Chapter 01

Performance and Reward Management

Abdul Waheed
Learning Objectives
By the end of this chapter, you will be able to do the following:
• Explain the concept of performance management (PM).
• Distinguish performance management from performance appraisal.
• Explain the many advantages and make a business case for implementing a well-designed performance
management system.
• Recognize the multiple negative consequences that can arise from the poor design and implementation of a
performance management system. These negative consequences affect all the parties involved: employees,
supervisors, and the organization as a whole.
• Understand the concept of a reward system and its relationship to a performance management system.
• Distinguish among the various types of employee rewards, including compensation, benefits, and relational
returns.
• Describe the multiple purposes of a performance management system including strategic, administrative,
informational, developmental, organizational maintenance, and documentational purposes.
• Describe and explain the key features of an ideal performance management system.
Chapter Outline
• Definition of Performance • Case study
Management (PM) • Aims and role of PM Systems
• Difference Between PM and • Purpose of PM Systems
Performance Appraisal
• Characteristics of an Ideal PM
• Case study – 1 system
• Case study – 2 • Case Study- PM system
• Case study – 3 • Definition of Reward Systems
• Case study - 4 • Types of Return
• Contribution of Performance • Returns and Their Degree of
Management Dependency on the
• Disadvantages/Dangers of Performance Management
Poorly-implemented PM systems System

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Performance Management
• Every business has one goal: to grow and achieve success.
• On paper, the plan is easy: start out, contact customers, supply customers and
become successful.
• These steps certainly seem clear-cut and foolproof when you’re starting out,
there is more to achieving success in business than simply planning well.
• No matter how big you dream or how well you plan, things often go wrong and
unpredictable elements might turn up out of the blue and throw your carefully
planned equations right off-track.
• So, what is it that drives a successful firm and separates it from the mediocre
players? The answer is simple:
A power-packed performance management
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Performance Management: Definition
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
Performance Management
• Main Components:
• Continuous Process
• Performance management is ongoing. It involves a never ending process of
setting goals and objectives, observing performance, and giving and receiving
ongoing coaching and feedback.

• Aligning with strategic goals

• Performance management requires that managers ensure that employee’s
activities and output are congruent with the organization’s goals
• and consequently, help the organization gain a competitive advantage.

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Performance Management: Definition
“PM 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”
(Herman Aguinis, 2008).

“Performance management is a strategic and integrated approach to

delivering sustained success to organizations by improving the performance
of the people who work in them and by developing the capabilities of teams
and individual contributors”
(M. Armstrong, 2006).
Performance Management
• Performance management therefore create a direct link
between employee performance and organizational goals and
makes the employees contribution to the organization explicit.
• Note that many organizations have what is labelled a
“performance management” system.
• However we must distinguish between performance
management and performance appraisal.

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Performance Appraisal
• A system that involves employees evaluation once a year
without ongoing effort to provide feedback management
system.
• Performance appraisal is the systematic description of
employees strength and weakness.
• Performance appraisal is an important component of
performance management, but it is just a part of bigger whole
because performance management is much more than just
performance measurement.
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Is PM and Performance Appraisal the same?
Performance Management
Strategic business considerations
On-going feedback so employees can
improve
Joint process through dialogue
Continuous review with one or more
formal reviews
Ratings less common
Flexible process
Focus on values and behaviors as well as
objectives
Less likely to be a direct link to pay
Documentation kept to a minimum
Owned by line managers
Performance Appraisal
Assess Employee Strengths and
Weaknesses
Lacks On-going feedback
Top-down assessment
Annual appraisal meeting
Use of ratings
Monolithic system / Once a year
Focus on quantified objectives
Often linked to pay
Bureaucratic – complex paperwork
Owned by the HR department
Performance Management- Case Study 1

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Performance Management
• This is painfully clear in Sally case described earlier: from her
point of view, the performance review forms did not provide any
useful information regarding the contribution of each of her
subordinates to the organization.

• A survey conducted by consulting firm Watson Wyatt showed

that only 3 in 10 employees believe their company's
performance review system actually helped them improve their
performance
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Performance Management- Case Study 2
• Consider the following scenario:
Amber is a marketing manager at a large pharmaceutical company. The fiscal year will end in one
week. She is busy with end of the year tasks like closing accounts, budget reviews etc, she is also
supervising a group of 10 marketing people. It's a very hectic time. She has been assigned by the
head office HR dept to give performance reviews of 10 employees but Amber thinks it a waste of
time. From Amber's point of view, there is no value in filling out those seemingly meaningless forms.
She does not see her subordinates in action because they are in the field visiting customers most of
the time. All that she knows about their performance is based on sales figures, which depend more on
the products offered and geographic territory covered than the individual effort and motivation of each
marketing person. Nothing happens in terms of rewards, regardless of her ratings. Salary adjustments
are based on seniority rather than on merit. She filled forms to please her employees and give
everyone the maximum possible rating. In this way, Amber believes the employees will be happy with
their ratings and she will not have to deal with complaints or follow-up meetings. Amber fills out the
forms in less than 15 minutes and gets back to her "real job."
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Performance Management (Contd.)
• This is painfully clear in Amber’s case described earlier: from
her point of view, the performance review forms did not provide
any useful information regarding the contribution of each of her
subordinates to the organization.

