgeer@gmail.com

3. Herman Aguinis, University of Colorado at Denver
Performance Management in Context:
Overview
 Definition of Performance Management (PM)
 The Performance Management Contribution
 Disadvantages/Dangers of Poorly-implemented PM
systems
 Definition of Reward Systems
 Aims and role of PM Systems
 Characteristics of an Ideal PM system
 Integration with Other Human Resources and
Development Activities

4. Herman Aguinis, University of Colorado at Denver
Performance Management: Definition
• Performance management is a continuous process of identifying,
measuring, and developing the performance of individuals and teams
and aligning performance with the strategic goals of the organization.
Continuous Process of
 Identifying performance of individuals and teams
 Measuring performance of individuals and teams
 Developing performance of individuals and teams
and
 Aligning performance with the strategic goals of the organization

5. Herman Aguinis, University of Colorado at Denver
Performance Management Vs
Performance Appraisal
• Performance Appraisal:
– Performance appraisal is the system that involves
employees evaluations once a year without an ongoing
efforts to provide feedback and coaching so that
performance can be improved.
– Performance appraisal is the systematic description of
an employee’s strengths and weakness.
– So performance appraisal is an important component of
performance management

6. Herman Aguinis, University of Colorado at Denver
PM is NOT performance appraisal
• PM
– Strategic business
considerations
– Ongoing feedback
– So employee can
improve performance
– Driven by line manager
• Performance appraisal
– Assesses employee
• Strengths &
• Weaknesses
– Once a year
– Lacks ongoing feedback
– Driven by HR

7. Herman Aguinis, University of Colorado at Denver
Contributions of PM
For Employees
The definitions of job and success are clarified
Motivation to perform is increased
Self-esteem is increased
Self-insight and development and enhanced

8. Herman Aguinis, University of Colorado at Denver
Contributions of PM
For Managers
Supervisors’ views of performance are
communicated more clearly
Managers gain insight about subordinates
There is better and more timely differentiation
between good and poor performers
Employees become more competent

9. Herman Aguinis, University of Colorado at Denver
Contributions of PM
For Organization/HR Function
Organizational goals are made clear
Organizational change is facilitated
Administrative actions are more fair and
appropriate
There is better protection from lawsuits

10. Herman Aguinis, University of Colorado at Denver
Integration with other Human Resources
and Development activities
PM provides information for:
Development of training to meet organizational
needs
Workforce planning
Recruitment and hiring decisions
Development of compensation systems

11. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–11
Performance Management Process:
Overview
Prerequisites
Performance Planning
Performance Execution
Performance Assessment
Performance Review
Performance Renewal and Recontracting

12. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–12
Performance Management Process
Performance
Review
Performance
Renewal and
Recontracting
Performance
Assessment
Performance
Execution
Performance
Planning
Prerequisites

13. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–13
Prerequisites
A. Knowledge of the organization’s
mission and strategic goals
B. Knowledge of the job in question

14. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–14
First prerequisite: Knowledge of mission
and strategic goals
Knowledge of the organization's mission and
strategic goals is a result of strategic planning.
• Strategic planning allows an organization to
clearly define:
– Purpose or reason for organization’s existence
– Where organization is going
– Where it wants to be in future
– The goals it wants to achieve
– Strategies for attaining goals

15. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–15
Mission and Goals
Cascade effect throughout organization
Organization Unit Employee
(Recall: An important objective of any performance
management system is to enhance each employee’s
contribution to the goals of the organization)

16. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–16
Second Prerequisite : Knowledge of the job
• Knowledge of the job (understand the job in
question) is done through job analysis
• Job analysis:
– A process of determining the key components of a
particular job, including activities, tasks, products,
services, and process.
– If there is no J.A, then???

17. Herman Aguinis, University of Colorado at Denver
• As a result of job analysis, we obtain information regarding
– Knowledge: having the information needed to perform
the work, but not necessarily having done it.
– Skills: required attributes that are usually acquired by
having done the work in the past.
– Abilities: having the physical, emotional, intelectual, and
psychological aptitude to perform the work but neither
having done it nor haing been trained to do the work is
required.
required to perform a job…
Prentice Hall, Inc. © 2006 2–17

18. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–18
Performance Planning
Performance Planning includes:
Results
Behavior
Development Plan

19. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–19
Performance Planning:
Results
Results refer to what needs to be done or the outcomes an employee must
produce.
A consideration of results needs to include:
 Key accountabilities:
Broad areas of a job for which the employee is responsible for producing
results .
 Specific objectives:
 Statements of outcomes
 Important
 Measurable
 Performance standards:
• “Yardstick” to evaluate how well employees have achieved each objective
• Information on acceptable and unacceptable performance, such as
 Quality, quantity, cost, time
Example: Job of university professor

20. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–20
Performance Planning:
Behaviors
Behavior in this context means:
How a job is done
• A consideration of behavior includes
discussing competencies:
– Measurable clusters of KSAs
– Critical in determining how results will be achieved
Example: a sales manager working in a specific
sales territory.

21. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–21
Performance Assessment
• Both the employee and the manager are
responsible for evaluating the extent to which
the desired behaviors have been displayed,
and whether the desired results have been
achieved.
• This also includes an evaluation of the extent
to which the goals stated in the development
plan have been achieved.

22. Herman Aguinis, University of Colorado at Denver
• Supervisors assessment
• Peers assessment
• Subordinates assessment
• Self-assessment
• Customers assessment
Prentice Hall, Inc. © 2006 2–22

23. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–23
Performance Review
Overview of Appraisal Meeting
The performance review stage involves the
meeting between the employee and the
manager to review their assessments. This
meeting is usually called the appraisal
meeting or discussion.

24. Herman Aguinis, University of Colorado at Denver
• Appraisal meeting provides for formal setting in which the
employee receives feedback on his/her performance.
• Many managers are uncomfortable providing performance
feedback, particularly when performance is deficient.
Prentice Hall, Inc. © 2006 2–24

25. Herman Aguinis, University of Colorado at Denver
Appraisal meeting is seen as a review of the
• Past
– What has been done (results) and how (behaviors).
• Present
– What new compensation employee may be receiving as a
result of his/her performance.
• Future
– Goals to be attained before the upcoming review session.
Prentice Hall, Inc. © 2006 2–25

26. Herman Aguinis, University of Colorado at Denver
Prentice Hall, Inc. © 2006 2–26
Performance Renewal and
Recontracting
• Same as/different from Performance Planning
– Uses insights and information from previous
phases
– Cycle begins again

27. Rewards Financial
Compensation
Dr. Ghulam Dastgeer

28. Herman Aguinis, University of Colorado at Denver
Reward Systems: Definition
• A reward system is the set of mechanisms for
distributing both tangible and intangible
returns as part of an employment
relationships.

29. Herman Aguinis, University of Colorado at Denver
Tangible returns
Cash compensation
Base pay
Cost-of-Living & Contingent Pay
Incentives (short- and long-term)
Benefits, such as
Income Protection
Allowances
Work/life focus

30. Herman Aguinis, University of Colorado at Denver
Intangible returns
 Relational returns, such as
Recognition and status
Employment security
Challenging work
Learning opportunities

31. Herman Aguinis, University of Colorado at Denver
Types of Return
• 1. Base Pay
– Base pay is given to employees in exchange of
work performed
– The base pay, which usually include a range of
values, focuses on the position and duties
performed rather than an individual contribution.
– Base pay is usually the same for all employees
performing similar duties and ignores differences
across employees.

32. Herman Aguinis, University of Colorado at Denver
• 2. Cost of living adjustments and contingent
pay
– Cost of living adjustments are given to combat the
effects of inflation in an attempt to preserve the
employee’s buying power.
– Contingent pay, sometimes refer to as merit pay,
is given as an addition to the base pay based on
past performance

33. Herman Aguinis, University of Colorado at Denver
• 3. Short term incentives
– Allocated based on past performance
– These incentives are not added to the base pay
and are only temporary pay adjustments based on
the review period (e.g, quarterly or annual)
– Incentives are one time payments and also called
variable pay

34. Herman Aguinis, University of Colorado at Denver
• 4. Long term incentives
– Long term incentives attempts to influence future
performance over a longer period of time.
– Involves stock ownership, options to buy stocks at
a pre-established and profitable price.

35. Herman Aguinis, University of Colorado at Denver
• 5. Income Protection
– Serves as a backup to employees’ salaries in the
event that an employee is sick, disabled, or no
longer able to work.
– Some countries mandate income protection
programs by law.
– Also include medical insurance, pension plans,
saving plans etc.

36. Herman Aguinis, University of Colorado at Denver
• 6. Work/life focus
– Help employees achieve a better balance
between work and non-work activities
• Time away from work (vacation time), service to meet
specific needs (e.g., counseling, financial planning, on-
site fitness programs) and flexible work schedules
(telecommuting, nonpaid time off).

