Part II System ImplementationChapter 4 Defining Performance .docx

Part II: System Implementation
Chapter 4: Defining Performance and Choosing a Measurement
Approach
Chapter 5: Measuring Results and Behaviors
Chapter 6: Performance Analytics
Chapter 7: Rolling Out the Performance Management System
Copyright © 2019 Chicago Business Press
4-1

Chapter 4
Defining Performance
and
Choosing a Measurement Approach
4-2

2
Overview
Determinants of Performance
Performance Dimensions
Approaches to Measuring Performance
4-3

Company Spotlight
Sprint uses five core dimensions to define what successful
performance looks like
Both task and contextual performance are measured
Includes:
Employees write behavioral examples of how they have
performed on each dimension
Employees are evaluated not only on results, but also on how
they are achieved through working with others

4

Performance is:
Behaviors and actions
What employees do
4-5

Performance is:
Results and Products
The outcome of employee behaviors
4-6

4-7

Behaviors Labeled as Performance Are…
Evaluative
Negative
Neutral
Positive
Multidimensional
Many different kinds of behaviors
Advance or hinder organizational goals
4-8

Behaviors Are NOT Always…
Observable
Measurable

4-9

Results or Products May Be Used…
To infer behavior
As proxy for behavioral measure
4-10

Performance =
Abilities and other traits
X
Knowledge and skills
X
Context
4-11

4-12

Abilities and Other Traits
Cognitive Abilities
Personality
Stable Motivational Dispositions
Physical Characteristics and Abilities
4-13

Knowledge and Skills
Job-Related Knowledge
Skills, Attitudes and Malleable Motivational States
4-14

Information about
Facts
Labels
Principles
Goals
Understanding of task requirements
4-15

Procedural Knowledge
Knowing
What to do
How to do it
Skills
Cognitive
Physical
Perceptual
Motor
Interpersonal
4-16

Context
HR Policies and Procedures (e.g., compensation system)
Managerial and Peer Leadership
Organizational and National Culture
Issues about time and timing of performance
Resources and opportunities given to employees
4-17

Abilities and Other Traits, and Knowledge and Skills
Knowledge and Skills are more malleable (i.e., easier to
change)
Individual differences that are easier to change through
interventions are called “states”
4-18

Part II System ImplementationChapter 4 Defining Performance .docx

Motivation
Choices
Expenditure of effort (”state” motivation)
Level of effort (“state” motivation)
Persistence of effort (stable trait)
Deliberate practice leads to excellence
4-19

Deliberate Practice
Approach performance with goal of getting better and better
Focus on performance
What is happening?
Why?
Seek feedback from expert sources
Build mental models of job, situation, and organization
Repeat first four steps on an ongoing basis
4-20

Deliberate Practice
https://www.youtube.com/watch?v=1-sjUoGO250
What are some of the tips to perform deliberate practice well?
What are some of the benefits of deliberate practice?
4-21

Context
HR policies and procedures
Managerial and peer leadership
Organizational and national culture
Time and timing of performance
Resources given to employees
4-22

Implications for Addressing Performance Problems
Managers need information to accurately identify source(s) of
performance problems
Performance management systems must…

Measure performance
AND
Provide information on source(s) of problems
4-23

Performance Dimensions:
Types of Multidimensional Behaviors
Task performance
Contextual performance
Prosocial behaviors
Organizational citizenship
Counterproductive performance
Adaptive Performance
4-24

Task Performance
Activities that
Transform raw materials
Help with the transformation process
Replenishing
Distributing
Supporting
4-25

25
Contextual Performance
Behaviors that
Contribute to the organization’s effectiveness
AND
Provide a good environment in which task performance can
occur
4-26

26
Differences Between
Task and Contextual Performance
Task Performance
Varies across jobs
Likely to be role prescribed
Influenced by
Abilities
Skills
Contextual Performance
Fairly similar across jobs
Not likely to be role prescribed
Influenced by
Personality
4-27

Why Include Task and Contextual
Performance Dimensions in PM System?
Global competition
Customer service
Teamwork
Employee perceptions of PM
Supervisor views
Cultural differences
4-28

Voice Behavior
Behavior that emphasizes expression of constructive challenge
with the goal to improve rather than merely criticize
Challenges the status quo in a positive way
Makes innovative suggestions for change
Recommends modifications to standard procedures

4-29

Counterproductive Performance
Behaviors and results that are voluntary
and violate organizational norms
Threaten well-being of the organization, its members, or both
4-30

Examples of counterproductive performance
Exaggerating hours worked
Gossiping about coworkers and one’s supervisor
Cyberloafing
Intentionally working slowly and carelessly
Staying out of sight to avoid work
4-31

Adaptive Performance
Related to an individual’s adaptability to changes
Be it in the organization and it’s goals,
in the requirements of the job,
or the overall work context
Becoming increasingly important due to rapid changes
4-32

Examples of adaptive performance
Handling emergencies
Solving problems creatively
Dealing with uncertain and unpredictable work situations
Demonstrating interpersonal adaptability

Demonstrating cultural adaptability
4-33

Behavior Approach
Emphasizes how employees do the job
Results Approach
Emphasizes what employees produce
4-34

Behavior Approach
Appropriate if…
Link between behaviors and results is not obvious
Outcomes occur in the distant future
Poor results are due to causes beyond the performer’s control
Not appropriate if…
Above conditions are not present
4-35

Company Spotlight
Dollar General uses a behavioral approach to measure
performance
Identified behaviors that serve as indicators of underlying
competencies
Behaviors are reviewed and utilized to encourage certain
outcomes and provide
feedback and rewards to staff members
36

Results Approach
Advantages:
Less time
Lower cost

Data appear objective
Most appropriate when:
Workers skilled in necessary behaviors
Behaviors and results obviously related
Consistent improvement in results over time
Many ways to do the job right
4-37

Company Spotlight
Basecamp divides its employees workload into six-week work
cycles containing 1-2 “big batch projects” and 4-8 “small batch
projects”
Uses a results-approach to performance planning
Company focuses exclusively on getting the project done within
6 weeks and does not measure efficiency or compare actual to
estimated costs
Team decides how to get the project done
4-38

Measuring Performance
https://www.youtube.com/watch?v=Jz8xBkQCpuE&amp=&t=48
s
What kind of approach to measuring performance is used at
Pfizer?
How is the focus on measuring performance based on patient
figures different than sales figures? What are some of the
benefits of this approach?
Is this an appropriate approach to measuring performance for
Pfizer? Why or why not?
4-39

Performance Dimensions
4-40

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1-41

41
Performance Management
Third Edition
Herman Aguinis
Kelley School of Business
Indiana University
Boston Columbus Indianapolis New York San Francisco Upper
Saddle River
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Library of Congress Cataloging-in-Publication Data
Aguinis, Herman
Performance management / Herman Aguinis. — 3rd ed.
p. cm.

ISBN-13: 978-0-13-255638-5 (alk. paper)
ISBN-10: 0-13-255638-3 (alk. paper)
1. Employees—Rating of. 2. Performance—Management. I.
Title.
HF5549.5.R3A38 2013
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2011037274
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CONTENTS

Preface viii
Acknowledgments xiii
Dedication xiv
About the Author xiv
PART I Strategic and General Considerations 1
Chapter 1 Performance Management and Reward Systems in
Context 1
1.1 Definition of Performance Management (PM) 2
1.2 The Performance Management Contribution 4
1.3 Disadvantages/Dangers of Poorly Implemented PM Systems
8
1.4 Definition of Reward Systems 10
1.4.1 Base Pay 10
1.4.2 Cost-of-Living Adjustments and Contingent Pay 11
1.4.3 Short-Term Incentives 11
1.4.4 Long-Term Incentives 11
1.4.5 Income Protection 12
1.4.6 Work/Life Focus 13
1.4.7 Allowances 13
1.4.8 Relational Returns 13
1.5 Aims and Role of PM Systems 14
1.5.1 Strategic Purpose 15
1.5.2 Administrative Purpose 16
1.5.3 Informational Purpose 16
1.5.4 Developmental Purpose 16
1.5.5 Organizational Maintenance Purpose 16
1.5.6 Documentational Purpose 17
1.6 Characteristics of an Ideal PM System 18
1.7 Integration with Other Human Resources and Development

Activities 23
1.8 Performance Management Around the World 24
� CASE STUDY 1-1: Reality Check: Ideal Versus Actual
Performance
Management System 28
� CASE STUDY 1-2: Performance Management at Network
Solution
s, Inc. 31
� CASE STUDY 1-3: Distinguishing Performance Management
Systems from
Performance Appraisal Systems 32
Chapter 2 Performance Management Process 37
2.1 Prerequisites 38
2.2 Performance Planning 46
2.2.1 Results 46
2.2.2 Behaviors 46
2.2.3 Development Plan 47 iii

iv Contents
2.3 Performance Execution 48
2.4 Performance Assessment 49
2.5 Performance Review 50
2.6 Performance Renewal and Recontracting 52
� CASE STUDY 2-1: Job Analysis Exercise 55
� CASE STUDY 2-2: Disrupted Links in the Performance
Management Process
at “Omega, Inc.” 55
� CASE STUDY 2-3: Performance Management at the
University of Ghana 56
Chapter 3 Performance Management and Strategic Planning 59
3.1 Definition and Purposes of Strategic Planning 60
3.2 Process of Linking Performance Management to the
Strategic
Plan 61
3.2.1 Strategic Planning 65
3.2.2 Developing Strategic Plans at the Unit Level 74
3.2.3 Job Descriptions 76
3.2.4 Individual and Team Performance 77

3.3 Building Support 79
� CASE STUDY 3-1: Evaluating Vision and Mission
Statements at Pepsico 82
� CASE STUDY 3-2: Dilbert’s Mission Statement Generator 83
� CASE STUDY 3-3: Linking Individual with Unit and
Organizational
Priorities 84
� CASE STUDY 3-4: Linking Performance Management to
Strategy at
Procter & Gamble 84
PART II System Implementation 87
Chapter 4 Defining Performance and Choosing a Measurement
Approach 87
4.1 Defining Performance 88
4.2 Determinants of Performance 89
4.2.1 Implications for Addressing Performance Problems 90
4.2.2 Factors Influencing Determinants of Performance 91

4.3 Performance Dimensions 91
4.4 Approaches to Measuring Performance 95
4.4.1 Behavior Approach 95
4.4.2 Results Approach 96
4.4.3 Trait Approach 99
� CASE STUDY 4-1: Diagnosing the Causes of Poor
Performance 101
� CASE STUDY 4-2: Differentiating Task from Contextual
Performance 102
� CASE STUDY 4-3: Choosing a Performance Measurement
Approach at
Paychex, Inc. 102
� CASE STUDY 4-4: Deliberate Practice Makes Perfect 103
Chapter 5 Measuring Results and Behaviors 106
5.1 Measuring Results 107
5.1.1 Determining Accountabilities 107
Contents v

5.1.2 Determining Objectives 109
5.1.3 Determining Performance Standards 111
5.2 Measuring Behaviors 112
5.2.1 Comparative Systems 115
5.2.2 Absolute Systems 118
� CASE STUDY 5-1: Accountabilities, Objectives, and
Standards 126
� CASE STUDY 5-2: Evaluating Objectives and Standards 126
� CASE STUDY 5-3: Measuring Competencies at the
Department of
Transportation 127
� CASE STUDY 5-4: Creating BARS-Based Graphic Rating
Scales for
Evaluating Business Student Performance in Team Projects 128
Chapter 6 Gathering Performance Information 130
6.1 Appraisal Forms 131
6.2 Characteristics of Appraisal Forms 137
6.3 Determining Overall Rating 140
6.4 Appraisal Period and Number of Meetings 143
6.5 Who Should Provide Performance Information? 146

6.5.1 Supervisors 146
6.5.2 Peers 146
6.5.3 Subordinates 147
6.5.4 Self 148
6.5.5 Customers 149
6.5.6 Disagreement Across Sources: Is This a Problem? 149
6.6 A Model of Rater Motivation 150
6.7 Preventing Rating Distortion Through Rater Training
Programs 153
� CASE STUDY 6-1: Evaluating an Appraisal Form Used in
Higher Education 157
� CASE STUDY 6-2: Judgmental and Mechanical Methods of
Assigning
Overall Performance Score at The Daily Planet 162
� CASE STUDY 6-3: Minimizing Intentional and Unintentional
Rating Errors 164
� CASE STUDY 6-4: Minimizing Biases in Performance
Evaluation at Expert
Engineering, Inc. 165
Chapter 7 Implementing a Performance Management System

168
7.1 Preparation: Communication, Appeals Process, Training
Programs, and Pilot Testing 169
7.2 Communication Plan 170
7.3 Appeals Process 174
7.4 Training Programs for the Acquisition of Required Skills
176
7.4.1 Rater Error Training 177
7.4.2 Frame of Reference Training 180
7.4.3 Behavioral Observation Training 181
7.4.4 Self-Leadership Training 182
7.5 Pilot Testing 184
7.6 Ongoing Monitoring and Evaluation 185
vi Contents
7.7 Online Implementation 188
� CASE STUDY 7-1: Implementing a Performance Management
Communication Plan at Accounting, Inc. 192

