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Learning Objectives

After reading this lesson you w ill be able to

To understand the Concept of Performance management

To understand the various performance management modules

To analyse the Linkage w ith other Hr systems


1.1 Introduction

1.2 Perform ance Managem ent

1.3 Elem ents of Performance Management

1.4 Linkage w ith HRsystem s

1.5 Principles of Performance Management

1.6 Characteristics of Perform ance Management

1.7 Scope of Perform ance Managem ent

1.8 Significance of Perform ance Managem ent

1.9 Perform ance Managem ent Models

1.10 Facilitating Perform ance Managem ent

1.11 Sum mary

1.12 Review Questions


1.1 Introduction

Performance management has assumed a pivotal role in the face of rapid changes
such as globalization, liberalization, technological and market changes. it is the backbone
of human resource management for any or ganization intending to produc e a high
performanc e and leverage its human capital. Human resource management during the
last tw o decades has shifted its focus from maintenance and administrative kind of function
to that of a value added role. In this process, performance management has occupied a
centre stage. In other w ords, all people management efforts are directed tow ards enhancing
performance of employees and thereby improving the bottomline of organizations. How ever,
mor e often than not organizations are saddled w ith human res ource strategies and
interventions that are piecemeal and fragmented. These isolated and individualistic practices
have not only failed to produce any positive results at the bottom line of organizations but
also caused ineffectiveness and chaos in management of people. Therefore, performance
management efforts in organizations should be distinctly integrated and every sphere of
human resource management activity must be integrated vertically and horizontally to deliver
significant positive business results.

1.2 Performance Management

Performance management is a process of des igning and executing motivational

strategies, interventions and drivers w ith an objective to transform the raw potential of human
resource into performance. All human beings possess potential w ithin themselves in a few
or more functional areas. How ever, utilization and conversion of this potential into deliv erable
A performance is often suboptimal due to a variety of reasons. Performance management
acts as an agent in converting the potential into performance by removing the intermediate
barriers as w ell as motivating and rejuvenating the human resource.

1.2.1 What is not Performance Management?

Performance appraisal system is often confused w ith performance management

and mostly misunderstood as synonymous. Performance appraisal is a singular activity
that is employed to assess performance of employees for a predetermined duration on a
set of parameters. As opposed to this performance management is an integrated activity
that aims to nurture and institutionalize performance management as a fundamental system

of an organization. In this parlance, performance appraisal is considered as one of the

tools that is used in measuring actual performance of employees on an assigned task.
Similarly, performance management is view ed as an activity of goal setting and monitoring
achievement of goals. Performance management in this sense is view ed as another form
of management by objectives (MBO).in fact, management by objectives is one of the
important f eatures of performanc e management. In contrast to the popular misbelieve.
Performance management is a comprehensive discipline that consists of strategies to
address the entire motivational need structure of human resource such as physiological,
security, social, self-esteem and self-actualization through appropriate interventions and

1.3 Elements of Performance Management

Performance management is a systemic approach to assure quality and progress
tow ard organizational goals by aligning structures, processes and routines through a set of
reinforcing activities. Performance management activities include the follow ing key elements:

1. Clarity of Outcom es and Theory of Action: Establishing and w idely communicating

priorities, and setting ambitious , clear and measurable goals and outcomes w ith
aligned strategies and activities

2. Alignm ent of Resources: Directing or redirecting resources (time, money, people)

to priority efforts that produce results and establishing clear roles and responsibilities

3. Collection and Use of Data: Establishing and implementing routines and processes
for collecting, analyzing and monitoring data, including leading and lagging indicators,
to inform continuous improvement, provide feedback and make decisions

4. Account ability for Results: Making decisions to continue improvement or end

practices based on data; implementing incentives tied to performance; and engaging
and communicating results w ith internal and external stakeholders

Project management, w hich is used primarily to track tasks and deadlines of projects
across the system, is an essential part of performance management. But the tw o differ:
Wher eas project management focuses on specific tools and s ystems f or how to do
something, performance management focuses on strategies for w hat to do. Performance
management consists of structures, processes and routines developed, implemented and

1.4 Linkage with HR System

1.4.1 Performance Management as an HRD Function

Performance management as a sub-set of human resource management function

focuses on facilitation support to employees for their individual and overall organizational
development traditionally, organizations used to focus on age-old command-and-control
models to exert the desired level of performance from the employees. How ever, modern
performance management practices altered such percepts and consider people as assets,
and like any other asset, people also have the potential to add future value. This obviously
shaped the HRD dimension of performance management function; making it a long-term
or strategic function of management it is strategic, as alignment of individual performance
w ith the business objectives of organizations ultimately leads to the achievement of strategic
intents. It is strategic as organizations, through effective performance management, can
focus on continuous development of human resources to sustain in competition. it facilitates
in not only achieving the business results co-creating the performance goals, but also
facilitates in preparing employee development plans matching w ith the long-term goals of
the organizations. All these made performance management, in the strictest sense, an
HRD function.

In Figure l.l, w e have illustrated the performance management cycle, w hich starts
from core job descriptions reinforced w ith strategic plans and goals, w hich translates to
per formance development, performance apprais al, obser vations and f eedback, and
ref ormulating the standar ds of performance. This cy cle continues , as perf ormance
management is an ongoing employee development function.

1.4.2 Job Description

Job description is a systematic process of collection, analysis and documentation of

the important facts about the job. Through job descriptions w e name a job, i.e., establish
the job identity. Job descriptions facilitate in implementing strategic plans, translating the
organizational vision to mission and then initiating the desired strategic initiatives to achieve
the mission through w ell-defined goals and objectives. From a performance management
point of view, job descriptions help in recruiting the right fit through adequate profile matching
and also extend support to develop performance standards. Across Organizations, w e find
commonality in job title; henc e a w ell-struc tur ed job desc ription als o f acilitates in
benc hmarking the performance, matching w ith the best per formanc es nationally and
internationally. Thus, job descriptions provide the basis for job-related selection procedures
and thereby also help in setting performance standards and, subsequently, in performance
benchmarking w ithin and outside organizations. For these r easons, job description is
construed as the first stage of performance management cycle of any organization.

1.4.3 Standards of Performance

Performance standards are documented guidelines for excellent performance of any

job. To gain acceptance from the employees, organizations prefer to develop performance
standards collaboratively.

How ever, this may not be feasible for every job. For example performance protocol or
standards for a complex research and development job may require the organizations to
conform to the laid dow n guidelines that are externally determined, w hich naturally squeezes
the pow er of the organizations to decide the performance standards. Whatever is the manner
of deciding performance standards, communicating the same to the employees is very
important. For new ly recruited employees, organizations prefer to familiarize performance
standards through induction programmes. Individual-level performance is compared w ith
the documented performance standards to measure the extent of employee performance
achievement. Standard job descriptions als o set the initial pr emis e for standards of
performance. These apart, performance standards are determined based on industry
practices, benchmarked data, etc

1.4.4 Observation and Feedback

Obs er vation is per formanc e monitoring to measur e the deviation f rom the
performance standards and to initiate the c orrective actions. Feedback is sharing the
performance levels achieved by the employees. Both observation and feedback are important
ingredients of the performance management process. Performance feedback is observable
and verifiable w ork-related behaviours, actions, statements and results. With the feedback,
employees can understand their performance gaps and can accordingly improve to deliver
better performance in future. Organizations can also take important HR decisions using
the performance feedback.

1.4.5 Performance Appraisal

The performance appraisal process summarizes, assesses and develops the w ork
performance of employees based on the objective assessment of performance related
information. We have several methods of performance appraisal and have discussed this
lesson. Most of the organizations focus on teamw ork. This has now made 360degree
assessment of performanc e more important. This method ev en requires customers to
evaluate employees performance.

1.5 Principles of Performance Management

Performance management can bring quality and effectiveness only w hen certain
basic and fundamental principles are follow ed. These include:

1.5.1 Transparency

The system should be transparent, free from partiality, bias and discrimination among
the employees. If not, the base of the system itself w ill not be strong to build anything above
that. For example, w ork allocation, promotions, transfers, incentives, and bonus if based
on Performance management, then the system should be transparent and gives no room
for employees to complaint.

1.5.2 Employee Empowerment

Participative and empow ered employees take the responsibility w ell. They develop
the belongingness tow ards the organisation. Recognizing and rew arding the employees
brings them together to w ork and achieve.

1.5.3 Organisational Values and Culture

A fair treatment and ensuring due satisfaction to the employees, empathy and trust,
respect and treating people equally are all the foundations for the development of the
Culture and values of the organisation, w hich reflects in overall output.

1.5.4 Amicable Workplace

A w ork environment w hich attracts the employee rather than expecting the w eek end
to be aw ay from the w orkplace is the principle. The w orkplace should be congenial, w arm
and amicable to the employees. This helps in improving the quality of w ork life and balancing
the w ork life.

1.6 Characteristics of Performance Management

Performance management is a complex concept that encompas ses diff erent

dimensions of the organisation and the people. Hence, the performance management has
some pre requisites that should be included w hile designing a system.

1.6.1 Organisational Strategies and Goals

The Organisational vision, mission and objectives need to be clearly and precisely
laid down and communicated to all the employees to make them realise w hat the organisation
expects from them. The need of imparting the expected performance in a broader view is
essential to create a platform for employees to set their personal goals along w ith the
organisational goals.

1.6.2 Planning

A w ell planned act is half done by itself. Planning in detail the

Availability of human resources

Optimum utilization of resources

Proper placement of employees

Output needed to meet w ith the organisational goals

Output needed from each individual employee

Training needs

Motivation and rew ards w ill be the major helping guide to achieve the expected result.

1.6.3 Leadership

The leadership play s an important role in the performance management system.

Even though the system w ill try to put the people in the places of improvement, it comes to
a point w here the inner w ill of the employee w ill be the deciding authority to move on or not
to move on.Leadership is a simple solution, w hich can influence the follow ers, the employees,
out of sheer respect, love, obedience, gratitude or adoration w hatever w e may name it,
w hich can influence the employee to decide on the positive side. The pull and charisma of
the leader is very important to implement a system of performance management.

1.6.4 Standardization of Evaluation Methods

If the evaluation criteria and methods are not standardized, the management cannot
say that they use them to hold the employees to a standard.

The aspects of performance that are to be measured must be uniform. Varying level
of strictness or different methods of evaluation w ill only lead to lack of trust and faith on the
system as w ell as on the organisation itself.

1.6.5 Cooperation, not Control

The performance managers s hould under stand that the system of performance
management is to nurture the grow th and potentiality to performance still better and not to
control or exercise authority by finding faults. They should be able to convince the employees
too, the concept of performance management is to help them do better and not just simply
to report their progress or regress.

1.6.6 Validity

Performance management systems should measure the valid tasks.

The confusion in role clarity

Assignment of substitutive tasks

Task assigned on the initiation of employee

Additional assignments

hard to hit targets

Voluntary assignments taken by the employee


All the above should be considered w ith due w ieghtage and all the above should be
carefully handled in cases of non-accomplishment of the tasks.

1.6.7 Trained Managers for Evaluation

No performance management system can succeed if the managers w ho conduct

evaluations are inadequately trained. The managers should understand the sensitivity of
the process, should have empathy, should have know ledge about the w ork process and
necessities of the job, and should know the hardships and obstacles in accomplishing the

1.7 Scope of Performance Management

Employees are the most s ignif icant res ourc e of an organisation. Perf ormance
management is the mir ror that show s the commitment of the human capital to the
organisation and to their assigned task. This system creates an opportunity for the top
management to reward the excellent performance or reprimand unsatisfactory performance.
This pow erful system should be a tool to assess the overall performance of the organisation.
This system not only show case the individual performance of the organisation, but it is
also a tool to measure the developing steps of the organisation as a w hole tow ards its
mis sions.

The scope of the performance management includes the follow ing:

Providing employees a better understanding of their role and responsibilities

Increase the confidence of the employees through recognizing their strengths

Identifying training needs to overcome the w eak areas

Improve the relationships in the w orking areas

Improve communication betw een superior and subordinates

Improve teams and team spirit

Improv e c ommitment

Succession planning through grooming subordinates to future managers

Providing space for personal reflections


Providing a platform for personal development

Providing assistance to achieve personal career goals

Providing a better w ork environment and w ork place

Providing counseling to make w ork life balance

Improving the overall organisational w ork culture

Creating qualitative w ork environment

And the list grow s day by day. As proposed by management guru Marshall Goldsmith,
organisations need to shift focus from performance feedback to feed forw ard. The feed
forw ard approach emphasizes proactive and holistic performance management at individual,
team and organisational levels.

1.8 Significance of Performance Management

Performance Management system is essentially evaluating and understanding the

performance of the employees, but also it is an overall holistic process of a cycle of improving
the performance of the individual human w ho has various interests, various potentialities,
problems, ego, and thousand other traits. Hence, w e can say that, performance management
tries to analyze and find the competency of the employees, identify the areas of performance
lack, planning w ith system to encourage and enhance the performance for improvement.

Per formance Management plays the vital role of identifying and enhancing the
potentials of employees to fulfill the needs and requirements of the jobs assigned to them
as w ell as to move upw ard them in his career ladder.

Performance Management helps the over all or ganisations ef fectivenes s and

development by

Effective business environment

Improved HR activities


Improved Work Culture

Sustainable w ork force


Optimal utilization and productivity from the w ork force

Scope for continuous learning

1.9 Performance Management Models

A performance management model is a method of stimulating the employees to adapt

themselves to activ ities that w ill generate the desired output. It may not be alw ays maximizing
the productivity, but to any other desired output like team building, harmonious w orkplace,
violence free environment, socially responsible w ork group, etc.

The important agenda of performance management model is efficiency. We know

that the efficiency of machines can easily be raised by inventing a new technology, buying
a new machine or even by overhauling the existing one. But, w hat w e deal w ith here are
humans, w hich is a lot more complicated. Employees may fall sick, may need rest, vacation,
motivation and other innumerous things to raise the level of performance.

A performance management model tries to understand these variables and integrate

them into one model. The traditional model creates a timeline and average production as a
standard. The group of w orkers w ho comes under the category of accomplishing the task
is aggregated. Once, the company has a group of performers, it becomes easier to simulate
the same model to other groups, w ho are identified as under producers.

The group of over producers is taken for simulating the average production group.
Hence, the bar can be pushed a little higher for each group over a period of time. Using the
average as a baseline w ill effect employees. When people have a clear goal, they w ill often
w ork to achieve the target. This keeps the employees focused.

The disadvantage of this traditional model is, the under producers w hen not able to
meet the goal, gets frustrated, resentment grow s and the group goes dow n, further low ering
the productivity.

Model of Performance Management System

Models of Performance management system are created more often catering to the
needs of the organisation. Let us see one model for our understanding.

The model given below is composed of three units, based on the level of influence on
the employee performance.

Primary influence - Organisation (Most influential)

Secondary influence Personality, attitude and behaviour (Second Level)

Tertiary influence - Work place (third level)

Let us see one by one in detail

1. Organisation - Primary Influence

The influential factors in an organisation are as follow s:

Organisational structure

Employee Motivation

Work place and its implications like, w ork place privacy, w orkplace violence and
harassments, w orkplace harmony and cleanliness

Management techniques and methods


Monitoring and control systems

Effective leadership

Performance evaluation systems

Rew ard System

Perfor mance Counseling

Organizational culture and w ork climate


2. Personal Orientation

The fac tor that comprises the per sonality of an employee obviously effects the
performance of the employee. The five factor model is used by many researchers of industrial
psychology to categorize the dimensions of personality. They are

Emotional Stability



Openness to experience

Extraversion/ introversion

Apart from these, there are many other factors, w hat w e commonly use in our business
terms like,




Know ledge and s kills are also important factors that determine the employees

John Campbell defines eight behavioural dimensions of Performance. They are

1. Job-specific task proficiency -how w ell an employee can do his job

2. Non-job-specific task proficiency how w ell an employee can do other jobs, related
to his job, in the organisation

3. Com m unication how w ell an employee can communicate, both w ritten and oral

4. Dem onstrating effort How w ell an employee can be committed and persistent at
his job

5. Maintaining personal discipline how w ell an employee can avoid negative


6. Facilitating team and peer perform ance how w ell an employee supports his
team and peers

7. Supervision How w ell an employee influences his subordinates

8. Managem ent and adm inistration How w ell and employee performs others
management functions such as organising, controlling etc.

Taking a good view of understanding in this side of the employee by both, employee
himself and the employer w ill help in identifying the blockages in better performance. Making
a note of these behavioural standards in the performance evaluations w ill create quantum
leaps of better relationship betw een the appraisee and the appraiser. Usually, Performance
Counseling method is used to stimulate and rectify the problem areas in this sector. We
w ill be having a better view of performance counseling in the forth coming units.

3. Work Place and its Influence

Workplace is w here the employee performs his job. The w ork place has a lot of
implication over the performance of the employee. The major factors are

Relationship of Superior and the subordinate

Relationship among the peers and team mates

Work life balance

Quality of w ork life

Quality of w ork place

Workplace privacy

Workplace violence and harassments

Workplace harmony

Workplace stress

Morale level

Workplace environment

1.10 Facilitating Performance Management

Facilitating Organizations

w e have seen the importance of the employees performance in many dimensions.

We have stressed all the w ay that, the behaviour of the employee has to change to perform.
And, w e have also seen that the organisation has to pave a w ay, clear the path and assist
him to do so. How to do that? The organisation should be facilitating to improve the levels.
Let us see, w hat are the key points, an organization should do to make this possible.

1. Key Result Areas : Also called as key performance index, Key result area is the
primary responsibility of an individual employee. It is the core area of his job, for w hich he is
answ erable and accountable. If the KRA is clearly outlined w ithout any ambiguity, the
employees focus w ill be sharp and smooth

2. Goals: The individual contributions are collectively the big result. But, the goals set
are often top-dow n process, and a little share in deciding the goals of the organisation, or
his division, or his individual job goal, is even a question mark for the low level employees,
w ho are the real players in the field. Hence, the morale and motivation can be triggered
positively if the employees are given a say w hile deciding goals for their div isions or
departments. As, they too are responsible for the goals set, they take it as their task to
accomplish it.

3. Holistic Approach : Key result areas, individual goals, organization goals,

department goals may be all these are diverse, but it is the responsibility of the Top
management and the performance manager to have a holistic approach and see to that
they dont collide w ith each other, but sail smoothly side by side.

4. Being Specific : The organisation should ensure that the promises and platforms
created for development are for real. For example, an announcement of incentives to
innovations and a follow ing appraisal report condemning the time spent on research w ing
rather than the w ork floor w ill not yield good result. If the organisation needs innovative
ideas from the employees, then the time budget and flexibility should follow, so that the
employees w ithout ambiguity can do their w ork.

5. Leadership and Ow nership : The most important facilitation the organisation

should do is taking the ow nership and responsibility of the performance management
process. The Governance as w ell as the top management should have the time and courage
to ask questions like

is the vision and mission are real, and for to be achieved?,

do w e really respect and empathize our employees?,

are the benefits for employees really helping?,

do w e really rew ard employees w ho demonstrates organisational values?,

can w e rew ard best efforts also equally to best performance?,

do w e really reach till the last level of employee, are the communication channels
w orking w ithout clogs?.

Questions may look silly, but the answ ers w ill give a clear picture of the leadership
and ow nership responsibility and commitment of the top management.

6. Com m itm ent : When w e talk for centuries that the employees should be committed
and loyal to the organizations, it is now time to go vice versa. The employees performance
and the organisations commitment tow ards the employees are directly related. When the
companies can show genuinely their c ommitment to their employees by continuously
improving their standards of ov erall Organisational performance and management, the
employees feels that the company really car es for them, and they do matter to the
organization. More than anything else, this facilitates performance.

1.11 Summary

In this lesson w e have introduced the basics of performance management, duly

delineating its concepts and focusing on its various dimensions. In organizations today
per formance management is considered as most impor tant and cruc ial f unction, as
leveraging continuous performance improvement of employees, organizations can sustain
in a competitive environment. Performance management systems in any organization, do
not just restrict its scope to employees performance appraisal, it integrates individual and
group performances of employees w ith the overall organizational performance.

1.12 Review Questions

1. Define Per formance Management. How c an w e unders tand that Performance

Management is practiced in an organization?

2. What are the important objectives of Performance Management?

3. Explain various models of Performance management.



Learning Objectives
After reading this lesson you w ill be able to

To understand the performance encouragement in organiasation

To understand the various w ork dimension

To analyse employees w ork atmosphere through the performance

2.1 Introduction

2.2 Work Place Privacy

2.3 Work Place Stress

2.4 Work Place Anxiety

2.5 Work Place Violence

2.6 Em ployee and the Em ployer

2.7 Work Place Ethics

2.8 Modern Managem ent Techniques in Performance Management

2.9 Goals and Feedback

2.11 How to set Goals?

2.12 Summ ary

2.13 Review Questions


2.1 Introduction

We are going to discuss on an interesting and important concept called Work Place.
A w ork place is generally defined as a place w here w ork is done. Work place has various
forms, design, lay out. Work place may be for production, packing, book keeping, managing,
storing etc. You may now think w hy w e have to know about w ork place. Good question.
Think on these lines. A w ork place is similar to that of a living place. The place w e live is
important to us in many w ays. It should be clean for some, should be spacious for some
and should be peaceful for some and so on. Why w e get attached to the place w e live in,
because it influences our behaviour. A clean, calm, ventilated, cool and bright setting of
home gives us happiness. On the other hand, a dirty and problematic home may result in
depression and demotivation. The same w ay, the w ork place has its implications in the
productivity of the employees working over there. A cleaner, friendlier w ork place w ill certainly
help to improve the quality of w ork life of the employees and also w ill result in increased

There are a few important concepts related to w ork place, w hich w e are going to see
in detail below. These concepts are for understanding the various issues of w orkplace all
over the w orld and the importance of a better w ork place for better performance.

2.2 Work Place Privacy

Going by the dictionary Work place Privacy can be defined as Freedom for employees
from unauthorized intrusion from the employers or the general right of the Individual to be
let alone. In other w ords, Work place privacy is a quality or state of not being under
observation and freedom from unauthorized intrusion. Privacy at home or at our place is of
course different from the one at our w ork place. Work place is common to many other
people and obviously ow ned and controlled by other people. But still, there is a level of
privacy the employees has to maintain, in order to perform their job in an effective manner.
Even though privacy is generally accepted as a basic right, w hether it is for the personal
information or the place of w ork, the question is w here to draw the line.

The level of information sought by the employer and the level of information used by
the employer are all under the vague umbrella of w ork place privacy.

The major issues of w ork place privacy and its violations are as follow s:

Electronic surveillance and Video Monitoring of employees at w ork place

Monitoring of emails (including personal emails) of the employees through the office
server system

Tapping of phone calls of employees during office hours

Credit check on employees

Seeking personal information of employees

The above said issues are ongoing debates and yet unresolved in many countries. In
USA, invasion of privacy is considered to be a major infringement of individual rights. In
India, the MNCs and industries w ith w estern ties like BPOs, KPOs and Softw are companies
are the major users of softw ares to monitors the employees. The popular softw ares like
spector soft and VPI empow er suite are available in the market w hich are specially
designed to monitor the desktops and phone calls of employees in the organisation.

On the other side of the coin, employers justify the surveillance or monitoring by
stating the follow ing reasons:

Monitoring employees helps identifying genuine and honest employees

Surveillance improves productivity

It helps in keeping a check on thefts in the organisation may it be materialistic or

know ledge base or data base

When employees know that they are under observation, they try to act cordial and
amicable to co-w orkers and conflicts are reduced

Cuts out the misuse of internet facilities

Keeps check on Industrial espionage

Cuts our computer slack time

Keeps the misuse of company resources at bay


2.3 Work Place Stress

Work place can be stress ful at times. Whatever may be the industry, institution,
organised sector or unorganized sector the presence of stress is inevitable. Some stress
are good and gives motivation. Stress makes us stronger. But, w hen it crosses the limit, it
creates bad effects.

