What exactly is the importance of Performance Management and how does it affect your organisation's growth? In the following article, Prof. Dr. Mark Bussin tells you why performance management is so crucial to your company and how the system brings you additional value into your workforce.
Article written by Prof. Dr. Mark Bussin
Have you ever considered the impact that Performance Management (PM) could have on your company? Just have a look at some of the stats from a recent 21st Century survey:
Companies that have adhered to the provision of regular employee feedback have 15% lower turnover rates than companies that offer no feedback
Feedback has been correlated to 43% of highly engaged employees
9% greater profitability is achieved when managers receive feedback pertaining to their strengths
70% of employees admit they would work harder if their efforts were recognised
Almost 80% of employees have stated that recognition motivates them
What is the Hype about performance management? Why do we use it?
Generally, PM serves the purpose of assisting the organisation in reaching its goals and objectives. Its main aim is to improve the quality and speed of employee output and aligning employee activities with the objectives of the organisation. It can thus be seen as a strategic initiative for an organisation to prosper by enhancing the competencies of its contributing agents.
PM has three purposes overall: administrative; strategic and developmental. These can be summarised as follows:
PM as an administrative function
PM contributes to other administrative duties such as assisting decision-making in terms of salaries (and other means of recognition), promotions and, recruitment and retention strategies. Consider it as a tool to assist you with your budget.
PM as a developmental function
The next function of PM is its developmental contributions. PM, being an ongoing process, allows for employees to continually learn and grow. How? By pointing out employees’ strengths and weaknesses. Becoming conscious of one’s’ weaknesses, one can deliberately work on them to turn them into strengths. Additionally, when feedback occurs soon after the implemented action, it leads to greater corrective action and learning. Where an employee lacks, management can determine as per the PM system, where training is key or otherwise where a promotion is fitting.
PM as a strategic function
The third function of PM is a strategic one. By setting goals in line with organisational strategies as well as with the aim of self-development, employee’s goal achievement will have a beneficial effect on both parties. Firstly, the employee aims to reach goals for two purposes- the recognition that at comes with as well as the self-fulfilment and growth they achieve. The organisation benefits in return as its employees are achieving for the company, and developing, leaving the organisation to benefit even further from the continual growth. Thus, there is a continuous cyclical effect of individual growth and organisational growth.
Evidently, PM can bring a lot to the table in terms of: increased productivity (determining where training is necessary and implementing it can be of great help); measuring employee performance in a meaningful way (continuous, timeous feedback can result in positive perceptions as well as perceptions of fairness for employees which leads to greater motivation and dedication to the company); as well as, increasing retention (a mutual understanding between the employee and management organisation, means that management can cater towards employees with regard to what they value most, resulting in higher retention rates).
But if PM has so many benefits, why are some organisations against it?
Today, PM is a route of discontent at some organisations. Studies show that some organisations believe that their PM systems have either no effect or a negative effect on the performance of the company.
Why is this so? The simple answer: Performance management is not being implemented correctly. Correct implementation of PM can result in a great positive impact upon performance of both the employee and the organisation in its entirety. Incorrect implementation can have an adverse effect. There are several unanimous problems among organisations that are affecting PM systems.
What are the problems affecting PM systems in organisations today?
When companies are struggling on the front of their PM systems, generally, the problems they should consider are the following:
Substandard PM software
Companies have emphasised the increasing need to upgrade their software in search of more sophisticated software.
Dissatisfaction of the PM system as a whole by all the agents involved
While nearly 90% of organisations have implemented a PM system, only 18% of these organisations are satisfied with them. Dissatisfaction with the system lies from the employees to the managers, who generally don’t like giving feedback, especially negative or adverse feedback.
Who has access to information and who holds responsibility
Generally, the unspoken rule dictates that leaders have information access and hold responsibility. Times have changed and employees control their own performance evaluations as well as their career paths and development.
Organisations tend to focus on process rather than focusing on learning and development.
Management has the tendency on focusing on the process and the performance rating which drives the focus away from learning.
The following table outlines the factors that are blocking the road to successful PM.
Factors Affecting Performance Management Systems In Ranking Order
As per the above table, the 3 most common reasons for PM system failure are: the lack of ability of leadership to act as coaches and mentors and initiate discussions that are procreative; the lack ability of leadership to differentiate performance levels and provide constructive feedback; and the inability of management to review performance on a continuous basis.
Despite research conducted extensively pertaining to PM and PM systems, there is one extremely important factor that despite its criticality, is a hidden force. Despite re-contemplating, restructuring, redesigning and re-implementing performance systems, without addressing this single factor, your performance system is destined for failure.
What is the most important, hidden factor when it comes to implementing PM system?
The long awaited answer is a simple 8 word letter… fairness.
For a PM system to work, it needs to be perceived as fair by both managers and employees. There are 3 simple steps you can take to achieve perceptions of fairness of the PM system, managers play a key role. Managers should be trained in line with: linking employee goals to the business objectives; effective coaching; and focus on remuneration.