� CASE STUDY 7-2: Implementing an Appeals Process at
Accounting, Inc. 192
� CASE STUDY 7-3: Evaluation of Performance Management
System at
Accounting, Inc. 192
� CASE STUDY 7-4: Training the Raters at Big Quality Care
193
PART III Employee Development 195
Chapter 8 Performance Management and Employee
Development 195
8.1 Personal Developmental Plans 196
8.1.1 Developmental Plan Objectives 197
8.1.2 Content of Developmental Plan 199
8.1.3 Developmental Activities 200
8.2 Direct Supervisor’s Role 203
8.3 360-Degree Feedback Systems 206
8.3.1 Advantages of 360-Degree Feedback Systems 213
8.3.2 Risks of Implementing 360-Degree Feedback Systems 215
8.3.3 Characteristics of a Good System 215
� CASE STUDY 8-1: Developmental Plan Form at Old

Dominion University 220
� CASE STUDY 8-2: Evaluation of a 360-Degree Feedback
System Demo 220
� CASE STUDY 8-3: Implementation of 360-Degree Feedback
System at Ridge
Intellectual 221
� CASE STUDY 8-4: Personal Developmental Plan at
Brainstorm, Inc.—Part I 221
� CASE STUDY 8-5: Personal Developmental Plan at
Brainstorm, Inc.—
Part II 222
Chapter 9 Performance Management Skills 226
9.1 Coaching 227
9.2 Coaching Styles 233
9.3 Coaching Process 233
9.3.1 Observation and Documentation of Developmental
Behavior
and Outcomes 235
9.3.2 Giving Feedback 239
9.3.3 Disciplinary Process and Termination 245

9.4 Performance Review Meetings 248
� CASE STUDY 9-1: Was Robert Eaton a Good Coach? 256
� CASE STUDY 9-2: What Is Your Coaching Style? 257
� CASE STUDY 9-3: Preventing Defensiveness 259
� CASE STUDY 9-4: Recommendations for Documentation 260
PART IV Reward Systems, Legal Issues, and Team
Performance Management 263
Chapter 10 Reward Systems and Legal Issues 263
10.1 Traditional and Contingent Pay Plans 264
10.2 Reasons for Introducing Contingent Pay Plans 265
Contents vii
10.3 Possible Problems Associated with Contingent Pay Plans
268
10.4 Selecting a Contingent Pay Plan 270
10.5 Putting Pay in Context 272
10.6 Pay Structures 276
10.6.1 Job Evaluation 277

10.6.2 Broad Banding 279
10.7 Performance Management and the Law 280
10.8 Some Legal Principles Affecting Performance
Management 281
10.9 Laws Affecting Performance Management 284
� CASE STUDY 10-1: Making the Case for a CP Plan at
Architects, Inc. 289
� CASE STUDY 10-2: Selecting a CP Plan at Dow
AgroSciences 289
� CASE STUDY 10-3: Contingency Pay Plan at Altenergy LLC
290
� CASE STUDY 10-4: Possible Illegal Discrimination at
Tractors, Inc. 291
Chapter 11 Managing Team Performance 294
11.1 Definition and Importance of Teams 295
11.2 Types of Teams and Implications for Performance
Management 296
11.3 Purposes and Challenges of Team Performance
Management 298

11.4 Including Team Performance in the Performance
Management
System 299
11.4.1 Prerequisites 300
11.4.2 Performance Planning 302
11.4.3 Performance Execution 303
11.4.4 Performance Assessment 304
11.4.5 Performance Review 305
11.4.6 Performance Renewal and Recontracting 306
11.5 Rewarding Team Performance 307
� CASE STUDY 11-1: Not All Teams Are Created Equal 309
� CASE STUDY 11-2: Team Performance Management at Duke
University
Health Systems 310
� CASE STUDY 11-3: Team-Based Rewards for the State of
Georgia 312
� CASE STUDY 11-4: Team Performance Management at Bose
313
Index 315

1 Generating buzz: Idaho Power takes on performance
management to prepare for workforce aging. (2006,
June). Power Engineering. Retrieved November 26, 2010 from
http://www.powergenworldwide.com/index/
display/articledisplay/258477/articles/power-
engineering/volume-110/issue-6/features/generating-buzz-
idaho-power-takes-on-performance-management-to-prepare-for-
workforce-aging.html
2 Workforce performance is top HR priority. (2005). T+D,
59(7), 16.
PREFACE AND INTRODUCTION
In today’s globalized world, it is relatively easy to gain access
to the competition’s technology and
products. Thanks to the Internet and the accompanying high
speed of communications, technolog-
ical and product differentiation is no longer a key competitive
advantage in most industries. For
example, most banks offer the same types of products (e.g.,
various types of savings accounts
and investment opportunities). If a particular bank decides to
offer a new product or service
(e.g., online banking), it will not be long until the competitors

offer precisely the same product. As
noted by James Kelley, performance management project leader
at Idaho Power, “technology is a
facilitator, but not a guarantor, of effectiveness or efficiency of
a company’s workforce.”1
So, what makes some businesses more successful than others?
What is today’s key compet-
itive advantage? The answer is people. Organizations with
motivated and talented employees
offering outstanding service to customers are likely to pull
ahead of the competition, even if
the products offered are similar to those offered by the
competitors. This is a key organizational
resource that many label “human capital” and gives
organizations an advantage over the compe-
tition. Customers want to get the right answer at the right time,
and they want to receive their
products or services promptly and accurately. Only having the
right human capital can make
these things happen. Only human capital can produce a
sustainable competitive advantage. And,
performance management systems are the key tools that can be
used to transform people’s talent
and motivation into a strategic business advantage.

Unfortunately, although 96% of human
resources (HR) professionals report that performance
management is their number 1 concern,
fewer than 12% of HR executives and technology managers
believe that their organizations have
aligned strategic organizational priorities with employee
performance.2
This edition includes the following six important changes. More
detailed information on
each of these issues is provided in the section titled “Changes in
This Edition.”
• There is an emphasis on the role of the context within which
performance management
takes place.
• This edition emphasizes that knowledge generated regarding
performance management is
essentially multidisciplinary.
• This edition emphasizes the important interplay between
science and practice.
• This edition describes the technical aspects of implementing a

system in detail and, in addition, it emphasizes the key role that
interpersonal dynamics
play in the process.
• This new edition includes new cases in almost every chapter.
Taken together, this new
edition includes a total of 43 case studies.
• Each of the chapters includes new sections.
SOME UNIQUE FEATURES OF THIS BOOK
Performance management is a continuous process of identifying,
measuring, and developing the
performance of individuals and teams and aligning their
performance with the strategic goals of
the organization. Performance management is critical to small
and large, for-profit and not-for-profit,
viii
http://www.powergenworldwide.com/index/display/articledispla
y/258477/articles/power-engineering/volume-110/issue-
6/features/generating-buzzidaho-power-takes-on-performance-

management-to-prepare-for-workforce-aging.html
Preface and Introduction ix
domestic and global organizations, and to all industries. In fact,
the performance management
model and processes described in this book have been used to
create systems to manage the perform-
ance of college students.3 After all, the performance of an
organization depends on the performance of
its people, regardless of the organization’s size, purpose, and
other characteristics. As noted by
Siemens CEO Heinrich von Pierer, “whether a company
measures its workforce in hundreds or
hundreds of thousands, its success relies solely on individual
performance.” As an example in the

not-for-profit sector, the government in England has
implemented what is probably the world’s
biggest performance management system, and, by statutory
force, the performance of teachers and
“headteachers” (i.e., school principals) is now evaluated
systematically. This particular system
includes a massive national effort of approximately 18,000
primary schools, 3,500 secondary schools,
1,100 special schools, 500 nursery schools, 23,000
headteachers, 400,000 teachers, and an unspecified
number of support staff.4
Unfortunately, few organizations use their existing performance
management systems
in productive ways. Performance management is usually vilified
as an “HR department require-
ment.” In many organizations, performance management means
that managers must comply
with their HR department’s request and fill out tedious, and
often useless, evaluation forms.
These evaluation forms are often completed only because it is
required by the “HR cops.”
Unfortunately, the only tangible consequence of the evaluation
process is that the manager has to
spend time away from his or her “real” job duties.

This book is about the design and implementation of successful
systems. In other words, it focuses on research-based findings
and up-to-date applications that
help increase an organization’s human capital. Performance
management is ongoing and cyclical;
however, for pedagogical reasons, the book needs to follow a
linear structure. Because performance
observation, evaluation, and improvement are ongoing
processes, some concepts and practices
may be introduced early in a cursory manner but receive more
detailed treatment in later sections.
Also, this book focuses on best practices and describes the
necessary steps to create a top-notch
performance management system. As a result of practical
constraints and lack of knowledge about
system implementation, many organizations cut corners and do
not implement systems that
follow best practices because of environmental and political
issues (e.g., goals of raters may not be
aligned with goals of the organization). Because the way in
which systems are implemented in
practice is often not close to the ideal system, the book includes
numerous examples from actual

organizations to illustrate how systems are implemented given
actual situational constraints.
CHANGES IN THIS EDITION
This edition includes important updates and additional
information. In preparation for revising
and updating this book, I gathered more than 300 potentially
relevant articles and books. About
150 of those were most relevant, and about 50 of those new
sources are now included in this
edition. These sources have been published since the second
edition of the book went into
production. This vast literature demonstrates an increased
interest in performance management
on the part of both academics and practitioners.
This edition includes five important changes throughout the
book. First, there is an emphasis
on the role of the context within which performance
management takes place. Performance manage-
ment does not operate in a vacuum. Rather, it takes place within
a particular organizational context,
and organizations have a particular history, unwritten norms
about what is valued and what is not,

3 Gillespie, T. L., & Parry, R. O. (2009). Students as
employees: Applying performance management principles
in the management classroom. Journal of Management
Education, 33, 553–576.
4 Brown, A. (2005). Implementing performance management in
England’s primary schools. International
Journal of Productivity and Performance Management, 54, 468–
481.
x Preface and Introduction
5 Aguinis, H., Boyd, B. K., Pierce, C. A., & Short, J. C. (2011).
Walking new avenues in management research
methods and theories: Bridging micro and macro domains.
Journal of Management, 37, 395–403.
6 Cascio, W. F., & Aguinis, H. (2008). Research in industrial
and organizational psychology from 1963 to 2007:
Changes, choices, and trends. Journal of Applied Psychology,
93, 1062–1081.
and unwritten norms about communication, trust, interpersonal
relations, and many other factors

that influence daily activities. Thus, for example, implementing
a 360-degree feedback system may be
effective in some organizations but not in others (Chapter 8). As
a second illustration, some organiza-
tions may have a culture that emphasizes results more than
behaviors which, in turn, would dictate
that the performance management system also emphasize
results; instead, other organizations may
place an emphasis on long-term goals, which would dictate that
performance be measured by empha-
sizing employee behaviors rather than results (Chapter 4). Also,
we need to understand the contextual
reasons why performance ratings may not be accurate—
particularly if there is no accountability for
raters to provide valid assessments (Chapter 6). As yet another
example, cultural factors affect what
sources are used for performance information: In a country like
Jordan, whose culture determines
more hierarchical organizational structures, the almost
exclusive source of performance information
is supervisors, whereas employees and their peers almost have
no input; this situation is different in
countries with less hierarchical cultures in which not only
performance information is collected from
peers, but also supervisors are rated by their subordinates

(Chapter 6). To emphasize the role of
culture, this edition describes examples and research conducted
in organizations in Jordan (Chapter
6); Japan, China, Turkey, Germany, France, South Korea,
Mexico, Australia, and the United Kingdom
(Chapter 1); Brazil (Chapter 3); Hong Kong and the Pearl River
Delta (Chapter 11); Ghana (Chapter 1);
South Africa (Chapter 1); Bulgaria and Romania (Chapter 1);
and India (Chapters 1 and 3).
Second, this edition emphasizes that knowledge generated
regarding performance manage-
ment is essentially multidisciplinary. Accordingly, the sources
used to support best-practice
recommendations offered in this book come from a very diverse
set of fields of study ranging from
micro-level fields focusing on the study of individual and teams
(e.g., organizational behavior,
human resource management) to macro-level fields focusing on
the study of organizations as a
whole (e.g., strategic management). This is consistent with a
general movement toward multidis-
ciplinary and integrative research in the field of management.5
For example, best-practice
recommendations regarding the measurement of performance

originate primarily from industrial
and organizational psychology (Chapter 5). On the other hand,
best-practice recommendations
regarding the relationship between performance management
and strategic planning were
derived primarily from theories and research from strategic
management (Chapter 3). In addition,
much of the best-practice recommendations regarding team
performance management originated
from the field of organizational behavior (Chapter 11).
Third, this edition emphasizes the important interplay between
science and practice.
Unfortunately, there is a great divide in management and related
fields between scholars and
practitioners. From the perspective of scholars, much of the
work conducted by practitioners is
seen as relevant but not rigorous. Conversely, from the
perspective of practitioners, the work done
by scholars is seen as rigorous but mostly not relevant. This
“science-practice divide” has been
documented by a content analysis of highly prestigious
scholarly journals, which regularly pub-
lish work that does not seem to be directly relevant to the needs
of managers and organizations.6