Stress is a very commonly used term in our w orld now. Not only you and me, w e can
see that even school children say casually that they are stressed of their project w orks or
home w orks. Whether w e understand the term correctly or not is an interesting question of
course. But one w ay or the other, w e understand the implications and symptoms of the
concept of stress. Like, w e identify the frequent outbursts, frustration, headaches, anger
all these or any of these or any other things other than these-w ithout any justifiable, identifiable,
obvious reason, may be symptoms of stress.

Work place gives employees a lot of scope to develop stress. They are called as
stressors Think of these things:

Employees w ork in confined places most often cabins, rooms.

Employees w ork w ith people around on top as superiors, bottom as subordinates,

and peers all around forced on us and often not very amicable and friendly, sometimes
the w orse w ith hatred and enmity

Employees w ork w ith targets ahead targets of different kinds like targets based on
time, quality, production, know ledge, skill etc

Employees w or k on challenges, over load of w ork, sometimes under load. Over

responsibility, over authority or under pow er any of these, w hich ever not properly
balanced, make us feel stressed

Employees often have to forget home in office and office at home, w hich most often
they are not able to.

Monotonous, soul less routines of procedures of w ork, causing thoughts about the
irrelativeness in ones ow n passion and job

Low levels of Job satisfaction


These are just samples of how a human mind can start on feeling depressed. Let us
first see, w hat the academic w orld thinks of stress. Here comes the definition:

Work place stress can be defined as a persons physiological and psychological

response to external s timuli that demands reaction fr om the pers ons phy sic al or
psychological system and create imbalance in the activities of the person.

The reason w e have to look upon stress as a serious issue related to employee
performance is, that, stress changes employee behaviour. It has been identified that stress
causes the follow ing behavioural changes:

Difficult to focus

Losing sense of humour

Losing temper

Over eating/ under eating

Excessive smoking/ drinking

It seems that, the overall belief is Work place stress is the curse of this century on
human kind. Look at this interesting quote:

Stress is w hen you w ake up screaming and you realize you havent fallen asleep

2.4 Work Place Anxiety

Anxiety at w ork place is an unavoidable phenomenon in the ever grow ing globe of
corporate w orld. The Symptoms of anxiety range from obsessive w orry and racing thoughts
to fears of appearing nervous and avoidant behavior. Those w ho suffer may go to incredible
lengths. The line betw een normal anxiety and abnormal anxiety is very fragile one. The
symptoms of fear, nervousness w hile facing people and feeling aw kw ard at some situations
are anxieties of normal type. It poses a threat of stress only w hen anxiety starts controlling
the employees. Employees, especially those at the managerial level w hen consumed by
w orry and anxiety may face a plunge in productivity, career de-railing and risk of mental

The figure shows the linear relationship of anxiety and performance. When an employee
is not having any anxiety, w hich means he is not having any interest tow ards the job and
feeling bored. When there is no push from w ithin the person, the performance w ill be very
low, w ithout any involvement and attachment. He is in a demotivated condition.

When anxiety piles up, his interest is aroused and hence, he starts enjoying his w ork.
His performance boosts up and at one point, the employee reaches the optimum level of
his performance. Unfortunately, if the anxiety at this level fails to cease dow n, the employee
finds himself

In a crisis. He doesnt find a w ay to cope up the developing anxiety, as his competency

level is used at maximum and he is exhausted. At this stage, the performance slow ly dives
dow nw ards and in due time, if not attended w ith correct remedy to decrease the anxiety
level, reaches the bottom line of performance. What do w e mean by remedy here? Proper
communication betw een the subordinate and the superior, accomplishing the competency
deficits to achieve the goal, timely assistance by the team, counseling if necessary, a little
motivation etc. w hen the organisation steps in through superior to help the employee cope
up w ith his anxiety, thats w hat the remedy is.

Feeling of uncertainty and pow erlessness is the reason behind the w ork place anxiety.
The Managers should understand this to help his employees overcome and have a control
of this symptom. Psychologists suggests follow ing tips to control the anxiety in the w ork

Loving the job or doing the job w e love to do! Satisfaction in job and being passionate
about the w ork outcome is an important self esteem booster.

Having trust on trustable peers. After all w e are all social animals and w e need human
company during stressful w ork hours.

Creating ow n self identity and not hesitating to be creative, because it stimulates the
stress busters in a natural w ay

Creating aw areness and know ing the symptoms of anxiety and stress and make it
out in a positive w ay. Eustress is really a good friend.

Improving time management skills and having w ork and w orkplace organised.

Relaxing and loosening up as often as possible during w ork hours. It is not that hard
as w e think. Relaxing needs hardly 2 minutes like w alking a small bit through the
office corridor, closing the eyes for a few seconds, taking a deep breath, etc

Trying to accept and embrace the changes and challenges as they come. Too much
of resistance takes the toll on mental as w ell as physical health.

2.5 Work Place Violence

The term Wor k Place Violence is often misleading and w e think only about the
incidents in history like the riot happened in Maruthi Plant in Manesar. But, the reality is
more painful. It is more an issue than just w hat merely affects the performance of the
employ ees. Work place violence not only has the negative impact ov er the employee
performance, but sometimes destructs the life of employee, physical health or mental health.
In an organization, w ork place violence may be in any form of


Har assment


Physical abuse

Verbal attacks

Minor injuries

Unw elcome teasing

Harmful or malicious gossip

Verbal or w ritten threats and

Intentional property damage


It also includes

Damages caused by animals in the w orkplace

Hazardous chemicals

Laboratory experiments

Hazardous machine operations

Work in terrorized zones

Work in dangerous and unhealthy climates etc

When w e talk about violence, w e think of heavy physical damage and pain. But,
hurting of mind and soul is almost equal or even w orse than hurting the body. The popular
Thirukural in Tamil has a hymn of tw o lines Theeyinal sutta pun ullarum, aarathey naavinal
sutta vadu meaning the scar of fire w ill heal sooner than the scar created by the tongue

Work place violence usually involves

1. Employee and the employer

2. Employee and co-w orker

3. Employee and customer/ client

4. Employee and outsider

2.6 Employee and the Employer

The acts of violence like verbal abuse, throw ing the table w eight or files, hitting/slapping
in the w orkplace is the commonly visible in many places. It is not necessarily the victim is
alw ays the employee most often the victim may be the manger or the superior. The recent
incident of riot and violence in Yanam, an enclave of Pondicherry union territory given in the
activity box below w ill make you understand the seriousness of this issue.

Work Place Harmony

The next topic is a step on the positive side. A harmonious w ork place. The dictionary
meaning of Harmony is the quality of forming a pleasing and consistent; the state of being
in agreement or concord and harmonious means free from disagreement or dissent.

Know ing the boundaries Employees should know w ith clarity w here they stand,
w hat their role is, w hat they are expected to do and w hat not they should do. Interference in
others boundaries is often the major problem causing factor in the w orkplace relationships

Role of Leader The vital part in creating harmony is leaders role. He has to clarify
the roles, vision, mission, goals, and the relationship betw een the organisational goals and
the employees role in achieving that, aligning the goal of employee and that of the organisation,
attending to grievances, being a real supporter to his team mates, being empathetic and
loyal to his employees and other innumerous actions he can perform to create the harmony.

Team Team playing is inevitable in creating harmony. A w ork place is full of people
and each one has to compliment the other to make it a w hole picture. Team w ork gives
positive energy even w ith long w ork hours and tough targets. The flaw s of individuals can
be adjusted w ith the strength of others in a team play.

Clear Agenda A days w ork should s tart w ith a breakfast plate of proteins,
carbohydrates, vitamins, minerals and calcium. Is it not? The same w ay, a days w ork at
the w ork place should start w ith clear plan of, hard w ork, meetings, intervals, reporting etc.
A clear agenda for small groups w hich comprises of big groups and their agenda w ith a
clear focus to attend to the goals w ill avoid small conflicts at the w ork place.

Rew ards and appreciations A good rew ard system and appreciation to the
employees create a place of happiness. In case of errors, a system of pointing out them
and helping the employees to rectify those errors w ill help in reducing conflicts and thus
resulting in good harmonious environment.

Rem oval of Hindrances Creating a good w ork place means clearing off bad
elements also. There is alw ays a possibility of having a black sheep in the team w ho spoils
the spirit. That should be taken care of for creating harmony.

Continuous Training A trained employee is a confident employee. That helps him

develop loyalty, hence, turn over comes dow n and as a result, the people staying for long
years automatically develop friendship and team spirit among them.

Promoting Work life balance The employers initiate to a sustained work lif e balance
of his employees w ill result in a much harmonious environment. A w ell balanced w ork life,

gives a sense of satisfaction tow ards life including the w ork time. It improves the attitude of
the employee to act cool and calm, friendly and team spirited, w hich is essential for w orkplace

2.7 Work Place Ethics

Business dictionary defines w ork place ethics as The belief that w ork has a moral
benefit and an inherent ability to strengthen character. It can be described as a set of
values, right attitude and right behaviour tow ards others in the w ork place. The explicit
behaviour at a w ork place has chain of reactions and hence, to retain w ork ethics is to
retain good behaviour- responsible, honest and dependable. Organisations also have their
ow n culture, value system and ethical code of conduct. The traditional virtues such as
loyalty, trust, commitment, Social responsibility, good governance are some of the traits of
a good value system of organisations. In the current globalised w orld, customer satisfaction
& sustainability, innovation, green culture & eco-friendliness, team culture is all new additions
to the w ay of w ork place ethics.

Good w ork Ethics at a w ork place means the existence of follow ing among the people
from top to bottom in the organization:




Trustw orthiness



Team Spirit

Helping spirit

Harassment free

Transparent accounting to the stake holders

Occupational health and safety


Performance and Ethics

Work place ethics plays an important role in sustaining the perfor mance of the
employees. The behaviour of being good w hen continued becomes habit and at a point
good performance levels becomes the culture of the organisation. One of the most important
responsibility lies w ith the leaders of the organisation to uphold the highest standards of
ethical behaviour. That behaviour slow ly comes dow n the line and reaches even the last
employee in the structure.

2.8 Modern Management Techniques in

Performance Management

Talking about the changes, the term of HRM is itself used w ith different tones like
Human Capital Management. The organisations are realizing the crucial role of their human
resource day-by-day. Let us see a few important concepts that have evolved in the recent
past, particularly in relevance w ith the Indian Business World.

The themes and concepts in this lesson are

Competenc y Mapping

Team performance Appraisals

Social Media and HRM

Successfully implemented innovative methods in Corporates and MNCs.

Competency Mapping

Called in dif fer ent names like Competenc e A r chitec ture , Competenc e
management, Competence Development etc, the basic concept of competency mapping
is a w ay of assessing the strengths and w eakness of an employee. It helps to

Identify the ability of a person, know ledge and skills, initiatives, team spirit etc

Understanding the ability in terms of management (For example Skill of influencing

and communication as negotiator and sales man)

Developing the ability to perform better and achieve the optimum



United Nations Industr ial Dev elopment Organisation def ines Competency as , A
competency is a set of skills, related know ledge and attributes that allow an individual to
successfully perform a task or an activity w ithin a specific function or job.

Competency Mapping

Competency Mapping is a process of identif ication and developing of the competencies

required to perform successfully a given job or a set of tasks.

Competency Map

A competency map is a chart or diagram that represents the important skill sets
needed to accomplish the given job.

Competency based HR Management helps the or ganisation in various w ays like

recr uiting competent employees, managing the performance w ell and conv erting the
organisation into learning and know ledge based. It further helps in discovering the gaps in
organisational competence structure as w ell as in personal career path. Organisations
accept this technique as a better w ay to combine the capabilities of an employee into one
job, and combine the capabilities of group of employees into one team. Career advancement
and higher elevations are made possible w ith this method.

Basically the

1. Functional skills,

2. Behaviour and

3. Past performances are the three domains analyzed.


In short, the competency method helps in

Gap Analysis

Role Clarity

Succession Planning

Grow th Plans

Restruc turing

Inventory of competencies for future planning

2.9 Goals and feedback

Goals and feedback w ork together to affect goal accomplishment, Employees may
provide their ow n feedback or receive it from others, such as supervisors or peers. Coaches
are another source of feedback and support for participation in goal setting. Employees
need feedback to help calibrate their progress tow ard a goal, as w ell as to suggest w ays to
adjust the level or direction of their efforts or to shift performance strategies. The combination
of goals plus feedback is more effective than goals alone (Locke and Latham, 2002 ).
Feedback and praise in the form of public recognition or by means of a monetary bonus do
not affect performance unless they lead to setting of and committing to specific and difficult

2.10 Types of goals

The different types of goals and how they are set are described below.

On-going role or work goals

All roles have builtin objectives that may be expressed as key result areas in a role
profile. The definition of a key result area states that this is w hat the role holder is expected
to achieve in this particular aspect of the role. For example: identify database requirements
for all projec ts that require data management in order to meet the needs of inter nal
customers or Deal quickly w ith customer queries in order to create and maintain high
levels of satisfaction. Good role or w ork objectives w ill clearly define the activity in terms of
the results and standards to be achieved. They may be supplemented by quantified targets
or standards that may be quantified or qualitative. Although described as nn-going, role
objectives need to be review ed regularly and as necessary, modified.


Targets are objectives that define the quantifiable results to be attained as measured
in such terms as output. Through put income sales, levels of service delivery cost reduction
of reject rates. Thus a customer service target could be to respond to 90 per cent of queries
w ithin tw o working days.


Objectives can be set for the completion of tasks or projects by a specified date or to
achieve an interim result. A target for a database administrator could be to develop a new
database to meet the needs of the HR department by the end of the year.

Performance standards

A performance standard definition takes the form of a statement that performance

w ill be up to standard if a desirable, specified and observable result happens. lt should
preferably be quantified in terms, for example, of level of service or speed of response.
Where this is not possible, a more qualitative approach may have to be adopted, in w hich
case the standard of performance definition w ould in effect state: This job or task w ill have
been w ell done w hen (the follow ing things happen).`


Behavioural expectations are often set out generally in competency framew orks but
they may also be def ined indiv idually under the framew ork headings. Competency
framew orks may deal w ith areas of behaviour associated w ith core values, for example
teamw ork, but they often convert the aspirations contained in value statements into more
specific examples of desirable and undesirable behaviour that can help in planning and
review ing performance.


Expectation can be defined for upholding the core values of the orgainsation the aim
w ould be to ensure that espoused valued become values in use.

Integrating goals

A defining characteristic of performance management is the importance attached to

the integration or alignment of individual goals w ith organizational objectives. The aim is to

focus people on doing the right things in order to achieve a shared understanding of
performance requirements throughout the organization. The integration of organizational
and individual/team objectives is often referred to as a process of cascading objectives.
How ever cascading should not be regarded as just a top-dow n process. There w ill be
overarching corporate goals, but people at each level should be given the opportunity to
indicate how they believe they can contribute to the attainment of team and departmental
objectiv es. This is a bottom-up process and the view s of employees about w hat they believe
they can achieve should be noted and, as appropriate. Higher-level objectives amended to
take account of them. An approach along these lines increases ow nership` of the objectives
as w ell as providing a channel for upw ard communication on key issues affecting the
achievement of business goals. Of course there w ill be times w hen the overriding challenge
has to be accepted, but there w ill also be many occasions w hen the opinions of those w ho
have to do the w ork w ill be w ell w orth listening to. Integration is achieved by ensuring that
everyone is aw are of corporate, functional and team goals and that the objectives they
agree for themselves are consistent w ith those goals and w ill contribute in specified w ays
to their achievement.

2.11 How to set goals

Goals are set by reference to an agreed role profile that should set out key result
areas. Role profiles should be amended at the time any changes are made to these areas.
But they should be formally review ed and updated at the planning and agreement stage of

the performance management cycle. The follow ing is an example of a goal-setting process
used in a retail company. When setting staff objectives for the coming year, line managers
are advised to start w ith their ow n objectives, going through each one and identifying w hat
it is they need each team member to do in order to achieve his or her ow n targets.

Predicting what is achievable

Schneiderman (l999) w arned that: Specific goals should be set based on know ledge of the
means that w ill be used to achieve them. Yet the means are rarely know n at the time the
goals are set. The usual result is that the goal is too low ; w e w ill underachieve relative to
our potential. I f the goal is too high, w e w ill under achieve according to other peoples
expectations. Whats really needed is a means of predicting w hat is achievable U some
sort of standard means for improvement w ere used.

Participation in goal setting

Participation in goal setting is important, but. as noted by London. Mone and Scott
(2004), it must be accompanied by an understanding of organizational goals, information
about translating them into action, and support for meeting goals. The evaluation of individual
goal setting and participation should begin w ith a review of the process that managers and
employees follow throughout the organization to establish goals. As previously pointed out,
participation in goal setting improves performance, not because participation by itself is
inherently motivating, but because it provides the employee w ith an increased understanding
of expectations and strategies for goal accomplishment.

2.12 Summary

There are a few important concepts related to w ork place, w hich w e have seen in
detail this lesson. These concepts are for understanding the various issues of w orkplace
all over the w orld and the importance of a better w ork place for better performance.

2.13 Review Questions

1. Explain the various dimensions of w orkplace and the relevance of w orkplace to
performance of employees.

2. Write dow n some of the modern management practices in the field of HRM w ith brief


Learning Objectives

After reading this lesson you w ill be able to

To recognize the importance of performance planning

To understand the performance planning process

To understand how and w hen performance planning should be done

3.1 Introduction

3.2 Perform ance Planning Process

3.3 Developm ent and contents of a perform ance plan

3.4 Performance planning steps

3.5 Standards of a perform ance plan

3.6 Preparing the perform ance developm ent plan

3.7 Perform ance plan and role clarity

3.8 Summ ary

3.9 Review Questions

3.1 Introduction

Performance management cycle starts w ith the process of review ing employees
performance against the organizational performance expectations. At the beginning of the
performance management cycle. it is important to review w ith employees the performance

expectations of the organizations. Such a review must als o consider the behavioural aspects,
as an employees behaviour also reflects on their performance. Review of employees`
behaviour is important as it helps to assess the w ay the job is done, employeespropensity
to teamw ork, interpersonal communications, attitude tow ards subordinates development,
etc. The review exercises also set the premises for future performance expectations from
the employees. in many organizations, it is often observed that outstanding performers are
attitudinally bad, and often exhibit disruptive behaviour, w hich ultimately creates a difficult
situation in the w ork place. People w ho are subordinate to such employees feel unhappy
and even take harsh decisions to leave the organization. Such attrition ultimately affects
the organizational performance. On the contrary, good performers w ith positive behaviour
for their helpful attitude cart benefit the organisation creating a compelling culture to perform.
Therefore, during the performance planning itself it is important for the organizations to
assign w eights to behavioural and target-achievement aspects, as the behavioural syndrome
decide the performanc e outcome, if not the perf ormance output. Performance review
process es. Ther efor e, take s tock of behavioural and the performance r esults, and
accordingly provide the feedback to the employees. Performance feedback needs to be
given to employees on an ongoing basis.

The purpose is to give the message to the performance laggards and help them to
develop their performance. With the balanced scorecard, now adays, it is possible to give
real-time performance feedback to employees, and even employees on their ow n can self-
assess their contributions in achieving the organizational objectives. Also, employees enjoy
selfpride in understanding the gravity of their contributions. Giving effective performance
feedback to a great extent depends on the w ay it is provided to the employees. Good
managers make this feedback process a tw o-w ay communication.

Some managers fear adverse performanc e feedback to employees w ill increase

their discussion, and they may even feel demoralized, w hich may exert adverse impact on
their future performance. But w ith the role of a performance facilitator, w hen managers
help the employees to understand their performance gaps, and also show them the w ay it
can be improved, even under performance can chum out to become good performers.
Many organizations, therefore, provide training to their managers to successfully provide
their perf ormance feedbac k to employees. With ongoing c andid per f or manc e

communication (tw o w ay), organizations achieve better results. It makes the performance
management system more effective, and ultimately contributes to develop a compelling
culture of performance.

3.2 Performance Planning Process

Performance management is the sy stematic proces s of planning, monitoring.

developing, rating, and rew ar ding good performance. Planning sets per for mance
expectations and goals for the individuals and groups, keeping pace w ith organizational
objectives. Performance plans for employees explain w hat employees need to do to
accomplish their jobs successfully. it consists of w ritten and documented performance
elements, w hich f orm the basis of perf or mance management. For group or team
performance, critical performance elements are difficult to document. Although individual
members of the group need to accomplish the c ritical per formance elements, gr oup
performance consists of achieving group goals. Group goals are an aggregation of individual
level critical and non-critical performance standards. Performance elements explain w hat
the employees are required to do and how w ell they have to do it to achieve the desired
level of performance. Effective performance elements und standards are those w hich are
understandable, measurable, attainable, fair, and challenging. Performance elements can
be critical, non-critical, and peripheral or additional elements.

3.3 Development and Contents of a Performance Plan

To develop a performance plan, w e f irst focus on individual level performance

requirements, rather than the performance requirements of groups and the organization as
a w hole. Hence, the steps for developing a performance plan are draw n using the employee
perfor mance requir ements that relate more to individual employee level perfor mance.
How ever, follow ing such steps, w e can cascade the performance efforts requirement for
the gr oups and the or ganizations as w ell. Such cas cading effects on groups and
organizational performances may not alw ays be possible for all types of jobs. For example,
one research and development (R&D) professional may develop several prototypes for
consumer durables, but marketing and operations people may adopt those w hich they feel
fit to the customers requirements and have an operational feasibility. In the consumer
electronics industry, to w ithstand the competitive pressure, mos t of the organizations

separate their R&D activities and allow their employees to innovate products independent
of market demand. This is to w oo the customers to new designs and gain market leadership.
Michel Porter (l985) named this as product differentiation strategy to light against competition.
Hence, performance consideration of the R&D professionals in an organizational context
is limited only to those w hose ideas effectively translated to new designs resulting in market

1. Review organizational goals to associate preferred organizational results in terms

of units of Performance, that is, quantity, Quality, cost, or timeliness. Organizational goals
are often established during strategic planning. Performance management translates these
to results that vary depending on the nature of jobs, in terms of quantity, quality, timeliness,
or costs. Results are the primary outcome in terms of products and services. or any other
that w e desire to achieve in the performance process.

2. In step 2 of the perform ance planning process, w e need to specify the desired
results. These results vary w ith respect to different performance domains. For example, at
the operation level employees may be expec ted to produce high quality items, w hile a
marketing team may be expected to render best customer services. in step 2, therefore,
w e cascade over goal or sub-goals into specific performance results.

3. In step 3, w e align perform ance results w ith the organizational results. This is
to ensure performance results contribute to the overall organizational goal achievement.
Hence, organizations look for answ ers to the follow ing questions:

a) Are the employees able to trace how their contributions fit to the achievement of
overall Organizational goals?

b) Are the employees able to understand w hat organizational goals they are pursuing?

c) Are the employees aw are of how they need to pursue organizational goals?

d) Are the employees able to understand w hat could be the most productive w ay to
pursue the goals?

c) Are the employees able to understand how their contribution to organizational goals
w ill be measured?

4. In step 4, w e need to prioritize the specific performance actions , sub-goals,

or goals, assigning some w eight to each criterion. To better understand, some organizations
may also assign numeric values to each criterion. Professionally managed organizations
w ho prefer performance-based recruitment indicate these through structured mapping,
assigning w eights or numeric values. Assigned w eights or numeric values help employees
prioritize their actions and als o decide the required time per criterion. For example, a marketing
managers time allocation may be w eighted as follow s:

a) 70 per cent of time to develop new market opportunities

b) I0 per cent of time in analyzing customer feedback

c) l0 per cent of time in planning

d) I0 per cent of time in scanning competitors information

5. In step 5. Perform ance evaluation m easures arc identified. Performance

measures may be quantity, quality, timeliness, innovativeness, or cost. For a factory w orker,
performance measures may be quantity pr oduced confor ming to quality and cos t-
eff ec tiveness in a given time f rame. For an HR manager, this may be r educ ing
employeesgrievances w ithin a w eek at the most, and saving the cost of arbitration or legal
suits. For an R&.D scientist, this may be developing a given number of prototypes w ithin a
given time at optimum costs. The biggest challenge for the managers is to identify the
appropriate performance measures. It requires thorough understanding of performance
domains and their relations w ith the goals or sub goals. Again, selection of measurement
tools requires special attention as these need to be valid and reliable.

