This document provides a literature review on performance management systems. It summarizes several studies that have examined the impact and effectiveness of performance management. Some key findings include: successful performance management systems are linked to positive organizational outcomes like financial performance; measurement and goal-setting are associated with better company performance; training and development practices are strongly related to perceived organizational performance; and line manager involvement and buy-in is important for effective implementation of performance management systems. The literature review covers research from 1997 to 2012.

1. THE M.S.UNIVERSITY OF BARODA
Literature Review on Performance Management System
(M.com Final ) (Human Resource Management)
 Study by DDI (1997), Performance Management Practices is the most recent
performance management study. It proves that successful organizations realize that
performance management is a critical business tool in translating strategy into results.
The CEOs in the majority of the 88 Organizations surveyed say their performance
management system drives the key factors associated with both business and cultural
strategies. Performance management systems directly influence five critical
organizational outcomes : Financial performance, productivity, product or service
quality, customer satisfaction & employee job satisfaction. When performance
management systems are flexible & linked to strategic goals, organization are more
likely to see improvement in the five critical areas : team objectives, non- manager
training, appraiser accountability & links to quality management are the specific
practices most strongly associated with positive outcomes.
 Watkins (2007) puts it, most public sector business organization like those in Delta
State of Nigeria have not given adequate attention to performance management review
as a tool for improving performance even when recent studies suggest that
performance review benefit organizational performance in both private & public
sectors. Performance management has been described as a systematic approach to the
management of people, using performance goal measurement, feedback and
recognition as a means of motivating them to realize their maximum potentials. Public
sector business organizations that strive to deliver quality services at competitive
prices are those that embrace various performance review practices to assess their
employee performance & motivate them with incentives.
 Robert & Angelo (2001), The success or failure of public sector business organizations
depends on the ability to attract, develop, retain, empower & reward a diverse array of
appropriately skilled people and is the key to improving organizational performance.
The explanation therefore is that human resource managers in the public sector
business concerns should embark on periodic performance management reviews of
their employees in order to re-position their business organizations though owned by
government for better performance & improved competitiveness.

2.  Study by Wm. Schiemann & Associates (1996), this national survey of cross-section
of executives concluded that measurement-managed companies- especially those that
measure employee performance- outperform those that downplay measurement. These
research studied 122 organizations making between $27 million and $50 billion in
sales. A higher percentage of measurement-managed companies were identified as
industry leaders, as financially in the top third of their industry, and as successfully
managing their change efforts. The research examined performance in six strategic
performance areas deemed crucial to long-term success : Financial performance,
operating efficiency, customer satisfaction, employee performance, innovation/change,
community/environment. The findings revealed that the biggest measurement area
separating successful from less successful firms is employee measurement. Successful
industry leaders simply do a better job than non-leaders at measuring their workforce,
which the study say is where real change won or lost.
 Study by Hewitt Associates (1994), The impact of performance management on
organizational success substantiates that performance management system can have a
significant impact on financial performance and productivity. The study used the
Boston Consulting Group/HOLT financial database to track the financial performance
of 437 publically held U.S. companies from 1990 through 1992.The study results
showed that: Companies with performance programs have higher profits, better cash
flows, stronger stock market performance and a greater stock value than companies
without performance management. Productivity in firms without performance
management is significantly below the industry average, while productivity in firms
with performance management is on par with the industry average. Companies with
performance management significantly improved their financial performance and
productivity after implementing performance management.
 Williams (2002) identifies globalization, increased competition and the increasingly
individualistic rather than collective employee relationship as some of the major drivers
contributing to the increased visibility of performance management systems (PMS).
Faced with fast moving and competitive environments, companies are constantly
searching for unique ways in which to differentiate themselves from their competition
and are increasingly looking to their “human resources” to provide this differentiation.

3. This has led to much interest in the performance of employees, or more importantly,
how to get the most out of employees in order to sustain competitive success.
 The study by Eleni T. Stavrou, Christakis Charalambous and Stelios Spiliotis
utilizes an innovative research methodology (kohonen’s Self-organizing Maps (SOMs),
Neural Network Analysis) to explore the connection between human resource
management as a source of competitive advantage and perceived organizational
performance in the European Union’s private and public sectors. While practices in
these two sectors did not differ significantly, three diverse but overlapping HRM
models did emerge, each of which involved a different set of EU member states.
Training & Development practices were strongly related to performance in all three
models and communication practices in two. These results show the usefulness of an
innovative technique when applied to research so far conducted through traditional
methodologies, and brings to the surface questions about the universal applicability of
the widely accepted relationship between superior HRM and superior business
Performance.
 Sharmistha Bhattacharjee and Santoshi Sengupta (2011) studied that employees are
the most valuable and dynamic assets of an organization. For achieving the strategic
objective of sustained & speedy growth, managing human resource has been featured
as a vital requirement in all organizations. It is a challenge to monitor the entire cycle
of defining the competence requirement of the business, accessing existing competence
in the organization and bridging the gap between the two. HR practices are crucial for
any organization. Every phase from recruitment to exit interview is under the HR
department. It is a challenge to monitor the entire cycle of defining the competence
requirement of the business, accessing existing competence in the organization and
bridging the gap between the two. In a manufacturing industry, with every technical
advancement business opportunities can show up. These opportunities can be
converted into business success only with performance alignment and competence
management.
 The research paper of Mohammad Tanvi Newaz (2012) provides an analysis and
evaluation of the role of performance management system in shaping psychological
contract at Sainsbury’s UK by a case study approach. Sainsbury’s has adopted the
performance management system to utilize the potential of their employees but result
of data analysis indicates that line managers have failed to achieve the objective of the
performance management system. This research analysis reveals how the line managers
of Sainsbury’s focus on short term goal i.e. financial success instead of long term goal
i.e. employee development. However, the performance management system of