• Amber's case is unfortunately more common than we would

like.

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Performance Management- Case Study 3
• As an illustration, consider how Morgan Stanley has transitioned from a performance appraisal
system to a performance management system. Morgan Stanley is one of the world's leading
financial management and advisory companies, with offices in 37 countries and private client assets
of approximately US$ 1.6 trillion (http://morganstanley.com/). As an investment bank, it is a leading
global underwriter of debt and equity securities and strategic adviser to corporations, governments,
institutions, and individuals worldwide. Recently, Morgan Stanley started the transition from giving
employees one performance appraisal per year to focusing on one of the important principles of
performance management: the conversation between managers and employees in which feedback
is exchanged and coaching is given if needed. In January, employees and managers set employee
objectives. Mid-year reviews assess what progress has been made toward the goals and how
personal development plans are faring. Finally, the end-of-the-year review incorporates feedback
from several sources, evaluates progress toward objectives, and identifies areas that need
improvement. Managers also get extensive training on how to set objectives and conduct reviews.
In addition, there is a Web site that managers can access with information on all aspects of the
performance management system. In sharp contrast to their old performance appraisal system,
Morgan Stanley goal for its newly implemented performance management program is worded as
follows: "This is what is expected of you, this is how we're going to help you in your development,
and this is how you'll be judged relative to compensation.
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Performance Management- Case Study 4

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Contributions of PM
Motivation to perform is increased
• Receiving feedback about ones performance increases the motivation for future performance.
• Knowledge about how one is doing and recognition about ones past success provide the fuel for
future accomplishments.
Self-esteem is increased
• Receiving feedback about ones performance fulfills a basic human need to be recognized and
valued at work.
• This, in turn, is likely to increase employee’s self-esteem.
Managers gains insight about subordinates:
• Direct supervisors and other managers in charge of appraisal gain new insights into the person
being appraised
The definitions of job and success criteria are clarified
• The job of person being appraised may be clarified and defined more clearly.
• In other words, employee’s gain a better understanding of the behaviors and results required of
their specific position.
Contributions of PM
Motivation, commitment, and intentions to stay in the organization are
enhanced:
• When employees are satisfied with their organizations performance management
system, they are more likely to be motivated to perform well, to be committed to
their organization, and not try to leave the organization
Self insight and development are enhanced:
• Direct supervisors and other managers in charge of appraisal gain new insights into
the person being appraised.
• The participants in this system are likely to develop a better understanding of
themselves and of the kind of development activities that are of value to them as
they progress through the organization.
• Participants in this system also gain a better understanding of their particular
strengths and weaknesses that can help them better define future career paths.
Contributions of PM
Administrative actions are more fair and appropriate:
• PM system provides valid information about performance that can be used for administrative
actions such as merit increases, promotions, and transfers, as well as terminations.
• PM system helps ensure that rewards are distributed on fair and credible basis.
• In turn, such decision based on sound performance management system lead to improved
interpersonal relationship and enhanced supervisor-subordinate trust.
Organizational goals are made clear:
• The goal of unit and organization are made clear, and the employee understands the link
between what she does and organization success.
• This is the contribution to the communication of what the unit and organization are all about
and how organization goals cascade down to the unit and the individual employee.
Employee becomes more competent:
• An obvious contribution is that employee performance is improved.
• In addition, there is a solid foundation for helping employees become more successful by
establishing developmental plans.
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Contributions of PM
There is a better protection from lawsuits:
• Data collected through performance management system can help document compliance
with regulations(e.g., equal treatment of all employees regardless of sex or ethnic back
ground).
There is better and more timely differentiation between good and poor performers
Supervisors view of performance are communicated more clearly:
• Performance management system allows managers to communicate to their subordinates
their judgment regarding performance.
Organization change is facilitated:
• PM system can be a useful tool to drive organizational change.
• For example, assume an organization decides to change its culture to give top priority to
product quality to produce quality and consumer service.
• Once this new organization direction is established, PM is used to align the organizational
culture with the goals and objectives of the organization to make possible changes.
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Disadvantages/ Dangers of Poorly
Implemented PM System
• Increase turnover:
• If the process is not seen as fair, employees may become upset and leave the
organization.
• Use of misleading information:
• If a standard system is not in place, there are multiple opportunities for fabricating
information about an employees performance
• Lowered self esteem:
• Self esteem may be lowered if feedback is provided in an in-appropriate and in-
accurate way.
• Wasted time and money :
• Performance management system costs money and quite a bit of time.