6. Identify specific m easures m ore precisely. For some performance domains,

w e need to be more precise to be able to accurately measure employees contributions.
For example, development of prototypes by R&D scientists can be further prcised. Proto
types that can be used and adopted in commercial runs, For example, a developed prototype
may not be suitable for fitment trial and subsequent production run in the absence of required
plants and machineries, or it may not be customer satisfactory.

7. Identify perfor m ance standards or the level of perf ormance for accurate
evaluation. Performance standards clarify the level that is expected to be achieved by the

employees w hile they deliver results. For example, if the performance standards for R&D
scientists is to develop l0 effective prototypes (effectiveness in terms of cost optimization,
produc tion feasibility, and customer acceptance) and one R&D scientist achiev es the
development of I2 prototypes, then this performance is termed exceeds expectations.
When it is just I0, it is termed meets expectation, but if it falls short of l0 then does not meet

8, Docum ent the perform ance plan indicating the expected results, performance
measur es and Per formanc e standards . A doc umented per for manc e helps both the
managers w ho evaluate the performance as w ell as the employees w ho deliver them.

3.4 Performance Planning Steps

We have already understood the process of developing the contents of performance

plans the follow ing performance planning steps can ensure the effectiveness of the same:

Establish performance goals that are objective, quantifiable, and measurable.

Describe the resource requirements to meet these goals.

Document indicators to measure the performance.

Align individual employee-level performances w ith organizational goals.

Rate performance as per documented procedures in the performance plan.

Process of Developing Employee Performance Plans

Traditionally in some organizations, performance plans are developed based on

employees job descriptions. This, how ever, cannot lead to achieving the expected results,
as it elaborates only the activities and not the performance accomplis hed. Activities in isolation
cannot be aligned to organizational goals.

3.5 Eight - Step Model of Elements and Standards of A

Performance Plan

So far w e have review ed performance plans focusing only on activities. Here w e w ill
focus on performance plans that establish elements and standards duly addressing the
accomplishments w hich lead to the achievement of organizational goals. This eight-step

model is based on organizational practices, and for each successive step, the inputs come
from the previous step.

Step l: Understand the Overall Picture : This initial step requires consideration of
ov erall organiz ational goals and objectives , r ather than c ons idering employeesjob
descriptions w hile developing the performance plans. This is done collecting information
on the general outcome of the strategic plan of organizations. Organizational strategic
plans also outline the goals and objectives (goals are the subjective targets w hile objectives
an: the quantitative targets) and the quantifiable and measurable performance goals.
Alignment of employee performance plans w ith the strategic plan of the organization ensures
a holistic consideration of all aspects providing the overall picture. Employees` achievements
of goals at every stage integrate w ith the overall goals of the organization and in the process
fulfill the organizations strategic intents. in other w ords, the general outcome goals of the
strategic plan cascade to the s pecific or output-oriented per for manc e plan making
performance plan a subset of the organizations strategic plan.

Step 2: Identify the Accom plishm ents at the Wo rk Unit Level : This step
deter mines the accomplis hments (i.e.. the pr oducts or s erv ices) at the unit level.
Organizational units may be a strategic business unit (SBU), a product line (representing a
bundle of similar types of products, such as detergents of Hindustan Unilever), a division,
or a product mix (representing a single product, that is, a single type of detergent of Hindustan
Unilever). Through adoption of appropriate measures, organizations determine the nature
of accomplishments expected from the w ork units to develop the performance plan

Step 3: Identify Individual Accomplishm ents and Their Integration w ith the Work
Unit Goals : Here w e consider the performance elements that include individual and group
assignments and responsibilities. Using a role-result matrix (represented in a table duly
identif y ing the expected r esults f rom the unit lev el employ ees that lead to the
accomplishment of results at the unit level), w e list the units products or services and the
members accomplishments for each job position in terms of quantifiable and verifiable
performance elements. It is important to understand that role result matrix is not intended
to document the activities (verbs); it specifies the accomplishments of unit level employees
w ho lead to the achievement of results at the unit level.

Step 4: Convert Expected Accom plishments into Performance Elem ents , Duly
Mentioning Their type and Priority in this step. We need to identify specific elements of the

performance plan and assign w eights as w ell as priorities. We may have a number of job
elements in a performance plan f or an employee but all may not be equally important.
Elements w ith highest priority and w eights are know n as critical elements. In each job
position, at least one critical element needs to be present. We may also have non-critical
and additional performance elements all such elements are clearly spelt out and accordingly
get reflected in the performance appraisal format.

Step 5: Determ ine Work Unit and Individual Measures: After identifying critical,
Non-critical and additional performance elements in the earlier step S, w e determine how
to measure their performance. Measures explain the w ork units w ork process. Here again
w e focus on general measures and specific measures.

Step 6: Develop Work Unit and Individual Standards: With the identification of
general and specific measures for the performance elements, at this stage w e establish
the standards. Standards f or the elements f orm thc basis of perfor mance appraisal
pr ogrammes.

Step 7: Determ ine How to Monitor Perform ance: Performance monitoring not
only indicates measurement of performance but also feedback to employees. Although
performance appraisal may be at a specific time interval, performance monitoring should
be an ongoing and inf ormal process, primarily to keep the employees on track. in the
performance plan, such detailing helps implement the structured process. To ensure that
performance monitoring is effective, organizations need to focus on follow ing aspects:

Decide the nature of data to be collected. Data collection may be through complete
enumeration or based on a sampling method.

Decide the time interval of data collection, the onus of data collection, and the custodian
of such data.

Study all the existing performance reports to design the feedback reports.

Design feedback tables, graphs. or matrix w herever necessary.

Ensure the feedback process is instantaneous and automatic.


Step 8: Check the Perform ance Plan : The final step examines the efficacy of the
performance plan based on the follow ing checklists. These checklists cannot be construed
as final and all inclusive, rather they are tentative. in many organizations ,performance
requirements need to conformto regulatory requirements. How ever, the checklis ts presented
below can be used as a template to understand the degree of effectiveness of a performance

Check w hether the critical elements are truly critical. (Ensure this is based on
the understanding that failure on the critical element makes the overall performance of
employees unacceptable.)

Decide the range of acceptable performance. (Ensure this making performance action
quantifiable, observable. and verifiable.)

Decide w hether the assigned performance standards are attainable. (Ensure this
deciding the degree of attainability of performance standards.)

Decide w hether the attainable standards are challenging. (Ensure this assessing the
degree of efforts that employees need to put to reach this performance level.)

Decide the degree of fairness of the standards. (Ensur e this comparing the
performance expectations in similar job positions.)

Understand w hether the performance standards are applicable. (Ensure this by

assessing the possibility of measurement of performance and data collection.)

Understand whether the performance standards can be understood by the employees.

(Ensure this avoiding any ambiguity in detailing the performance standards.)

Understand the flexibility of elements and standards of performance. (Ensure this by

making the perf ormance plan adaptable enough to the changes in the goals,
objectives, and strategies of the organization.)

Understand w hether the measurement is possible at each level of job element, that
is, exceed the expectation level, meet the expectation level, good in meeting the
expectation level, average in meeting the expectation level, and poor in performance
achievement. (Ensure this by developing a scale assigning a numeric value to each
such performance level.)

3.6 Preparing the Performance Development Plan

Performance development plans are prepared alter setting the performance standards.
Performance standards are decided as a part of the ongoing process of observation and
feedback. It is the final element of the performance appraisal process. Based on the
performance development plans, organizations and employees initiate action for organizing
education or development opportunities. While developing the performance development
plan, it is necessary to discuss training, education, or development opportunities w ith the
employees, identify the steps to be taken, and document the strategy to accomplish the
objectives. Such documentation should include the follow ing:

A description of the specific steps to be taken

Names of those w ho w ill assist the employee.

End dates for the completion of the plans objectives.

A statement of how the successful completion of the plans objectiv es w ill be apprais ed.

Performance management itself is considered as an employee development function.

Based on the performance appraisal results, organizations draw employee development
programmes to meet the performance gaps and to enhance the existing performance level.
Employees also given inputs about their chosen development path, keeping pace w ith the
organizational goals

Perform ance Developm ent Programm e


3.7 Performance Plan and Role Clarity

Role clarity in performance plans helps us achieve higher teamw ork. This is, obviously,
so that employees understand w hat is expected from them and w hich aspects of the job
are important. Also, employees can understand the jobs evaluation process. Therefore,
role clarity becomes the key driver to employee performance. Without role clarity, employees
fail to understand their job requirements, w hich ultimately lead to performanc e-related
problems. This makes role clarity an important prerequisite f or effective perfor mance
planning, and job expectations and performance measures clear w ith focus on the goals
for each person or w ork group. Role clarity also helps employees better understand the
w ay w ork should be done. With increased freedom and authority, employees feel more
committed to w ork and organizations and get the best to meet their strategic intents. Hence,
it is necessary to differentiate role accountabilities both horizontally and vertically.

To check w hether adequate role clarity exists or not, w e need to consider the follow ing

Does every member of the team have a documented job description?

Does ev er y employ ee unders tand the pr oces s of meas ur ement for their

Do employees match w ith their job role in terms of their know ledge, skills, and abilities?

Do employees under stand how their per formance r elates to the organizations
achievement of strategic goals?

Components of role clarity


3.8 Summary

Monitoring is the phase of the performance planning process, w hich facilitates the
continuous measurement of performance to provide feedback. Employees und their groups
can track their contribution to reach the performance goals of the organizations. At the
individual level, monitoring involves review ing the performance progress w ith the employees
against job elements and standards. Ongoing monitoring helps the managers to understand
how w ell employees are performing in meeting the pre-decided performance standards
and the underlying problem in performance standards, if any, for making necessary changes.
Unrealistic performance standards lead to complications, as employees get demotivated
w hen they deliver far less than their assigned targets. Systematic monitoring and adjustment
of the performance plans can eliminate such problems.

3.9 Review Questions

1. What are the importances of Performance planning?

2. Explain the Performance planning steps of the organization.



Learning Objectives

After reading this lesson you w ill be able to

To understand the concept of performance appraisal

To understand the characteristics of appraisal

To describe the performance appraisal process.

To explain the characteristics of an effective appraisal system

To identify the various performance appraisal methods

4.1 Introductions

4.2 Definitions of Perform ance Appraisal

4.3 Objectives of Perform ance Appraisal

4.4 Characteristics of Perform ance Appraisal

4.5 The Perform ance Appraisal Process

4.6 Principles of Perform ance Appraisal

4.7 Advantages of Perform ance Appraisal

4.8 Perform ance Appraisal Methods

4.9 Features of effective Appraisal System

4.10 Problem s in Perform ance Appraisal

4.11 Biases in Perform ance Appraisal

4.12 Reducing Perform ance Errors

4.13 Summ ary

4.14 Review Questions


4.1 Introduction

Performance appraisal (PA) is a formal system of review and evaluation of individual

or team task performance. A critical point in the definition is the w ord formal, because in
actuality, managers should be review ing an individuals performance on a continuing basis.PA
is especially critical to the success of performance management. Although performance
appraisal is but one component of performance management, it is vital, in that it directly
reflects the organizations strategic plan. Although evaluation of team performance is critical
w hen teams exist in an organization, the focus of PA in most firms remains on the individual
employee. Regardles s of the emphas is , an ef fec tive apprais al sy stem ev aluates
accomplishments and initiates plans for development, goals, and objectives.

Performance appraisal is often a negative, disliked activity and one that seems to
elude mastery. Managers do not like giving them and employees do not like receiving them.
In fact, in one survey, almost 80 percent of w orkers stated dissatisfaction w ith their PA
process. If this is so, w hy not just eliminate it? Actually, some managers might do just that
if they did not need to provide feedback, encourage performance improvement, make valid
decis ions, justify terminations, identify training and development needs, and defend personnel
decisions. Performance appraisal s erves many purposes, and improved results and
efficiency are increasingly critical in todays globally competitive marketplace. Therefore,
abandoning the only program w ith performance in its name and employees as its focus
w ould seem to be an ill-advised overreaction. On top of these considerations, managers
must be concerned about legal ramifications. Developing an effective performance appraisal
system has been and w ill continue to be a high priority for management.

4.2 Definitions of Performance Appraisal

A few notew orthy definitions of Performance Appraisal are as follow s:

Performance Appraisal is the ongoing process of evaluating and managing both the
behaviour and human outcomes in w orkplace. - (Carrell, Elbert and Hatfield)

Performance Appraisal may be defined as any procedure that involves (1) Setting
w or k standards; (2) assess ing the employees actual per formance relative to these
standards; and (3) providing feedback to the employee w ith the aim of motivating that person
to eliminate performance deficiencies or to continue to perform above par. (Dessler)

Performance Appraisal is the process of evaluating how w ell employees perform

their jobs w hen compared to a set of standards and then communicating that information
to those employees - (Mathis and Jackson)

4.3 Objectives of Performance Appraisal

Performance Appraisal can be done w ith follow ing objectives in mind:

To maintain records in order to determine compensation packages, w age structure,

salaries raises, etc.

To identify the strengths and w eaknesses of employees to place right men on right

To maintain and assess the potential present in a person for further grow th and

To provide a feedback to employees regarding their performance and related status.

To provide a feedback to employees regarding their performance and related status.

It serves as a basis for influencing w orking habits of the employees.

To review and retain the promotional and other training programmes

4.4 Characteristics of Performance Appraisal

The major characteristics of performance appraisal are:

1. A data generation system : Performance appraisal helps in generating total personal

and professional profile of all employees in ter ms of their number, age, ex perience,
qualification, trainings, skills and competencies mix by aggregating individual performance
appraisal. This provides a pictur e of the number and quality of the w orkforce of the
organization and a number of managerial decisions can be taken on the basis of this data.
For example, if the number of personnel is lesser than the forecasted need, then organiz ation
can draw out recruitment and selection process, if the skills and competencies are on the
low er side, then organization can conduct training programmes for the employees for skill

2. A tool for strategy form ulation and im plem entation: The data generated by
performance appraisal acts as an input to strategy formulation and implementation initiatives
of the organization. If an organization lacks proper mix of skills and competencies, then
achievement of goals and objectives may pose several challenges. Thus, organization has
to formulate an alternative strategy so as to avoid implementation failures. For example, if
an IT company lacks availability of softw are professionals IBM mainframe area, then it has
to formulate a strategy to serve other mainframes in order to sustain the business till the
time required expertise is acquired or developed.

3. An integration device for HR system: Performance appraisal plays a central

role in the human resource system architecture. It connects the organizati0ns business
strategies w ith the competencies of its human resources for achieving optimal performance.
Appraisal helps in identifying the appropriate skills, competencies and behaviours required
for successful implementation of organizational strategy. It also identifies the areas of
developmental opportunities for removing performance deficiencies and gaps.

4. A legally defensible docum ent: Performance appraisal provides a documented

evidence of level of performance of employees. In case of legal battles betw een an
organization and employee for unfair treatment or discriminatory charges, it comes as a
legal defense for the organizations.

5. A m otivational tool: Performance appraisal distinguishes good performance from

marginal performance. Employee w ith good performance are rew arded and recognized for
their accomplishments w hich tend to satisfy their intrinsic and extrinsic motivational needs.
Employees w ith marginal performance are motivated and suppor ted to impr ove their

4.5 The Performance Appraisal Process

The per for mance appr ais al (PA) pr ocess , note the connection betw een the
organizations mission and objectives and the performance appraisal process. Here w e
briefly discuss each step of the process.

Step 1. Job analysis. This is logically our first step because if w e dont know w hat a
job consists of, how can w e possibly evaluate an employees performance? We already
learned how to do a job analysis. We should realize that the job must be based on the
organizational mission and objectives, the department, and the job itself.

Step 2. Develop standards and measurement methods. If w e dont have standards

of ac ceptable behavior and methods to measure performance, how can w e assess
performance? We w ill discuss performance measurement methods in the next part of this
section, and in the major section How Do We Use Appraisal Methods and Forms? w e w ill
discuss these topics in more detail.

Step 3. Informal performance appraisalcoaching and disciplining. Performance

appraisal should not be simply a once- or tw ice-yearly formal interview. As its definition
states, performance appraisal is an ongoing process. While a formal evaluation may only
take place once or tw ice a year, people need regular feedback on their performance to
know how they are doing. We w ill briefly discuss coaching in the Critical Incidents Method
subsection of How Do We Use Appraisal Methods and Forms? and in more detail along
w ith teaching how to discipline in the next lesson.

Step 4. Prepare for and conduct the formal performance appraisal. The common
practice is to have a formal performance review w ith the boss once or sometimes tw ice a

year using one or more of the measurement forms w e w ill be learning about. Later in this
lesson w e w ill discuss the steps of preparing for and conducting the performance appraisal.

In the major sections to come, w e discuss w hy w e assess performance, w hat w e

assess, how we assess, and w ho conducts the performance apprais al. Then we discuss
performance appraisal problems and how to avoid them, and w e end the performance
appraisal process w ith the actual formal review session. But before w e leave this section,
w e need to understand a critically important part of each step in the performance appraisal
processaccurate performance measurement.

4.6 Principles of Performance Appraisal

The principles of performance appraisal are as follow s:

1. Establish clear job descriptions: Performance appraisal shall be effective only

w hen it is based on current, realistic, and relevant job description of employees. A clear job
description is fundamental basis of developing performance objectives of an employee. lf
the job description is inadequate or vague then performance objectives w ill be poor or
difficult to establish. Once performance objectives are generated on clear job description,
evaluating performance of individuals becomes a fruitful task for organizations.

2. Give perform ance feedback: Once performance objectives have been establish,
it is crucial for managers to observe, monitor and analyze the outputs or outcomes of
employees in accomplishing these performance objectives. Managers must provide positive
feedback, reinforcement, support, guidance, resources and encouragement to employees
periodically in order to ensure that employees stay focused on their performance objectives.
While prov iding perfor manc e f eedback, New lons Law of Motion can be applied to
performance feedback as follow s:

(i) Performance of employees continues to remain unchanged unless clear specific

and meaningful feedback is given by managers for improving performance;

(ii) Constructive feedback and positive reinforcement enhances the discretionary efforts
of the employees as the primary diver to maximize their performance: and

(iii) For every negative or destructive feedback given by a manager, there is an equal and
opposite reaction of the employee.

3. Provide perform ance counseling: Managers should formally dis cuss employees
w ork performance w ith them on periodic basis. The frequency of the discussion should be
enough to build up an atmosphere w hich encourages an exchange of ideas and feelings
about the job w ith a view to develop new skills, and/or to improve various aspects of job

4. Continuous com m unication: Performance of employees can truly flourish in s

climate of open communication in w hich the employee finds it easy and desirable to
approach his manager for further help or discussions. Frequent communication betw een a
manager and an employee clarifies mutual expectations, focus ar eas, changes to be
incorporated and agreeing upon an action plan for removing performance deficiencies.

4.7 Advantages of Performance Appraisal

It is said that performance appraisal is an investment for the company w hich can be
justified by follow ing advantages:

Prom otion: Performance Appraisal helps the supervisors to chalk out the promotion
programmes for efficient employees. In this regards, inefficient w orkers can be dismissed
or demoted in case.

Com pensation: Performance Appraisal helps in chalking out compensation packages

for employees. Merit rating is possible through perf ormance appraisal. Performance
Appraisal tries to give w orth to a performance. Compensation packages w hich include
bonus, high salary rates, extra benefits, allow ances and pre-requisites are dependent on
performance appraisal. The criteria should be merit rather than seniority.

Em ployees Developm ent: The systematic procedure of performance appraisal helps

the supervisors to frame training policies and programmes. It helps to analyse strengths
and w eaknesses of employees so that new jobs can be designed for efficient employees.
It also helps in framing future development programmes.

Selection Validation: Performance Appraisal helps the supervisors to understand

the validity and importance of the selection procedure. The supervisors come to know the
validity and thereby the strengths and w eaknesses of selection procedure. Future changes
in selection methods can be made in this regard.

Com m unication: For an organization, effective communication betw een employees

and employers is very important. Through performance appraisal, communication can be
sought for in the follow ing w ays:

Through performance appraisal, the employers can understand and accept skills of

The subordinates can also understand and create a trust and confidence in superiors.

It also helps in maintaining cordial and congenial labour management relationship.

It develops the spirit of w ork and boosts the morale of employees.

All the above factors ensure effective communication.

Motivation: Performance appraisal serves as a motivation tool. Through evaluating

performance of employees, a persons efficiency can be determined if the targets are
achieved. This very w ell motivates a person for better job and helps him to improve his
performance in the future.

Responsibility for Appraisal

Often the human resource department is responsible for coordinating the design and
implementation of per formance appraisal progr ams. How ever, it is essential that line
managers play a key role from beginning to end. These individuals usually conduct the
appraisals, and they must directly participate in the program if it is to succeed. Several
possibilities exist w ith regard to the person w ho w ill actually rate the employee.

Immediate Supervisor

An employees immediate supervisor has traditionally been the most logical choice
for evaluating performance and this continues to be the case. The supervisor is usually in
an excellent position to observe the employees job performance and the supervisor has
the responsibility for managing a par ticular unit. When someone else has the task of
evaluating subordinates, the supervisors authority may be undermined. Also, subordinate
training and development is an important element in every managers job and, as previously
mentioned, appraisal programs and employee development are usually closely related.

On the negative side, the immediate supervisor may emphasize certain aspects of
employee performance and neglect others. Also, managers have been know n to manipulate
evaluations to justify pay increases and promotions and vice versa.

When geography separates subordinates from their supervisors, evaluation becomes

increasingly difficult. In other cases, the appraised employee may be more technically
know ledgeable than the boss, and this presents another potential problem. One suggestion
for overcoming these disadvantages is to bring subordinates into the process more closely.
Have them suggest w ays to fairly evaluate their performance and then use their suggestions
as part of the appraisal criteria.

In most instances, the immediate supervisor w ill probably continue to be involved in

evaluating performanc e. Organizations w ill seek alternatives, how ever, bec ause of
technological advances and a desire to broaden the perspective of the appraisal.


Historically, our culture has view ed evaluation by subordinates negatively. How ever,
this thinking has changed somew hat. Some firms conclude that evaluation of managers by
subordinates is both feasible and needed. They reason that subordinates are in an excellent
position to view their superiors managerial effectiveness. Advocates believ e that this
approach leads supervisors to become especially conscious of the w ork groups needs
and to do a better job of managing. In the higher education environment, it is a common
practice for instructors to be evaluated by students. Critics are concerned that the manager
(and instructors) w ill be caught up in a popularity contest or that employees w ill be fearful of
reprisal. If this approach has a chance for success, one thing is clear: the evaluators must
be guaranteed anonymity. Ensuring this might be particularly difficult in a small department
and especially if demographic data on the appraisal form could identify raters.

Peers and Team Members

A major strength of using peers to appraise performance is that they w ork closely
w ith the evaluated employee and probably have an undistorted perspective on typical
performance, especially in team assignments. Organizations are increasingly using teams,
including those that are self-directed. The rationale for evaluations conducted by team
members includes the follow ing:

Team members know each other s perf ormance better than anyone and can,
therefore, evaluate performance more accurately.

Peer pressure is a pow erful motivator for team members.

Members w ho recognize that peers w ithin the team w ill be evaluating their w ork show
increased commitment and productivity.

Peer review involves numerous opinions and is not dependent on one individual.

Problems w ith peer evaluations include the reluctance of some people w ho w ork
closely together, especially on teams, to criticize eac h other. On the other hand, if an
employee has been at odds w ith another w orker he or she might really unload on the
enemy, resulting in an unfair evaluation. Another problem concerns peers w ho interact
infrequently and lack the information needed to make an accurate assessment.