Fairness is quite a subjective term. A PM system that is “fair”, relies on the perceptions of the stakeholders involved. There are different types of fairness and in this context, procedural fairness is the topic of conversation. Procedural fairness refers to the perceived fairness in a process rather than the outcome. In this case, perceived fairness will be achieved when the PM system is well-designed and functions in a manner that is fair. A study conducted by McKinsey research revealed that 60% of employees, who rated the PM system as fair, furthermore proclaimed that it was effective. It is therefore important to focus on fairness when implementing or redesigning your performance system.
How to boost perceptions of fairness with your PM system
1. Link employee goals to the business objectives
A PM management system that links employee goals to company goals is one that is a success in the making. Employees perceive fairness when a reciprocal relationship exists. When personal goals are acknowledged and respected, they can be shaped in a way to obtaining company goals. This way, employees feel valued and well-treated. By allowing employees the freedom of shaping their own goals, employee engagement is likely to be earned. Performance goals and progress must also continuously be revised to ensure that the employee is still on track to reaching the overall goal.
2. Train managers in becoming better coaches
When managers are not good coaches, the PM system is not trusted overall. Employees view the PM system as fair when they are treated like human beings. This has led to the trend of managers taking on a coaching or mentoring role. Managers (or coaches) as mentioned before, have the role of assisting in goal creation and continuous revision of these goals. The constant feedback leaves employees feeling more confident and enabled.
It is therefore important to build the confidence of managers so that they are able to fairly assess performance as well as to boost it. Managers should be trained on delivering not-so-favourable news and convert it to being productive towards the company goals.
3. Focus on remuneration
Remuneration and incentivisation may seem pretty straight forward- reward the quality and output of work. For instance, the salesperson that makes the most sales should be rewarded the most. However, it is trickier to conclude the right benchmarks or to make a distinction between top, bottom and middle performers when employees are required to work in teams, when the roles of the employees are dependent on one another and it is difficult to deduce the efforts of each individual. Balanced-measurement approach is therefore the solution.
Commonly, when there is a vast amount of performers in the middle-range, organisations tend to opt for eliminating performance rating systems. It is advised to rather keep performance ratings so that employees can understand the measure by which their pay is derived from. This also leads to higher levels of perceived fairness.
Pay parity is achieved when employees all earn a base salary that is aligned with the market rates. JEasy Paterson Points, for instance, is a system that gathers data from all the various industries and jobs in the markets and finds a benchmark for what the employee in a similar category should be paid. Aligning with these rates is what assists in the perceived fairness of remuneration of an employee on an external basis.
On an internal basis, employees of same groupings (such as middle-performers), should be remunerated similarly. Since it is not considered as contradicting the law to question a fellow colleague about their salary, if two performers of the same level earn a different income, the system will be perceived as unfair and will have little effect on employees as well as decreased motivation.
PM systems are also perceived as unfair when top performers are not recognised. It is thus important to reward top performers which will then lead, not only to perceptions of fairness among top employees, and most likely, the rest of the employees in the organisation, but motivation will become widespread when employees see that their efforts will be recognised. It is advised that incentives are designed according to the individual in order to be the most effective.
Spot bonuses are another form of recognition that proves to be a win-win for both parties. First of all, as a rule of thumb, reward is most effective soon after the task has been completed. Reward acts as reinforcement, motivating employees to consistently produce the effort that earned them the reward. Rewards are less effective when time has gone by and employees have already forgotten their contributions. Spot bonuses that are rewarded timeously, are not only effective in reproducing the desired behaviours, but are also a great way to avoid salary inflation as the payments remain impartial of the base pay.
Now that perceived fairness has been addressed in terms of employees’ personal goals aligning with organisational goals, management’s role as a coach as well as the role that remuneration plays, there is another factor that plays a significant role. This factor is the role of technology. Technology in a PM system, can, in fact, influence perceptions among the stakeholders. Let us have a closer look.
What role technology plays in reinforcing fairness
Technology can have a significant impact on PM for several reasons:
1) Cost reduction: The cost of administration is considerably reduced as one is cutting out the middle man. The human labour required for designing and implementing a good PM system is significantly decreased when replaced by technology.
2) Saving time: Not only is designing and implementing a PM system time consuming, but it is also subject to human error. By means of artificial intelligence, the time span of the process is significantly decreased. Not only this, but since software is pre-existing, it saves one time to merely implement a system rather than designing and working out the whole process oneself.
Studies have revealed a positive effect of PM-relate technologies (mobile) and the performance of individuals as well as the overall performance of the company. Since recording goals and tracking them is made so much simpler, managers can keep better track of the company as a whole and employee engagement improves as employees feel they are part of the process with continuous feedback. Some mobile apps can also encourage managers to coach better by conversing with employees and constantly revisiting goals.
For technology to influence perceptions of fairness, however, it needs to capture individual performance on a more thorough basis, gauge it from differing perspectives and also suggest behaviours for developmental purposes.
First and foremost, the utmost detail needs to be considered. Are performance ratings among peers perhaps not working because peers are not so certain how to rate one another? Maybe the system needs to be readjusted so that criteria are set out in a more fool-proof manner, guiding individuals on the ratings they assign. It is important that ratings are justifiable for heightened fairness perceptions.
Secondly, and just as important as the first point, development must be separated from evaluation feedback. Apps can ca