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Disadvantages/ Dangers of Poorly
Implemented PM System (Contd.)
• Damaged relationships:
• As a consequence of a deficient system, the relationships among the individuals involved may
be damaged, often permanently.
• Decreased motivation to perform:
• Motivations can be lowered for many reasons, including the feeling that superior performance is
not translated into meaningful tangible or intangible rewards.
• Employee burnout and job dissatisfaction:
• When the performance assessment system is not seen as a valid and the system is not
perceived as fair, employees are likely to feel increased levels of job burnout and job
dissatisfaction.
• Increased risk of litigations:
• Expensive law suits may be filled by individuals who feel that they have been appraised unfairly.

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Disadvantages/ Dangers of Poorly
Implemented PM System (Contd.)
• Unjustified demands on managers and employees resources:
• Poorly implemented system do not provide the benefits provided by well implemented
systems, yet they still take up managers and employees time.
• Varying and unfair standards ratings:
• Both standards and individual ratings may vary across and within units and also be unfair.
• Emerging biases:
• Personal values, biases, and relationships are likely to replace organizational standards.
• Unclear rating system:
• Because of poor communication, employees may not know how their ratings are
generated and how the ratings are translated into rewards.

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Disadvantages/ Dangers of Poorly Implemented PM
System- Case Study

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Aims of PM
• Empowering, motivating and rewarding employees to do their best.
• Aligning everyone’s individual goals to the goals of the organization.
• Managing and resourcing performance against agreed
accountabilities and objectives.
• To achieve expected standards.
• Maximizing the potential of individuals and teams to benefit
themselves and the organization, focusing on achievement of their
objectives
Purposes of PM Systems
Strategic Purpose
• Link employee behavior with organization’s goals
• Communicate most crucial business strategic initiatives /
advantages
• Performance management systems help top management
achieve strategic business objectives.
• By linking organization’s goal with individual goals, the PM
system reinforces behaviors consistent with the attainment
of organizational goals.
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Administrative Purpose
• PM system also functions to furnish valid and useful
information for making administrative decisions about
employees.
• Such decisions include:
• Salary Adjustments
• Promotions
• Employee retention or termination
• Recognition of performance
• Identification of poor performers / layoffs
Informational Purpose
• PM system serve as an important communication device.
• First information is relayed to employee about their performance and the specific
area which they need to improve.
• Second information is provided about the organization and supervisor’s expectation
and what aspects of work are of most importance.

Communicate to Employees:
• Expectations
• What is important
• How they are doing
• How to improve
Developmental Purpose
• Managers coach employees on the basis of feedback to improve
their performance.

• The feedback also allows for the identification of strengths and

weakness and causes of performance deficiencies.

• Causes of performance deficiencies

• Tailor development of individual career path

Organizational Maintenance Purpose
• PM system also serves the purpose of work force planning (Plan
effective workforce)
• Workforce planning comprises a set of system that allows
organizations to anticipate and respond to needs emerging within and
outside the organization, to determine priorities and to allocate
human resources where they can do the most good.
• Assess future training needs
• Evaluate performance at organizational level
• Evaluate effectiveness of HR interventions
Documentation Purpose
• Performance management systems allow organizations to collect,
useful information that can be used for several documentation and
administrative decision purposes (Document administrative
decisions)

• This information can also be useful in case of litigation (Help meet

legal requirements)
An Ideal PM System: 14 Characteristics
1. Congruent with 8. Valid
organizational strategy 9. Acceptable and Fair
2. Thorough 10. Inclusive
3. Practical 11. Open (No Secrets)
4. Meaningful 12. Correctable
5. Specific 13. Standardized
6. Identifies effective/ 14. Ethical
ineffective performance
7. Reliable
Characteristics of an Ideal PM System
• Congruent with organizational strategy:
• Consistent with organization’s strategy
• Aligned with unit and organizational goals

• Thorough:
• All employees are evaluated
• All major job responsibilities are evaluated
• Evaluations cover performance for entire review period
• Feedback is given on both positive and negative performance

• Practical
• Available
• Easy to use
• Acceptable to decision makers
• Benefits outweigh costs
Characteristics of an Ideal PM System
• Meaningful
• Standards are important and relevant
• System measures ONLY what employee can control
• Results have consequences Evaluations occur regularly and at
appropriate times
• System provides for continuing skill development of evaluators