When employees w ork in teams, and their appraisal system focuses entirely on
individual results, it is not surprising that they show little interest in their teams. But, this
problem can be c orrected. If teamw ork is essential, make it a criterion for evaluating
employees; rew arding collaboration w ill encourage teamw ork.


If employees understand their objectives and the criteria used for evaluation, they are
in a good position to appraise their ow n performance. Many people know w hat they do w ell
on the job and

What they need to improve. If they have the opportunity, they w ill criticize their ow n
performance objectively and take action to improve it. Paul Falcone, vice-president of HR
at Nickelodeon, said, The fascinating thing is that employees are usually tougher on
themselv es than you w ill ever be.18 Als o, because employee development is self-
development, employees w ho appraise their ow n performance may become more highly
motivated. Self-appraisal provides employees w ith a means of keeping the supervisor
informed about everything the w orker has done during the appraisal period.19 Even if a
self-appraisal is not a part of the system, the employee should at least provide the manager
a list of his or her most important accomplishments and contributions over the appraisal
period. This w ill prevent the manager from being blindsided w hen the employee complains,
perhaps justifiably, You didnt even mention the Bandy contract I landed last December!
As a complement to other approaches, self-appraisal has great appeal to managers w ho

are primarily concerned w ith employee participation and development. For compensation
purposes, how ever, its value is considerably less. Some individuals are masters at attributing
good performance to their ow n efforts and poor performance to someone elses.

Customer Appraisal

Customer behav ior determines a firms degr ee of suc cess . Ther efore, some
organizations believe it is important to obtain performance input from this critical source.
Organizations use this approach because it demonstrates a commitment to the customer,
holds employees accountable, and fosters change. Customer-related goals for executives
generally are of a broad, strategic nature, w hereas targets for low er-level employees tend
to be more specific. For example, an objective might be to improve the rating for accurate
delivery or reduce the number of dissatisfied customers by half. It is important to have
employees participate in setting their goals and to include only factors that are w ithin the
employees control.

4.8 Performance Appraisal Methods

Managers may choose from among a number of appraisal methods. The type of
performance appraisal system used depends on its purpose. If the major emphasis is on
selecting people for promotion, training, and merit pay increases, a traditional method,
such as rating scales, may be appropriate. Collaborative methods, including input from the
employees themselves, may prove to be more suitable for developing employees.

1. 360-Degree Feedback Evaluation Method

The 360-degree feedback evaluation m ethod is a popular performance appraisal

method that involves evaluation input from multiple levels w ithin the firm as w ell as external
sources. The 360-degree method is unlike traditional performance review s, w hich provide
employees w ith feedback only from supervisors. In this method, people all around the rated
employee may provide ratings, including senior managers, the employee himself or herself,
supervisors, subordinates, peers, team members, and internal or external customers. As
many as 90 percent of Fortune 500 companies use some form of 360-degree feedback for
either employee evaluation or development. Many companies use results from 360-degree
programs not only for conventional applications but also for succession planning, training,
and professional development.

Unlike traditional approaches, 360-degree feedback focuses on skills needed across

organizational boundaries. Also, by shifting the responsibility for evaluation to more than
one person, many of the common appraisal errors can be reduced or eliminated. Softw are
is available to permit managers to give the ratings quickly and conveniently. The 360-degree
feedback method may provide a more objec tive measur e of a pers ons perfor mance.
Including the perspective of multiple sources results in a broader view of the employees
performance and may minimize biases that result from limited view s of behavior.

Having multiple raters also makes the process more legally defensible. How ever, it is
important for all parties to know the evaluation criteria, the methods for gathering and
summarizing the feedback, and the use to w hich the feedback w ill be put. An appraisal
system involving numerous evaluators w ill naturally take more time and, therefore, be more
costly. Nevertheless, the w ay firms are being organized and managed may require innovative
alternatives to traditional top-dow n appraisals.

According to some managers, the 360-degree feedback method has problems. Ilene
Gochman, director of Watson Wyatts organization effectiveness practice, says, Weve
found that use of the 360 is actually negatively correlated w ith financial results. GEs former
CEO Jack Welch maintains that the 360-degree system in his firm had been gamed and
that people w ere saying nice things about one another, resulting in all good ratings. Another
critical view w ith an opposite tw ist is that input from peers, w ho may be competitors for
raises and promotions, might intentionally distort the data and sabotage the colleague. Yet,
since so many firms use 360-degree feedback evaluation, it seems that many firms have
found w ays to avoid the pitfalls.

Google has a different approach to 360-degree feedback as it provides managers

and employees to nominate peer review ers from anyw here across the organization.
According to the companys manager of HR technology and operations, Melissa Karp,
People are fairly candid in their feedback. One might ask, w hat happens at Google w hen
people w rite unconstructive comments? Karp said, managers are encouraged to use that
as a coachable moment to talk to the person w ho w rote something unconstructiv e. How ever,
at Google this hasnt been too much of a problem.

The biggest risk w ith 360-degree feedback is confidentiality. Many firms outsource
the process to make participants feel comfortable that the information they share and receive

is completely anonymous, but the information is very sensitive and, in the w rong hands,
could impact careers.

2. Rating Scales Method

The rating scales m ethod is a performance appraisal method that rates employees
according to defined factors.

Using this approach, evaluators record their judgments about performance on a scale.
The scale includes several categories; normally 57 in number, defined by adjectives such
as outstanding, meets expectations, or needs improvement. Although systems often provide
an overall rating, the method generally allow s for the use of more than one performance
criterion. One reason for the popularity of the rating scales method is its simplicity, w hich
permits quick evaluations of many employees. When you quantify the ratings, the method
facilitates comparison of employees performances. The factors chosen for evaluation are
typically of tw o types: job-related and personal characteristics. Note that in Figure, job-
related factors include quality and quantity of w ork, w hereas personal factors include such
behaviors as interpersonal skills and traits, like adaptability. The rater (evaluator) completes
the form by indicating the degree of each factor that is most descriptive of the employee
and his or her performance. In this illustration, evaluators total and then average the points
in each part. They then multiply this average by a factor representing the w eight given to
each section. The final score (total points) for the employee is the total of each sections

Some firms provide space for the rater to comment on the evaluation given for each
factor. This practice may be especially encouraged, or even required, w hen the rater gives
an extreme rating, either the highest or low est. For instance, if an employee is rated needs
improvement (a 1 on the sample form) on teamw ork, the rater provides w ritten justification
for this low evaluation. The purpose of this requirement is to focus on correcting deficiencies
and to discourage arbitrary and hastily made judgments.

The more precise the definition of factors and degrees, the more accurately the rater
can evaluate w orker performance. For instance, in order to receive an outstanding rating
for a factor such as quality of w ork, a person must consistently go beyond the prescribed
w ork requirements. When the various performance levels are described merely as above
expectations or below expectations w ithout further elaboration, w hat has the employee
really learned? These generalities do not prov ide the guidance needed for impr oving
performance. It is important that each rater interpret the factors and degrees in the same
w ay. Raters acquire this ability through performance appraisal training. Many rating scale
forms also provide for consideration of future behavior. Notice that the form show n as
Figure has space for performance goals for the next period and self-development activities
for the next appraisal period.

3. Critical Incident Method

The critical incident m ethod is a performance appraisal method that requires keeping

w ritten records of highly favorable and unfavorable employee w ork actions.

When such an action, a critical incident, affects the departments effectiveness

significantly, either positively or negatively, the manager w rites it dow n. At the end of the

appraisal period, the rater uses these records along w ith other data to evaluate employee

performance. With this method, the appraisal is more likely to cover the entire evaluation

period and not focus on the past few w eeks or months.

4.Essay Method

The essay m ethod is a performance appraisal method in w hich the rater w rites a

brief narrative describing the employees performance.

This method tends to focus on extreme behavior in the employees w ork rather than

on routine day-to-day performance. Ratings of this type depend heavily on the evaluators

w riting ability. Supervisors w ith excellent w riting skills, if so inclined, can make a marginal

w orker sound like a top performer. Comparing essay evaluations might be difficult because

no common criteria exist. How ever, some managers believe that the essay method is not

only the most simple but also an acceptable approach to employee evaluation.

5.Work Standards Method

The w ork standards m ethod is a performance appraisal method that compares

each employees performance to a predetermined standard or expected level of output.

Standards reflect the normal output of an average w orker operating at a normal pace.

Firms may apply w ork standards to virtually all types of jobs, but production jobs generally

receive the most attention. An obvious advantage of using standards as appraisal criteria is

objectivity. How ever, in order for employees to perceive that the standards are objective,

they should understand clearly how the standards w ere set. Management must also explain

the rationale for any changes to the standards.


6.Ranking Method

The ranking m ethod is a performance appraisal method in w hich the rater ranks all
employees from a group in order of overall performance.

For example, the best employee in the group is ranked highest, and the poorest is
ranked low est. You follow this procedure until you rank all employees. A difficulty occurs
w hen all individuals have performed at comparable levels (as perceived by the evaluator).

Paired comparison is a variation of the ranking method in w hich the performance of

each employee is compared w ith that of every other employee in the group.A single criterion,
such as

Overall performance is often the basis for this c omparison. The employ ee w ho
receives the greatest number of favorable comparisons receives the highest ranking. Some
professionals in the field argue for using a comparative approach, such as ranking, w henever
management must make human resourc e decisions. They believe that employees are
promoted or receive the highest pay increases not because they achieve their objectives,
but rather because they achieve them better than others in their w ork group.

7.Forced Distribution Method

The forced distribution method of performance appraisal requires the rater to assign
individuals in a w ork group to a limited number of categories, similar to a normal frequency
distribution. The purpose of forced distribution is to keep managers from being excessively
lenient and having a disproportionate number of employees in the superior category.

Forced dis tribution systems have been around for decades and firms such as General
Elec tric, Cisc o Sys tems, EDS, Hew lett- Pac kard, Mic ros of t, Peps i, Cater pillar, Sun
Microsystems, Goodyear, Ford Motor, and Capital One use them today. Proponents of
forced distribution believe they facilitate budgeting and guard against w eak managers w ho
are too timid to get rid of poor performers. They think that forced rankings require managers
to be honest w ith w orkers about how they are doing.

The forced distribution systems tend to be based on three levels. In GEs system, the
best performers are placed in the top 20 percent, the next group in the middle 70 percent,
and the poorest performing group w inds up in the bottom 10 percent. The underperformers
are, after being given a time to improve their performance, generally let go. If any of the

underperformers are able to improve their performance, you might w onder if any in the 70
percent group w ould get nervous!

Although used by some prestigious firms, the forced distribution system appears to
be unpopular w ith many managers . In a surv ey of HR pr ofessionals, 44 percent of
respondents thought their firms forced ranking system damages morale and generates
mistrust of leadership. Some believe it fosters cutthroat competition, paranoia, and general
ill w ill, and destroys employee loyalty. A Midw estern banker states that his company began
a r ank- and-y ank s ystem that flies directly in the face of the teamw ork that senior
management says it w ants to encourage Dont tell me Im supposed to put the good of the
team first and then tell me the bottom 10 percent of us are going to lose our jobs because,
team be damned, Im going to make sur e Im not in that bottom 10 perc ent. Critics of
forced distribution contend that they compel managers to penalize a good, although not a
great, employee w ho is part of a superstar team. One reason employees are opposed to
forced ranking is that they suspect that the rankings are a w ay for companies to rationalize
firings more easily.

8.Behaviorally Anchored Rating Scale Method

The behaviorally anchored rating scale (BARS) method is a performance apprais al

method that combines elements of the traditional rating scales and critical incident methods;
various performance levels are show n along a scale w ith each described in terms of an
employees specific job behavior.

Table illustrates a portion of a BARS system that w as developed to evaluate college

recruiters. Suppose the factor chosen for evaluation is Ability to Present Positive Company
Image. On the very positive end of this factor w ould be Makes excellent impression on
college recruits. Carefully explains positive aspects of the company. Listens to applicant
and answ ers questions in a very positive manner. On the very negative end of this factor
w ould be Even w ith repeated instructions continues to make a poor impression. This
interview er could be expected to turn off college applicants from w anting to join the firm. As
may be noted, there are several levels in betw een the very negative and the very positive.
The rater is able to determine more objectively how frequently the employee performs in
each defined level.

A BARS system differs from rating scales because, instead of using terms such as
high, medium, and low at each scale point, it uses behavioral anchors related to the criterion
being measured. This modification clarifies the meaning of each point on the scale and
reduces rater bias and error by anchoring the rating w ith specific behavioral examples
based on job analysis information. Instead of providing a space for entering a rating figure
for a category such as Above Expectations, the BARS method provides examples of such
behavior. This approach facilitates discussion of the rating because it addresses specific
behav iors, thus overcoming w eakness es in other evaluation methods . Regardless of
apparent advantages of the BARS method, reports on its effectiveness are mixed. A specific
deficiency is that the behaviors used are activity oriented rather than results oriented. Also,
the method may not be economically feasible since each job category requires its ow n
BARS. Yet, among the various appraisal techniques, the BARS method is perhaps the
most highly defensible in court because it is based on actual observable job behaviors.

9.Results-Based System

The manager and subordinate jointly agree on objectives for the next appraisal period
in a results-based system , in the past a form of management by objectives. In such a

system, one objective might be, for example, to cut w aste by 10 percent. At the end of the
appraisal period, an evaluation focuses on how w ell the employee achieved this objective.

4.9 Features of Effective Appraisal System

The basic purpose of a performance appraisal system is to improve performance of

individuals, teams, and the entire organization. The system may also serve to assist in
making administr ative decisions concerning pay increas es, pr omotions, transfers , or
terminations. In addition, the appraisal system must be legally defensible. Although a perfect
system does not exist, every system should possess certain characteristics. Organizations
should seek an accurate assessment of performance that permits the development of a
plan to improve individual and group performance. The system must honestly inform people
of how they stand w ith the organization. The follow ing factors assist in accomplishing these

1. Job-Related Criteria: Job-relatedness is perhaps the most basic criterion needed

in employee performance apprais als. The Uniform Guidelines on Employee Selection
Procedures and court decisions are quite clear on this point. More specifically, evaluation
criteria should be determined through job analysis. Subjective factors, such as initiative,
enthusiasm, loyalty, and cooperation may be important; how ever, unless clearly show n to
be job-related, they should not be used.

2.Perf orm ance Exp ect atio ns ; Managers and subor dinates must agr ee on
performance expectations in advance of the appraisal period. How can employees function
effectively if they do not know w hat they are being measured against? On the other hand, if
employees clearly understand the expectations, they can evaluate their ow n performance
and make timely adjustments as they perform their jobs, w ithout having to w ait for the
formal evaluation review. The establishment of highly objective w ork standards is relatively
simple in many areas, such as manufacturing, assembly, and sales. For numerous other
types of jobs, how ever, this task is more difficult. Still, evaluation must take place based on
clearly understood performance expectations.

3.Stand ardization : Firms should use the s ame evaluation instrument f or all
employees in the same job category w ho w ork for the same supervisor. Supervisors should
also conduct appraisals covering similar periods for these employees. Regularly scheduled
feedback sessions and appraisal interview s for all employees are essential.

Formal documentation of appraisal data serves several purposes, including protection

against possible legal action. Employees should sign their evaluations. If the employee
refuses to sign, the manager should document this behavior. Records should also include
a description of employee responsibilities, expected performance results, and the role these
data play in making appraisal decisions. Although performance appraisal is important for
small firms, they are not expected to maintain performance appraisal systems that are as
formal as those used by large organizations. Courts have reasoned that objective criteria
are not as important in firms w ith only a few employees because in smaller firms top
managers are more intimately acquainted w ith their employees w ork.

4.Trained Appraise rs : A common deficiency in appraisal sys tems is that the

evaluators seldom receive training on how to conduct effective evaluations. Unless everyone
evaluating performance receives training in the art of giving and receiving feedback, the
process can lead to uncertainty and conflict. The training should be an ongoing process in
order to ensure accuracy and consistency. The training should cover how to rate employees
and how to conduct appraisal interview s. Instructions should be rather detailed and the
importance of making objective and unbiased ratings should be emphasized. An e-learning
training module may serve to provide information for managers as needed.

5.Continuous Open Com munication : Most employees have a strong need to know
how w ell they are performing. A good appraisal system provides highly desired feedback on
a continuing basis. There should be few surprises in the performance review. Managers
should handle daily performance problems as they occur and not allow them to pile up for
six months or a year and then address them during the performance appraisal interview.
Continuous feedback is vitally important to help direct, coach, and teach employees to
grow and improve performance. When something new s urfaces dur ing the appraisal
interview, the manager probably did not do a good enough job communicating w ith the
employee throughout the appraisal period. Even though the interview presents an excellent
opportunity for both parties to exchange ideas, it should never serve as a substitute for the
day to- day communication and coaching required by performance management.

6. Condu ct Perfor m ance Review s : In addition to the need for continuous

communication betw een managers and their employees, a special time should be set for a
for mal discus sion of an employees performance. Sinc e improved per formance is a

common goal of appraisal systems, w ithholding appraisal results is absurd. Employees

are severely handicapped in their developmental efforts if denied access to this information.
A performance review allow s them to detect any errors or omissions in the appraisal, or an
employee may disagree w ith the evaluation and w ant to challenge it. Constant employee
perf ormance documentation is vitally important for accurate performance apprais als.
Although the task can be tedious and boring for managers, maintaining a continuous record
of observed and reported incidents is essential in building a useful appraisal. The appraisal
interview w ill be discussed in a later section.

7.Due Process : Ensuring due process is vital. If the company does not have a
formal grievance procedure, it should develop one to provide employees an opportunity to
appeal appraisal results that they consider inaccurate or unfair. They must have a procedure
for pursuing their grievances and having them addressed objectively.

4.10 Problems in Performance Appraisal

As indicated at the beginning of this lesson, performance appraisal is constantly under

a barrage of criticism. The rating scales method seems to be the most vulnerable target.
Yet, in all fairness, many of the problems commonly mentioned are not inherent in this
method but, rather, reflect improper implementation. For example, firms may fail to provide
adequate rater training or they may use appraisal criteria that are too subjective and lack
job-relatedness. The follow ing section highlights some of the more common problem areas.

1. Appraiser Discom fort : Conducting performance appraisals is often a frustrating

human resource management tas k. One management guru, Edw ard Law ler, noted the
considerable documentation show ing that performance appraisal systems neither motivate
individuals nor effectively guide their development. Instead, he maintains, they create conflict
betw een supervisors and subordinates and lead to dysfunctional behaviors.34 This caveat
is important. If a per for mance appr aisal sy stem has a f aulty design, or impr oper
administration, employees w ill dread receiving appraisals and the managers w ill despise
giving them. In fact, some managers have alw ays loathed the time, paperw ork, difficult
choices, and discomfort that often accompanies the appraisal process. Going through the
procedure cuts into a managers high-priority w orkload and the experience can be especially
unpleasant w hen the employee in question has not performed w ell.

2.Lack of Objectivity : A potential w eakness of traditional performance appraisal

methods is that they lack objectivity. In the rating scales method, for example, commonly
used factors such as attitude, appearance, and personality are difficult to measure. In
addition, these factors may have little to do w ith an employees job performance. Although
subjectivity w ill alw ays exist in appraisal methods, employee appraisal based primarily on
personal characteristics may place the evaluator and the company in untenable positions
w ith the employee and equal employment opportunity guidelines. The firm may be hard-
pressed to show that these factors are job-related.

3. Halo/Horn : A halo e rror occurs w hen a manager generalizes one positive

performance feature or incident to all aspects of employee performance, resulting in a
higher rating. For example, Rodney Pirkle, accounting supervisor, placed a high value on
neatness, a factor used in the companys performance appraisal system. As Rodney w as
evaluating the performance of his senior accounting clerk, Jack Hicks, he noted that Jack
w as a very neat individual and gave him a high ranking on this factor. Also, consciously or
unconsciously, Rodney permitted the high ranking on neatness to carry over to other factors,
giving Jack undeserved high ratings on all factors. Of course, if Jack had not been neat, the
opposite could have occurred. This phenomenon is know n as the horn error, an evaluation
error that occurs when a manager generalizes one negative performance feature or incident
to all aspects of employee performance, resulting in a low er rating.

4. Leniency/Strictness : Some managers are too generous w ith praise or too hard
on a person. Dick Grote, a per formance management expert and president of Grote
Consulting Corporation, a management consulting firm in Dallas, said, It is not OK to have
performance rated differently from manager to manager because these decisions impact
compensation, development and succession planning.

Giving undeserved high ratings to an employee is referred to as leniency. This behavior

is often motivated by a desire to avoid controversy over the appraisal. It is most prevalent
w hen highly subjective (and difficult to defend) performance criteria are used, and the rater
is required to discuss evaluation results w ith employees. When managers know they are
evaluating employees for administrative purposes, such as pay increases, they are likely to
be more lenient than w hen evaluating performance to achieve employee development.
Leniency, how ever, may result in failure to recognize correctable deficiencies. The practice

may also deplete the merit budget and reduce the rew ards available for superior employees.
In addition, an organization w ill find it difficult to terminate poor-performing employees w ho
continuously receive positive evaluations. Being unduly critical of an employees w ork
performance is referred to as strictness. Although leniency is usually more prevalent than
strictness, some managers, on their ow n initiative, apply an evaluation more rigorously
than the company standard. This behavior may be due to a lack of understanding of various
evaluation factors. The w orst situation is w hen a firm has both lenient and strict managers
and does nothing to level the inequities. Here, the w eak performers get relatively high pay
increases and promotions from a lenient boss, w hereas the strict manager shortchanges
the stronger employees. This can have a demoralizing effect on the morale and motivation
of the top-performing people.

5. Central Tendency : Central tendency error is an evaluation appraisal error that

occurs w hen employees are incorrectly rated near the average or middle of a scale. This
practice may be encouraged by some rating scale systems that require the evaluator to
justify in w riting extremely high or extremely low ratings. With such a system, the rater may
avoid possible controversy or criticism by giving only average ratings. How ever, since these
ratings tend to cluster in the fully satisfactory range, employees do not often complain.
Nevertheless, this error does exist and it influences the accuracy of evaluations. Typically,
w hen pay raises are given, they w ill be based on an employees performance. When a
manager gives an underachiever or overachiever, an average rating, it undermines the
compensation system.

6. Recent Behavior Bias : Anyone w ho has observed the behavior of young children
several w eeks before Christmas can readily identify w ith the problem of recent behavior
bias . Suddenly, the w ildest kids in the neighborhood develop angelic personalities in
anticipation of the rew ards they hope to receive from Old Saint Nick. Individuals in the
w orkforce are not children, but they are human. Virtually every employee know s precisely
w hen a performance review is scheduled. Although his or her actions may not be conscious,
an employees behavior often improves and productivity tends to rise several days or w eeks
before the scheduled evaluation. It is only natural for a rater to remember recent behavior
more clear ly than actions fr om the more distant past. How ev er, formal performance
appraisals generally cover a specified time, and an individuals performance over the entire

period should be considered. Maintaining records of performance throughout the appraisal

period helps avoid this problem.

7.Personal Bias (Stereotyping) : This pitfall occurs w hen managers allow individual
differences to affect the ratings they give. If these are factors to avoid such as gender, race,
or age, not only is this problem detrimental to employee morale, but it is blatantly illegal and
can result in costly litigation. The effects of cultural bias, or stereotyping, can definitely
influence appraisals.38 Managers establish mental pictures of w hat are considered ideal
typical w orkers, and employees w ho do not match this picture may be unfairly judged.

Discrimination in appraisal can be based on other factors as w ell. For example, mild-
mannered employees may be appraised more harshly because they do not seriously object
to the results. This type of behavior is in sharp contrast to the more outspoken employee,
w ho often confirms the adage: the squeaky wheel gets the grease.

8. Manipulating the Evaluation :In some instances, managers control virtually every
aspect of the appraisal process and are therefore in a position to manipulate the system.
For example, a supervisor may w ant to give a pay raise to a certain employee or the
supervisor may just favor one w orker more than another. In order to justify this action, the
supervisor may give the employee an undeserved high performance evaluation and perhaps
a less favored, but productive, employee a low er rating. Or, the supervisor may w ant to get
rid of an employee and so may give the individual an undeserved low rating. In either instance,
the system is distorted and the goals of performance appraisal cannot be achieved. In
addition, in the latter example, if the employee is a member of a protected group, the firm
may w ind up in court. If the organization cannot adequately support the evaluation, it may
suffer significant financial loss.

