Performance Management: Impacts and Trends White Paper

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Performance Management: Impacts and Trends White Paper

  1. 1. whitepaper Performance Management Trends/ Performance Best Practices. Management: 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 Organizational Success 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 job satisfaction. To learn more, call your local DDI office or contact: The Americas ....... 412.257.0600 Southeast Asia ... 65.339.5255 France ............. 33.1.41.96.86.86 United Kingdom 44.1628.810800 Toll-free Canada... 800.668.7971 Australia.............. 61.2.9466.0300 Germany ......... 49.2159.91680 E-mail ...............info@ddiworld.com Toll-free U.S. ........ 800.933.4463 Greater China ..... 852.2526.1188 New Zealand ... 64.9.377.6742 Web ..................www.ddiworld.com
  2. 2. DEVELOPMENT DIMENSIONS INTERNATIONAL 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. positive outcomes. The research examined performance in six strategic Supplemental Survey—CEO Ratings performance areas deemed crucial to long-term success: 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 companies: 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 for communication. 2 Performance Management
  3. 3. DEVELOPMENT DIMENSIONS INTERNATIONAL • 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 management. performance, and a greater willingness to • Productivity in firms without performance take risks. 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 3 Performance Management
  4. 4. DEVELOPMENT DIMENSIONS INTERNATIONAL 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 common. this paper). • 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 inputparticularly peer inputhave 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. 4 Performance Management
  5. 5. DEVELOPMENT DIMENSIONS INTERNATIONAL 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 process. 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 5 Performance Management
  6. 6. DEVELOPMENT DIMENSIONS INTERNATIONAL 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 management. 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. organizations will: • 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: overall performance. • 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 nonmanagers. • Performance Review offered a good news/bad news scenario. Most participants consistently 6 Performance Management
  7. 7. DEVELOPMENT DIMENSIONS INTERNATIONAL Conclusion References This growing body of research finds for us Bernthal, P., Sumlin, R., Davis, P., & Rogers, R. characteristics and practices that have proven (1997). Performance Management Practices successful for others. In doing so, it helps guide us Survey Report. Development Dimensions in improving our own performance management International. system. Some of the research also provides the hard data we need to know that performance Hewitt Associates. (1994). The Impact of management is an important business system—one Performance Management on Organizational that affects our organization's bottom line and is Success. Hewitt Associates LLC. worth our efforts to make it right. Lingle, J. & Schiemann, W. (1996, March). Is Measurement Worth It? American Management Association Management Review, 56–61. Rogers, R., Miller, L., & Worklan, J. (1993). Performance Management: What's Hot—What's Not. Development Dimensions International and the Society for Human Resources Management. The Wyatt Company. (1994). The 1994 Wyatt Performance Management Survey. The Wyatt Company. *FYKT* 7 Performance Management © Development Dimensions International, Inc. MCMXCVIII. FYKT MKTOCWP06-0598.1MA All rights reserved.

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