This edition attempts to bridge this divide by discussing best-
practice recommendations based on
sound theory and research and, at the same time, by discussing
the realities of organizations and
how some of these practices have been implemented in actual
organizations.
Fourth, this edition, as its predecessor, describes the technical
aspects of implementing a
performance management system in detail. In addition, this
edition emphasizes the key role that
interpersonal dynamics play in the process.7 Traditionally,
much of the performance appraisal
literature has focused almost exclusively on the measurement of
performance—for example,
Preface and Introduction xi
whether it is better to use 5-point versus 7-point scales.
However, more recent research suggests
that, related to the issue of context mentioned earlier, issues
such as trust, politics, leadership, nego-

tiation, mentorship, communication, and other related topics
related to interpersonal dynamics are
just as important in determining the success of a performance
management system. Accordingly,
this edition discusses the need to establish a helping and
trusting relationship between supervisors
and employees (Chapter 9), the role of an organization’s top
management in determining the
success of a system (Chapter 3), and the motivation of
supervisors to provide accurate performance
ratings (Chapter 6), among many other related issues throughout
the book.
Fifth, this new edition includes new cases in almost every
chapter. Taken together, this
new edition includes a total of 43 case studies. In addition, the
instructor’s manual includes
approximately 4 more cases per chapter, for a total of about 40
additional cases. Thus, depending
on an instructor’s preference, a course based on this new edition
could be taught entirely follow-
ing a case format or using a lecture and case combination
format.
In addition to the aforementioned changes that permeate the

entire book, each chapter includes
new sections. As illustrations, consider the following chapter-
by-chapter nonexhaustive additions:
• Performance management around the world (Chapter 1). This
material will be useful in
terms of understanding that although performance management
systems may have similar
goals, their implementation and deployment will be affected by
cultural and contextual
factors depending on where the organization is located.
• Biases in the job analysis process and their effects in the
resulting job analysis ratings
(Chapter 2). This material will be useful in terms of providing
guidelines on how to gather
valid job analysis information.
• Relationship between strategies, goals, and firm performance
(Chapter 3). This new material
will be useful in providing guidelines on the most effective
sequence of implementation of
the various strategic planning steps as it cascades down and
across the various organizational
units.

• Voice behavior: Raising constructive challenges with the goal
to improve rather than merely
criticize, challenge the status quo in a positive way, and make
innovative suggestions for
change when others, including an employee’s supervisor,
disagree (Chapter 4). This material
will be useful in terms of understanding the multidimensional
nature of performance and
how different performance dimensions may be valued
differently in different organizations.
• Relative percentile method for measuring performance
(Chapter 5). This material will be
useful regarding the development of measures to assess
performance more accurately.
• Open-ended sections included in most appraisal forms
(Chapter 6). This material will be
useful in terms of learning how to make the most of this
information, which is typically
underutilized in most performance management systems.
• Calculation of return on investment of portions of a
performance management system

(Chapter 7). This material will be useful in terms of learning
how to document the relative
effectiveness, in tangible and financial terms, of a performance
management system.
• The feedforward interview (FFI) (Chapter 8). This new
material will be useful in terms of
understanding how the FFI is a process that leads to uncovering
the contextual and per-
sonal conditions that lead to success regarding both
achievement and job satisfaction.
• Disciplinary process that may lead to termination (Chapter 9).
This material will be useful in
terms of providing information on what to do when performance
problems are identified but
employees are unable or unwilling to address them effectively.
• Relationship between new legal regulations and the
implementation of performance
management systems in China (Chapter 10). This new
information will be useful in terms
7Aguinis, H., & Pierce, C. A. (2008). Enhancing the relevance
of organizational behavior by embracing

performance management research. Journal of Organizational
Behavior, 29, 139–145.
xii Preface and Introduction
of understanding how the legal environment has a direct impact
on performance
management practices worldwide.
• Types of learning that can take place as part of the team
development plan in the perform-
ance planning stage (Chapter 11). This material will be useful in
terms of providing a
deeper understanding of specific interventions aimed at
improving team learning and
performance.
Further, the following is a nonexhaustive list of specific topics
that have been updated and
expanded in each chapter:
• The discussion of voice behavior (i.e., constructive criticisms
that challenge the status quo

and promote innovative improvements) as an important
contribution of performance
management systems, performance management’s contribution
to minimizing employee
misconduct, an expanded discussion of allowances, an expanded
discussion of the four dif-
ferent dimensions of fairness (i.e., procedural, distributive,
interpersonal, and informa-
tional justice), the additional strategic purpose of performance
management systems as a
catalyst for onboarding (i.e., processes helping new employees
to transition from organiza-
tional outsiders to organizational insiders), and the importance
of implementing a system
that is congruent with the cultural norms of the organization as
well as the culture of the re-
gion and country where the organization is located (Chapter 1).
• An expanded discussion of how rater accountability leads to
improved accuracy in perform-
ance ratings (Chapter 6).
• An expanded discussion of how to evaluate whether the
performance management system
is working as intended, and a new section on the

implementation of online performance
management systems (Chapter 7).
• A description of the performance review meetings as work
meetings—each one with spe-
cific purposes, the need to separate the performance review
meetings to minimize negative
surprises, an expanded discussion of how to deal with employee
defensiveness during the
performance review meeting, and the need to consider an
employee’s personality (e.g., core
self-evaluations) in the process of giving feedback (Chapter 9).
• An expanded discussion of nonfinancial rewards (Chapter 10).
• New material regarding challenges faced in implementing
performance management with
expatriate teams (Chapter 11).
PLAN FOR THE BOOK
Part I, which includes Chapters 1 through 3, addresses general
as well as strategic considerations
regarding performance management. Chapter 1 discusses the
advantages of implementing a

successful performance management system as well as the
negative outcomes associated with
deficient systems, including lowered employee motivation and
perceptions of unfairness. This
chapter also includes what can be described as the features of an
ideal system. Chapter 2
describes the performance management process starting with
what should be done before a
system is implemented and ending with the performance
renewal and recontracting phases.
Chapter 3 links performance management systems with reward
systems and an organization’s
strategic plan. This chapter makes it clear that a good
performance management system is a
critical component of the successful implementation of an
organization’s strategy.
Part II, including Chapters 4 through 7, addresses the details of
system implementation. This
discussion is sufficiently general yet detailed enough so that all
managers, not just HR managers,
will benefit from this material. Chapters 4 and 5 describe some
of the technical aspects associated
with the assessment of performance and how to identify and
measure both behaviors and results.

Chapter 6 discusses appraisal forms and various types of rating
schemes, and it discusses the
Preface and Introduction xiii
advantages and disadvantages of using various sources of
performance information (e.g., supervisor,
peers, and customers). Finally, Chapter 7 describes the steps
involved in implementing a
performance management system, including a communication
plan and pilot testing of the system
before it is implemented.
Part III, including Chapters 8 and 9, addresses employee
development issues. Chapter 8
includes a description of employee developmental plans and the
advantages of using 360-degree
systems for developmental purposes. Chapter 9 addresses the
skills needed by supervisors to
observe and assess performance as well as those needed to
provide constructive feedback.
Part IV, including Chapters 10 and 11, concerns the relationship

among performance
management, rewards, the law, and teams. Chapter 10 includes a
discussion of traditional and
contingent pay plans, pay structures, and their links to
performance management. In addition, this
chapter provides a discussion of legal issues to consider when
implementing a performance man-
agement system. Finally, Chapter 11 addresses the timely topic
of how to design and implement
performance management systems dealing with team
performance.
FACULTY RESOURCES
Each of the chapters includes a list of its learning objectives as
well as summary points and cases for
discussion. I hope this additional material will allow students to
have an enjoyable and productive
learning experience that will enhance your own individual
human capital. Also, there are several
resources available for instructors including PowerPoint slides,
exam questions and answers
(multiple choice and essay-type), role plays, and approximately
40 additional cases (about 4 per
chapter) that can be used for in-class discussions, examination

materials, or take-home homework
or examinations. These materials will allow instructors to
prepare for teaching this course more
quickly and help make teaching this course a more enjoyable
and interactive experience. These fac-
ulty resources can be downloaded by visiting
www.pearsonhighered.com/aguinis and clicking on
Instructor Resources.
ACKNOWLEDGMENTS
I would like to thank several individuals who were extremely
instrumental in allowing me to
write the first edition, second, and current third edition of this
book. I am indebted to Graeme
Martin for encouraging me to start this project. Wendy
O’Connell and Jon Dale helped me
gather the numerous examples and illustrations that I have used
throughout. Barbara Stephens
helped me update many of these examples in the second edition.
Christine Henle allowed me to
use her extremely useful lecture notes. Barbara Stephens,
Bonnie Davis, Debra Lammers, and
Ray Zammuto gave me excellent and detailed comments that
allowed me to improve each of

the chapters. Harry Joo, Ryan K. Gottfredson, and Sofia J.
Vaschetto assisted me in writing the
Instructor’s Manual for this edition. Teaching and giving
lectures and workshops on perform-
ance management at the Instituto de Empresa (Madrid, Spain),
Université Jean Moulin Lyon 3
(Lyon, France), University of Johannesburg (South Africa),
University of Salamanca (Spain),
and University of Melbourne (Australia) allowed me to test and
improve various sections of the
book. Finally, this edition benefited from the feedback provided
by Lynn K. Bartels, Robyn A.
Berkley, Perry A. Barton, Alan Cabelly, and Clifford E.
Thermer, who have used the second
edition to teach courses at universities throughout the United
States and were kind enough to
offer their suggestions for improvements and additions. I thank
each of you for your time and
intellectual investment in this project. Your coaching and
feedback certainly helped me improve
my performance!
Herman Aguinis
Bloomington, Indiana

www.pearsonhighered.com/aguinis
ABOUT THE AUTHOR
Dr. Herman Aguinis is the Dean’s Research Professor, Professor
of Organizational Behavior and
Human Resources, and the Founding Director of the Institute for
Global Organizational
Effectiveness at Indiana University’s Kelley School of
Business. He has been a visiting scholar at
universities in the People’s Republic of China (Beijing and
Hong Kong), Malaysia, Singapore,
Australia, Argentina, France, Puerto Rico, South Africa, and
Spain. His teaching, research, and
consulting activities are in the areas of human capital
acquisition, development, and deployment.
Dr. Aguinis wrote Applied Psychology in Human Resource
Management (with Wayne F. Cascio,
7th ed., 2011, Prentice Hall) and Regression Analysis for
Categorical Moderators (2004, Guilford) and
edited Test-Score Banding in Human Resource Selection (2004,
Praeger) and Opening the Black Box of
Editorship (with Y. Baruch, A. M. Konrad, & W. H. Starbuck,
2008, Palgrave-Macmillan). In addi-

tion, he has written more than 90 refereed journal articles in
Academy of Management Journal,
Academy of Management Review, Journal of Applied
Psychology, Personnel Psychology, Organizational
Behavior and Human Decision Processes, and elsewhere. Dr.
Aguinis is a Fellow of the American
Psychological Association, the Society for Industrial and
Organizational Psychology, and
the Association for Psychological Science, and has been
inducted into the Society of
Organizational Behavior. He has served as Division Chair for
the Research Methods Division of
the Academy of Management, Program Chair for the
Iberoamerican Academy of Management,
and editor-in-chief for the journal Organizational Research
Methods. He has delivered more than
180 presentations at professional conferences and more than 90
invited presentations at universi-
ties in more than 20 countries around the world, and consulted
with numerous organizations in
the United States, Europe, and Latin America using his English,
Spanish, French, Italian, and
German language skills. For more information, please visit
http://mypage.iu.edu/~haguinis/

xiv
DEDICATION
To my dear friend Ariel Aisiks, true visionary and global leader
who has
been teaching me how to be a top performer for more than 30
years.
http://mypage.iu.edu/~haguinis/
1
A manager is responsible for the application
and performance of knowledge.
—PETER F. DRUCKER
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.
PART I: STRATEGIC AND GENERAL CONSIDERATIONS
Chapter 1
Performance Management
and Reward Systems in Context
2 Part I • Strategic and General Considerations
� Create a presentation providing persuasive arguments in
support of the reasons that
an organization should implement a performance management
system, including
the purposes that performance management systems serve and
the dangers of a
poorly implemented system.
� Note the relationships and links between a performance
management system and

other human resources functions, including recruitment and
selection, training and
development, workforce planning, and compensation.
� Describe and explain contextual and cultural factors that
affect the implementation
of performance management systems around the world.
1.1 DEFINITION OF PERFORMANCE MANAGEMENT
Consider the following scenario:
Sally is a sales manager at a large pharmaceutical company. The
fiscal year
will end in one week. She is overwhelmed with end-of-the-year
tasks,
including reviewing the budget she is likely to be allocated for
the following
year, responding to customers’ phone calls, and supervising a
group of
10 salespeople. It’s a very hectic time, probably the most hectic
time of the
year. She receives a phone call from the human resources (HR)
department:
“Sally, we have not received your performance reviews for your