9. Em ployee Anxiety : The evaluation process may also create anxiety for the
appraised employee. This may take the form of discontent, apathy, and turnover. In a w orst-
case scenario, a law suit is filed based on real or perceived unfairness.42 Opportunities for
promotion, better w ork assignments, and increased compensation may hinge on the results.
This could cause not only apprehension, but also outright resistance. One opinion is that if
you surveyed typical employees, they w ould tell you performance appraisal is managements
w ay of highlighting all the bad things they did all year.

4.11 Biases in Performance Appraisal

In organizations, performance appraisal often suffers from the crisis of errors or

biases. Such errors or biases can be primarily attributed to the lack of objectivity of the
raters or the assessors. Organizations need to reduce such errors, else the purpose of
performance appraisal gets defeated, broadly, and w e can categorize performance errors/
biases as follow s:

The halo effect and horn effect.

Leniency error (loose rater).

The error of strictness (tight rater).

The central tendency error

The recency effect.

The contrast error.

The similarity (similar-to-me) effect.

1. The Halo and Horn Effect : Solomonson and Lance ( 1997) defined the halo
effect as the influence of a raters general impression on ratings of specific ratee qualities.
In other w ords, the rater gives the subordinates good grades although the performances
are not at the expected level. Hem mitts get influenced by one or the other qualities of the
ratee, even w hen his/her perfor manc es ar e not up to the mark. For ex ample, less
absenteeism, timely attendance, and obedience of a particular ratee may influence the
raters to giv e high performance score, irrespective of the level of actual performance. Often
personal likings or disliking of the raters overlook the poor performances. Lefltow itzs (2000)
studies found that positive regard for subordinates relates to higher halo effect.

Horn effect is the opposite of halo effect. Here the rater rates the ratee poor despite
the ratees higher level of performance. It means that because of tl1e raters perceived
negativity of any behavioural traits, the misc scores poor in the performance appraisal,
irrespective of their level of performances.

Uyar gil (l994) proposed some solutions to reduce the halo and horn effects in
performance appraisals,such as raters training and directing raters to provide some proof
of events, that justify his/her high or poor rating.

2. The Leniency Error : This common appraisal error occurs w hen the appraisers
feel scared of their strenuous relationship w ith the subordinates for giving poor rating. Such
fear propels them to give a high rating, w hich causes leniency error. Jaw ahar and Williams
(I997) study indicated that performance rating for pay raises or promotions are more prone
to Ieniency error How ever, performance ratings for employees development and feedback
are less likely to suffer from leniency error Raters w ho are more prone to leniency error are
know n as loose raters.

3.The Error of Strictness :This type of error is just the opposite of leniency error.
Here the raters ar e know n as tight raters , as they alw ays rate performances of the
subordinates poorly. Often such types of raters pre-decide the rating score, for example, a
maximum of 80 per cent for top performers, betw een 70 per cent and 80 per cent for very
good performers, betw een 60 per cent and 70 per cent for good performers, and so on.
Based on such pre-decided rating scores, they rate their subordinates. According to Kaynak
etal. (2005), such raters suffer from the problems of losing their positions w hen employees
get the highest rating. Also they try to show that they are the best.

4.The Central Tendency Error : Some raters instead of over (lenient) or under
(strictness) rating give an average score to all performers, despite actual performance
variations. They prefer to rate the employees in the middle of the scale. According to Dessler
(2000), such errors occur as the rater is less acquainted w ith the ratees. and giving an
average score is the best option to commit any judgmental mistake. Also these types of
raters often believe performance appraisal is a w aste of time; hence, the average rating is
the best bet.

5.Th e Recency Effect : Mos t of the or ganizations carry out the performance
evaluation function annually or biannually. Such long time gaps betw een appraisals create
the problems, as the rater looses performance-related information. The rater then tries to
find information directly related to the value of performance. in this process, the rater gets
more inclined to the ratees latest behaviour irrespective of their actual performances. This
ultimately leads to errors due to recency effect. Such errors can be minimized by keeping
an ongoing record of performance, and accounting the same for the w hole performance
period. It is also important to remember that some ratees deliberately perform very high
w ith the approaching of the appraisal time, to get the benefit of high rating for the errors due
to recency effect.

6.The Contrast Error : Objective performance rating is possible w hen the rating is
done based on the pre-decided established standards. How ever, often the rater rates the
employees per for mance in relation to other employees, forgetting the established
performance standards. In this process, the contrast errors occur. Here the performance
score or the appraisal grade of the ratee gets affected w ith the rating of the other, w ho has
been rated just before. Uyargil (I994) recommends a random appraisal of employees to
avoid such errors. it means that instead of assessing employees in the same nature of
jobs and grades sequentially, to avoid the contrast error, the as sessors may assess
employees simultaneously, picking them from different groups or clusters.

7.The Sim ilarity Effect : While assessing the performance of the ratees, often the
appraisers suffer from the propensity of overrating those ratees w ho are similar to them in
terms of personality, behaviour, or background (Pulakos and Wexley. l983). Some ratees
may deliberately induce the raters to commit this type of error, aping their behaviours,
tastes, and preferences. Their demonstration pleases the raters and consequently they
get the best rating. Raters training can reduce such performance rating bias. Whatever
may be the nature of performance bias or errors, it is difficult to eliminate the same altogether
how ever, it is possible to minimize it. Accordingly, organizations need to adopt a suitable
line of actions to minimize the performance bias or performance rating errors.

4.12 Reducing Performance Errors

We have already explained a different nature of performance bias and errors. To

reduce suc h er ror s, organizations adopt various alternative for ms of performance
assessments, such as direct observations, open ended questions, essays, consolidation
of view s from multiple raters, and so on. Such measures improve the reliability of standard
tests mentioned earlier. Various studies indicate that training can substantially reduce the
rating errors. Studies by Latham, Wexley, and Purcell (l975), Jaeger and Busch (l984), and
Pulakos (l986) could authenticate it. Training pr ogr ammes for the r aters foc us on
familiarization w ith the measures making the raters understand the sequence of operations,
and the process of interpreting the nonnative data.

Another approach to reduce the performance rating err ors is the selection of
appropriate judges raters. Hambleton and Pow el (l983) recommended certain criteria for

the selection of performance Judges/raters . These are considerations of demographic

variables forming the panel of raters w ith the representation of experts and people from the
interest groups etc. Organizations also make use of statistical techniques to measure the
degree of performance bias rating errors. Rater effect is measured computing the difference
betw een a raters average w ith the average of all ratings. When the rater effect is zero, w e
consider non-existence of systematic bias in the performance scores. Other statistical
techniques to measure the performance errors/bias recommended by Houston. Raymond,
and Svec (l99l) are least squares regression, w eighted least squares regression, and the
imputation of the missing data. Ordinary least squares regression tits w here the observed
rating is view ed as the stun of the candidates true ability, a rater effect and random error.
Weighted least squares regression is used w here each raters score is w eighted by a
measure of the raters consistency. Finally imputation of missing data method is appropriate
w here actual data of the performers could not be evaluated. The imputation approach is
most appropriate w hen each rater evaluates only a few candidates. The w eighted regression
approach is most appropriate w hen variations are expected in rater reliability.

4.13 Summary

The identification of specific goals is the starting point for the PA process and the
beginning of a Continuous cycle. Then job expectations are established w ith the help of job
analysis. The next step involves examining the actual w ork performed. Performance is
then appraised. The final step involves discussing the appraisal w ith the employee. Who
ar e usually responsible f or per for mance appraisal include immediate s upervisor s,
subordinates, peers, groups, the employee, customers and for the 360-degree feedback
evaluation method, perhaps all of the above.

4.14 Review Questions

1. Define performance management and performance appraisal.

2. What are the uses of performance appraisal?

3. What are the steps in the performance appraisal process?

4. What aspects of a persons performance might an organization evaluate?



Learning Objectives

After reading this lesson you w ill be able to

Describe the meaning and role of counselling

Identify the effective counseling

Examine the practical consideration in counseling

5.1 Introduction

5.2 Perform ance Counseling

5.3 Conditions for Effective Counseling

5.4 What Constitutes Counseling Process?

5.5 Process of Perform ance Counseling

5.6 Functions of Counselling

5.7 Conducting a Successful Counselllng Sesslon

5.8 Practical Considerations in Counselling

5.9 Summ ary

5.10 Review Questions

5.1 Introduction

In recent years the term counseling has been w idely used in management literature
to the extent that some w riters have suggested that managers cannot avoid acting as
counselors. How ever, the term is used in a vague w ay and often this employee counseling
bears little relationship to psychotherapy or other forms of professional counseling.

5.2 Performance Counselling

Counseling is central to performance management. It is essentially about helping

people to help themselves and is particularly relevant to self-development. One of the key
aims of performance management is to get individuals to accept much of the responsibility
for their ow n self-development. What people seek out for them, w ith some guidance as
necessary, is likely to make a greater impact than anything handed out to them by their
managers. Performance counseling can be defined as the help provided by a manager to
his subordinates in analyzing their performance and other job behaviour in order to increase
their job effectiveness. Performance counseling essentially focuses on the analysis of
performance on the job and identification of training needs for further improvement.

Counseling is based on the relation betw een tw o persons, a manager w ho is providing

help or w ho is counseling and an employee to w hom such help is given. It differs from
training mainly in its intensity of tw o person relationships and its focus on establishing
mutuality and confidentiality.

Performance counseling is achieved through five critical aspects:

(a) Assessing performance against agreed target and standards.

(b) Feedback discussion how appraises has been doing in free exchange of view s.

(c) Positive reinforcement by he has done w ell and it w ill be done better in future by w ay
of improvement

(d) Reaching an agreed action plan jointly by both parties and monitoring progress.

5.3 Conditions for Effective Counseling

Counseling is a means and not an end in itself. It could be an effective instrument in

helping people to integrate w ith their organization and have a sense of involvement and
satisfaction. The follow ing conditions are necessary for counseling to be effective:

General climate of openness and mutuality.

General helpful and empathic, attitude of management.

Sense of participation by the subordinate in the performance review process.


Dual relationship in goal setting and performance review.

Focus on w ork-oriented behaviours.

Focus on w ork-related problems and difficulties.

Avoidance of discussion of salary and other rew ards.

5.4 What Constitutes Counselling Process?

Counseling is given by one w ho is senior to the other person in competence or in

know ledge or in the hierarchical position in the organization. The three main sub-processes
involved in counseling are as follow s:

(a) Communication

(b) Influencing

(c) Helping

Thus, there are three main sub processes involved in counseling-communication,

influencing and helping. The sub-processes of counseling are show n in Figure.

(a) Communication

Communic ation involves r ec eiv ing mes s ages (lis tening), giving mes sages
(responding) and giving feedback. Communication can only be possible if both the parties
(counselor and the counselee) are empathic to each other and try to understand each
others point of view. Non- verbal communication is as important as verbal communication.

(b) Influencing

Influence simply means making an impact on me other person in relationship. Usually

influence is understood in the sense of restricting the autonomy of the person and directing
him into channels desired by the person w ho is inf luencing. ln appraisal discuss ion/
counselling the desired influence is just the opposite, sometimes also called as indirect
mode of influence (w hich increases the autonomy! freedom of the other person). In this
indir ec t mode, influence is af fec ted by r ecognizing feelings, expr ess ing feelings,
acknow ledging and praising good ideas given by the counsellee and raising questions w hich
promote thinking and explorations. This special type of influence enables the other person
to exercise more autonomy, provides positive reinforcement and creates conditions in w hich
the counsellee identifies himself w ith the counsellor.

(c) Helping

Helping, the third sub-process, involves three elements, i.e., Empathy, Mutuality and
Development. Without the counse1lors concern and empathy for the counsellee, effective
helping in the counseling session cannot be provided. It ts als o based on mutuality of relation-
ship, w hereby, both the counsellor and counsellee feel free to ask for and provide help to
each other. Finally, helping involves identification of developmental needs of the counsellee
so that he may be able to develop and increase his effectiveness.

Counselling is helping the employee to grow and develop in the organisation. Every
manager is counselling his employees know ingly or unknow ingly in his day-to-day life. An
effective counsellor is one who helps his employees to become more aw are of their strengths
and w eaknesses and helps them to improve further on the strong points and overcome
w eaknesses. Bv the process of mutuality and support he helps the employees to develop
providing the proper emotional climate.

5.5 Process of Performance Counseling

Psy chology based counseling w ould be perf ormed better by the professional
counselors. But still, the organizations can train the Middle level managers some methods
of counseling. Here, w e w ill see a simple model of counseling process.

Stage 1 : Rapport building- Without the first stage the manager cannot move to the
next stage. He needs to make the relationship amicable for the employee to easily approach

Stage 2 : Exploration- Exploring the issues involved along w ith the person. This is a
time consuming process, but still once the ice breaking is achieved, it w ould be easier to
explore the problem areas w ith the employee.

Stage 3 : Action Planning Along w ith the employee, the manager can make an
individual action plan for the employee, for a short period of time. Both of them can make a
mutual agreement on monitoring the performance for that short duration. This w ill help to
reinstate the confidence in the employee for performing up to the expected standards

5.6 Functions of Counselling

Counselling accomplishes the objectives discussed earlier by performing one or more

of the follow ing six functions: (i) advice,(ii) reassurance, (iii) communication, (iv) release of
emotional tension, (v) clarified thinking and (vu) reorientation.

(i) Advice. Advice is mistakenly considered as equivalent to counselling How ever; it

forms one of its sever al functions. Advising involv es judging an individuals emotional
problems and marshalling a course of action. it causes complications because of the inability
of a person to understand another persons problem and suggest a solution for it. It also
provides an inferior status to a counselee w ho remains dependent on the counsellor. Despite
its ineffectiveness in resolving emotional problems of an employee advicegiving is the
most natural phenomenon practiced betw een a superior and a subordinate in day-to-day
w ork situations.

(ii) Reassurance. Counselling performs the function of reassurance w hich refers to

a w ay of providing courage to an individual to deal w ith a problem or developing confidence
in him that he is facing tow ards an appropriate course of action. How ever, the difficulty w ith
such assurance is that the counselled does not accept counselling intrinsically. Even w hen
he is reassured, the counsel|ors re-assurance fades aw ay w ith the reemergence of the
problem. Despite its w eaknesses, reassurance is useful in certain situations, if handled

(iii) Com m u nicat io n. Counselling facilitates both upw ar d and dow nw ard
communication. It provides the employee w ith an opportunity to express his feeling in an
upw ard direction to the management. Thus, the management c omes to know how the
employees Feel. The counselor should keep in confidence the names of individual employees

and interpret their feelings and convey to the management. These feeling expressed through
logically classified statements may relate to their emotional problems w ith varied aspects
of the organization. Counselling also facilitates dow nw ard communication w her e the
counsellor helps to interpret varied policies and programmes of the company to people
w ho tend to discuss their problems related to them.

(iv) Release of Em otional Tension. Release of emotional tension or catharsis forms

a signif icant function of counselling. By expressing the emotional problem during the process
of counselling the counselled gets an emotional releas e from his frustration and allied
problems. Indeed, as soon as an individual starts explaining the problems to an active
listener, his tensions tend to subside and his speech becomes coherent and rational. Although
this release of tension may not necessarily solve the problems, it removes mental barriers
and enables the person to again face his problems boldly.

(v) Clarified Thinking. Counselling facilitates clarified thinking w hich an outcome of

emotional release is it can be generated quickly by a skilled counsellor acting as a catalyst.
It may partly or entirely take place outside the counselling session as a result of certain
developments during the counseling relationships. Nth the emergence of clarified thinking,
the individual tends to accept responsibility for solving his emotional problems in a realistic

(vi) Reorientation. Last but not the least; c ouns elling per forms the func tion of
reorientation w hich relates to a change in an individuals psychic self stemming from a
change in his basic goals and values. It involves a shift in ones level of aspiration
corresponding to reality and enables one to recognize and accept ones ow n limitations.
How ever it can be largely generated by a professional counselor rather than a line executive.

5.7 Conducting a Successful Counselling Session

You know the objectives of a counselling session. You also know as to w hy you need
to counsel your subordinate. When you are the leader of a team, not all team members
perform equally. There may be a single individual causing problems and you may feel that
his actions are causing troubles for other team members. Now, you w ant to correct this
subordinate by w ay of counselling. How to go about it? Here is an action plan for you but
you have to go step-by-step rom 1 to 10 in the sequence as listed below :

1. Be prepared w ith the plan and be clear about its pros and cons.

2. Wait for the right opportunity.

3. Make to the subordinate clear facts about his conduct in the beginning itself.

4. Convince the subordinate about the problem for the team.

5. Listen patiently as to w hat the subordinate w ants to say.

6. Give enough scope for involvement of outside causes.

7. Try to sell your ideas in the form of suggestions.

8. Give opportunity to the subordinate for suggesting alternatives.

9. Have a mutual agreement over the alternatives.

10. Follow up the action plan after the counselling session.

5.8 Practical Considerations in Counselling

Some practical considerations in counseling relate to responsibility of counselling;

length and number of sessions; time and place of sessions and need for keeping confidence.

Responsibility of Counselling

Line Responsibility Coumelling of employees w ith minor emotional problems is certainly

w ithin the capabilities of line management. Therefore, the responsibility of counselling in
less serious cases of emotional difficulties should not be shunted to special staff counsellors.
The line supervisor must aid the employees in solving problems for w hich he is responsible.
ln addition to fostering the relationship betw een a supervisor and the employee, use of
supervisors as counsellors has several other advantages.

First, they are more available to employees than the staff counsellors.

Second, counselling by the supervisor forms a more natural part of job relationship
than counselling by the staff specialist.

Third, as a line responsibility it does not involve any stigma.


Fourth, the job performance of the counselee (employee) is know n to the counselor

Fifth, there is no need for the induction of a counselling programme when it is conducted
by the supervisor.

Finally, skills acquired during the counseling sessions are useful in performing other
supervis ory functions including interview ing and resolving several communication problems.

Use of Staff Counsellors

On the other hand, the use of staff counselors has several advantages. They provide
more skilful services, more confidential nature of counselling less conflict in view of other
du ties, lack of bias due to the know ledge of an individuals w ork history, and absence of
emotional involvement in the case of a problem employee. How ever, there are certain
disadvantages related to the use of staff as a counsellor. Frequently, the supervisor may
suspect that his subordinate is criticizing him w hile talking to the staff counsellor. Although
it provides the employee w ith an opportunity to express his criticism of his supervisor, there
exists a possibility for developing antagonism and further w orsening the relationship betw een
the supervisor and the subordinate. Moreover, the employees may feel embarrassed to
contact the staff counsellor w ho, comparatively speaking, is a stranger to discuss their
emotional problems. How ever, the staff counsellor may be useful in counselling employees
w ho are either upset by off-the job problems such as domestic problems, or w ho suffer
from serious emotional difficulties.

Length and Number of Session

A number of counselling sessions are required to help a disturbed or confused individual

to improve his emotional adjustment. These sessions may have duration of 45 to 60 minutes,
and the counsellee is made to realize that the predetermined time is his if he intends to use
it. This helps both the counsellor and the counsellee to utilize the time at their disposal
adequately. Moreover, the spacing of sessions helps the counsellee to consolidate gains
that grow betw een them. The requirement of the actual number of sessions varies w ith the
nature of the counsellees problem. Although improvement may occur w ithin counsellee
even after one session, I0 to 20 sessions are considered as typical for personal off-the-job
problems involving personality difficulties. In situations w here problems are not rooted in an

individuals past, there is need for few er sessions to locate the disturbing condition and
manage it effectively. Even single counseling session is found to solve some complex job
problems prevent others getting involved and serve as the means for clarification of others

5.9 Summary

Today; the need for counselling may arise from varied on-and off-the-job condition as
dissatisfaction, resistance to change, alienation, frustration, conflict and stress. Among
time ondition, stress deserves special attention in view of its major contribution to emotional
problems in todays complex w ork environment. Although counselling forms an important
technique to prevent and treat emotional problems stemming from stress at w ork, there
are a number of other techniques w hich can also be used independently to accomplish the

5.10 Review Questions

1. What is couselling? And its uses for performance.

2. Explain the Process of performance couselling.



Learning Objectives

After reading this lesson you w ill be able to

To understand the issues and concerns in compensation strategies

To know about the performance related inputs for compensation

To understand the core compensation

6.1 Introduction

6.2 Core Compensation

6.3 Process of Determination of Com pensation

6.4 Modern Com pensation System s

6.5 Summ ary

6.6 Review Questions

6.1 Introduction

The compensation function does not operate in isolation. To the contrary, it is just one
c omponent of a company s human r esour ce sy stem. In addition Compens ation
profess ionals interact w ith members of various c onstituenc ies, including union
representatives and top executives. We w ill explore these ideas in more detail after me
have introduced some fundamental compensation concepts.

What is Compensation?

Compensation represents both the intrinsic and extrinsic rew ards employees receive
for performing their jobs, Together, both intrinsic and extrinsic compensation describe a

companys total compensation sys tem. This system of practices is depicted in Figure.
Intrins ic c ompensation reflects employees psychological mind-sets that result f rom
performing their jobs. Extrinsic compensation includes both monetary and nonmonetary
rew ards. Organizational development professionals promote intrinsic compensation through
effective job design. Compensation professionals are responsible for extrinsic compensation.
Although extrinsic compensation is the focus of this book, w e w ill take a moment briefly to
explore the intrinsic compensation concept.

Intrin sic Com pensation Intrinsic Compensation repr esents employees cr itical
psyc hological states that result from performing their jobs. Job char acteris tic theory
descr ibes these critical psychological states. Accor ding to this job theory employees
experience enhanced psychological states(i.e. intrinsic compensation) w hom their jobs
rate high on five core job dimensions; skill, Variety, task identity, task significance autonomy
and f eedback jobs that lack these core characteristics do not provide much intr insic

Characteristics on intrinsic compensation and subsequent benefits to employers,

Skill variety is the degree to w hich the job requires the person to perform different
tasks and involves different skills, abilities and talents

Task identity is the degree to w hich a job enables a person to complete an entire job
from start to finish.

Task significance is the degree to w hich the job has an impact on the lives or w ork of
other people

Autonomy is the amount of freedom independence and discretion the employee enjoys
in determining how to perform the job.

Feedback is the degree to w hich the job or employer provides the employee w ith
clear and direct information about job outcomes and performance.

Extr insic co m pensation: Extrinsic compens ation includes both monetary and
nonmonetary rew ards. Compensation professionals establish monetary compensation
programs to rew ard employees according to their job performance levels or for learning job
related know ledge or skills. As w e w ill discuss shortly monetary compensation represents
core compensation.

Nonmonetary rew ards include protection programs (e.g., medical insurance), paid
time off (e.g., vacations) and s ervices (e.g. day cue assistance). Most c ompensation
professionals refer to nonmonetary rew ards as employee benefits.

6.2 Core Compensation

There are seven types of monetary or core compensation. The elements of base pay
adjustments are

BASIC PAY Employees receive basic pay or money, for performing their jobs. Base
pay is recurring; that is, employees continue to receive base pay as long as they remain in
their jobs. Companies disburse base pay to employees in one of tw o forms hourly pay or
w age or as salary. Employees cam hourly pay for each hour w orked. They earn salaries
for performing their jobs, regardless of the actual number of hours w orked. Companies
measure salary on an annual basis. The fair labor Standards Act established criteria for
determining w hether employees should be paid hourly or by salary.

Companies typically set base pay amounts for jobs according to the level of skill
effort and responsibility required to perform the jobs and the severity of the working conditions.
Compensation professionals refer to skill effort, responsibility, and working condition factors
as compensable factors because they influence pay level. Courts of law use these four
compensable factors to determine w hether jobs are equal per the Equal Pay Act of l963.
According to the Equal Pay Act it is against the law to pay w omen less than men for
performing equal w ork. Compensation professionals use these compensable factors to

help meet three pressing challenges w hich w e w ill introduce later in this lesson internal
consistency market competitiveness and recognition of individual contributions.