• Specific:
• Concrete and detailed guidance to employees
• what’s expected
• how to meet the expectations
Characteristics of an Ideal PM System
• Identifies effective and ineffective performance:
• Distinguish between effective and ineffective
• Behaviors
• Results
• Provide ability to identify employees with various levels of performance

• Reliable:
• Consistent
• Free of error

• Valid:
• Relevant (measures what is important)
• Not deficient (doesn’t measure unimportant facets of job)
• Not contaminated (only measures what the employee can control)
Characteristics of an Ideal PM System
• Acceptable and Fair:
• Perception of Distributive Justice
• Work performed  evaluation received  reward
• Perception of Procedural Justice
• Fairness of procedures used to:
• Determine ratings
• Link ratings to rewards
• Inclusive:
• Represents concerns of all involved
• When system is created, employees should help with deciding
• What should be measured
• How it should be measured
• Employee should provide input on performance prior to evaluation meeting

• Open (no secret):

• Frequent, ongoing evaluations and feedback
• 2-way communications in appraisal meeting
• Clear standards, ongoing communication
• Communications are factual, open, honest
Characteristics of an Ideal PM System
• Correctable:
• Recognizes that human judgment is fallible
• Appeals process provided

• Standardized:
• Ongoing training of managers to provide
• Consistent evaluations across
• People
• Time

• Ethical:
• Supervisor suppresses self-interest
• Supervisor rates only where she has sufficient information about the performance dimension
• Supervisor respects employee privacy
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
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Reward System (Definition)
A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of
an employment relationship”.

• An employee’s compensation, usually referred to as tangible returns, includes;

• Cash compensation
• Basic Pay
• Cost of Living & Contingent Pay
• Incentives (short- and long-term)
• Merit Pay
• Short Term incentives
• Long Term incentives
• And Benefits;
• Income protection
• Work / life focus
• Tuition reimbursement
• And allowances

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Reward System (Contd.)
• However, employees also receive intangible returns, also referred to as relational returns.
• They include;
• Recognition
• Status
• Employment security
• Challenging work
• And learning opportunities.

• It should be noted that not all types of returns are directly related to performance
management systems.
• For example:
• Some allocations are based on seniority as opposed to performance.

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Types of Returns
• Base Pay;
• Base pay is given to employees in exchange for work performed.
• The base pay which usually includes a range of values, focuses on the position and
duties performed rather than an individual’s contribution.
• Cost of Living Adjustments and Contingent Pay:
• Cost of Living Adjustments (COLA) imply the same percentage increase for all
employees regardless of their individual performance.
• COLA is given to combat the effects of inflation in an attempt to preserve the employee’s
buying power.
• Contingent pay:
• sometimes referred to as Merit pay is given as an addition to the base pay based on
past performance.

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Types of Returns (Contd.)
• Short Term Incentives:
• Similar to contingent pay, short term incentives are allocated based on past
performance.
• They are one time payments and they are known in advance.
• Long Term Incentives:
• Long term incentives attempt to influence future performance over a longer period
of time.
• Typically they involve stock ownership or options to buy stock at a pre-established
and profitable rate.
• This way employees will be personally investing in the organizational success and
this investment is expected to translate into a sustained high level of performance.

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Types of Returns (Contd.)
• Income Protection:
• Income protection programs serve as a backup to employee’s salaries in the event that an employee is
sick, disabled, or no longer able to work.
• Other type of benefits which come under income protection are ;
• Medical insurance
• Pension plan
• Savings plan
• Work Life Focus:
• Benefits related to work life focus include programs that help employees achieve a better balance
between work and non work activities. They include;
• Vacation
• Counselling
• Financial Planning
• On site fitness programs
• Flexible work schedules

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Types of Returns (Contd.)
• Allowances:
• Benefits include allowances covering housing and transportation.
• Example
• Employer provides a house or reimburses the rent.
• Employer provides a car for private and business use or allowance is paid for the transportation.

• Relational Returns:
• Relational returns are intangible in nature. They include;
• Recognition and status
• Employment Security
• Challenging work
• Opportunities to learn
• Opportunities to form personal relationships at work

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Returns and Their Degree of Dependency
on the Performance Management System
Return Degree of Dependency
 Cost of Living Adjustment • Low
 Income Protection • Low
 Work/life Focus • Moderate
 Allowances • Moderate
 Relational Returns • Moderate
 Base Pay • Moderate
 Contingent / Dependent Pay • High
 Short-term Incentives • High
 Long-term Incentives • High