10 employees;
they are due by the end of the fiscal year.” Sally thinks, “Oh,
those perform-
ance reviews. . . .What a waste of my time!” From Sally’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 sales-
person. And, nothing happens in terms of rewards, regardless of
her ratings.
These are lean times in her organization, and salary adjustments
are based
on seniority rather than on merit. She has less than three days to
turn in her
forms. What will she do? She decides to follow the path of least
resistance: to
please her employees and give everyone the maximum possible
rating. In

this way, Sally believes the employees will be happy with their
ratings and
she will not have to deal with complaints or follow-up meetings.
Sally fills
out the forms in less than 20 minutes and gets back to her “real
job.”
There is something very wrong with this picture, which
unfortunately happens all
too frequently in many organizations. Although Sally’s HR
department calls this
process “performance management,” it is not.
Performance management is a continuous process of identifying,
measuring, and devel-
oping the performance of individuals and teams and aligning
performance with the strategic goals
of the organization. Let’s consider each of the definition’s two
main components:
1. Continuous process. Performance management is ongoing. It
involves a
neverending process of setting goals and objectives, observing
performance,
and giving and receiving ongoing coaching and feedback.1

Chapter 1 • Performance Management and Reward Systems in
Context 3
2. Alignment with strategic goals. Performance management
requires that
managers ensure that employees’ activities and outputs are
congruent with the
organization’s goals and, consequently, help the organization
gain a competitive
advantage. Performance management therefore creates a direct
link between
employee performance and organizational goals and makes the
employees’ contri-
bution to the organization explicit.
Note that many organizations have what is labeled a
“performance management”
system. However, we must distinguish between performance
management and
performance appraisal. A system that involves employee
evaluations once a year
without an ongoing effort to provide feedback and coaching so

that performance can be
improved is not a true performance management system.
Instead, this is only a
performance appraisal system. Performance appraisal is the
systematic description of
an employee’s strengths and weaknesses. Thus, performance
appraisal is an important
component of performance management, but it is just a part of a
bigger whole because
performance management is much more than just performance
measurement.2
As an illustration, consider how Merrill Lynch has transitioned
from a perform-
ance appraisal system to a performance management system.
Merrill Lynch 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://ml.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 world-
wide. Recently, Merrill Lynch started the transition from giving

employees one per-
formance 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 its old performance
appraisal system, Merrill
Lynch’s 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.”3
As a second example, consider the performance management
system for managers
at Germany-based Siemens, which provides mobile phones,
computer networks, and
wireless technology and employs 475,000 people in 190
countries (www.siemens.com).
At Siemens, the performance management system is based on
three pillars: setting clear
and measurable goals, implementing concrete actions, and
imposing rigorous
consequences. The performance management at Siemens has
helped change people’s
mind-set, and the organization is now truly performance
oriented. Every manager
understands that performance is a critical aspect of working at
Siemens, and this guiding
philosophy is communicated in many ways throughout the
organization.4
Performance management systems that do not make explicit the
employee con-
tribution to the organizational goals are not true performance

management systems.
Making an explicit link between an employee’s performance
objectives and the
www.siemens.com
http://ml.com/
organizational goals also serves the purpose of establishing a
shared understanding
about what is to be achieved and how it is to be achieved. This
is painfully clear in
Sally’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. Sally’s case is unfortunately
more common than we
would like. A survey conducted by the consulting firm Watson
Wyatt showed that
only 3 in 10 employees believe their companies’ performance
review systems actually
helped them improve their performance.5

In subsequent chapters, we describe best practices on how to
design and implement
performance management systems. For now, however, let’s say
that well-designed and
implemented performance management systems make
substantial contributions to the
organization. This is why a recent survey of almost 1,000 HR
management professionals
in Australia revealed that 96% of Australian companies
currently implement some type of
performance management system.6 Similarly, results of a
survey of 278 organizations,
about two-thirds of which are multinational corporations, from
15 different countries,
indicated that about 91% of organizations implement a formal
system.7 Moreover, organizations with formal and systematic
systems are 51% more likely to perform better than the other
organizations in the sample
regarding financial outcomes, and 41% more likely to perform
better than the other
organizations in the sample regarding other outcomes including
customer satisfaction,

employee retention, and other important metrics. Based on these
results, it is not surpris-
ing that senior executives of companies listed in the Sunday
Times list of best employers in
the United Kingdom believe that performance management is
one of the top two most
important HR management priorities in their organizations.8
Let’s describe these
performance management contributions in detail.
1.2 THE PERFORMANCE MANAGEMENT CONTRIBUTION
There are many advantages associated with the implementation
of a performance
management system.9 A performance management system can
make the following
important contributions:10
1. Motivation to perform is increased. Receiving feedback about
one’s performance
increases the motivation for future performance. Knowledge
about how one is
doing and recognition about one’s past successes provide the
fuel for future
accomplishments.

2. Self-esteem is increased. Receiving feedback about one’s
performance fulfills a
basic human need to be recognized and valued at work. This, in
turn, is likely to
increase employees’ self-esteem.
3. Managers gain insight about subordinates. Direct supervisors
and other
managers in charge of the appraisal gain new insights into the
person being
appraised. The importance of knowing your employees is
highlighted by the fact
that the Management Standards Centre, the government-
recognized organization
in the United Kingdom for setting standards for the management
and leadership
areas, has recognized that developing productive relationships
with colleagues is
a key competency for managers (http://www.management-
standards.org, Unit
D2). Gaining new insights into a person’s performance and
personality will help
http://www.management-standards.org

Context 5
the manager build a better relationship with that person. Also,
supervisors gain a
better understanding of each individual’s contribution to the
organization. This
can be useful for direct supervisors as well as for supervisors
once removed.
4. The definitions of job and criteria are clarified. The job of
the person being
appraised may be clarified and defined more clearly. In other
words, employees
gain a better understanding of the behaviors and results required
of their specific
position. Employees also gain a better understanding of what it
takes to be a
successful performer (i.e., what are the specific criteria that
define job success).
5. Self-insight and development are enhanced. The participants
in the 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 the system also gain a better
understanding of
their particular strengths and weaknesses that can help them
better define
future career paths.
6. Administrative actions are more fair and appropriate.
Performance management
systems provide valid information about performance that can
be used for adminis-
trative actions such as merit increases, promotions, and
transfers as well as termina-
tions. In general, a performance management system helps
ensure that rewards are
distributed on a fair and credible basis. In turn, such decisions
based on a sound
performance management system lead to improved interpersonal
relationships and
enhanced supervisor–subordinate trust.11 For example, a good
performance man-
agement system can help mitigate explicit or implicit emphasis

on age as a basis for
decisions. This is particularly important given the aging
working population in the
United States, Europe, and many other countries around the
world.12
7. Organizational goals are made clear. The goals of the unit
and the organization are
made clear, and the employee understands the link between
what she does and orga-
nizational success. This is a contribution to the communication
of what the unit and
the organization are all about and how organizational goals
cascade down to the unit
and the individual employee. Performance management systems
can help improve
employee acceptance of these wider goals (i.e., organizational
and unit levels).
8. Employees become 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.

9. Employee misconduct is minimized.13 Employee misconduct
is an increasingly
pervasive phenomenon that has received widespread media
coverage. Such
misconduct includes accounting irregularities, churning
customer accounts, abus-
ing overtime policies, giving inappropriate gifts to clients and
potential clients
hoping to secure their business, and using company resources
for personal use.
Although some individuals are more likely to engage in
misconduct compared to
others based on individual differences in personality and other
attributes, having
a good performance management in place provides the
appropriate context so
that misconduct is clearly defined and labeled as such and
identified early on
before it leads to sometimes irreversible negative consequences.
10. There is better protection from lawsuits. Data collected
through performance
management systems can help document compliance with
regulations (e.g.,

equal treatment of all employees regardless of sex or ethnic
background). When
performance management systems are not in place, arbitrary
performance
evaluations are more likely, resulting in an increased exposure
to litigation for
the organization.
11. There is better and more timely differentiation between
good and poor performers.
Performance management systems allow for a quicker
identification of good and
poor performers. Also, they force supervisors to face up to and
address performance
problems on a timely basis (i.e., before the problem becomes so
entrenched that it
cannot be easily remedied).
12. Supervisors’ views of performance are communicated more
clearly. Performance

management systems allow managers to communicate to their
subordinates their
judgments regarding performance. Thus, there is greater
accountability in how man-
agers discuss performance expectations and provide feedback.
Both assessing and
monitoring the performance of others are listed as key
competencies for
managers by the Management Standards Centre
(www.management-standards.org,
Units B3, B4, and B7). When managers possess these
competencies, subordinates
receive useful information about how their performance is seen
by their supervisor.
13. Organizational change is facilitated. Performance
management systems can
be a useful tool to drive organizational change. For example,
assume an organi-
zation decides to change its culture to give top priority to
product quality and
customer service. Once this new organizational direction is
established, per-
formance management is used to align the organizational culture
with the goals

and objectives of the organization to make change possible.
Employees are pro-
vided training in the necessary skills and are rewarded for
improved perform-
ance so that they have both the knowledge and motivation to
improve product
quality and customer service. This is precisely what IBM did in
the 1980s when
it wanted to switch focus to customer satisfaction: the
performance evaluation of
every member in the organization was based, to some extent, on
customer satis-
faction ratings regardless of function (i.e., accounting,
programming, manufac-
turing, etc.).14 For IBM as well as numerous other
organizations, performance
management provides tools and motivation for individuals to
change, which, in
turn, helps drive organizational change. In short, performance
management sys-
tems are likely to produce changes in the culture of the
organization and, there-
fore, the consequences of such cultural changes should be
considered carefully
before implementing the system.15 As noted by Randy

Pennington, president of
Pennington Performance Group, “The truth is that the culture
change is driven
by a change in performance. An organization’s culture cannot
be installed. It can
be guided and influenced by policies, practices, skills, and
procedures that are
implemented and reinforced. The only way to change the culture
is to change
the way individuals perform on a daily basis.”16
14. Motivation, commitment, and intentions to stay in the
organization are
enhanced. When employees are satisfied with their
organization’s perform-
ance 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.17
For example, satisfaction with the performance management
system is likely to
make employees feel that the organization has a great deal of
personal meaning
for them. In terms of turnover intentions, satisfaction with the

performance
management system leads employees to report that they will
probably not look
for a new job in the next year and that they don’t often think
about quitting
www.management-standards.org
Context 7
their present job. As an illustration of this point, results of a
study including
93 professors at a university in South Africa suggested that the
implementation
of a good performance management system would be useful in
preventing
them from leaving their university jobs.18
15. Voice behavior is encouraged. A well-implemented
system allows employees to engage in voice behavior that can
lead to improved
organizational processes. Voice behavior involves making

suggestions for changes
and improvements that are innovative, challenge the status quo,
are intended to be
constructive, and are offered even when others disagree.19 For
example, the per-
formance review meeting can lead to a conversation during
which the employee
provides suggestions on how to reduce cost or speed up specific
process.
16. Employee engagement is enhanced. A good performance
management system
leads to enhanced employee engagement. Employees who are
engaged feel
involved, committed, passionate, and empowered. Moreover,
these attitudes and
feelings result in behaviors that are innovative and, overall,
demonstrate good
organizational citizenship and take action in support of the
organization.
Employee engagement is an important predictor of
organizational performance
and success and, consequently, engagement is an important
contribution of good
performance management systems.20

Table 1.1 lists the 16 contributions made by performance
management systems.
Recall Sally’s situation earlier in the chapter. Which of the
contributions included in
Table 1.1 result from the system implemented at Sally’s
organization? For example, are
Sally’s employees more motivated to perform as a consequence
of implementing their
“performance management” system? Is their self-esteem
increased? What about Sally’s
Contributions of Performance Management Systems
Motivation to perform is increased.
Self-esteem is increased.
Managers gain insight about subordinates.
The definitions of job and criteria are clarified.
Self-insight and development are enhanced.
Administrative actions are more fair and appropriate.

Organizational goals are made clear.
Employees become more competent.
Employee misconduct is minimized.
There is better protection from lawsuits.
There is better and more timely differentiation between good
and poor performers.
Supervisors’ views of performance are communicated more
clearly.
Organizational change is facilitated.
Motivation, commitment, and intentions to stay in the
organization are enhanced.
Voice behavior is encouraged.
Employee engagement is enhanced.
TABLE 1.1

BOX 1.1
What CEOs Say About the Contribution of Performance
Management Systems
A study conducted by Development Dimensions International
(DDI), a global human resources
consulting firm specializing in leadership and selection, found
that performance management
systems are a key tool that organizations use to translate
business strategy into business results.
Specifically, performance management systems influence
“financial performance, productivity,
product or service quality, customer satisfaction, and employee
job satisfaction.” In addition,
79% of the CEOs surveyed say that the performance
management system implemented in their
organizations drives the “cultural strategies that maximize
human assets.”21
insight and understanding of her employees’ contributions to

the organization?
Is Sally’s organization now better protected in the face of
potential litigation?
Unfortunately, the system implemented at Sally’s organization
is not a true perform-
ance management system but simply an administrative nuisance.
Consequently, many,
if not most, of the potential contributions of the performance
management system are
not realized. In fact, poorly implemented systems, as in the case
of Sally’s organization,
not only do not make positive contributions but also can be very
dangerous and lead to
several negative outcomes.
1.3 DISADVANTAGES/DANGERS OF POORLY
IMPLEMENTED PM SYSTEMS
What happens when performance management systems do not
work as intended, as in
the case of Sally’s organization? What are some of the negative
consequences associated
with low-quality and poorly implemented systems? Consider the
following list:

1. Increased turnover. If the process is not seen as fair,
employees may become
upset and leave the organization. They can leave physically
(i.e., quit) or
withdraw psychologically (i.e., minimize their effort until they
are able to find a
job elsewhere).
2. Use of misleading information. If a standardized system is
not in place, there
are multiple opportunities for fabricating information about an
employee’s
performance.
3. Lowered self-esteem. Self-esteem may be lowered if feedback
is provided
in an inappropriate and inaccurate way. This, in turn, can create
employee
resentment.
4. Wasted time and money. Performance management systems
cost money and
quite a bit of time. These resources are wasted when systems
are poorly designed
and implemented.

