Performance Management: Impacts and Trends White Paper
Performance Management Trends/
Performance Best Practices.
The first group substantiates the importance of
Impacts and Trends performance management; the latter group aids the
practitioner seeking the characteristics of successful
Written and prepared by: systems. Two studies, one by DDI in 1997 and one
Roger Sumlin, Senior Consultant by Hewitt in 1994, address and appear in both
Performance Management Practice areas—organizational impact and trends.
Recent studies have identified trends in effective
Performance Management Impact on
performance management systems and determined
the impact of these systems on organizational
success. The messages from these studies are
1997 Study by DDI
dramatic: Performance management is an important
business system; it makes a difference in Performance Management Practices is the most
organizational performance; approaches to recent performance management study. It proves
performance management are changing; and senior that successful organizations realize that
managers must be attentive to the performance performance management is a critical business tool
management systems in their organizations. in translating strategy into results. The CEOs in the
majority of the 88 organizations surveyed say their
This body of research is useful to anyone designing performance management system drives the key
and implementing a new performance management factors associated with both business and cultural
system and equally beneficial to those trying to strategies. Some key findings of the study follow.
prove the value of effective performance
management. Organizational Impact
Performance management systems directly
This paper reviews six recent performance
influence five critical organizational outcomes:
management studies and organizes their key
financial performance, productivity, product or
findings into two groups: Performance Manage-
service quality, customer satisfaction, and employee
ment Impact on Organizational Success and
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When performance management systems are A higher percentage of measurement-managed
flexible and linked to strategic goals, organizations companies were identified as industry leaders, as
are more likely to see improvement in the five financially in the top third of their industry, and as
critical areas. successfully managing their change efforts. This
last area implies that measurement-managed
Team objectives, nonmanager training, appraiser companies tend to anticipate the future and are
accountability, and links to quality management are likely to remain in a leadership position in a rapidly
the specific practices most strongly associated with changing environment.
The research examined performance in six strategic
Supplemental Survey—CEO Ratings performance areas deemed crucial to long-term
A supplemental survey in this study sought CEOs'
perceptions of their organizations' performance • Financial performance
management systems. • Operating efficiency
• Customer satisfaction
Sixty-three percent of CEOs believe their • Employee performance
performance management system drives the key • Innovation/Change
factors associated with business strategy. Seventy- • Community/Environment
nine percent say their system drives the cultural
strategies that maximize human assets. The findings revealed that the biggest measurement
area separating successful from less successful firms
When CEOs realize the value of performance is employee measurement. Successful industry
management in driving business strategy, overall leaders simply do a better job than nonleaders at
system effectiveness is significantly higher. measuring their workforce, which, the study says, is
where real change is won or lost.
The success of performance management and its
effect on business and cultural strategies depend Study data point strongly to four mechanisms that
heavily on senior-level support. contribute to the success of measurement-managed
1996 Study by Wm. Schiemann & Associates • Agreement on strategy. Ninety-three percent of
This national survey of a cross-section of executives the measurement-managed firms reported
concluded that measurement-managed companies— agreement among top management on strategy,
especially those that measure employee versus only 37 percent of the nonmeasurement-
performance—outperform those that downplay managed organizations.
measurement. The research studied 122 • Clarity of communication. Good communi-
organizations making between $27 million and cation demands a clear message, and
$50 billion in sales. measurement provides a common language
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• Focus and alignment of efforts. Measurement- management systems with those in the same
managed companies reported more frequently industry that did not. The researchers then
that unit performance measures were linked to compared the financial performance of the
strategic company measures and that individual organizations having performance management
performance measures were linked to unit systems (47 percent) to see how those organizations
measures. fared before and after implementation.
• Organizational culture. Compared to
nonmeasurement-managed organizations, The study results showed that:
measurement-managed companies more
• Companies with performance management
frequently reported strong cultural elements,
programs have higher profits, better cash flows,
such as cooperation and teamwork among
stronger stock market performance, and a
the management team, a greater extent of
greater stock value than companies without
employees self-monitoring their own
performance, and a greater willingness to
• Productivity in firms without performance
management is significantly below the industry
average, while productivity in firms with
1995 Study by Yankelovich Partners for performance management is on par with the
William M. Mercer industry average.
The 1,200 workers surveyed said that on average • Companies with performance management
they could improve their daily output by at least significantly improved their financial
26 percent if only they weren't hindered by lack performance and productivity after
of —in order of importance—direction, support, implementing performance management.
training, and equipment. One in four said they
could raise productivity by 50 percent. An effective In 1995 the researchers conducted additional
performance management system delivers the analysis of the study data. This longitudinal
direction and support workers need. research focused on the following three financial
ratios that the researchers say are excellent
1994 Study by Hewitt Associates indicators of a company's overall financial strength:
The Impact of Performance Management on • Stock return to market index
Organizational Success substantiates that • Price to book total capital
performance management systems can have a • Real value to cost
significant impact on financial performance and Companies with performance management achieved
productivity. The study used the Boston Consulting higher ratios than those without in all three areas.
Group/HOLT financial database to track the
financial performance of 437 publicly held U.S.
companies from 1990 through 1992. Researchers
first compared organizations that had performance
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Performance Management Trends/ following highlights the key changes in usage
Best Practices between the two studies:
1997 Study by DDI • Training for both managers and nonmanagers in
performance management doubled in four years.