Over time employers adjust employees base pay to recognize increases in the cost
of living differences in employees performance, or differences in employees acquisition of
job related know ledge and skills. We w ill discuss these core compensation elements next.

COST OF LIVING ADJUSTMENTS ( COLA) Cos t-of-living adjustments (COLAs)

represent periodic base pay increases that are founded on changes in prices as recorded
by the consumer price index (CPI). COLAs enable w orkers to maintain their purchasing
pow er and standard of living by adjusting base pay for inflation. COLM are most common
among w orkers represented by unions. Union leaders fought hard for these improvements
to maintain their members loyalty and support. Many employers use the CFI to adjust base
pay levels for new ly hired employees.

SENIORITY PAY Seniority pay system rew ard employees w ith periodic additions to
base pay according to employees length of service in performing their jobs These pay
plans assume that employees become more valuable to companies w ith time and that
valued employees w ill leave if they do not have a clear idea that their w ages w ill progress
over time. This rationale comes from human capital theory w hich states that employed
know ledge and skills generate product capital know n as human capital. Employees can
develop such know ledge and skills from formal education and training, including on-the-job
experience. Over time, employees presumably refine existing skills or acquire new ones
that enable them to w ork more productively. Seniority pay rew ards employees for acquiring
and relining their skills as indexed by length (years) of employment.

MERIT PAY: Merit pay programs assume that employees compensation over time
should be determined at least in part, by differences in job performance. Employees earn
permanent increases to base pay according to their performance. Merit pay rew ards excellent
effort or results, motivates future performance and helps employers retain valued employees.

INCENTIVE PAY: Incentive pay or variable pay rew ards employees for partially or
completely attaining a predeter mined w ork objective. Inc entiv e pay is def ined as
compensation (other than base w ages or salaries) that fluctuates according to employees
attainment of some standard based on a pre established formula, individual or group goals
or company earnings.

PAY FOR KNOWLEDGE PLANS AND SKILL Pay for know ledge plans rew ard
managerial service or professional w orkers for successfully learning specific curricula. Sill
based pay used mostly for employees w ho perform physical work, increases these w orkers
pay as they master new skills. Both skill- and know ledge based pay programs rew ard
employees for the range, depth and types of skills or know ledge they are capable of applying
productively to their jobs. This feature distinguishes pay-for-know ledge plans from merit
pay, w hich rew ards employees job performance. Said another w ay, pay for know ledge
programs rew ard employees for their potential to make meaningful contributions on the

EM PL OYEE BENEFIT S Ear lier, w e noted that employ ee benefits repr es ent
nonmonetary rew ards. Employee benefits include any variety of programs that provide
paid time off, employee services and protection programs. Companies offer many benefits
on a discretionary basis. We refer to these as discretionary benefits. In addition the U.S.
government requires most employers to provide particular sets of benefits to employees.
We refer to these as legally required benefits. Different forces led to the rise of legally
required and discretionary employee benefits, w hich w e discuss shortly.

DISCRETIONARY BENEFITS The firs t signs of c ontempor ar y disc retionar y

employee benefits w ere evident in the late l800s w hen large companies such as American
Express offered pension plans to employees. Most of the developments in employee benefits
practice for the next few decades resulted from government legislation, as previously noted.
Discretionary benefits offerings became more prominent in the 1940s and 1950s due in
large part to federal government restrictions placed on increasing w age levels. Employee
benefits w ere not subject to those restrictions.

Discretionary benefits tall into three broad categories protection programs, paid time
off and services Protection programs provide family benefits, promote health and guard
against income loss caused by such catastrophic factors as unemployment disability, or
serious illness. Not surprisingly, paid time off provides employees w ith pay for time w hen
they are not w orking (e.g.. vacation). Ser vices provide such enhancements as tuition
reimbursement and day care assistance to employees and their families.

LEGALLY REQUIRED BENEFITS Legally required benefits historically provided a

form of social insurance. Prompted largely by the rapid grow th of industrialization in the

United States during the late nineteenth and early tw entieth centuries as w ell as the Great
Depression of the l930s, initial social insurance programs w ere designed to minimize the
possibility of destitution for individuals w ho w ere unemployed or became severely injured
w hile w orking. in addition, social insurance programs aimed to stabilize the w ell-being of
dependent family member s of injured or unemployed individuals. Further early social
insurance programs w ere designed to enable retirees to maintain subs istence income
levels. These intents of legally required benefits remain intact today. The U.S. government
has established programs to protect individuals from such catastrophic events as disability
and unemploy ment. Legally r equired benefits are protection progr ams that attempt to
promote w orker safety and health maintain the influx of family income and assist families in
crisis. The key legally required benefits are mandated by the Social Security Act of I935
various SIAIC w orkers compensation law s and the Family and Medical Leave Act of I993.
All provide protection programs to employees and their dependents.

6.3 Process of Determination of Compensation

Today the compensation systems are designed aligned to the business goals and
strategies. The employees are expected to w ork and take their ow n decisions. Authority is
being delegated. Employees feel secured and valued in the organization. Organizations
offer monetary and non-monetary benefits to attract and retain the best talents in the
competitive environment. Some of the benefits are special allow ances like mobile, companys
vehicle; House rent allow ances; statutory leaves, etc. The w age determination process
consists of the follow ing steps:

Evolution of Strategic Com pensation

Traditional Com pensation System s In the traditional organizational structures,

employees w ere expected to w ork hard and obey the bosses orders. In return they w ere

provided w ith job security, salary increments and promotions annually. The salary w as
determined on the basis of the job w ork and the years of experience the employee is holding.
Some of the organizations provided for retirement benefits such as, pension plans, for the
employees. It w as assumed that humans w ork for money, there w as no space for other
psychological and social needs of w orkers.

Change in Com pensation System s : With the behavioral science theories and
evolution of labour and trade unions, employees started asking for their rights. Maslow
brought in the need hierarchy for the rights of the employees. He stated that employees do
not w ork only for money but there are other needs too w hich they w ant to satisfy from their
job, i.e. social needs, psychological needs, safety needs, self-actualization, etc.

Now the employees w ere being treated as human resource. Their performance w as
being measured and appraised based on the organizational and individual performance.
Competition among employees existed. Employees w ere expected to w ork hard to have
the job security. The compensation system w as designed on the basis of job w ork and
related proficiency of the employee.

6.4 Modern Compensation Systems

1. The Salary/Wage Survey : It is difficult to set pay rates if one dont know w hat
others paying, so salary survey of w hat others are paying w ill play a big role in pricing jobs.
Virtually every employer conducts at least an informal telephone, new spaper, or internet
salary survey.

2. Job Analysis : Job analysis is a systematic approach to defining the job role,
description, requirements, responsibilities, evaluation, etc. It helps in finding out required
level of education, skills, know ledge, training, etc for the job position. It also depicts the job
w orth i.e. measurable effectiveness of the job and contribution of job to the organization.
Thus, it effectively contributes to setting up the compensation package for the job position.

Job Analysis

Job Description : Job description refers the requirements an organization looks for
a particular job position. It states the key skill requirements, the level of experience needed,
level of education required, etc. It also describes the roles and responsibilities attached
w ith the job position. The roles and responsibilities are key determinant factor in estimating
the level of experience, education, skill, etc required for the job. It also helps in benchmarking
the performance standards.

Job Position : Job position refers to the designation of the job and employee in the
organization. Job position forms an important part of the compensation strategy as it
determines the level of the job in the organiz ation. For example management level employees
receive greater pay scale than non-managerial employees. The non-monetary benefits
offered to tw o different levels in the organization also vary

Job Worth : Job Worth refers to estimating the job w orthiness i.e. how much the job
contributes to the organization. It is also know n as job evaluation. Job description is used to
analyze the job w orthiness. It is also know n as job evaluation. Roles and responsibilities
helps in determining the outcome from the job profile. Once it is determined that how much
the job is w orth, it becomes easy to define the compensation strategy for the position.

Job Evaluation : The relative value of every job is determined through job evaluation.
The relative job value is then converted into money value so s to fix. Wage Survey: Wage or
salary surveys are conducted to find out w age or salary levels prevailing in the region or
industry for similar jobs. Other organizational problems such as recruitment policy, fringe
benefits, etc, are also considered.

3. Groups Sim ilar Jobs In to Pay Grades : Once the committee has used job
evaluation to determine the relative w orth of each job, it can turn to the task of assigning pay
rates to each job; how ever, it w ill usually w ant to first group jobs into pay grades. It could, of
course, just assign pay rates to each individual job. But for a larger employer, such a plan
w ould be difficult to administer, since there might be different pay rates for hundreds or
even thousands of jobs. And even in smaller organization, theres a tendency to try to simplify
w age and salary structures as much as possible. Therefore, the committees w ill probably
group similar jobs into grades of pay purposes.

4. Developing Wage Structure : On the basis of foregoing steps an equitable w age

structure is prepared. While determining s uch a structure several points need to be

a) Legislation elating to w ages

b) Payments equal to, more or less than prevailing w age rates

c) Number and w idth of pay grades


d) Jobs to be placed in each pay grade

e) Provision for merit increases

f) Differentials betw een pay and plans and

g) Dealing w ith w ages or salaries that are not line w ith the structure

5. Wage Adm inistration Rules : Rules are required to determine the degree to w hich
advance w ill be based on length of service rather than merit, the frequency w ith w hich pay
based on length of service rather than merit, the frequency w ith w hich pay increments w ill
be aw arded, the rules that w ill govern promotions from one pay grade to another, and the
w ay control over w age/salary costs can be maintained. Once the rules are framed these
should be communicated to the employees.

6. Em ployee Appraisal : In order to rew ard merit and performance, it is necessary to

evaluate the performance of individual employees. Some differentials in pay are maintained
on the basis of employees performance. This is necessary to provide incentive for hard
w ork and s uperior perf or mance is evaluated against pr edetermined standar ds of
perf ormanc e. Ther efore, job analy sis f orms an integral part in the formulation of
compensation strategy of an organization. Organizations should conduct the job analysis
in a systematic at regular intervals. Job analysis can be used for setting up the compensation
packages, for review ing employees performance w ith the standard level of performance,
determining the training needs for employees w ho are lacking certain skills.

6.5 Summary

Compensation is a methodical approach to assigning a monetary value to employees

in return for w ork performed. Compensation may include any or all of base pay, overtime
pay, commissions, stock option plans, merit pay, profit sharing, bonuses, housing allow ance,
vacations and all benefits. Compensation is a term used to describe not only employee
salaries but also all other benefits received. This is also referred to as remuneration.

6.6 Review Questions

1. Ex plain the concept of competency. How competency development helps in

compensation design.

2. Discuss the process of determination of compensation



Learning Objectives
After reading this lesson you w ill be able to

Which employee benefits are legally required

The Social Sec urity A ct of l935 and its mandated protec tion programs-
unemployment insurance. Old age, suvivor and disability insurance (OASDI),
and Medicare

Compulsory state disability law s (w orkers compensation)

The Family and Medical Leave Act 1993

7.1 Introduction

7.2 Overview of Legally Required Benefits

7.3 Com ponents of Legally Required Benefits

7.4 Fam ily and Medical Leave Act of l993

7.5 Summ ary

7.6 Review Questions

7.1 Introduction

The Social Security programs (for example, retirement and disability) are perhaps
the most w idely publicized legally required benefits in the United States For years there
have been valid concerns that there w ill be insufficient funding to meet promised benefits
As time passes, these concerns are grow ing stronger. Also, there are new and ongoing
political debates about how to ensure the viability of Social Security programs President
George W. Bush signed an executive order to create the new Presidential Commission to
Strengthen Social Security. The Compensation in Action feature at the end of this lesson
dis cusses conc erns s uch as the possible impact of ref orm on employer- sponsored
retirement plans.

7.2 Overview of Legally Required Benefits

The US government established programs to protect individuals from catastrophic

events such as disability and unemployment. Legally required benefits are protection
programs that attempt to promote w orker safety and health maintain family income streams
and assist families in crisis. The cost of legally required benefits to employers is quite high.
As of March 2002 US companies spent an average $3.744 per employee annually to provide
legally required benef its. Human resource staff s and compens ation profes sionals in
particular must follow a variety of law s as they develop and implement programs

Historically, legally required benefits provided a form of social insurance. Prompted

largely by the rapid grow th of industrialization in the United States in the early l9th century
and the Great Depression of the 1930s, initial social insurance programs w ere designed to
minimize the possibility that individuals w ho became unemployed or severely injured w hile
w orking w ould become destitute. In addition social insurance programs aimed to stabilize
the w ell-being of dependent family members of injured or unemployed individuals Further
early social insurance programs w ere designed to enable retirees to maintain subsistence
income levels These intents of legally required benefits remain intact today.

7.3 Components of Legally Required Benefits

The key legally required benefits are mandated by the follow ing law s: the Social Security
Act of I935 various state w orkers? Compensation law s und the Family and Medical Leave
Act of 1993. All provide protection programs to employees and their dependents .

Social Security Act of 1935

Historical Background : Income discontinuity caused by the Great Depression led

to the Social Security Act as a means to protect families from financial devastation in the
event of unemploy ment. The Great Depres sion of the 1930s w as a time w hen many
businesses failed and masses of people became chronic ally unemployed. During this period,
employers shifted their focus from maximizing prohts to simply staying in business Overall
ensuring the financial solvency of employees during periods of temporary unemployment
and follow ing w ork-related injuries promoted the w ell being of the economy and contributed
to some companies ability to remain in business. Specifically these subsistence payments
contributed to the viability of the economy by providing temporarily unemployed or injured
individuals w ith the means to contribute to economic activity by making purchases that
result in demand for products and services.

The Social Security Act of l935 also addresses retirement income and the health
and w elfare of employees and their families. Many employees could not meet their financial
obligations (for example, housing expenses and food) on n daily basis and most employees
could not retire because they w ere unable to save enough money to s upport them in
retirement. Further, employees poor financial situations left them unable to afford medical
treatment for themselves and their families As a result of these social maladies three
programs w ithin the act aim to relieve some of the consequences of these social problems:

Unemployment insurance

Old Age. Survivor and Disability Insurance (OASDI)


Each of those programs w ill be review ed in turn.

1.Unem ploym ent insurance : The Social Security Act founded national federal-state
unemployment insurance program for individuals w ho become unemployed through no
fault of their ow n. Each state administers its ow n program and develops guidelines w ithin
parameters set by the federal government. States pay into a central unemployment tax
fund administered by the f ederal government. The federal gover nment invests these
payments and it disburses funds to s tates as needed. The unemployment insur ance
program applies to virtually all employees in the United States, w ith the exception of most
agricultural and domestic w orkers (for example, housekeepers).

2. Old Age, Survivor and Disability Insurance (OASDI) : OASDIcontains a number

of benefits that w ere amended to the act follow ing its enactment in 1935. Besides providing
retirement income, the amendments include sur vivors insurance (l939) and disability
insurance (l965). The phrase old age in the title refers to retirement benefits.

Virtually all U.S w orkers are eligible for protections under the Social Security Act except
for three exempt classes. First civilian employees of the federal government and railroad
employees w ho w ere employed prior to l984 are exempt from the retirement program;
how ever, these individuals are not exempt from the Medicare program w hich w e discus:
later in this lesson. Second employees of state and local governments w ho are already
cover ed under other r etirement plans are exempt fr om Soc ial Security retir ement
contributions Third American citizens working overseas for foreign affiliates of U.S. employers
w ho ow n less than l0 percent of the foreign affiliate are exempt fromthe retirement program.

3. Old Age Benefits : Individuals may receive various benefit levels upon retirement
or under survivors and disability programs based on how much credit they have earned
through eligible payroll contributions they earn credit based on quarters of coverage. For
example in 2003 a w orker cams credit for one quarter of coverage for each $890 in annual
earings on w hich Social Security taxes is paid. This figure is based on the average total
w ages of all w orkers as determined by the Social Security Administration (SSA) Of course
w orkers may camup to four quarters of coverage credit each year. Individuals become fully
insured w hen they earn credit for 40 quarters of coverage or l0 years of employment. and
remain fully insured during their life- time. Other eligibility criteria concerning quarters of
coverage are based on more complex formulas.

4. Survivor Benefits : The SSA calculates survivors benefits based on the insureds
employment status and the survivors relationship to the deceased. Dependent, unmarried
children of the deceased and a spouse of the deceased w ho is caring for a child or children
may receive survivors benefits if the deceased w orker w as fully insured.A w idow or widower
at least age 60 or a parent at least age 02 w ho w as dependent on the deceased employee,
is entitled to survivors benefits if the deceased w orker w as fully insured. In December 2001
the average monthly benefit w as $238 for children of disabled w orkers and SSN for w idow s
and w idowers.

5.Disability Benefits : An individual must meet the requirements of disability insured

status to obtain disability benefits Disability insured status requires that n w orker be fully
insured and have a minimum amount of w ork under Social Security w ithin a recent time
period. This latter element varies according to a persons age and the type of disability.

Disabled employees of any age are entitled to disability benefits only if they meet
disability insured status. Moreover the disability must be of a serious nature: it must be
expected to endure for at least 1 year or to result in death. Finally disability benefits are
subject to a w aiting period of up to 6 months in January 2003, the average monthly disability
benefit w as $833.

6.Medicare The Medicare program serves nearly all US citizens aged 65 or older by
providing insurance coverage for hospitalization convalescent care and major doctor bills.
The Medicare program includes four separate plans:

Medicare: Port A: compulsory hospitalization insurance

Medicare Perl B: Voluntary supplementary medical insurance


Medigap: Voluntary supplemental insurance to fill in the gaps for Parts A and B

Medicare-Choice or Medicare Part C: New choices in health care providers.

Claim s under Workers Com pensation Program s : Employees can incur three
kinds of w orkers compensation claims. The first injury claims are usually defined as claims
for disabilities that have resulted from accidents such as falls, injuries from equipment use,
or physical strains from heavy lifting.

Employees w ho w ork long hours at computer keyboards or assembly lines performing

the same task over and over again frequently complain of numbness in the lingers and
neck as w ell as severe w rist pain. This type of injury is know n as repetitive strain injury .A
2002 Bureau of Labor Statistic s press release indicates that repetitive strain injuries typically
led an employee to miss I7 days of w ork.

The second kind of claim, occupational disease claims, results from disabilities caused
by ailments associated w ith particular industrial trades or processes For example. black
lung, a chronic respiratory disease. is :t common ailment among coal miners.

In older office buildings lung disease from prolonged exposure to asbestos is another
kind of ailment. Generally the follow ing occupational diseases are covered under w orkers
compensation programs:

Pncumoconioses, w hich are associated w ith exposure to dusts

Silicosis from exposure to silica

Asbestos poisoning

Radiation illness

The third kind of claim death claims asks for compensation for deaths that occurring
the course of employment or that are caused by compensable injuries or occupational
disease. The particular injuries and illnesses covered by w orkers compensation programs
vary by state.

Workers file claims to the state commission charged w ith administering the w orkers
compensation program. The names of these agencies vary by State. Examples include
bureaus of w orkers compensation und industrial accident boards typic ally; one State agency
oversees the administration of the program and disburses benefits to the individuals w hose

claims have been deemed meritorious Another agency w ithin the state, such as the hoard
of w orkers compensation appeal, resolves conflicts that may arise such as claim denials
w ith w hich claimants are dissatisfied.

Depending upon the claim w orkers compensation law s specify four kinds of benefits.
The first medical benefits are provided w ithout regard to the amount or time over w hich the
benefits w ill be paid.

7.4 Family and Medical Leave Act of l993

The Family and Medical Leave A ct (FMLA) aims to pr ovide employees w ith job
protection in cases of family or medical emergency. The basic thrust of the act is guaranteed
leave. and a key element of that guarantee is the right of the employee to return either to the
position he or she left w hen the leave began or to an equivalent position w ith the same
benefits pay and other terms and conditions of employment. The passage of the FMLA
reflects a grow ing recognition that many employee! Parents are becoming elderly, rendering
them susceptible to n serious illness or medical condition. These elderly parents are likely
to require frequent (if not constant) attention for an extended period w hile ill., w hich places
a burden on their adult children.

7.5 Summary
This lesson provided a discussion of the legally required benefits concept the rationale
for legally required benefits varieties of legally required benefits and the implications of
benefits for strategic compensation. Although companies have little choice w ith regard to
the implementation of these benefits the management of these companies can proactively
manage the costs of these legally required benefits to sonic extent. in the coming years
employees, employers, unions and the government w ill pay greater attention to the adequacy
of Social Security benefits for the succeeding generations. Likew ise, these groups w ill
closely monitor the effectiveness of the FMLA.

7.6 Review Questions

1. Define Overview of Legally Required Benefits

2. Explain Components of Legally Required Benefits

3. Describe Family and Medical Leave Act of l993



Learning Objectives

After reading this lesson you w ill be able to

The role of discretionary benefits in strategic compensation

The various kinds of protection programs

The different types of paid time off

A variety of employee services

8.1 Introduction

8.2 Overview of Discretionary Benefits

8.3 Strategic Perspectives on Benefits

8.4 Classification of Em ployee Benefits

8.5 Factors Influencing Cho ice of Benefit Package

8.6 Em ployee Stock Ow nership Plans

8.7 Statutory w elfare provisions in india

8.8 Objectives of Em ployee Assistance Program m e

8.9 Types of Em ployee Assistance Programm e

8.10 Designing/Developing an Employee Assistance Program m e

8.11 Elem ents of Successful Employee Assistance Program mes

8.12 Summ ary

8.13 Review Questions


8.1 Introduction

Today, discretionary benefits represent a significant fiscal cost to companies. As 1 of

March 2002 U.S companies spent an average $9,547 per employee annually to provide
discretionary benefits. Dis cretionary benefits account for as much as 40 percent of employers
total payroll c osts (that is. the sum of core compensation and all fringe compensation

As the term implies disc retionary benef its ar e offer ed at the w ill of company
management. Unlike w ell des igned pay -for-perf ormanc e s ystems employ ees view
discretionary benefits such as paid vacation and holidays as an entitlement much like any
of the legally required benefits. Employers reinforce an entitlement mentality toward benefits
because they aw ard discretionary benefits regardless of employee performance. The
Compensation in Action feature at the end of this lesson discusses aw arding discretionary
benefits according to employee performance.

8.2 Overview of Discretionary Benefits

Discretionary benefits fall into three broad categories: protection programs paid time
off and services Protection programs provide family benefits promote health, and guard
against income loss caused by catastrophic factors such as unemployment, disability, or
serious illnesses Not surprisingly paid time-off provides employees time off w ith pay for
such events as vacation. Services provide enhancements such as tuition reimbursement
and day care assistance to employees and their families. in the past several decades firms
have offered a tremendous number of both legally required and discretionary benefits l, w e
discussed how the grow th in legally required benefits from a select body of federal and
state legislation developed out of social w elfare philosophies Quite different from these
reasons are several factors that have contributed to the rise in discretionary benefits.

Discretionary benefits originated in the 1940s and l950s. During both World War II
and the Kor ean War, the f ederal government mandated that companies not incr ease
employees cor e compensation but it did not place restrictions on companies fringe
compensation expenditures Companies invested in expanding their offerings of discretionary
benefits as an alternate to pay hikes as a motivational tool. As a result many companies
began to offer w elfare practices Welfare practices w ere anything for the comfort and

improvement, intellectual or social of the employees over and above w ages paid, w hich is
not a necessity of the industry nor required by law . Moreover, companies offered employees
w elfare benefits to promote good management and to enhance w ork productivity.

The opportunities to employees through w elfare practices varied. For example, some
employers offered libraries and recreational areas and others provided financial assistance
for education, home purchases and home improvements in addition employers sponsorships
of medical insurance converge became common.