5. Damaged relationships. As a consequence of a deficient
system, the relationship
among the individuals involved may be damaged, often
permanently.
6. Decreased motivation to perform. Motivation may be lowered
for many reasons,
including the feeling that superior performance is not translated
into meaningful
tangible (e.g., pay increase) or intangible (e.g., personal
recognition) rewards.
Context 9
7. Employee burnout and job dissatisfaction. When the
performance assessment
instrument is not seen as valid and the system is not perceived
as fair, employees
are likely to feel increased levels of job burnout and job
dissatisfaction. As a con-
sequence, employees are likely to become increasingly

irritated.22
8. Increased risk of litigation. Expensive lawsuits may be filed
by individuals who
feel they have been appraised unfairly.
9. Unjustified demands on managers’ and employees’ resources.
Poorly imple-
mented systems do not provide the benefits provided by well-
implemented
systems, yet they take up managers’ and employees’ time. Such
systems will be
resisted because of competing obligations and allocation of
resources (e.g., time).
What is sometimes worse, managers may simply choose to avoid
the system
altogether, and employees may feel increased levels of
overload.23
10. Varying and unfair standards and ratings. Both standards
and individual
ratings may vary across and within units and be unfair.
11. Emerging biases. Personal values, biases, and relationships
are likely to replace

organizational standards.
12. Unclear ratings system. Because of poor communication,
employees may not
know how their ratings are generated and how the ratings are
translated into
rewards.
Table 1.2 summarizes the list of disadvantages and negative
consequences resulting
from the careless design and implementation of a performance
management system. Once
again, consider Sally’s organization. What are some of the
consequences of the system
implemented by her company? Let’s consider each of the
consequences listed in Table 1.2.
For example, is it likely that the performance information used
is false and misleading?
How about the risk of litigation? How about the time and money
invested in collecting,
compiling, and reporting the data? Unfortunately, an analysis of
Sally’s situation, taken
with the positive and negative consequences listed in Tables 1.1
and 1.2, leads to the con-
clusion that this particular system is more likely to do harm

than good. Now think about
TABLE 1.2 Disadvantages/Dangers of Poorly Implemented
Performance Management Systems
Increased turnover
Use of false or misleading information
Lowered self-esteem
Wasted time and money
Damaged relationships
Decreased motivation to perform
Employee job burnout and job dissatisfaction
Increased risk of litigation
Unjustified demands on managers’ and employees’ resources
Varying and unfair standards and ratings

Emerging biases
Unclear ratings system
the system implemented at your current organization or at the
organization you have
worked for most recently. Take a look at Tables 1.1 and 1.2.
Where does the system fit best?
Is the system more closely aligned with some of the positive
consequences listed in Table
1.1 or more closely aligned with some of the negative
consequences listed in Table 1.2?
One of the purposes of a performance management system is to
make decisions
about employees’ compensation (e.g., pay raises). For many
employees, this is perhaps
one of the most meaningful consequences of a performance
management system.
Chapter 10 provides a detailed discussion of how a performance
management system is

used to allocate rewards. However, here we will discuss some
basic features of reward
systems and the extent to which the allocation of various types
of rewards is dependent
on the performance management system.
1.4 DEFINITION OF REWARD SYSTEMS
An employee’s compensation, usually referred to as tangible
returns, includes cash
compensation (i.e., base pay, cost-of-living and merit pay,
short-term incentives, and
long-term incentives) and benefits (i.e., income protection,
work/life focus, tuition
reimbursement, and allowances). However, employees also
receive intangible returns,
also referred to as relational returns, which include recognition
and status, employment
security, challenging work, and learning opportunities. A
reward system is the set of
mechanisms for distributing both tangible and intangible returns
as part of an employ-
ment relationship.
It should be noted that not all types of returns are directly

related to performance
management systems. This is the case because not all types of
returns are allocated
based on performance. For example, some allocations are based
on seniority as opposed
to performance. The various types of returns are defined next.25
1.4.1 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. Thus, the base pay is usually
the same for all employ-
ees performing similar duties and ignores differences across
employees. However,
BOX 1.2
What Happens When Performance Management Is Implemented
Poorly?
One example of a poorly implemented performance management
system resulted in a $1.2 million

lawsuit. A female employee was promoted several times and
succeeded in the construction industry
until she started working under the supervision of a new
manager. She stated in her lawsuit that
once she was promoted and reported to the new manager, the
boss ignored her and did not give her
the same support or opportunities for training that her male
colleagues received. After eight months
of receiving no feedback from her manager, she was called into
his office, where the manager told
her that she was failing, resulting in a demotion and a $20,000
reduction in her annual salary. When
she won her sex-discrimination lawsuit, a jury awarded her $1.2
million in emotional distress and
economic damages.24
Context 11
differences within the base pay range may exist based on such
variables as experience
and differential performance. In some countries (e.g., United
States), there is a differ-

ence between wage and salary. Salary is base cash compensation
received by employees
who are exempt from regulations of the Fair Labor Standards
Act and, in most cases,
cannot receive overtime pay. Employees in most professional
and managerial jobs (also
called salaried employees) are exempt employees. On the other
hand, nonexempt
employees receive their pay calculated on an hourly wage.
1.4.2 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. Cost-of-living
adjustments are given to com-
bat the effects of inflation in an attempt to preserve the
employees’ buying power. For
example, in 2003 in the United States, organizations that
implemented a COLA used a
2.1% pay increase. In 2001, this same percentage was only
1.4%. Year-by-year COLA
percentages can be obtained from such agencies as the Social
Security Administration in
the United States

(http://www.ssa.gov/OACT/COLA/colaseries.html).
Contingent pay, sometimes referred to as merit pay, is given as
an addition to the
base pay based on past performance. Chapter 10 describes the
topic of contingent pay
in detail. In a nutshell, contingent pay means that the amount of
additional compensa-
tion depends on an employee’s level of performance. So, for
example, the top 20% of
employees in the performance score distribution may receive a
10% annual increase,
whereas employees in the middle 70% of the distribution may
receive a 4% increase,
and employees in the bottom 10% may receive no increase at
all.
1.4.3 Short-Term Incentives
Similar to contingent pay, short-term incentives are allocated
based on past performance.
However, incentives are not added to the base pay and are only
temporary pay adjust-
ments based on the review period (e.g., quarterly or annual).
Incentives are one-time

payments and are sometimes referred to as variable pay.
A second difference between incentives and contingent pay is
that incentives are
known in advance. For example, a salesperson in a
pharmaceutical company knows
that if she meets her sales quota, she will receive a $3,000
bonus at the end of the quar-
ter. She also knows that if she exceeds her sales quota by 10%,
her bonus will be $6,000.
By contrast, in the case of contingent pay, in most cases, the
specific value of the reward
is not known in advance.
1.4.4 Long-Term Incentives
Whereas short-term incentives usually involve an attempt to
motivate performance in
the short term (i.e., quarter, year) and involve cash bonuses or
specific prizes (e.g., two
extra days off), long-term incentives attempt to influence future
performance over a
longer period of time. Typically, they involve stock ownership
or options to buy stocks
at a preestablished and profitable price. The rationale for long-

term incentives is that
employees will be personally invested in the organization’s
success, and this invest-
ment is expected to translate into a sustained high level of
performance.
Both short-term and long-term incentives are quite popular.
Take, for example, the
public sector in the United States. A survey administered in late
1998 to 25 state and 400
http://www.ssa.gov/OACT/COLA/colaseries.html
local governments employing more than six people showed that
all but one of the state
governments and 242 (i.e., 85%) of the local governments used
some type of incentive.26
Some organizations are taking this idea to what may be called
“big pay for big
performance.” Contingent pay plans will be discussed in detail
in Chapter 10. In the

meantime, consider the case of a Denver, Colorado, energy
company, Delta Petroleum,
which gave four top executives 1.5 million shares the day the
stock closed at $21.76, for
a total value of $32.6 million.28 However, there is a catch:
Delta stock will have to reach
$40 per share for the executives to be able to sell theirs. If this
value is not reached, the
executives’ shares cannot be cashed in. Moreover, the
executives will be able to sell only
one-sixth of their shares when the price reaches $40. They will
be able to sell another
one-sixth if and when the stock price reaches $50, and another
sixth if and when it
reaches $60. And there is yet another restriction: time. The first
batch of stock that vests
at $40 must reach that value within 13 months of the time the
executives received the
options. If the value of $40 is not reached within this time
frame, the second and third
batches of stock cannot be cashed in and they simply disappear.
1.4.5 Income Protection
Income protection programs serve as a backup to employees’

salaries in the event that
an employee is sick, disabled, or no longer able to work. Some
countries mandate
income protection programs by law. For example, Canadian
organizations pay into a
fund that provides income protection in the case of a disability.
Take, for instance, the
University of Alberta, which offers a monthly income of 70% of
salary to employees
who become severely disabled. In the United States, employers
pay 50% of an
employee’s total contribution to Social Security so that income
is protected for family
members in case of an employee’s death or a disability that
prevents the employee
from doing substantial work for one year and for an employee
when he or she reaches
retirement age. For example, a 40-year-old employee earning an
annual salary of
BOX 1.3
Short-Term Incentives for Physicians
Short-term incentives are being used in a test pilot program in

Colorado Springs, Colorado. Eight
health-care providers and three insurance companies have
teamed up with the nonprofit Colorado
Business Group on Health to pay physicians up to $100 in cash
per patient for providing diabetes
care that results in positive outcomes for patients. Doctors in
the program receive the additional pay
as an incentive without an increase to base salary. The program
requires doctors to work closely
with patients and focus on preventative medicine, including
education, goal-setting, and follow-up
meetings. Physical indicators, such as blood pressure, blood
sugar, and cholesterol, are measured
against goals to determine whether successful outcomes are
being achieved. The goals of the
program are to provide better disease control for the patient and
to cut down on expensive future
treatments, such as emergency room visits and inpatient stays in
the hospital. Additional savings are
expected through reduced medical claims and health insurance
premiums paid by employers. In
summary, the health providers and insurers are utilizing short-
term incentives as part of the
performance management systems with the goal of motivating
physicians to focus on treatments

that will enhance the overall health and well-being of the
patient in an ongoing manner.27
Context 13
$90,000 and expected to continue to earn that salary until
retirement age would receive
about $1,400 a month if he retired at age 62, about $2,000 a
month if he retired at age 67,
and about $2,500 if he retired at age 70.
Other types of benefits under the income protection rubric
include medical
insurance, pension plans, and savings plans. These are optional
benefits provided by
organizations, but they are becoming increasingly important and
often guide an
applicant’s decision to accept a job offer. In fact, a recent
survey including both employees
in general and HR professionals in particular showed that health
care/medical insurance
is the most important benefit, followed by paid time off and

retirement benefits.29
1.4.6 Work/Life Focus
Benefits related to work/life focus include programs that help
employees achieve a better
balance between work and nonwork activities. These include
time away from work (e.g.,
vacation time), services to meet specific needs (e.g., counseling,
financial planning, on-site
fitness program), and flexible work schedules (e.g.,
telecommuting, nonpaid time off). For
example, Sun Microsystems actively promotes an equal balance
between work and home
life and closes its Broomfield, Colorado, campus from late
December through early
January every year. This benefit (i.e., vacation time for all
employees in addition to indi-
vidual yearly vacation time) is part of Sun’s culture. Sun
believes in a work hard–play
hard attitude, as is evidenced by CEO Scott McNealy’s motto:
“Kick butt and have fun.”30
1.4.7 Allowances