4. Sainsbury’s comprises all the necessary components to play a significant role in
developing employees as well as facilitating the formation of a positive psychological
contract. But partial and inattentive implementation of the system makes the situation
unfavourable for the psychological contract to develop at Sainsbury’s UK.
 The article of Javed Iqbal , Samina Naz, Mahnaz Aslam, Saba Arshad (2012), offers
a survey of selected literature on performance management. Purpose is to identify key
themes that govern the topic in the contemporary turbulent economic and business
environment where employees are more uncertain that anything else because every day
they face downsizing, volunteer retirement and “golden hand shakes’’ to get rid of
them. Under these circumstances it is worthwhile to look into the ways by which they
can be motivated to work under hard conditions. It is found that performance
management processes, evaluation, its impact and factors are key themes. Researchers
apply popular research approaches for data collection analysis and communication.
 The paper of Akua Asantewaa Aforo and Kodjo Asafo-Adjei Antwi (2012) shows
that academic libraries have a performance appraisal system comprising setting of
goals, feedback, participation and incentives for performance. This study aimed at
evaluating the performance appraisal system in the KNUST and GIMPA libraries in
Ghana and give recommendations on improving the system. Questionnaires were
randomly administered to 46 staff members of these libraries.
 The aim of this study of Akinyele S. T. (2010) was to evaluate the effectiveness of
performance appraisal system at private universities in Nigeria. The focus of the study
was on the administrative staff of Crawford University. The study evaluated the
purpose of performance appraisal in private universities and identifies relevant factors
for achieving an effective performance appraisal. A cross- sectional survey was
selected for this study because it was easy to undertake compared to longitudinal
survey and the results from the same can be inferred to the larger population. The
study population was for all the administrative staff of Crawford University. The whole
populations of staff were selected as respondents. A structured questionnaire was used
to collect the data for analysis. The effectiveness of performance appraisal systems in
private universities are only based on training the members of staff involved in the
rating/ appraising process and are multi- rating systems. Conclusively because the
performance appraisal systems used in private universities are not effective and that
they exist just as a matter of formalities, the private universities cannot measure

5. members of staff performance, hence making it difficult to achieve the intended human
resource management objective.
 The paper of Al Bento and Regina Bento (2006) proposes and tests a model to
explain three critical outcomes of Performance Management Systems: information
quality, effectiveness, and usefulness of the PMS to managerial decision-making.
Drawing from Organizational Information Processing Theory (OIPT), we examined
how those three outcomes may be influenced by factors that affect OIP requirements
(industry, size, and geographic scope of operations) and by organizational and
technological factors that affect OIP capabilities. Organizational factors included
management's decision-making style and organizational structure. Technological
factors included the types of technology used in the PMS (ERP; specialized tools such
as EIS and DSS; and generic tools such as Excel, Access and Lotus Notes), and the
degree of use of e-commerce and Internet technologies.
 The study of George Ndemo Ochoti, Elijah Maronga, Stephen Muathe, Robert
Nyamao Nyabwanga, Peter Kibet Ronoh (2012) investigated the multifaceted factors
influencing employee Performance Appraisal System in the Ministry of State for
Provincial Administration, Nyamira District, Kenya. A target population of 76
employees was surveyed. A structured questionnaire was self-administered to the
employees to collect data. Multiple regression analysis technique was used to explain
the nature of the relationship between PAS and the factors that influence it. Results of
the study showed that all the five factors: Implementation process (X1), interpersonal
relationships (X2), rater accuracy (X3), informational factors (X4), and employee
attitudes (X5) had a significant positive relationship with the performance appraisal
system (Y). It shows that if these factors are taken into consideration by the ratees, the
raters and the government policy makers, the PAS can be a good performance
management tool.
 The paper of Jawaria Andleeb Qureshi, Asad Shahjehan, Zia-ur-Rehman and Bilal
Afsar (2010) notifies that many organizations install Performance Management
Systems (PMS) formally and informally in their organizations, with the motivation to
achieve better organizational results. In practice, organizations have difficulty in
implementing a performance management system because its different dimensions are
not taken into considerations enough. This article describes the findings of a
comparative analyses conducted between a standard performance management model
and performance management systems as applied by Local Development Organization
(LDO). Data was collected from 50 employees of the organization with a Cronbach
Alpha (0.935). Results identified barriers to implementation of effective PMS, also
recommendations and viable solutions are presented.
 Research of Leena Toppo, Twinkle Prusty (2012) informs that performance appraisal
and performance management were one of the emerging issues since last decade. Many
organizations have shifted from employee’s performance appraisal system to
employee’s performance management system. This paper has focused to study the
evolution of employee’s performance appraisal system, critics the system suffered and