37. Herman Aguinis, University of Colorado at Denver
• 7. Allowances:
– Include allowances covering housing and
transportation.
– Typical for expatriate, personnel and are also
popular for high level managers throughout the
world

38. Herman Aguinis, University of Colorado at Denver
• 8. Relational returns:
– Intangible in nature.
– Include recognition and status, employment
security, challenging work, opportunities to learn
and opportunities to form personal relationships at
work (like friendship).

39. Herman Aguinis, University of Colorado at Denver
Returns and Their Degree of Dependency
on the Performance Management System
Return
 Cost of Living Adjustment
 Income Protection
 Work/life Focus
 Allowances
 Relational Returns
 Base Pay
 Contingent Pay
 Short-term Incentives
 Long-term Incentives
Degree of Dependency
• Low
• Low
• Moderate
• Moderate
• Moderate
• Moderate
• High
• High
• High

40. Herman Aguinis, University of Colorado at Denver
Compensation
• Compensation is the total of all rewards
provided employees in return for their
services.
• The overall purpose of providing
compensation are to attract, retain and
motivate employees.

41. Herman Aguinis, University of Colorado at Denver
3 types of compensation
• 1. Direct financial compensation: consists of the pay that a person
receives in the form of wages, salaries, commissions.
• 2. Indirect financial compensation: (called benefits) consists of all
financial rewards that are not included in direct financial
compensation (i.e medical and hospital costs).
• 3. Non financial compensation: Consists of the satisfaction that a
person receives from the job itself or from the psychological and/or
physical environment in which the person works.
• With total rewards, the idea of a three-legged stool is used to
balance workforce compensation. These legs are direct financial
compensation, indirect financial compensation and non financial
compensation.

42. Herman Aguinis, University of Colorado at Denver
Equity in financial compensation
• The equity theory is the motivation theory that people
assess their performance and attitudes by comparing both
their contribution to work and the benefits they derive from
it to contributions and benefits of comparison others whom
they select and who in reality may or may not be like them.
• Equity theory further states that a person is motivated in
proportion to the perceived fairness of the rewards received
for a certain amount of efforts as compared to what others
receive.

43. Herman Aguinis, University of Colorado at Denver
• Financial equity: means a perception of fair pay treatment for
employees.
• External equity: exists when a firm’s employees receive pay
comparable to workers who perform similar jobs in other firms.
• Internal equity: exists when employees receive pay according to the
relative value of their jobs within the same organization. Job
evaluation is a primary means for determining internal equity.
• Employee equity: exists when individual performing similar jobs for
the same firm receive pay according to factors unique to the
employees, such as performance level or seniority.
• Team Equity: is achieved when teams are rewarded based on their
group’s productivity.

44. Herman Aguinis, University of Colorado at Denver
• Why understanding equity theory is very
important as it pertains to compensations?
• How inequity in any category can results in
morale problems?

45. Herman Aguinis, University of Colorado at Denver
Determinants of direct financial
compensation
• 1. Organization as a determinants of direct
financial compensation
• 2. Labor market determinants of direct
financial compensation
• 3. Job as a determinants of direct financial
compensation
• 4. Employee as a determinants of direct
financial compensation

46. Herman Aguinis, University of Colorado at Denver
Organization as a determinants of direct financial compensation
• Q: Do managers view financial compensation as an expense or an
asset?
• Compensation programs have top management’s attestation
because they have the potential to influence employees work
attitudes and behaviors that lead to improved organizational
performance and implementation of the firm’s strategic plan.
• 1. Compensation policy:
– A compensation policy provides general guidelines for making
compensation decisions.
– An organization often establishes compensation policies that
determine it will be a pay leader, a pay follower, or strive for an
average position in the labor market.

47. Herman Aguinis, University of Colorado at Denver
• Pay leader: are organizations that pay higher
wages and salaries than competing firms.
• Market rate: is the average pay that most
employers provide for a similar job in a
particular area or industry.
• Pay Followers: companies that choose to pay
blow the market rate because of poor financial
conditions or a belief that they do not require
highly capable employees are pay followers.

48. Herman Aguinis, University of Colorado at Denver
• 2. Ability of organization to pay
– An organization’s assessment of its ability to pay
is also an important factor on determining pay
levels. Financially successful firms tend to provide
higher than average compensation.

49. Herman Aguinis, University of Colorado at Denver
2. Labor market determinants of direct financial compensation
• Managerial and professional employees are
often recruited from a wide geographic area.
For more and more business firms, the world
has become the labor market.
• The market rate is an important guide in
determining pay. Many employees view it as
the standard for judging the fairness of their
firm’s compensation practices.