Benefits in some countries and organizations include allowances
covering housing and
transportation. These kinds of allowances are typical for
expatriate personnel and are
popular for high-level managers throughout the world. In South
Africa, for example, it is
common for a transportation allowance to include one of the
following choices:31
• The employer provides a car and the employee has the right to
use it both privately
and for business.
• The employer provides a car allowance, more correctly
referred to as a travel allowance,
which means reimbursing the employee for the business use of
the employee’s
personal car.
Other allowances can include smart phones and their monthly
charges, club and
gym fees, discount loans, and mortgage subsidies.32 Although
these allowances are
clearly a benefit for employees, some of them directly or
indirectly also produce a benefit

for the employer. For example, smart phones means that
employees are reachable via
phone, text, and e-mail 24/7. Similarly, if employees take
advantage of a gym fee
allowance, they are likely to stay healthier which in turn may
lead to less health-related
expenses for the organization.
1.4.8 Relational Returns
Relational returns are intangible in nature. They include
recognition and status, employment secu-
rity, challenging work, opportunities to learn, and opportunities
to form personal relationships at
work (including friendships and romances).33 For example, Sun
Microsystems allows employees
to enroll in SunU, which is Sun’s own online education tool.
SunU encapsulates a mix of traditional
classroom courses with online classes that can be accessed
anywhere in the world at any time.34

Sun offers its employees enormous scope for development and
career progression, and there is a
commitment to ensuring that all employees are given the
opportunity to develop professionally.
The new knowledge and skills acquired by employees can help
them not only to further their
careers within Sun but also to take this knowledge with them if
they seek employment elsewhere.
Thus, some types of relational returns can be long-lasting.
Table 1.3 includes a list of the various returns, together with
their degree of
dependency on the performance management system. As an
example of the low end
of the dependency continuum, cost-of-living adjustment has a
low degree of depend-
ency on the performance management system, meaning that the
system has no impact
on this type of return. In other words, all employees receive this
type of return regard-
less of past performance. On the other end, short-term
incentives have a high degree of
dependency, meaning that the performance management system
dictates who receives

these incentives and who does not. Long-term incentives (e.g.,
profit sharing and stock
options, which are discussed in more detail in Chapter 10) also
have a high degree of
dependency; although this type of incentive is not specifically
tied to individual
performance, it does depend on performance measured at the
team, unit, or even
organizational levels. Between the high and low end, we find
some returns with a mod-
erate degree of dependency on the performance management
system such as base pay,
a type of return that may or may not be influenced by the
system.
Think about the performance management system of your
current employer, the
system used by your most recent employer, or the system in
place at an organization where
someone you know is employed at present. Based on Table 1.3,
try to think about the vari-
ous types of tangible and intangible returns allocated in this
organization. To what extent is
each of these returns dependent on the organization’s
performance management system?

1.5 AIMS AND ROLE OF PM SYSTEMS
The information collected by a performance management system
is most frequently used
for salary administration, performance feedback, and the
identification of employee
strengths and weaknesses. In general, however, performance
management systems can
TABLE 1.3 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 pay High
Short-term incentives High
Long-term incentives High
Context 15
serve the following six purposes: strategic, administrative,
informational, developmental,
organizational maintenance, and documentational purposes.35
Let’s consider each of these
purposes in turn.
1.5.1 Strategic Purpose
The first purpose of performance management systems is to help
top management
achieve strategic business objectives. By linking the
organization’s goals with individual

goals, the performance management system reinforces behaviors
consistent with the
attainment of organizational goals. Moreover, even if for some
reason individual goals
are not achieved, linking individual goals with organizational
goals serves as a way to
communicate what are the most crucial business strategic
initiatives.
A second strategic purpose of performance management systems
is that they play an
important role in the onboarding process.36 Onboarding refers
to the processes that lead
new employees to transition from being organizational outsiders
to organizational insid-
ers. Performance management serves as a catalyst for
onboarding because it allows new
BOX 1.4
How Sears Uses Performance Management to
Focus on Strategic Business Priorities
New leadership at Sears is utilizing performance management
practices and principles to align

human resources with business strategy. Headquartered in
Hoffman Estates, Illinois, Sears Holdings
Corporation is the third largest broad-line retailer in the United
States, with approximately $55
billion in annual revenues and with approximately 3,900 retail
stores in the United States and
Canada. Sears Holdings is the leading home appliance retailer
as well as a leader in tools, lawn and
garden products, home electronics, and automotive repair and
maintenance. The company is the
nation’s largest provider of home services, with more than 13
million service calls made annually.
Following the merger with Kmart Corp. and Sears, Roebuck &
Co., Aylwin B. Lewis was promoted
to chief executive and tasked with a strategic culture change
initiative in hopes of reinvigorating
the struggling retail company. A strategic objective is to move
from an inward focus to a customer
service approach. A second key objective is to bring about an
entrepreneurial spirit where store
managers strive for financial literacy and are challenged to
identify opportunities for greater
profits. Several aspects of the performance management system
are being utilized to achieve these
strategic objectives. For example, employee duties and

objectives are being revised so that employ-
ees will spend less time in back rooms and more time
interacting with customers to facilitate pur-
chases and understand customer needs. In addition, leadership
communication with employees
and face-to-face interaction are being encouraged. Lewis spends
three days per week in stores
with employees and frequently quizzes managers on their
knowledge, such as asking about profit
margins for a given department. The greatest compliment
employees receive is to be referred to as
“commercial” or someone who can identify opportunities for
profits. All Sears headquarters
employees are also required to spend a day working in a store,
which many had never done
before. Executive management has identified 500 employees
who are considered potential leaders
and given training and development opportunities specifically
aimed at cultural and strategic
changes. In sum, the performance management system at Sears
is used as a strategic tool to
change Sears’ culture because senior management views
encouraging key desired behaviors as
critical to the company’s success in the marketplace.37

employees to understand the types of behaviors and results that
are valued and rewarded,
which, in turn, lead to an understanding of the organization’s
culture and its values.
1.5.2 Administrative Purpose
A second function of performance management systems is to
furnish valid and useful
information for making administrative decisions about
employees. Such administrative
decisions include salary adjustments, promotions, employee
retention or termination,
recognition of superior individual performance, identification of
poor performers,
layoffs, and merit increases. Therefore, the implementation of
reward systems based on
information provided by the performance management system
falls within the adminis-
trative purpose. For example, the government in Turkey
mandates performance

management systems in all public organizations in that country
with the aim to prevent
favoritism, corruption, and bribery and to emphasize the
importance of impartiality and
merit in administrative decisions.38
1.5.3 Informational Purpose
Performance management systems serve as an important
communication device. First,
they inform employees about how they are doing and provide
them with information
on specific areas that may need improvement. Second, related to
the strategic purpose,
they provide information regarding the organization’s and the
supervisor’s expecta-
tions and what aspects of work the supervisor believes are most
important.
1.5.4 Developmental Purpose
As noted earlier, feedback is an important component of a well-
implemented per-
formance management system. This feedback can be used in a
developmental man-

ner. Managers can use feedback to coach employees and
improve performance on an
ongoing basis. This feedback allows for the identification of
strengths and weak-
nesses as well as the causes for performance deficiencies (which
could be due to
individual, group, or contextual factors). Of course, feedback is
useful only to the
extent that remedial action is taken and concrete steps are
implemented to remedy
any deficiencies. Feedback is useful only when employees are
willing to receive it.
Organizations should strive to create a “feedback culture” that
reflects support for
feedback, including feedback that is nonthreatening and is
focused on behaviors and
coaching to help interpret the feedback provided.39
Another aspect of the developmental purpose is that employees
receive information
about themselves that can help them individualize their career
paths. Thus, the develop-
mental purpose refers to both short-term and long-term aspects
of development.

1.5.5 Organizational Maintenance Purpose
A fifth purpose of performance management systems is to
provide information to be
used in workforce planning. Workforce planning comprises a set
of systems 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.40 An important component of any
workforce planning effort is
Context 17
the talent inventory, which is information on current resources
(e.g., skills, abilities,
promotional potential, and assignment histories of current
employees). Performance
management systems are the primary means through which
accurate talent invento-
ries can be assembled.

Other organizational maintenance purposes served by
systems include assessing future training needs, evaluating
performance achievements
at the organizational level, and evaluating the effectiveness of
HR interventions
(e.g., whether employees perform at higher levels after
participating in a training
program). These activities cannot be conducted effectively in
the absence of a good
performance management system.
1.5.6 Documentational Purpose
Finally, performance management systems allow organizations
to collect useful
information that can be used for several documentation
purposes. First, performance
data can be used to validate newly proposed selection
instruments. For example, a
newly developed test of computer literacy can be administered
to all administrative
personnel. Scores on the test can then be paired with scores
collected through the

performance management system. If scores on the test and on
the performance meas-
ure are correlated, then the test can be used with future
applicants for the
administrative positions. Second, performance management
systems allow for
the documentation of important administrative decisions. This
information can be
especially useful in the case of litigation.
Several companies implement performance management systems
that allow
them to accomplish the multiple objectives described earlier.
For an example of one
such company, consider the case of SELCO Credit Union
(http://selco.org/selco/
about.asp) in Eugene, Oregon, a not-for-profit consumer
cooperative that was estab-
lished in 1936.41 SELCO’s eight branches serve nearly 80,000
members. SELCO
offers many of the same services offered by other banks,
including personal check-
ing and savings accounts, loans, and credit cards. Being
members of the credit
union, however, allows individual members a say in how the

credit union is run,
something a traditional bank does not permit. Recently, SELCO
scrapped an old
performance appraisal system and replaced it with a new
multipurpose and more
effective performance management system. First, the timing of
the new system is
now aligned with the business cycle instead of the employee’s
date of hire to ensure
that business needs are aligned with individual goals. This
alignment serves both
strategic and informational purposes. Second, managers are
given a pool of money
that they can work with to award bonuses and raises as needed,
which is more
effective than the complex set of matrices that had been in place
to calculate
bonuses. This improved the way in which the system is used for
allocating rewards
and therefore serves an administrative purpose. Third, managers
are required to sit
down and have regular conversations with their employees
about their perform-
ance and make note of any problems that arise. This gives the
employees a clear

sense of areas in which they need improvement and provides
documentation if
disciplinary action is needed. This component serves both
informational and docu-
mentational purposes. Finally, the time that was previously
spent filling out complicated
http://selco.org/selco/about.asp
http://selco.org/selco/about.asp
matrices and forms is now spent talking with the employees
about how they can
improve their performance, allowing for progress on an ongoing
basis. This serves a
developmental purpose.
Although multiple purposes are possible, a survey of industrial
and organizational
psychologists working in HR departments in more than 100
different organizations
reported that the two most frequent purposes are administrative
(i.e., salary decisions)

and developmental (i.e., to identify employees’ weaknesses and
strengths). Overall, in the
organizations that participated in this study, performance
management served at least
two of the purposes mentioned earlier.42 As will be discussed
in Chapter 9, these
purposes place conflicting demands on the raters because they
must be both judges
(i.e., make salary decisions) and coaches (i.e., provide useful
feedback for performance
improvement) at the same time.
Now, think about the performance management system
implemented in your
organization or the last organization for which you worked.
Table 1.4 summarizes
the various purposes served by a performance management
system. Which of these
purposes are being served by the system you are considering?
1.6 CHARACTERISTICS OF AN IDEAL PM SYSTEM
So far, we have defined performance management, described the
advantages of
implementing good performance management systems,

discussed some of the dangers of
not doing a good job with the design and implementation of the
system, and described
the various purposes achieved by a good system. But what does
a good system look like?
The following characteristics are likely to allow a performance
management system to be
successful. Practical constraints may not allow for the
implementation of all these fea-
tures. The reality is that performance management systems are
seldom implemented in an
ideal way.43 For example, there may not be sufficient funds to
deliver training to all people
involved, supervisors may have biases in how they provide
performance ratings, or peo-
ple may be just too busy to pay attention to a new
organizational initiative that requires
their time and attention. Also, there may be organizational or
even country-level con-
straints that prevent the implementation of a good performance
management system. For
example, consider the case of Ghana, which is a country that
espouses collectivist values
over individual performance, and it is a society that is male-
dominated and dominated by

Purposes Served by a Performance Management System
Strategic: To help top management achieve strategic business
objectives
Administrative: To furnish valid and useful information for
making administrative decisions about
employees
Informational: To inform employees about how they are doing
and about the organization’s and
the supervisor’s expectations
Developmental: To allow managers to provide coaching to their
employees
Organizational maintenance: To provide information to be used
in workplace planning and
allocation of human resources
Documentational: To collect useful information that can be used
for various purposes (e.g., test
development, administrative decisions)