6. how the performance management system came to the practice. The main purpose of
this paper is to differentiate these two systems, employee’s performance appraisal and
management system. This paper uses a review of the literature to evaluate the
development of appraisal system and argues the critic areas of appraisal system.
Performance management eliminates the shortcomings of performance appraisal
system to the some extent.
 There are, however, several models which have attempted to explain how HR policies
have an impact on firm performance, one such model adopted as a conceptual
framework in this paper is the “People Process Framework” (Gratton 1996). This
framework focuses on individual performance linked to organizational performance
and is designed to deliver short term business objectives as well as long term
sustainable success. The model clearly identifies a set of HR practices which have been
designed to link individual effort to the overall objectives of the business and also
strikes a balance between achieving short term goals and preparing the company for its
future long term success. The major focus of the research will be on the processes
which contribute to short term business success, given their direct relevance to PMS
and the crucial role of line managers in their implementation. These short term
processes are critical to the overall success of the business as they provide the
foundations to encourage sustained performance through clear identification of
objectives, continuous assessment of performance against those objectives, reward
strategies that emphasize the required behaviors and the provision of training and skills
which will improve performance. Implemented correctly, these processes should
enhance the individuals confidence in themselves and their company creating an
environment where employees “want to” perform rather than feeling like they “have
to” perform. Long term success is only possible therefore when the short term
processes generate this type of response.
 Whittaker and Marchington (2003) found evidence in their study that line managers
spent very little time on people management issues, preferring instead to concentrate
on financial or business objectives. Hope Hailey et al (2005) report that line managers
are only measured on their technical role and not their people management
responsibilities. The appraisal process is therefore of secondary importance to them
and the appraisal is generally approached with little preparation, training or enthusiasm
(Cook and Crossman 2004, Holt-Larsen and Brewster 2003). To address this,
Hendry et al (2000) argue that not only should line managers own the performance
management process but that they should be involved in its design, and only by
involving them at this stage will they “buy-in” to the process. Lack of management
“buy-in” can potentially frustrate the whole purpose of a performance management
system, leading to an inability to meet short-term goals as well as failure to address
longer term developmental opportunities (Weeks, 2005).
 Lohr (1981) had stated that even Abraham Taylor (1856-1915) widely regarded as the
father of Scientific Management in his legendary thesis on performance improvement in
organizations had recognized the negative influences of groups on performance and
sought to break-up informal group activities through spatial and work-flow designs
and individual piece rate systems of pay. Taylor had based his management system on
production-line time studies. Instead of relying on traditional work methods, he
analyzed and timed steelworkers’ movements on a series of jobs. Using time study as
his base, he broke each job down into its components and designed the quickest and
best methods of performing each component (Idemobi et al 2010). In this way he
established how much workers should be able to do with the equipment and materials