8.3 Strategic Perspectives on Benefits

From the employers perspective, employee benefits represent a double edged sw ord.
On one side, employ ers know that in order to attract and retain employ ees w ith the
necessary capabilities they must offer appropriate benefits. On the other side, they know
the importance of controlling or even cutting costs. Benefits comprise a significant part of
the total compensation package offered to the employees. Total compensation includes
money paid directly (such as w ages and salaries) and money paid indirectly (such as
benefits). Too often, both managers and employees think of only w ages and salaries as
compensation and fail to consider the additional costs associated w ith benefits expenditures.
Total compensation costs for labour amounts to more than half of total operating costs in
many organizations, even more in some service operations For example, about 80% of the
US Post office budget is labour cost. Because of their sizable proportion of organizational
costs, the compensation components of base pay, variable pay, and benefits require serious
and realistic assessment and planning.

Goal for Benefits : Benefits should be looked at as part of the overall compensation
strategy of the organisation. For instance, an organisation can choose to compete for
employees by providing base compensation, variable pay, or benefits, or perhaps all three.
Whic h appr oach is chos en depends on many factor s, such as the competition,
organisational life cycle, and corporate strategy For example, a new firm may choose to
have low er base pay, and use high variable incentives to attract new employees, but keep
the cost of benefits as low as possible for a w hile or an organisation that hires predominately
younger female employees might choose a family-friendly set of benefits including on-site
child care to attract good employees.

8.4 Classification of Employee Benefits

Employee benefits can be further classified under these seven major groups:

(1) Disability income continuation,

(2) Loss-of-job income continuation,

(3) Deferred income,

(4) Spouse or family income continuation,

(5) Health and accident protection,

(6) Property and liability protection, and

(7) A special group of benefits and services called perquisites

1. Disability Incom e Continuation : Disability may be classified as regular, temporary,

total or partial. When employees are unable to w ork because of an accident or some health-
related problem, disability income continuation payments assist them in maintaining their
ex isting lifes ty le w ithout major modific ation. Various disability inc ome c ontinuation
components provide w eekly or monthly payments in lieu of die regular earned income
paycheck. The follow ing 11 components are among the more commonly available disability
income continuation plans. Although all components w ill seldom be available to employees,
components can be packaged to maximize employee protection w hile maintaining costs
w ithin reasonable limits for the employer. The major components are as follow s:

1. Short-term disability

1. long-term disability

2. w orkers compensation

3. Non occupational disability

4. Social security

5. Travel accident insurance

6. Sick leave

7. Supplemental disability insurance


8. Accidental death and dismemberment.

9. Group life insurance: Total Permanent Disability (IPD)

10. Retirement plans

2.Loss of Job Income Continuation

Loss of job income continuation plans are designed to assist w orkers during short-
term periods of unemployment due to layoffs and termination. The eight major compensation
components that make up this group of benefits are as follow s:

l. Unemployment Insurance (Ul)

2. Supplemental Unemployment Benefit Insurance (SUBI)

3. Guaranteed Annual Income (GM)

4. Guaranteed Income Stream (GIS)

3.Deferred Income

Over the year employers hav e established the follow ing kinds of compensation
components to help employees accumulate capital and meet Future financial goals:

1. Social Security

2. Qualified Retirement Plan

Pension plan

Profit sharing plan

Stock bonus plan

3. Simplified Employee Pension Plans (SEPPs)

4. Supplemental Executive

Retirement Plans ( SERPs)

5. Supplemental & Executive

Group life Insurance Plans

6. Stock Purc hase Plan

7. Stock Option Plan

8. Stock Grant

4.Spouse and Family Income Protection

Most employees attempt to ensure the future w elfare of their dependents in case of
their death. One component, life insurance, and a number of other components previously
identified and described have specific features to assists a w orkers dependents in the
event of such a calamity. The major components available to protect w orkers dependents

1. Life Insurance

2. Retirement Plans

3. Social Security and Medicare

4. Tax-sheltered Annuity

5. Worker s Compens ation

6. Accidental Death and Dismemberment

7. Travel Accident Insurance

8. Heath Care Coverage

5.Health & Accident Protection : Organizations provide their employees w ith a

w ide variety of insurance services to help them and their families maintain a normal standard
of living w hen unusual or unexpected health-related adversities occur. These health care
related insurance plans cover medical, surgical and hospital bills resulting from an accident
or illness.

6.Property & Liability Protection : Of rather recent vintage is the addition of

compensation components that provide employees w ith personal property and liability
protection. These property and liability protection components include the follow ing:

l. Group auto

2 Group home

3. Group legal

4. Group umbrella liability

5. Employee liability

6. Fidelity bond insurance


7.Em ployees Services Fringe : Employer provides a w ide array of services that
enhance the lifestyle of employees. in some cases, these services grant employees time
off w ith pay In other cases, the services include highly valued in-kind benefits, w hich, if
purchased by employees themselves, w ould the expenditure of after-tax dollars. In providing
these services, the employer usually receives a tax deduction and, in most cases, the
good or service is not considered an earned income item. Even in cases in w hic h employees
may be charged w ith additional earned income for the receipt of the good or service, the
charge to income is considerably less than the cost that w ould have been incurred by the
recipient. The three major sets of components that constitute the employee services group

(l) Pay for time not w orked

(2) Time off w ithout pay and

(3) Income equivalent payments and reimbursements for incurred expenses

(i) Pay for Tim e Not Worked : Over the past 35 years the drive to reduce w orking
hours and total time spent at w ork has focused on providing w orkers w ith more paid holidays
and longer vacations. From an employees perspective, possibly the most desired but
frequently unrecognized benefit is time-off w ith pay Numerous time-off w ith pay components
have developed, and employees usually receive their daily base pay rate as the rate paid
for these timeoff opportunities The more common time-off w ith pay components are

1. Holidays

2. Vacations

3. Jury duty

4. Election official

5. Witness in court

6. Civic duty

7. Military duty

8. Funeral leave

9. Illness in family leave


I0. Marriage leave

11. Paternity leave

12. Maternity leave

13. Sick leave

14. Wellness leave

15. Time-off m vote

16. Blood donation

17. Grievance and contract negotiations

18. Lunch, rest and w ash-up periods

19. Personal leave

20. Sabbatical leave

(ii) Tim e off from Work w ithout Pay : For years, some organization have provided
employees w ith sabbaticals w ithout pay in this case, an employee has an opportunity to
pursue a special interest area. Although the employee is not paid, he or she continues to be
covered by the employers medical, life insurance, disability Programmes.

(iii)Incom e Equivalent Payments and Reimbursem ents for incurred Expenses :

The ever-increasing diversity and population of employee benefits have given rise to a
significant number of benefits that can be grouped under a category called non statutory
benefits. The majority of benefits previously described are either mandated by legislation or
permitted by statutes and given preferential tax treatment.

This group of compensation components includes some of the most diverse and
most desirable kinds of goods and services employees receive from their employers. Many
of these components and new ones that appear almost daily have been introduced in
response to changes in the economic situation and to tax demands. This broad group of
services provides employees w ith the opportunity for an improved and more enjoyable
lifestyle. Some of the more common components are as follow s:

Preferred Benefits of Services

l. Charitable contributions

2. Counselling




Psyc hological

3. Tax preparation opportunities

4. Education subsidies

5. Child adoption

6. Child care

7. Elderly care

8. Subsidized food service

9. Discounts on merchandise

10. Physical aw areness and fitness programmes

11. Social and recreational

12. Parking

13. Transportation to and from w ork

14. Travel expenses

Car r eimbursement

Tolls and parking

Tool and entertainment reimbursement

I5. Clothing reimbursement/allow ance

I6. Tool reimbursement/allow ance

l7. Relocation expenses

l8. Emergenc y loans

I9. Credit union

20. Hous ing

Such services also give income tax.


8.5 Factors Influencing Choice of Benefit Package

Employers Factors

l. Relationship to total compensation costs

2. Costs relative to benefits

3. Competitors offerings

4. Role of benefits in

a. Attraction

b. Retention

c. Motivation

5. Legal Requirements

Employees Factors
1. Equity (internal + External) w hat others
of same/similar status receive

2. Personal needs as linked to -

a. Age

b. Sex

c. Marital status

d. No. of dependents etc.

8.6 Employee Stock Ownership Plans (ESOP)

May be the basis for a companys 40l(k)plan and these plans invest in company
securities making them similar to profit sharing plans and stock bonus plans ESOPs and
profit sharing plans differ because ESOPs usually make distributions in company stock
rather than cash. ESOPs are essentially stock bonus plans that use borrow ed funds to
purchase stock.

Savings and thrift plans are savings plans that employ ers set up on behalf of
employees. They feature employee contributions matched by the employer. Employees
make contributions to savings and thrift plans on a pretax basis Also, employees can not

w ithdraw their contributions from their accounts prior to their retirement w ithout a substantial
monetary penalty. The contributions by employers vary w idely, usually betw een 1 and $0
percent of employees annual contributions.

Stock bonus plans are governed by rules similar to those that apply to profit sharing
plans, except that benefits generally are distributed in the form of stock of the employer
corporation. Both employees and employers make regular contributions to these plans.
The employer then invests both contributions in an investment vehicle selected by the
employee stocks bonds and money market funds.

8.7 Statutory Welfare Provisions in India

These are amenities that are necessary to be provided to the employees under different
labour legislations. The important legislations w hich call for these w elfare provisions include
The Factories Act, 1948, the Plantation Labour Act, 1951, Mines Act, 1952, Motor Transport
Workers Act, 1961, and the Contract labour (Regulation and Abolition) Act, 1970.

The Factories Act, 1948 : The Act covers areas including health, w elfare, and safety;
w orking hours, annual leave w ith w ages and employment of w omen and children. The Act
is applicable to premises including precincts thereof w here ten or more w orkers are employed
w ith the aid of pow er, or w here 20 or more w orkers are employed w ithout pow er.

The w elfare amenities provided under the act include:

1. Washing facilities.

2. Facilities for storing and dry clothing.

3. Sitting facilities for occasional rest for w orkers w ho are obliged to w ork standing.

4. Fust-aid boxes for cup boards - one for every 150 w orkers, and ambulance facilities
if there are more than 500 w orkers.

5. Canteens if employing more than 250 w orkers.

6. Shelters, rest rooms and lunch rooms, if employing over 150 w orkers

7. Crche, if employing more than 30 w omen.

8. Welfare officer, if employing more than 500 w orkers.


The Mines Act, 1952 : The mine ow ners should make provisions for

1. Maintenance of crches w here 50 or more w omen w orkers are employed.

2. Shelters for taking food and rest if I50 or more w orkers are employed.

The Contract Labour (Regulation & Abolition) Act, 1970 : The contractor is required
to provide the follow ing w elfare and health measures to the contract w orkers:

I. A canteen in every establishment employing l00 or more w orkers

2. Rest rooms or other suitable alternative accommodation w here the contract labour
is required to halt at night in connection w ith w ork of an establishment.

3. Provision for w ashing facilities

4. Provision for first-aid box equipped w ith the prescribed contents.

Canteen : The Royal Commission on Labour and the Labour Investigation Committee
has laid considerable emphasis on the provision of a canteen inside the w orkplace. The
ILO, in its Recommendation 102, mentioned this facility and fdr that a competent authority
in each country should guide establishments w ith regard to nutrition, hygiene, finance, etc.
in India; the Factories Act places the responsibility on State Governments of making rules
to ensure provisions of a canteen in any specified factory w ith more than 250 w orkers.
Workers should be pr ov ided r epres entation in the management of c anteens. The
Commission on labour Welfare has suggested that canteens should be run on cooperative
basis and that legislation should be amended to empow er State Governments to make
rules to meet the objective of nutrition.

Crches : The need for setting up crches in industrial establishments w as stressed

by the Royal Commission on Labour in its report w ay back in 193l. The Factories Act lays
dow n that in any factory w ith more than 50 w omen w orkers a crche should be provided
and maintained for children under 6 years in clean and sanitary conditions. The crche
should be under the care of w omen trained in child care. The crche should have adequate
accommodation, should be properly lighted and ventilated. You must note that the State
Government is empow ered to make rules in respect of standards, equipment and facilities.
Mothers should also be given time to feed their children at necessary intervals.

Social Security : Co ncept and Evo lution : The c oncept of social security is
essentially related to the high ideals of human dignity and social justice. It is in aw ay, one of
the pillars of the Welfare State. Social security measures have introduced an element of
stability and protection in the midst of the stress and strains of modem life.

Social security programmes are increasingly being accepted as useful and necessary
instruments for the protection and stability of the labour force. It is primarily an instrument of
social and economic justice. It is a dynamic concept, its content changes w ith the social
and economic system obtaining in a given time and space. The ILO defines Social security
as the protection w hich society pr ovides for its members through a series of public
measures, against the economic and social distress t.hat otherw ise w ould be caused by
the stoppage or subs tantial reduction of earnings resulting from sickness , maternity;
employment injury, unemployment, invalidity, old age, and death, the provision of medical
care; and the provision of subsidies for families w ith children.

The term social security came into popularity after the US Government passed the
Social Security Act in l935, introducing the old age pension system. The formation of ILO in
I9l9 to promote social justice thorough (i) international standards; (ii) providing information;
(iii) technical ass istance and guidance; and ( iv) c ooper ation w ith other inter national
organizational organization, provided the impetus and direction needed by most countries.
In India over the years, a number of legislative measures have been adopted to ensure
benefits to employees of industrial undertakings under the scheme of social security. Let
us have a look at some of these important rules and regulations.

The Workm en Com pensation Act, 1923 : Indias first social security legislation w as
passed in l923.The w orkmens Compensation Act w as to provide injury compensation to
industrial w orkers. The Act imposes obligation on the employer to pay compensation for
accidents arising out of and in course of employment. The Act w as amended in l962 raising
the w age limit to per month and a later amendment raised the w age limit to Rs. 1,000 per
month, and a later amendment raised it to Rs 1,600 per month. The compensation limits in
case of death w ere raised from Rs. l0, 000 to 30,000 and for permanent and total disablement
from Rs 14,000 to 40,000 by the same amendment.

The termw orkmen in the Act refers to those employed in factories mines, plantations,
construction w ork and other hazardous occupations, except those covered by Employees
State Insurance Act, l948, and clerical employees

The compensation is related to the extent of the injury of circumstances of death.

How ever, the employee cannot claim any compensation if he sustains injuries under the
influence of drugs, alcohol, etc. The Act provides for half the monthly w ages. The Act is
administered by a Commissioner appointed by the Government. The employer is required
to file annual return details of the compensation paid, number of injur ies and other
particulars. If the w orkman contacts any occupational disease due to the employment in
that particular job, it w ould be deemed an injury by accident arising out of and in the course
of his employment for purpose of the Act. In this case, the compensation w ill be payable
only if the w orkman has been in service of the employer for more than six months.

If the employer does not pay the compensation w ithin one month from the date it fell
due, the commissioner may order recovery of not only the amount of arrears but also a
simple interest at the rate of six per cent per annum on the amount clue. lf there is no
justification for the delay in the opinion of the Commissioner, an additional sum not exceeding
50 per cent of such amount may be recovered from the employer by w ay of penalty.

The Employees State Insurance Act, 1948 : This is a pioneering attempt to provide
medical facilities and unemployment insurance during illness to industrial w orkers. The
subject of health insurance for industrial w orkers w as first discussed in 1927 by the Indian
Legislature w hen the applicability of the convention adopted by the International Conference
w as considered by the Government of India. The Royal Commission on labour in its Report
(1931) stressed the need for health insurance for w orkers in India.

The Act covers smaller factories using pow er and employing I0 or more persons and
those not using pow er but employing 20 or more people. The Act has also been extended
to the new classes of establishments, shops, hotels, restaurants, cinemas, theatres, motor
transport, building construction, and new spaper establishments employing 20 or more
persons. it covers all employees, manual, clerical and supervisory and employees engaged
by or through contractors, w hose remuneration does not exceed Rs. 1,600 per month. The
definition of employee includes administrative staff and persons engaged in connection
w ith purchase of raw materials or sale or distribution of products and related functions. The
State Government is empow ered to exceed the Act to cover other establishments or class
of establishments. The scheme is administered by an autonomous corporation w ith the
Minister of labour at the Centre as its Chairman, the Union Health Minister as the Vice

Chairman, and representatives of State Government, employers and the medical profession
nominated by the Central Government.

The scheme is financed by contribution from employers and employees, w ith the
State Governments sharing one eighth of the cost of medical care. The employer pays
4.7% of the w age bill, a maximum of Rs. 7.50 per w eek on the highest w age scale, and the
insured person pays about 2.3% of his w age, around Rs. 4 per w eek. The maximum
corresponding daily benefit rate for the insured person is Rs. I5. The State Government
w hich implements the scheme is reimbursed to the extent of 7/ 8 of d1e expenses incurred
on w orkers families and 3/4 of the expenses incurred in the case of w orkers. In order to
qualify for the benefit the w orker should have contributed to the scheme for a minimum
period of 12 w eeks.

The benefits provided under the scheme include: (i) Sickness and extended sickness
benefit (ii) Maternity benefit (iii) Disablement benefit (iv) Dependents benefit, (v) Funeral
benefit and (vi) Medical benefit.

Sickness and extended sickness benefit: For sickness occurring during any benefit
period, an insured person is entitled to receive sickness cash benefits at the standard
benefits are subject to contributory conditions. An insured person suffering from long-term
ailments like tuberculosis, leprosy; mental diseases, is eligible for extended sickness
benefit at a rate of 25 per cent more than the sickness benefit rate rounded to the next
higher multiple of 5 paise, for of l24/309 days. Contributions are calculated w ith reference
to average daily w ages and w ages have been classified into 9 groups for the purpose of
fixing the contribution.

Maternity benefit: An insured w oman is entitled to maternity benefit at double the

standard benefit rate. This is practically equal to full w ages for a of 12 w eeks.

Disablem ent benefit: lf a member of the scheme suffers an injury in the course of
his employment; he w ill receive free medical treatment and temporary disablement benefit
in cash. The temporary disablement benefit is about 70 per cent of the w ages as long as
the temporary disablement lasts, provided that it lasted for not less than 3 days, excluding
the day of accident. In case of permanent disablement, the insured person w ill be given life
pension at full rate, i.e. about 70 per cent of his w ages.

Dependents benefit This provides timely help to the eligible dependents of an insured
person w ho dies as a result of an accident or an occupational disease arising out of and in
the course of employment. Pension at the rate of 40 per cent more than the standard rate
w ill be paid periodically to w idow and children in accordance w ith the prescribed share. The
benefit also accrues to parents and grandparents and any other dependent upto the age of
18, w here the deceased has no surviving w idow or child.

Funeral benefit: This benefit w as introduced in l968. An amount of not exceeding

Rs. l00 is payable as funeral benefit to the eldest surviving member of the family of the
deceased insured person. If the insured person did not have a family or w as not living w ith
his family at the time of death, it is payable to the person w ho actually incurs the expenditure
on the funeral of the deceased insured person.

Medial benefit: The major attraction of the ESI scheme is medical benefit. Medical
benefit has been divided into three parts:

(a) Restricted m edical care: it consists of out-patient medical care at dispensaries

or panel clinics. Facilities of consultation w ith medical officers, supply of drugs, pre-natal
and post natal c are, family planning and immuniz ation serv ices are av ailable in these
institutions The beneficiaries are also entitled to call a doctor to their house to see a serious

(b) Expanded m edical care: This consists of consultation with specialists and supply
of special medicines and drugs as may be prescribed by them. Facilities for special laboratory
tests and X-ray examinations are also available under this scheme.

(c) Full m edical care. Hospitalization facilities, services of specialists and drugs
and diet as are required for in-patients are available under this scheme.

The Maternity Benefit Act, 1961 : The Act is applicable to all establishments not
covered under the ESI scheme. The Act w as amended in l976 to extend the benefits to all
w omen w orkers earning more than Rs. 1,600 per month in establishments covered by the
ESI Act.

Under the Act, a w oman can get maternity leave up to I2 w eeks. Of this, 6 w eeks
must be taken prior to the delivery of the child and 6 w eeks immediately follow ing that date.

During the period of leave the employee is entitled to full w ages/salary The employee is
also entitled to a medical bonus of Rs 25 if not pre-natal confinement and post-natal care
has been provided by the employer free of charge. To avail of the leave and benefits, the
employee should have put in l60 w orking days of service in the l2 months immediately
preceding the date of expected delivery.

The Paym ent of Gratuity Act, 1972 : Gratuity is an additional retirement benefit. The
act is applicable to all factories mines, oil- fields, plantations, ports, railw ays, shops or
establishments in w hich 10 or more w orkers are employed, The Central Government can
bring in any establishment by notification under the provisions of the Act.

According to the Act, an employee is entitled to I5 days w ages for every continuance
in service. Seasonal w orkers should be paid gratuity at the rate of 7 days w ages per season.
The total gratuity payable shall not exceed more than 20 months w ages. The Act applies to
w orkers w ho do not have any managerial or administrative capacity or are employed under
the government and do not draw w ages of more than Rs. l, 600 per month. Gratuity is
payable on termination of employment after the completion of at least five years of continuous
service. This is relaxable in the case of death or disablement.

8.8 Objectives of Employee Assistance Programme

The major objectives are:

l. To encourage employees w ith personal problems to seek help.

2. To refer employees to appropriate assistance resources.

3. To restore productivity of the individual.

4. To retain talented/valued employees.

5. To enhance the personal health and w ell-being of employees and their family members.

6. To encourage employees through educational sessions to seek assistance early,

before problems affect w ork performance.

7. To provide employees appropriate assistance in a timely, confidential manner.


8. To provide quality care and/or referral and follow -up to employees w hile containing
com for employers.

9. To establish and implement guidelines for dealing w ith any problem w hich may cause
a decline in w ork performance.

10. To provide fair and consistent treatment for all employees w ho need help.

11. To allow employees to seek help confidentially.

12. To link employees w ith the best help available in the organization.

Employee Assistance Programme belongs to everyone: employees and management

in partnership.

Models of Employee Assistance Programme

Follow ings are the major models of employee assistance programmes:

1. Cor por ate Mod el : Large organizations tend to have in-house employ ee
assistanc e programme. These are administered under the or ganization auspices by a
coordinator w ith a counselling staff, all of w hom are employed by the organization. They
may be an integral part of either the human resources or medical departments or else
constitute an independent service directly responsible to senior management.

In-house employee assistance programmes offer services to all employees and often
to family members as w ell. These may range from simple dianosis and referral, to extensive
psychotherapeutic treatment of employees. Normally, they are staffed by mental health
professionals (e.g., social w orkers. Psychologist certified alcoholism counsellors) w ith strong
clinical backgrounds.

The adv antages of internal programmes ar e: exper tis e is ensur ed by hiring

professionals to develop the programme; employers believe it is a most effective manner
to express humanitarian concerns; and, finally, it is believed to be cost-effective over time.

How ever shor tcomings have been pointed out; the main criticisms concern the
confidentiality issue as w ell as that of conflicts of interest faced by therapists. The counseIlor
(e.g., a HR officer) w ill in some cases obtain confidential information about an employee.

2. Con tracted Mod el : Many organiz ations contract w ith pr ofit and non-pr ofit
organisations (e.g., a private consultant, a social service agency, a hospital or a university)
to provide employee assistance services for their employees. These agencies provide a
variety of services such as diagnosis of employees problems enc., w hich can be delivered
either on site or off-site.

Organizations choose this mute for various reasons. It is a quick and efficient w ay to
implement a progr amme w here a manager w ill s imply be delegated r esponsibility for
coordination. Moreover, this model may deal more effectively w ith the sensitive issue of

The major draw back to contracted services is believed to be a lack of experience

w ith the w orkplace. Dis patching employees to professional agencies becomes the principal
focus and primary organizational prevention may be forgotten. Moreover it is more difficult
to hold accountable and to evaluate those w ho provide external services. A combination of
internal and external services is needed for better results.

3. Consor tium Modal : An employee as sistance programme c onsortium is a

cooperative agreement among organizations and agencies that do not have enough
employees to w arrant their ow n employee assistance programmes. Instead, they pool their
resources and develop a collaborative programme to maximize the individual resources of
each organization.