TABLE 1.4
Context 19
political and administrative leaders, where these socio-cultural
norms have a clear
influence on organizational decision making and practices.44
These institutional
constraints that are so pervasive in Ghana and so many other
emerging market countries
must be taken into consideration in terms of what type of
performance management sys-
tem will be possible to implement as well as the effectiveness of
such a system. However,
regardless of the societal, institutional, and practical
constraints, we should strive to place
a check mark next to each of these characteristics: the more
features that are checked, the
more likely it will be that the system will live up to its promise.
• Strategic congruence. The system should be congruent with
the unit and orga-

nization’s strategy. In other words, individual goals must be
aligned with unit
and organizational goals.
• Context congruence. The system should be congruent with the
organization’s
culture as well as the broader cultural context of the region or
country.
The importance of context in implementing highly effective
performance manage-
ment systems is emphasized throughout the book. However, for
now, consider the
example of an organization that has a culture in which
communication is not fluid
and hierarchies are rigid. In such organizations, a 360-degree
feedback system in
which individuals receive comments on their performance from
their subordi-
nates, peers, and superiors would be resisted and likely not very
effective.
Regarding broader cultural issues, consider that performance
management
research published in scholarly journals has been conducted in
about 40 countries
around the world.45 Taken together, this body of work suggests

that culture plays
an important role in the effectiveness of a performance
management system. For
example, in countries such as Japan, there is an emphasis on the
measurement of
both behaviors (i.e., how people do the work) and results (i.e.,
the results of
people’s work), whereas in the United States results are
typically preferred over
behaviors. Thus, implementing a results-only system in Japan is
not likely to be
effective. As a second illustration, a study including 97
multinational corporations
suggested that they have adapted their performance management
systems in their
subsidiaries in Bulgaria and Romania.46 Specifically, although
performance is
measured similarly around the world (see standardization
criterion below), the
interpersonal aspects of the system are adapted and customized
to the local
culture. For example, performance management systems in the
subsidiaries are
more likely to differ from those in the headquarters as
differences in power

distance (i.e., degree to which a society accepts unequal
distribution of power)
increase between countries.
• Thoroughness. The system should be thorough regarding four
dimensions. First,
all employees should be evaluated (including managers).
Second, all major job
responsibilities should be evaluated (including behaviors and
results; a detailed
discussion of this topic is presented in Chapter 5). Third, the
evaluation should
include performance spanning the entire review period, not just
the few weeks or
months before the review. Finally, feedback should be given on
positive perform-
ance aspects as well as those that are in need of improvement.
• Practicality. Systems that are too expensive, time consuming,
and convoluted
will obviously not be effective. Good, easy-to-use systems (e.g.,
performance
data are entered via user-friendly software) are available for
managers to help

them make decisions. Finally, the benefits of using the system
(e.g., increased
performance and job satisfaction) must be seen as outweighing
the costs
(e.g., time, effort, expense).
• Meaningfulness. The system must be meaningful in several
ways. First, the stan-
dards and evaluations conducted for each job function must be
considered important
and relevant. Second, performance assessment must emphasize
only those functions
that are under the control of the employee. For example, there is
no point in letting an
employee know she needs to increase the speed of service
delivery when the
supplier does not get the product to her on time. Third,
evaluations must take place
at regular intervals and at appropriate moments. Because one
formal evaluation per
year is usually not sufficient, informal quarterly reviews are

recommended. Fourth,
the system should provide for the continuing skill development
of evaluators.
Finally, the results should be used for important administrative
decisions. People will
not pay attention to a system that has no consequences in terms
of outcomes that
they value. For example, a recent study compared performance
management
systems in the former East versus former West Germany.
Results showed that in
former West German companies, there was a stronger link
between the performance
management system and administrative decisions such as
promotions. This relation-
ship was weaker in former East German companies, and this
difference is probably
due to the socialist political system in the former German
Democratic Republic,
which has had a long-lasting effect that is still observed
today.47
• Specificity. A good system should be specific: it should
provide detailed and
concrete guidance to employees about what is expected of them

and how they can
meet these expectations.
• Identification of effective and ineffective performance. The
performance man-
agement system should provide information that allows for the
identification of
effective and ineffective performance. That is, the system
should allow for
distinguishing between effective and ineffective behaviors and
results, thereby
also allowing for the identification of employees displaying
various levels of
performance effectiveness. In terms of decision making, a
system that classifies or
ranks all levels of performance and all employees similarly is
useless.
• Reliability. A good system should include measures of
performance that are
consistent and free of error. For example, if two supervisors
provided ratings of
the same employee and performance dimensions, ratings should
be similar.

• Validity. The measures of performance should also be valid.
In this context,
validity refers to the fact that the measures include all relevant
performance facets
and do not include irrelevant performance facets. In other
words, measures are
relevant (i.e., include all critical performance facets), not
deficient (i.e., do not leave
any important aspects out), and are not contaminated (i.e., do
not include factors
outside of the control of the employee or factors unrelated to
performance). In short,
measures include what is important and do not assess what is
not important and
outside of the control of the employee. For example, the
gondolieri in the city of
Venice (Italy) have had a performance management system for
about 1,000 years.
Among other relevant performance dimensions, older versions
of the performance
management system required gondolieri to demonstrate their
level of rowing skills
and their ability to transport people and goods safely. These are
clearly relevant
dimensions. However, the system was contaminated because it

included the
Context 21
following requirement: “Every brother shall be obliged to
confess twice a year, or at
least once and if after a warning, he remains impenitent, he
shall be expelled . . .
[from the gondolieri guild].”48
• Acceptability and fairness. A good system is acceptable and is
perceived as fair
by all participants. Perceptions of fairness are subjective and
the only way to know
if a system is seen as fair is to ask the participants about the
system. Such percep-
tions include four distinct components. First, we can ask about
distributive justice,
which includes perceptions of the performance evaluation
received relative to the
work performed, and perceptions of the rewards received
relative to the evaluation

received, particularly when the system is implemented across
countries. For exam-
ple, differences in perceptions may be found in comparing
employees from more
individualistic (e.g., United States) to more collectivistic (e.g.,
Korea) cultures.49 If a
discrepancy is perceived between work and evaluation or
between evaluation and
rewards, then the system is likely to be seen as unfair.50
Second, we can ask about
procedural justice, which includes perceptions of the procedures
used to determine
the ratings as well as the procedures used to link ratings with
rewards. Third, we
can assess perceptions regarding interpersonal justice, which
refers to the quality of
the design and implementation of the performance management
system. For ex-
ample, what are employees’ perceptions regarding how they are
treated by their
supervisors during the performance review meeting? Do they
feel that supervisors
are empathic and helpful? Finally, informational justice refers
to fairness perceptions
about performance expectations and goals, feedback received,

and the information
given to justify administrative decisions. For example, are
explanations perceived
to be honest, sincere, and logical? Because a good system is
inherently discrimina-
tory, some employees will receive ratings that are lower than
those received by
other employees. However, we should strive to develop systems
that are regarded
as fair from the distributive, procedural, interpersonal, and
informational perspec-
tives because each type of justice perception leads to different
outcomes.51 For
example, a perception that the system is not fair from a
distributive point of view is
likely to lead to a poor relationship between employee and
supervisor and lowered
satisfaction of the employee with the supervisor. On the other
hand, a perception
that the system is unfair from a procedural point of view is
likely to lead to de-
creased employee commitment toward the organization and
increased intentions
to leave.52 One way to improve all four justice dimensions is to
set clear rules that

are applied consistently by all supervisors.
• Inclusiveness. Good systems include input from multiple
sources on an ongoing
basis. First, the evaluation process must represent the concerns
of all the people who
will be affected by the outcome. Consequently, employees must
participate in the
process of creating the system by providing input regarding
what behaviors or
results will be measured and how. This is particularly important
in today’s diverse
and global organizations including individuals from different
cultural backgrounds,
which may lead to different views regarding what is
performance and how it should
be measured.53 Second, input about employee performance
should be gathered from
the employees themselves before the appraisal meeting.54 In
short, all participants
must be given a voice in the process of designing and
implementing the system. Such
inclusive systems are likely to lead to more successful systems
including less
employee resistance, improved performance, and fewer legal

challenges.55
• Openness. Good systems have no secrets. First, performance is
evaluated
frequently and performance feedback is provided on an ongoing
basis. Therefore,
employees are continually informed of the quality of their
performance. Second,
the appraisal meeting consists of a two-way communication
process during which
information is exchanged, not delivered from the supervisor to
the employee
without his or her input. Third, standards should be clear and
communicated on
an ongoing basis. Finally, communications are factual, open,
and honest.
• Correctability. The process of assigning ratings should
minimize subjective
aspects; however, it is virtually impossible to create a system
that is completely

objective because human judgment is an important component
of the evalua-
tion process. When employees perceive an error has been made,
there should be
a mechanism through which this error can be corrected.
Establishing an appeals
process, through which employees can challenge what may be
unjust decisions,
is an important aspect of a good performance management
system.
• Standardization. As noted earlier, good systems are
standardized. This means
that performance is evaluated consistently across people and
time. To achieve this
goal, the ongoing training of the individuals in charge of
appraisals, usually man-
agers, is a must.
• Ethicality. Good systems comply with ethical standards. This
means that the su-
pervisor suppresses her personal self-interest in providing
evaluations. In addi-
tion, the supervisor evaluates only performance dimensions for
which she has

sufficient information, and the privacy of the employee is
respected.56
Table 1.5 lists the characteristics of an ideal performance
management system.
Think about the performance management system implemented
in your organization
or the last organization for which you worked. Which of the
features listed in Table 1.5
included in the system you are considering? How far is your
system from the ideal?
TABLE 1.5 Characteristics of an Ideal
Performance Management System
Strategic congruence
Context congruence
Thoroughness
Practicality
Meaningfulness

Specificity
Identification of effective and ineffective performance
Reliability
Validity
Acceptability and fairness
Inclusiveness
Openness
Correctability
Standardization
Ethicality
Context 23

1.7 INTEGRATION WITH OTHER HUMAN RESOURCES
AND DEVELOPMENT ACTIVITIES
Performance management systems serve as important “feeders”
to other human
resources and development activities. For example, consider the
relationship between
performance management and training. Performance
management provides informa-
tion on developmental needs for employees. In the absence of a
good performance
management system, it is not clear that organizations will use
their training resources in
the most efficient way (i.e., to train those who most need it in
the most critical areas).
One organization that is able to link its performance
management system to training
initiatives is Kimberly-Clark.58 Kimberly-Clark’s global
performance management sys-
tem includes about 57,000 employees across 36 countries
(http://www.kimberly-clark.
com/ourcompany/overview.aspx). This system makes a clear
link between perform-
ance and training, allows employees to understand areas that
need to be improved, and

directs them to appropriate opportunities to enable
improvements in performance. For
example, in Peru, Kimberly-Clark has partnered with the
National Service of
Occupational Training in Industry (Senati), a local technical
institute, to provide train-
ing on manufacturing skills. Kimberly-Clark reached a similar
agreement in Malaysia
with the University College of Tun Hussein Onn. Similarly,
there is a training partner in
Korea. The beneficial link between performance management
and training became evi-
denced recently in the Korean operations, where the newspaper
Dong-A Ilbo named
Yuhan-Kimberly one of “the 30 most respected companies in
Korea.”
Unfortunately, despite the successful Kimberly-Clark example,
most organizations
do not use performance management systems to determine
training content and waste
an opportunity to use the performance management system as
the needs assessment
phase of their training efforts.59 Specifically, a recent survey
including 218 HR leaders at

companies with at least 2,500 employees revealed that there is
tight integration between
performance management and learning/development activities in
only 15.3% of the
organizations surveyed.60
Performance management also provides key information for
workforce planning.
Specifically, an organization’s talent inventory is based on
information collected
through the performance management system. Development
plans provide informa-
tion on what skills will be acquired in the near future. This
information is also used
in making recruitment and hiring decisions. Knowledge of an
organization’s current
and future talent is important when deciding what types of skills
need to be acquired
externally and what types of skills can be found within the
organization.
BOX 1.5
Good Performance Management Implementation Pays Off

Implementing a performance management system that includes
the characteristics just described
will pay off. A study conducted for Mercer, a global diversified
consulting company, revealed that
the 1,200 workers surveyed stated that they could improve their
productivity by an average of
26% if they were not held back by a lack of “direction, support,
training, and equipment.”
Successfully implementing a performance management system
can give workers the direction
and support that they need to improve their productivity.57
http://www.kimberly-clark.com/ourcompany/overview.aspx
http://www.kimberly-clark.com/ourcompany/overview.aspx
Finally, there is an obvious relationship between performance
management and
compensation systems. Compensation and reward decisions are
likely to be arbitrary in
the absence of a good performance management system.
In short, performance management is a key component of talent

management
in organizations. It allows for assessing the current talent and
making predictions
about future needs both at the individual and organizational
levels. Implementing a
successful performance management system is a requirement for
the successful
implementation of other HR functions, including training,
workforce planning,
recruitment and selection, and compensation.
1.8 PERFORMANCE MANAGEMENT AROUND THE WORLD
Performance management is a global phenomenon and
organizations all over the world
are implementing various types of performance management
systems. We will discuss
examples of how systems are implemented in different
countries. As a preview and to
highlight the increasing importance of performance management
globally, consider the
following results from recent research relating to 10 specific
countries:61
• Performance management in Mexico. Performance

management has become
increasingly popular since the 1970s. For the most part, systems
in Mexico are
similar to those implemented in the United States. For example,
the measurement
of results (as discussed in Chapter 5) is quite pervasive.
However, more research is
needed for us to gain a better understanding of what types of
systems would
work best in Mexico.
• Performance management in the United Kingdom.
Performance management in
the United Kingdom has been affected by several factors,
including an emphasis
on cost effectiveness and the developmental purpose of
performance manage-
ment. Performance management is gaining increased stature and
significance
given the more recent emphasis on talent management and total
rewards manage-
ment. As noted earlier, performance management provides
critical information
regarding the identification of top performers, which helps
talent management,

and critical information to be used in administrative decisions,
including the
allocation of rewards. Performance management in the United
Kingdom is an
established organizational practice and is clearly influenced by
broader societal
issues such as socioeconomic, political, and legal trends.
• Performance management in France. Performance management
in France faces
unique contextual issues such as legal requirements to invest in
employee training
and development and the need to emphasize individual
accountability. Once
again, performance management systems are not implemented in
a vacuum, and
it is important to consider the broader environment when
designing and imple-
menting a system.
• Performance management in Germany. Performance
management in Germany
has been affected by the established practice of long-term
employment relation-
ships. Thus, performance management systems emphasize long-

term goals and
usually do not have a short-term focus. In spite of this unique
feature, systems
share some similarities with France given their membership in
the European
Union, which provides a common legal framework for many
labor-related issues.
Context 25
• Performance management in Turkey. Performance management
in Turkey is
evolving rapidly given its official candidacy for European
Union membership.
Negotiations began in 2005, and it is likely that Turkey will
become a European
Union member by around 2015. Turkey’s unique contextual
issues involve
being a democratic and secular state—yet ruled by a single-
party government.
Performance management is a fairly novel issue in Turkey, but
almost 80%

of firms in Turkey are using some type of system. Because
personal relation-
ships play an important role in Turkish culture, an important
challenge is the
implementation of systems that ensure valid, reliable, and fair
performance
measurement.
• Performance management in India. The India economy has
been on “overdrive”
since the early 1990s and there is intense international business
activity, including a
significant increase in foreign direct investment going into
India as well as India
firms going abroad. The intense international business activity
is leading to a
change in traditional values, at least in work environment, from
more collectivistic
to more individualistic and short-term. Nevertheless, the
traditional paternalistic
values do not seem to be changing, and they pose a challenge
for the implementa-
tion of performance management systems in which the
supervisor serves as a coach
instead of as a “boss” (see Chapter 9).