7. at hand. He also encouraged employers to pay more productive workers at a higher
rate than others, using a “scientifically correct” rate that would benefit both company
and worker. Thus, workers were urged to surpass their previous performance
standards to earn more pay. Taylor called his plan the differential rate system. Rather
than quarrel over profits, both management and workers should try to increase
production and by so doing, he believed, profits would rise to such an extent that
labour and management would no longer have to fight over them.
 Timmons (1992) had opined that competitiveness is a major issue in foreign
competition, and if a country’s export promotion drive is to yield the desired results,
competitiveness in particular must be optimized. He further posited that the declining
productivity in business organizations which leads to un-competitiveness is a major
cause of monetary problems and inflation, and governments obviously should be
interested in the level of competitiveness arising from productivity improvement.
 Although the use of goal setting is primarily used to improve performance, there are
other benefits such as: to clarify expectations, to improve job satisfaction, to enhance
self-esteem through attainment of goals and to improve quality of work (Locke and
Latham 1984).Appraisal provides the mechanism to provide effective feedback on
achievement of which is an important factor in improving performance (Williams 2002).
 Fletcher (2004) describes it as a “high risk activity” for managers, given the many
pitfalls associated with it and Newton and Findlay (1996) highlight the fallibility of
appraisals as they are open to manager manipulation. Despite the criticisms, the use of
performance appraisal is widespread and perceived to be an effective part of a
performance management system (CIPD 2005a).
 Many organizations have looked to improve performance by linking it to pay;
performance related pay (PRP) can take many different forms (Williams 2002) and the
type of reward and how it is linked to performance management varies by organization
(IDS 2003). There are many differing views on the effectiveness of PRP (Williams
2002) and whether or not it contributes to improved performance. It has been argued
that PRP is a process of control, rather than contributing to real development (Hendry
et al 2000).
 (Gratton 1996)There has been a change in scope of the appraisal process in recent
years, with an increasing focus on employee development, as more and more
businesses focus on how targets are achieved rather than just the achievement itself.
This has led to a combination of both objectives (outputs) and competencies (inputs,
Taylor, 2005) and the recognition that personal development planning (PDPs) are a
fundamental part of a PMS. By offering employees the opportunity of enhancing their
skills through training, levels of self-confidence will improve and performance will be
enhanced (White 1999).
 Willcoxson, (2000) High performance is considered to be achievable in different ways,
two of which are the humanistic and rational process perspectives. According to
proponents of the humanistic perspective, high performance is attributed to investment
in the ‘softer’ people aspects of organizational life. Through valuing, trusting,
developing and empowering employees, encouraging cooperative modes of operating
and stakeholder engagement, organizations can achieve high performance. Emphasis is

8. also placed on organizational culture as a key element of success or failure
(Willcoxson, 2000).
 In essence the productivity of an organization is jointly determined by the efficiency
with which the organization utilizes several available factors of production which
invariably are scarce relative to the demand for them. As it were therefore, one can
conceive of an equilibrium condition in productivity terms within given and stated
constraints in an organization. Like the price scenario, several factors operate to make
it difficult to optimize the use of human and other resources in the organization such
that the equilibrium condition is not achieved easily. Ouchi (1981) clearly pointed this
out when he addressed the issue of what he labelled “the organizational dilemma”
meaning that the organization’s search for rationality (technological determinism) and
the human beings search for happiness (as in the Doctrine of Hedonism).
 Robert and Angelo, (2001) The success or failure of public sector business
organizations hinges on the ability to attract, develop, retain, empower and reward a
diverse array of appropriately skilled people and is the key to improving organizational
performance The explanation therefore is that human resource managers in the public
sector business concerns should embark on periodic performance management reviews
of their employees in order to re-position their business organizations though owned
by government for better performance and improved competitiveness.
 Sung & Ashton,(2005)It is the business strategy that gives the high performance
working practices their dynamism and provides the framework against which
performance can be evaluated and improved. Thus, the concern is not with the specific
type or number of practices employed, but the way they are linked to organizational
performance.
 Results from the Watson Wyatt Worldwide (2004) study suggest that PM systems
should recognize high performers and confront poor performers as soon as possible,
eliminate paper forms, and utilize a user-friendly automation. Researchers from
Watson Wyatt Worldwide also assert that if PM systems are designed and
implemented properly, they can lead to positive impact on individual performance as
well as better financial results for the organization (i.e., improvement in shareholder
value).
 A common weakness in the implementation of performance management systems
noted by de Waal (2004) is the focus only on the “structural side”, that is, “the
structure that needs to be in place to be able to use performance management such as
critical success factors & key performance indicators, possibly supported by a balance
scorecard”. De Waal (2004) argues that successful implementation also requires
attention to the “behavioral side” that is, the necessary performance-driven behavior
required from organizational members to achieve the desired objectives. According to
de Waal (2004), appropriate behaviors, including attitudes and beliefs, depend on a
range of factors including management style, the perceived relevance of performance

9. indicators, the degree to which employees feel they can influence change, and the
quality of communication within the organization.
(Source : http://eprints.jcu.edu.au/26275/ ).
 A study conducted by McDonald and Shield of Hewitt Associates found that companies
that used performance management programs had greater profits, better cash flow,
stronger stock market performance and greater stock value than companies that did not.
Not only performance management improved financial performance, but it also
improved productivity; companies with such programs had higher sales per employees
(Rheem, 1995). Nonetheless, performance management has been mistaken as performance
evaluation. As a matter of fact, both performance management and performance evaluation
are related but they are not exactly the same concept. Performance management is a
systematic process for improving organizational performance by developing the performance
of individuals and teams; it is a mean of getting better results from the organization, teams,
and individuals by understanding and managing performance within an agreed framework of
planned goals, standards, and competence requirement
(Armstrong, 2006). While performance evaluation is a process of assess and rate past
performance of individuals or groups (Oct 2004). Performance evaluation is just a part of
performance management.
(Prepared by Sem Shaikh)
(Private circular only for academic purpose)