50. Herman Aguinis, University of Colorado at Denver
• 1. Compensation survey
– A compensation survey is a mean of obtaining data regarding what other firms
are paying for specific jobs within a given labor market.
– Of all the wage criteria, market rates remain the most important standard for
determining pay.
• 2. Cost of living
– The logic for using cost of living as a pay determinant is both simple and
sound. When prices rise over time and pay does not, real pay is actually
lowered. A pay increases must be roughly equivalent to the increased cost of
living if a person is to maintain his or her previous level of real wages.
– As some firms index pay increases to the inflation rate.
– Inflation is not the only factor affecting cost of living; location also comes into
play.

51. Herman Aguinis, University of Colorado at Denver
• 3. Labor union
– Unions normally prefer to determine
compensation through the process of collective
bargaining.
• 4. Economy
– Economy definitely affects financial compensation
decisions, for example, a depressed economy
generally increase the labor supply and this
serves to lower the market rate.

52. Herman Aguinis, University of Colorado at Denver
3. employee as a determinants of direct financial compensation
• 1. Job performance –performance-based Pay
– A compensation feature generally controllable by employees is their
job performance.
– The objective of performance based pay is to improve productivity.
– An effective performance appraisal program is a prerequisite for any
pay system tied to performance.
– A. Merit pay: is a pay increase added to employee’s base pay based
on their level of performance.
– B. Variable pay (bonus): a one time annual financial award, based on
productivity, that is not added to base pay.
– C. Piecework: is an incentive pay plan where employees are paid for
each unit they produce.

53. Herman Aguinis, University of Colorado at Denver
• 2. Skills---skills based pay:
– Is a system that compensates employees for their
hob-related skills and knowledge, not for their job
title.
– The system assumes that employees who know
more are more valuable to the firm and, therefore,
they deserve a reward for their efforts in acquiring
new skills.
– When employees obtain additional job relevant
skills, both individuals and the department they
serve benefits.

54. Herman Aguinis, University of Colorado at Denver
• 3. Competencies--- competency based pay
– Is a compensation plan that rewards employees
for the capabilities they attain.
– Competencies include skills, but also involve other
factors such as motivation, values, attitudes, and
self-concepts that can be linked to better
performance.

55. Herman Aguinis, University of Colorado at Denver
• 4. Seniority
– Is the length of time an employee has been
associated with the company, division,
department, or job.
• 5. Experience:
– Regardless of the nature of the task, experience
has the potential for enhancing a person’s ability
to perform. However, this possibility materializes
only if the experience acquired is positive.

56. Herman Aguinis, University of Colorado at Denver
• 6. Organizational membership:
– Employees receive some compensation components because they are
members of the organization,
– For example, an average performer occupying a job in pay grade 1 may
receive the same number of vacation days, the same amount of group life
insurance, and the same reimbursement for educational expenses as a
supervisor employee working in a job classified in pay grade 10.
• 7. Potential:
– Many young employees are paid well, perhaps not because of their ability to
make an immediate contribution, but because they have the potential to add
value to the firm as a professional, first-line supervisor, manager of
compensation, VP of marketing or Chief executive officer.

57. Herman Aguinis, University of Colorado at Denver
• 8. Political Influence:
– It may be natural for a manager to favor a friend
or relative in granting a pay increase or promotion.

58. Benefits, Nonfinancial
Compensation, and other
compensation issues

59. Herman Aguinis, University of Colorado at Denver
Benefits (Indirect financial
compensation)
• Benefits: includes all financial rewards not
included in direct financial compensation
• A distinct advantage “it is generally nontaxable
to the employee”

60. Herman Aguinis, University of Colorado at Denver
Types of indirect compensation
• 1. In direct financial compensation (Benefits)
1. Legally required
1. Social security
2. Unemployment compensation
3. Worker’s compensation
4. Family medical leave
2. Voluntary benefits
1. Payment for time not worked
2. Health care
3. Life insurance
4. Retirement plans
5. Disability protection
6. Employee stock option plans
7. Premium pay

61. Herman Aguinis, University of Colorado at Denver
• 2. non financial compensation
1. The job
1. Skill verity
2. Task identity
3. Task significance
4. Autonomy
5. Feedback
2. Job environment
1. Sound policies
2. Capable manager
3. Competent employees
4. Suitable status symbols
5. Working condition

62. Herman Aguinis, University of Colorado at Denver
– 3. Workplace Flexibility
1. Flextime
2. Compressed workweek
3. Job sharing
4. Telecommuting
5. Part-time work