• Performance management in China. From the founding of the
socialist state in
1949 until the 1980s, performance management systems in
China emphasized
mostly attendance and skills. However, since the 1980s, the
view of performance
management has expanded to consider broader sets of behaviors
as well as the
relationship between performance management and other
organizational systems
(e.g., compensation). Important issues to consider for successful
implementation
of performance management systems in China include respect
for age and senior-
ity and the emphasis on social harmony.
• Performance management in South Korea. Work relationships
in South
Korea are hierarchical in nature and emphasize the importance
of groups over
individuals. More recently, the establishment of a democratic
government in
1987 and the Asian financial crisis of 1997 affected
organizational practices

substantially. Specifically, the financial crisis led many
organizations to adopt
what in Korean is called Yunbongje (i.e., merit-based systems).
The current
challenge is how to reconcile a merit-based approach with more
traditional
cultural values.
• Performance management in Japan. Although Japanese firms
relied on lifetime
employment and seniority as key organizational practices, more
recently firms
also consider the importance of new knowledge acquisition. For
example, com-
petency modeling, which is discussed in Chapter 8, has become
increasingly
popular. In general performance management systems in Japan
tend to empha-
size behaviors to the detriment of results (this distinction is
discussed in detail
in Chapter 4).
• Performance management in Australia. The Australian
economy has made an
important shift from manufacturing to service, and there are

important demo-
graphic changes in the workforce including an increased
presence of women and
members of ethnic minority groups. The legal framework in
Australia is similar to
that in the United States and the United Kingdom (see Chapter
10). So, much like
the United States and the United Kingdom, performance
management systems
tend to include documentation of performance, considerations
regarding equal
opportunity, and due process issues.
This brief overview provides us with some information
regarding performance
management systems around the world. Although there is a
common challenge to align
individual and organizational goals and enhance the
performance of individuals and
groups, the way these goals are achieved is influenced by both

organizational and
societal contextual issues. Thus, these issues should not be
ignored when implementing
performance management systems.
Summary Points
• Performance management is a continu-
ous process of identifying, measuring,
and developing the performance of
individuals and teams and aligning
performance with the strategic goals of
the organization.
• Although many organizations have
systems labeled “performance manage-
ment,” they usually are only perform-
ance appraisal systems. Performance
appraisal emphasizes the assessment of
an employee’s strengths and weaknesses
and does not include strategic business
considerations. Also, performance
appraisal systems usually do not include
extensive and ongoing feedback that an
employee can use to improve her per-

formance in the future. Finally, perform-
ance appraisal is a once-a-year event that
is often driven by the HR department,
whereas performance management is a
year-round way of managing business
that is driven by managers.
• Implementing a well-designed perform-
ance management system has many
advantages. From the perspective of
employees, a good system increases
motivation and self-esteem, helps
improve performance, clarifies job tasks
and duties, provides self-insight and
development opportunities, and clarifies
supervisors’ expectations. From the
perspective of managers, good systems
allow them to gain insight into employ-
ees’ activities and goals, allow for more
fair and appropriate administrative
actions, allow them to communicate
organizational goals more clearly, let
them differentiate good and poor per-
formers, help drive organizational

change, encourage voice behavior, and
improve employee engagement. Finally,
from the perspective of the HR function,
a good system provides protection from
litigation and can also help minimize
employee misconduct which can have so
many negative consequences for the
organization.
• Poorly designed and implemented per-
formance management systems can
have disastrous consequences for all
involved. For example, employees may
quit, those who stay may be less moti-
vated, and relationships (e.g., supervi-
sor–subordinate) can suffer irreparable
damage. Also, poorly designed systems
can be biased, resulting in costly law-
suits and wasted time and resources. In
the end, low-quality or poorly imple-
mented systems can be a source of
enormous frustration and cynicism for
all involved.
• Reward systems include all mecha-

nisms for determining and distributing
Context 27
tangible and intangible returns as
part of an employment relationship.
Tangible returns, collectively referred to
as compensation, include both cash and
benefits. Intangible returns, also
referred to as relational returns, include
recognition and status, employment
security, challenging work, and learn-
ing opportunities. Not all types of
returns are directly related to perform-
ance management systems because not
all types of returns are allocated based
on past performance.
• Performance management systems serve
multiple purposes. First, they serve a
strategic purpose because they help link
employee activities with the organiza-

tion’s mission and goals, they identify
results and behaviors needed to carry
out strategy, and they maximize the
extent to which employees exhibit
the desired behaviors and produce the
desired results. Second, they serve an
administrative purpose in that they pro-
duce information used by the reward
system and other HR decision making
(e.g., promotions, termination, discipli-
nary actions). Third, they serve an infor-
mational purpose because they enable
employees to learn about their perform-
ance in relation to the organization’s
expectations. Fourth, they serve a devel-
opmental purpose in that performance
feedback allows individuals to learn
about their strengths and weaknesses, to
identify training needs, and to make
better decisions regarding job assign-
ments. Fifth, performance management
systems serve an organizational mainte-
nance purpose because they provide
useful information for workforce plan-
ning and for evaluating the effectiveness

of other HR systems (e.g., comparing per-
formance before and after an expensive
training program to determine whether
training made a difference). Finally,
performance management systems also
serve a documentational purpose; for
example, they support HR decisions
and help meet legal requirements.
• Ideal performance management sys-
tems are rare. Such ideal systems are
• congruent with strategy (i.e., there
is a clear link among individual,
unit, and organizational goals)
• congruent with context (i.e., the sys-
tem is consistent with norms based
on the culture of the organization and
the region and country in which the
organization is located)
• thorough (i.e., they include all rele-
vant performance dimensions)

• practical (i.e., they do not require
excessive time and resources)
• meaningful (i.e., they have impor-
tant consequences)
• specific (i.e., they provide a concrete
employee improvement agenda)
• able to identify effective and inef-
fective performance (i.e., they help
distinguish employees at different
performance levels)
• reliable (i.e., the measurement of
performance is consistent)
• valid (i.e., the measures of per-
formance are not contaminated or
deficient)
• fair (i.e., people participating in the
system believe the processes and
outcomes are just)

• inclusive (i.e., they include input
from multiple sources on an ongo-
ing basis)
• open (i.e., they are transparent and
there are no secrets)
• correctable (i.e., they include mecha-
nisms so that errors can be corrected)
• standardized (i.e., performance is
evaluated consistently across people
and time)
• ethical (i.e., they comply with ethical
standards)
• Many trade-offs take place in the real-
world implementation of performance
management systems; however, the

closer the system is to the ideal charac-
teristics, the greater the return will be
for the employees, supervisors, and the
organization as a whole.
• A performance management system is
the key factor used in determining
whether an organization can manage its
human resources and talent effectively.
Performance management provides
information on who should be trained
and in what areas, which employees
should be rewarded, and what type of
skills are lacking at the organization or
unit level. Therefore, performance man-
agement also provides information on
the type of employees that should be
hired. When implemented well,
performance management systems pro-
vide critical information that allows
organizations to make sound decisions
regarding their people resources.
• Given the globalized and hyper-
competitive nature of business in the

twenty-first century, there is a common
worldwide challenge to align individ-
ual and organizational goals and
enhance the performance of individu-
als and groups. However, the way
these goals are achieved is influenced
by both organizational and societal
contextual issues. A performance man-
agement system in China may not be
the same as a performance manage-
ment system in Mexico or France.
Although the system’s main objectives
may be the same, the way the system
is implemented and deployed must
take contextual considerations into
account.
As should be evident by now, imple-
menting an ideal performance management
system requires a substantial amount of
work; however, this does not start when the
system is put into place. The process starts
much earlier because unless specific
conditions are present before the system is

implemented, the system will not achieve its
multiple purposes. Chapter 2 provides a
description of the entire performance
management process.
C A S E S T U DY 1-1
Reality Check: Ideal versus Actual
Performance Management System
The table here summarizes the key characteristics of an ideal
performance management system as discussed in this chap-
ter. Think about a performance management system you know.
This could be the one implemented at your current (or most
recent) job. If you don’t have information about such a system,
talk to a friend or acquaintance who is currently working, and
gather information about the system used in his or her organi-
zation. Use the Y/N column in the table to indicate whether
each of the features is present (Y: yes) or not (N: no) in the
system you are considering. In some cases, some elements
may be present to a matter of degree and may require that you
include some additional information in the Comments column.
Next, prepare a brief report addressing the following
issues:

1. How many of the 14 characteristics of an ideal system
are present in the system you are evaluating?
2. Identify two characteristics that are not present at
all, or barely present, in your system. Discuss the
implications that the lack of these characteristics
has on the effectiveness of the system.
3. Identify one characteristic that is clearly present in your
system. Discuss the implications of the presence of this
characteristic on the effectiveness of the system.
4. Identify the characteristic in your system that is furthest
from the ideal. What can be done to produce a better
alignment between your system and the ideal? Who
should be responsible for doing what so that your system
becomes “ideal” regarding this characteristic? �
Context 29
Characteristics Y/N Definition Comments

Strategic congruence Individual goals are aligned with unit and
organizational goals.
Context congruence The system is congruent with norms based
on the organization’s culture.
The system is congruent with norms based
on the culture of the region and country
where the organization is located.
Thoroughness All employees are evaluated.
Evaluations include performance spanning
the entire review period.
All major job responsibilities are evaluated.
Feedback is provided on both positive and
negative performance.
Practicality It is readily available for use.
It is easy to use.
It is acceptable to those who use it for
decisions.

Benefits of the system outweigh the costs.
Standards and evaluations for each job
function are important and relevant.
Only the functions that are under the
control of the employee are measured.
Meaningfulness Evaluations take place at regular intervals
and at appropriate moments.
System provides for continuing skill
development of evaluators.
Results are used for important
administrative decisions.
Specificity Detailed guidance is provided to employees
about what is expected of them and how
they can meet these expectations.
Identification of
effective and
ineffective
performance

The system distinguishes between effective
and ineffective behaviors and results, thereby
also identifying employees displaying various
levels of performance effectiveness.
Reliability Measures of performance are consistent.
Measures of performance are free of error.
Validity Measures include all critical performance
facets.
Measures do not leave out any important
performance facets.
Measures do not include factors outside
employee control.
Characteristics Y/N Definition Comments
Acceptability and

fairness
Employees perceive the performance
evaluation and rewards received relative
to the work performed as fair
(distributive justice).
Employees perceive the procedures used to
determine the ratings and subsequent
rewards as fair (procedural justice).
Employees perceive the way they are treated
in the course of designing and implementing
the system as fair (interpersonal justice).
Employees perceive the information and
explanations they receive as part of the
performance management system as fair
(informational justice).
Inclusiveness Employee input about their performance is
gathered from the employees before the
appraisal meeting.
Employees participate in the process of

creating the system by providing input on
how performance should be measured.
Openness Performance is evaluated frequently and
feedback is provided on an ongoing basis.
Appraisal meeting is a two-way
communication process and not one-way
communication delivered from the
supervisor to the employee.
Standards are clear and communicated on
an ongoing basis.
Communications are factual, open, and
honest.
Correctability There is an appeals process, through which
employees can challenge unjust or
incorrect decisions.
Standardization Performance is evaluated consistently across
people and time.
Ethicality Supervisors suppress their personal

self-interest in providing evaluations.
Supervisors evaluate performance
dimensions only for which they have
sufficient information.
Employee privacy is respected.
Context 31
C A S E S T U DY 1-2
Performance Management at Network

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