In addition to looking at impact on organizational
• Forced rankings (i.e., the use of a predetermined
success as reported in the first section, this study
percentage of ratings distribution) decreased by
also investigated organizations' current performance
more than 300 percent since 1993.
management practices and compared the results
• Team-based objectives have become more
with those from DDI's 1993 study (described later in
• The most common rating tools—overall ratings
and summary statements—are used even more
Most Frequently Used Practices
frequently than they were four years previous.
• Fifty-one percent of organizations frequently • Different forms of performance management
train managers in applying performance inputparticularly peer inputhave become
management systems, and 22 percent frequently more common.
train nonmanagers. • Respondents to the 1993 survey predicted a
• Thirty-eight percent of the organizations large increase in the use of team appraisal.
frequently use competencies in their That prediction proved to be off target.
performance management systems.
• Approximately 20–25 percent of organizations Effectiveness
frequently use peer input, customer feedback,
Although some system qualities such as employee
and input from direct reports.
involvement and flexibility were more prevalent,
• Twenty percent of organizations frequently
they were not necessarily the qualities most
include team-based objectives in individual
predictive of system success. The following system
performance plans. Team appraisal, in which
qualities and practices had the strongest relationship
team members or peers actually appraise one
to overall effectiveness.
another, is less common.
• Alignment. Aligning performance management
• For rating techniques organizations rely
to support organizational goals and integrate
primarily on overall ratings, summary
with other systems proved to be the most critical
statements, and numerical ratings.
differentiator in system effectiveness. However,
it was the least common quality of the
Changes in Usage
performance management systems in the
In 1993 DDI's survey of performance management sample.
practices measured current and predicted usage for • Accountability and training. The most
12 of the practices measured in this study. The successful performance management systems
required training in using the system,
established clear accountability for the people
using it, and focused on competencies.
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1994 Study by Wyatt performance management through merit
systems and sometimes through incentives.
This study focused on identifying best practices in
• Feedback from multiple sources. Leading
performance management by examining the systems
businesses are building 360-degree or
of a select group of 37 companies recognized for
multiperspective feedback into their systems.
financial success and innovative resource programs.
These include self-assessment and assessments
from peers and subordinates, and customers are
What emerged from the study is not a single best
increasingly brought into the assessment
system, but a set of best practices that can help
focus the process of designing, implementing, and
• Simplicity. Simple performance management
monitoring performance management. Distilled,
systems are easier to use, offer greater
the best practices share a handful of traits:
flexibility, and are easier for employees to
• Full alignment with other parts of understand, which fosters faster acceptance by
the organization the employees.
• Simplicity • Measurement of results. Many managers look
• Flexibility to their organization's value statements for key
• Decentralized control behaviors or competencies. Clearly
• A measurement process communicated business strategies drive the
• Employee development results measures.
• Senior management involvement. By
Other findings include: participating themselves and making sure that
• Alignment with business objectives, strategy, direct reports participate, senior managers can
customer needs. Alignment is central to help ensure that the system works.
performance management. Companies
reinforce the following most important 1994 Study by Hewitt
behaviors and results when they link This study analyzed data from 18 companies in
performance measurement to key areas: which senior managers and human resource
customer needs, the company's mission and executives were particularly satisfied with the
values, business improvement initiatives, and results of their performance management systems.
human resources. The study found that those programs shared several
• Decentralized control. Performance characteristics:
management works best when the process is • Implementation at the top. Senior managers
not highly centralized. Allowing individual helped design and implement the program and
business units the flexibility to customize the used it with those reporting directly to them.
system fosters a greater sense of employee • Simple process. The performance management
ownership. process was relatively simple and was
• Greater links between pay and performance. integrated into the daily work process.
All companies in the survey link pay and • Reasonable number of goals. The number of
goals was limited to four or five, with bonuses
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and incentives to reward those who achieved receive an annual review, and most viewed
their goals. theirs as participative and covering both
• Additional feedback. Annual reviews were strengths and areas for improvement. However,
supplemented by regular informal feedback. most respondents indicated they prepared little,
suggesting that the assessment process might
1993 Study by DDI and Society for Human not be participative. And reviews still
Resource Management emphasize results instead of results and the
skills and behaviors used to achieve them.
The national study Performance Management:
• Outcomes, defined as results or overall feelings
What's Hot—What's Not examined trends in
after participating in the performance
performance management practices, people's
management system, received mixed responses
satisfaction with their organization's current
with no areas of great satisfaction. Respondents
systems, and the bridges and barriers to effective
indicated significant frustration about pay and
promotion decisions not being clearly linked to
the performance management system.
The study involved 1,149 people, including
managers (56.8 percent) and nonmanagers
Regarding the top trends, respondents think
(42.2 percent), representing 79 companies.
• Continue to adopt the already-popular practice
Major study findings regarding people's satisfaction
of using essays to describe an employee's
with their current system revealed:
• Feedback and Coaching, considered the heart of • Give managers more training in performance
an effective performance management system, management.
fared the worst. Respondents reported they • Tie performance management more closely to
receive feedback and coaching too infrequently, quality improvement efforts.
and when they do, it is unbalanced and • Hold managers accountable for using
nonspecific. performance appraisal effectively.
• Performance Planning got the highest marks. • Educate employees about their companies'
Results from this section show that performance management system to help them
organizations are getting better at clarifying manage their own performance.
goals and linking them to organizational • Ask internal and external customers to
strategies, although there is room for contribute to appraisals.
improvement. Managers reported a much
stronger sense of ownership and involvement in
establishing their performance plans than did
• Performance Review offered a good news/bad
news scenario. Most participants consistently