The advantages of the consortium model include: the consortium decreases coats
for small or medium-size organizations, confidentiality is easier to maintain, often there is
better identif ication of and communic ation w ith community resources , the range of
employees served is increased.

The disadvantages include: some supervisory and management staff are reluctant
to deal w ith outsiders, the service provider usually know s little about the participating
organizations. Consortiums are more complex because they include several organizations,
participating agencies may disagree about the services needed and the apportionment of
costs and some counsellors find it difficult to become a part of the formal and informal
w orksite networks.

8.9 Types of Employee Assistance Programme

For a relativ ely modes t cos t, or ganiz ation can introduce employee ass istance
programme to offer support to employees on a w ide range of personal and w ork related
problems . An effective employ ee as sistance pr ogramme can contribute to improved
employee morale and productivity and give early w arning of w orkplace issues that need to
be addressed. The emphasis is on short term, solution focused interventions

These provide counselling for a w ide range of w ork-related and personal w orries.
Employee Assistance Programmes are fundamentally of tw o types:

1. Personal Matters : Counselling and help ex tended on per sonal matter s uf

employees such as health, relationship, family, financial, emotional, legal, anxiety, alcohol,
drugs, and other w ork related issues

2. Work Matter: Counselling and help extended to employees on w ork related matters
such as w ork demands, fairness at w ork, w orking relationships, harassment and bullying,
personal and interpersonal skills, w ork/life balance, stress and other related issues.

There is a grow ing trend for employee assistance programmes to be integrated w ith
related services such as occupational health and risk management, stress management,
harassment or bullying and absence reduction.

8.10 Designing/Developing an Employee Assistance


1. Building Com m itm ent : Both employees/union and management need to feel
prepared to deal w ith unexpected problems and they must be able to handle the often
stressful changes that may occur during the initial period, so that the programme w ill be
strongly supported throughout. Mutual trust and relative pow er are central to this step.

2. Com m unication : A study of existing programmes and close review of existing

policies and procedures w ill illuminate the issues to be served by the employee assistance
programme. The best employee assistance programmes fit smoothly into existing policies
and procedures.

3. M aking St ructure : Selecting a cross s ection of employees to serve on a

committee to represent a w ide variety of view s and needs is important for playing a major
role in formulating the progr amme and its operation. The best employee ass istance
programmes are ow ned by the employees.

4. Developing Policy : A w ritten statement w ill define, among other things, the logic
behind the programme, its objectives and authority, the roles and responsibilities of the
various personnel in the organization (e.g.. department heads, supervisors, employee
representatives) and the commitment to confidentiality. The bes t employee ass istance
programmes a benefit that everyone can use confidentially.

5. Training : This is a tw o-step procedure. First, a selected number of personnel

need to be trained; second the employees need to be educated and aw areness about the
programme must be created. The best employee assistance programmes are rooted in
training and education.

6. Im plem entation : The strategies for implementing should be evolved by studying

the organization (e.g., players, and structure) and finding out its motivation and goals for
the employee assistance programmes. Also the personal involvement of theright people(e.g.
the C.E.O, or C.O.O., union representatives, Head of Human Resources) has to be sought
.As all the times, the employee assistance programmes should function as consistently as
possible w ith other organization practices and goals. it has to be incorporated into other
organization systems and become an integral part of its operations.

7. Evaluation : Evaluating employee assistance programmes regularly w ill give some

indication as to w hat aspects need to be fine- tuned or c hanged. The best employee
assistance programmes become one of the w ays an organization emulates itself.

8. Maintenance : Maintenance of employee assistance programmes is believed to

be an autonomous and s elf s ufficient func tion, somew hat abandoned, sandw ic hed
somew here betw een implementation and evaluation. In order to keep it alive, a system of
maintenance activities is needed that w ill provide for and encourage a level of meaningful
activity and w ill permit adjustments on a regular basis. Some w ays f or maintaining a
programme in the follow ing areas: publicity efforts, personnel meetings and briefings,
programme monitoring and community resources.

8.11 Elements of Successful Employee

Assistance Programmes

A number of attributes are deemed tn be critically important to ensure an effective

smoothly oper ating, comprehensive progr amme: top management support; employee
backing; strict confidentiality; a w ritten policy; clear procedures; organization w ide education
and communication; easy access; supervisor training; insurance involvement professional
leadership; an information assessment and referral servicq a community referral netw ork;
follow up and evaluation.

Thus, major ingredients of successful employee assistance programme c an be

summarized as:

1. Clearly Com m unicating Organization Offerings : An employee assistance

programme is ineffective if employees do not use it. Organizations must educate employees
about how these services can benefit their lives and encourage them to take advantage of
these services. Employees should also be assured that any personal issues they address
w ould remain confidential.

2. Creating Advocacy Relat ionships : Employees can benefit more from an

employee assis tance programme that provides them advocacy as w ell as advice and
guidance. Advocacy relationships can help employees feel that someone w ithin the
organization has their best interests at heart, takes interest in their personal w ell-being, and
w ill advocate on their behalf.

3. Addressing Non-w ork Concerns : Employees are not alw ays able to check their
personal problems at the door w hen they come to w ork. Thus, organization sponsored
programmes that allow employees to address concerns affecting their lives outside of
w ork can improve employees productivity at w ork.

8.12 Summary

Employees are getting more educated, sophisticated and more demanding of benefits
and services. In order to keep them happy; benefits and services policies have no be taken
as strategic HR initiatives. The organizations are going for simpler and flexible benefit
packages -more attention on individual needs and greater attention on simplification of
benefit policies. Inflexibility means stagnation w hich breeds frustration. Therefore, flexible,
tailor- made and customized services. This requir es greater communication among the
employees and their improved involvement.

8.13 Review Questions

1. Explain the various discretionary benefits for employees.

2. Explain the Indian employees benefit schemes.



Learning Objectives

After reading this lesson you w ill be able to

To understand the concept of executive compensation

To recognize the factors affecting effective executive compensation

To understand the guiding principles of executive management

To examine the process of setting executive compensation

To present the Problem of executive compensation

9.1 Introduction

9.2 Definition

9.3 Agency theory

9.4 Principles of executive com pensation

9.5 Factors affecting executive com pensation

9.6 Models of executive com pensation

9.7 Setting executive com pensation

9.8 Executive com pensation system and policy

9.9 Im portant issues in executive com pensation

9.10 Summ ary

9.11 Review Questions


9.1 Introduction

Executive Compensation means any rew ard given to top ranking executives such as
Chairman, Vice Chairman, Executive Chairman, Managing Director, joint Managing Director,
Dy. Managing Director, Directors, Chief Technology Officer, Chief Financial Officer, Chief
Operating Officer. etc., for services and expertise rendered to an organization.

Executive compensation can be broadly classified as:

Bare compens ation: This usually consists of salaries, allow ances, medical and
insurance benefits.

Per formance linked compensation: This usually consists of bonus es, incentive
payments, deferred compensation plans, and stock options.

Perquisites: This usually consists of personal staff personal transportation, company

leased or provided house, club membership, and exclusive car parking, and paid

Terminal benefit: This usually consists of severance pay, retirement benefits etc.

Deter mining executive compensation is a challenging tas k as many internal and

external factors need to be considered. internally pow er to decide executive compensation
lies w ith the c ompensation committee c ons tituted by the board of dir ec tor s (the
representatives of shareholders) and corporate governance mechanism. Externally the
mar ketplace r are f or manager ial talent and government regulations aff ect executive
compensation. Therefore, an organizations ability to understand the drivers of compensation
policy and executive compensation is, theref ore a critical component in determining its
present and fixture success.

9.2 Definition of Executive Compensation

Robert W Kolb (2006) defines Executive Compensation as follow s:

Executive Compensation refers to the total rew ard provided by the firms to the top
level of executives in a corporation, such as the CEO, COO, CFO, and a handful of other
executives w ho occupy the very highest level of management.

9.3 Agency Theory and Executive Compensation

The association betw een shareholders and executives is an example of agency

relationship. This relationship w as defined by Jensen and Mailing (l976) as a contract
under w hich one or more persons (the principal/s) engage another person (the agent) to
perform some service on their behalf w hich involves delegating some decision making.
The organization is view ed as a system of explicit and implicit contracts among those w ho
participate in it, such as ow ners, managers, employees, and the suppliers of capital. Agency
theor y description a situation w here the shareholders are not physically running the
organization they ow n, having hired executives to perform some service on their behalf
w hich involves delegating some decision making authority to the agent. The underlying
assumptions and sequence of action involved in agency theory/model are as follow s:


Principals (shareholders) are risk neutral or risk averse;

Agents (executives) are risk-averse or risk neutral:

Material incentives are necessary and sufficient to motivate executives to w ork;

Higher sum of monetary compensation causes higher executive effort; and

The effort of an executive is difficult to observe.

The sequence of actions

Stage 1: Shareholders create a contract having or not the condition of aw arding

pr emiums :

Stage 2: Executives sign or not;

Stage 3: Executives decide on quantity and quality of w ork they w ant;

Stage 4: Executives handle a w ork:

Stage 5: Shareholders (through board of directors) evaluate the results; and

Stage 6: Shareholders pay for w ork provided including premiums.

A primary function of executive compensation is to control the conflict of interest

betw een management and shareholders. The costs of resolving this conflict of interests

are called agency costs. The principal is faced w ith the problem of controlling the agent,
because (a) both principals and agents are assumed to be rational and sellZmaximi1ing
individuals w ith divergent interests. (ii) Agents can have private information that the principal
cannot learn w ithout costs, creating information asymmetry and (c) the agent is assumed
to be w ork- and risk-averse. Agency theory provides a theoretical foundation to understand
human organizational arrangements including incentive compensation auditing and many
bonding arrangements.

Controlling and monitoring the agent represent a series of costs to the principal Jensen
and Meckling (1976) divided agency costs into three different categories:

The cost involv ed in the bonding ones w hich are the resources that the agents expend:
in order to prevent or compensate deviations from the principals goals;

The cost involved in monitoring the activities of the agent; and

The cost that arises w hen the agents decision do not maximize the w elfare of the
princ ipal

Fama and Jensen (1983) incorporated in the com of monitoring and bonding the
cost of w riting the contracts among the agents w ith conflict of interest and added the
residual loss derived from enforcing those contracts. Their concept of the agency problem
therefore arises, from the cost of w riting and enforcing the contracts the agent and principal
w hich are needed to compensate the different attitudes tow ards risk. Smith (1995) states
that nevertheless some firms have ow ners w ho do not hold w elldiversified portfolios.
This is most likely the case in firms w here ownership is concentrated. Thus in partnerships,
Proprietorships and closely held corporations, risk aversion of the firms ow ners can provide
an important risk management incentive. Figure summarizes the above discussions of
agency theory

Executives of organizations do not bear all the consequences of their decisions as

they do not ow n all the shares of an organization. From that perspective it is necessary to
establish various types of market and contractual mechanisms to motivate or monitor the
agents so that they align their interests w ith those of the shareholders. Among the
mechanisms, executive compensation is a very important means to achieve this objective.
Compensation plans are a form of contract designed to link the goals of the shareholders

w ith those of the MD/CEO or other key executives. Compensation plans are so designed
that executives have sufficient incentives to make decisions that maximize shareholder
w ealth and thus reduce the manager- shareholder agency problem. How ever, compensation
packages are als o designed in such a w ay that agency costs are reduced. If a compensation
package reduces agency costs or is believed by shareholders to do so the adoption of a
compensation package by an organization should result in an increase in shareholder w ealth.
Also, compensation decisions made by shareholders for executives should lead to improved
organizational performance.

9.4 Principles of Executive Compensation

Exec utive c ompensation is critical to the long- term interest of shareholder: and
attainment of organiz ational goals and objectives s uccess fully. Therefore, executive
compensation must be based on certain sound principles as under:

1. Attracting and retaining executive talents: Executive compensation policies

should be able to attract and retain high caliber individuals for ensuring organizations ability
to compete successfully in the marketplace characterized by Olympian competition. This
is critical for the survival, grow th and success of the organization as executives are the
drivers of the organization.

2. Upholding shareholder interests: Executive compensation should be linked

w ith performance and profitability of the organization that they drive. Once an executives
compensation is linked to organization grow th and prosperity then in his ow n self- interest
to earn more money and other benefits, he shall act in the best interest of the organization
in order to ensure its success. By doing so the interest of the shareholders shall be protected.

3. Perform ance based com pensation: Executive compensation should be linked

to ac hievement of per for mance objec tives of the organization. By making explic it
performance goals, executives are more likely to w ork for organizational competitiveness
and profitability If the executive is able to achieve successfully the performance objectives,
as exemplified in organizations balance sheet and other relevant data like increase in market
share, new product launches export performance, etc., the executive should be paid w ell.
How ever, in the event, the executive fails to achieve the performance objectives, and then
his compensation should be reduced. For example, a large Indian textile company reported
loss of l0 crores for the quarter Q3 (October 2007 to December 2007), the compensation
of the Chairman. Managing Director and joint Managing Director w as voluntarily reduced to
Rs. 5 lakh each from 6 lakhs. A ratification of the reduction w as obtained from the board of
directors. How ever, such instances of voluntarism are not very common in India.

4. Effective com pe nsation com m ittee: Direc tors of compensation committee

should be independent in both fact and conduct. They should have, and be perceived to
have, the ability to exercise independent judgment Free from any relationship or influence
that could adversely affect their decisions. This w ill help in bringing about the much desired
transparency and validity of compensation decisions taken by the committee members in
respect of setting executive compensation especially that of CEO?

5. Executive to shareholders: The compensation committee should establish

requirements that executives (particularly CEOs) acquire and hold a meaningful amount of
the organizations stock to align executive interests w ith the interests of shareholders. As
executives ow n compensation and return on investment w ill be at stake, therefore due
performance of responsibilities is expected to be carried out by the executives.

6. Com pliance of law : The compensation committee should oversee executive

compens ation programmes in order to ens ure c ompliance w ith applicable law s and
regulations and align w ith best practices.

7. Transparent disclosu re: Or ganizations should prov ide complete accur ate
understandable and timely disclosure concerning all elements of executive compensation
and the factors underlying executive compensation policies and decisions. Dif ferent countries
have different norms about disclosure of executive compensation. How ever an effort should
be made by the executive (particularly CEOs) to ensure that disclosures are true, ethically
correct and speak Facts.

9.5 Factors Affecting Executive Compensation

Executive compensation system is very important and the establishment of an efficient

system is challenging Not only are the contributions and efforts of executives difficult to
quantify, their decisions affecting the performance of the organization cannot alw ays be
accurately assessed. Under this circumstance the executive compensation system must
rely upon proxies such as corporate profit or share price to assess the performance of
executive. These proxies w ill be influenced by factors w hich are not under the control of

Milkovich and Rubin (199l) argue that executive compensation is more complex than
meets the eye and that a strategic perspective on compensation needs a look beyond how
much executiv es earn. The dic hotomy of attraction, motivation and retention of good
executives versus tough corporate governance and media spotlights places compensation
decision-makers in a difficult position.

l. Changing nature of w ork: The w ay w ork is organized and managed is constantly

changing. This change is triggered by technological breakthrough and the mounting pressure
of global competition. The changing w orld of w ork demands new compensation practices
for executives w ho are at the helm of affairs of an organization. They are the drivers of
shareholder w ealth. Many compensation principles w ere conceived over 50 years ago. in
recent years the environments of organizations have moved from being relatively stable,
simple, orderly, predictable and local to one of discontinuous change complexity, chaos,
ambiguity and globalization. The pressure of keeping up w ith fast changing technology
and improving performance is organizations need to find w ays to become more competitive
in paying their top level executives. Wright (2001) speaks of a compensation revolution that
is being created from a w ork revolution.

2. Investor confidence: Corporate image and governance have a large influence

on the market price and perceived value of an organization. The collapse of Enron and
others has highlighted the need for good corporate governance in executive compensation.
Investors analysts and stakeholders are nervous and it may cost organizations dearly if
they get the slightest sniff of something untow ard. Members of the committees making
compensation policy decisions are under the spotlight and theres nothing more important
than restoring investor confidence in the executives.

3. Effective benchm arking: Compensation committees rely on benchmarking in

order to ascertain the going rate of executive compensation. Most often, organizations
engage the services of compensation consultants for the purpose of benchmarking w ith
market rates. How ever, care should be taken that the compensation consultant:

(a) Is not engaged for other assignments w ith the organization:

(b) Has a w idely acknow ledged Fair credibility in the market:

(c) is directly under the control of compensation committee: and

(d) is aw are of the government regulations on executive compensation.

4. Governance: on 2 December 2001, Enron Corporation, then the seventh largest

publicly traded corporation in the United States, declared bankruptcy. This bankruptcy, the
largest in US history at that time, sent shock w aves throughout the w orld. Thousands of

Enron employees lost not only their jobs, but a significant part of their retirement saving.
Enron shar eholder s saw the v alue of their inves tment plummet. A large number of
businesses: around the w orld w ere turned into Enron creditors in bankruptcy courts and
are to receive only a small portion of the money ow ed to them. Thus, the implications for
directors, managers, board committees, consultants investment analysts, asset managers,
pension funds, the accounting pr ofession, regulator s, politicians and common man is
enormous. Compensation policies are now being questioned far more frequently and closely.
Non-executive directors and compensation committees are playing an increasingly important
role as organization Focus on issues of corporate governance. Organizations that fail to
comply w ith the Stock Exchange listings requirements w ill attract penalties. Depending on
the breach an organization could be suspended or have its listing terminated. Rules and
practices in compensation and disclosure can facilitate or inhibit the effective operation of

5. Attracting and retaining perform ance executives There is a greater need

now for competitiveness in attracting and retaining high-performing executives than at any
time in the history of w or k. Recent dramatic changes in the nature of the w or kplace
globalization, diversification, flexible time and telecommuting mean that organizations can
no longer afford a single rew ard solution. Successful organizations are designing solutions
that truly link compensation to business performance or they are losing their best executives
to competitors.

6. Fostering right executive behaviours: No investment offers a greater potential

for r eturn than one in executives. Compensation is mos t organiz ations s ingle largest
expenditure and executive compensation is a major part of this. Organizations can no
longer afford to be behind in executive compensation strategy. The cost of executive turnover
could be crippling for an organization. But at the same time, executive compensation system
should drive the right executive behaviours that can w ithstand governance questions, media
and stakeholder scrutiny. Organiz ations put gov ernance struc tures and committees
comprising independent or non-executive directors in place to assist w ith compliance and
ensure that the right behaviours are rew arded.

9.6 Models of Executive Compensation

The executive compensation models can be classified as Optimal Contracting and

Managerial Pow er. Organizations enter into employment contrac ts w ith executives to
agenc y costs w ith a view to max imize the ner economic value to shareholders less
transaction costs and payments to executives. The efficiency of any individual employment
contract is difficult to measure and therefore judgments about the efficiency of executive
compensation are based on theoretical models of the employment contracting process.

The details of models of executive compensation are as follow s:

l. Optim al Contracting Model: This model contends that executives compensation

pac kages are s pecif ically des igned to reduce agency costs. in this model, common
contractual terms, such as option grants, corporate loans and severance agreements are
best explained as ow ners attempts to overcome the tendency of executives to be risk
averse to shirk to build empires, to prefer idiosyncratic investments of corporate funds
(e.g., saving the environment or local jobs), and to prefer a diversified investment portfolio.
Individual contracts may deviate from the optimal level because transaction costs make it
impr actical for or ganizations to recontract continuously w ith executives over their
compensation, and over time the system is effic ient w ithin transaction costs. This is because
a variety of market forces-markets for managerial talent, capital, products and corporate
control-preclude executives from earning excessive compensation. In other w ords, optimal
contracting predicts that executive compensation packages are generally those one w ould
expect from arms length bargaining for labour betw een the executive and the organization.

2. Managerial Pow er Model: This model contends that compensation agreements

systematically deviate from efficient results because of the ability of executives to manipulate
the decision-making process to serve their ow n interests. Compensation contract are not
attempts to reduce agency costs, rather, they are evidence of agency costs. Executives
are able to extract tents because directors, w ho are firmly under management control, set
their compensation, and because shareholders are diffuse and uninterested in corporate
governanc e, generally preferr ing liquidity to c ontrol. Compensation is set by the
compensation committee w ith the input of a consultant w ho prepares reports on executive
c ompens ation in general and in the s pec ific indus tr y in question, and makes
recommendations on lev els and types of compens ation. Shareholder appr oval of

compensation is limited to certain stock option aw ards because these aw ards have potential
dilutive effects, but it generally amounts to nothing more than a blanket approval of the total
number of options available for the entire organization.

9.7 Setting Executive Compensation

Adam Smith made a for reaching observation about the agency problem: The directors
of such companies, how ever, being the managers of other peoples money than their ow n,
it cannot w ell be expected, that they should w atch over it w ith the same anxious vigilance
w ith w hich the partners in a private co-partnery frequently w atch over them. Negligence
and profusion therefore must alw ays prevail more or less. in the management of the affairs
of such a company.

Therefore, executive compensation is a complex and challenging task. it cannot be

set like employees in the organization by deciding upon compensation level, structure and
systems. This is because organi1.ations compens ation level, structure and sys tems
decisions are taken by these executiv es. Additionally there are many considerations involved
in setting executive compensation.

9.8 Executive Compensation System and Policy

Executive compensation system is very important, but the establishment of an efficient

process, system and policy is challenging. Not only are the contributions and efforts of
executives difficult to quantify, their decision affecting the performance of the organization
cannot alw ays he accurately assessed. Thus, the executive compensation process, system
and policy must rely upon proxies such as corporate profit or share price to assess the
performance of executives. These proxies w ill be influenced by factors w hich are not under
the control of executives

.The compensation system and polity in respect of executive compensation are as


1. Legal com pliance Complying w ith relevant legislation like The Companies Act
1965 guidelines on managerial remuneration.

2. Market position policy: Refers to w here relative to compensation surveys, an

organization w ants to compensate its executives.

3. My com pensation-m y w ay: Refers to structuring the employment contract and

conditions of employment in the most flexible w ay. The impact is greater than moral package

4. Rand hedging of com pensation: Compensation practices designed to protect

salary against a slide in currency.

5. Com pensation comm ittee: The appointed committee usually compris ing executive
and non- ex ec utive dir ec tors that dec ides on c ompensation polic y and impor tant
compensation decisions such as the executives compensation.

6. Com pensation governance: The governance issues that apply to compensation

including how decisions are taken and limits of authority.

7. Com pensation m ix: The mix or ratio betw een guaranteed compensation (e.g.,
base compensation or total package) and variable compensation (e.g., short-term incentives.
long-term incentives and share schemes).

8. Retention strategies: Strategies put in place to retain executives.

9.9 Important Issues in Executive Compensation

According to Mark van Clieaf and Janet Langford Kelly (2003). 60% of the low est
decile of Russell 3000 companies lost a total of $700 billion in market value and had $485
billion in cumulative negative economic profit over the five years ending in 2003. w hile paying
their executive officers $9 no $12 billion in total direct compensation, not including pension
benefits. Thus, it implies that common executive compensation practices fail to establish
links w ith business strategy, organizational structure and long-term performance. They
cite the follow ing problems associated w ith executive compensation:

Total shar eholder return ( TSR) and ear nings per shar e (EPS) can become
disconnected from intrinsic company value for significant periods of time are subject
to manipulation, do not reflect return on invested capital and can encourage executives
to focus on short-term Factors at the expense of building long-term value.

Stock options and time vested restricted stock aw ards do not necessary create
alignment w ith long-term interests of shareholders and can incentivize executives to

pursue risky, short term strategies rew ard them for industry-w ide or marker w ide
trends unrelated to their ow n effectiveness and have often been used to merely inflate
compensation levels.

Executive compensation surveys often do not reflect market compensation levels

because of comparability problems in selection of peers and variations in levels of
w ork or executive capabilities betw een peer group organizations.

Money is not necessarily the key driver For executive retention.

9.10 Summary

The discussion of c ompensation management s hall be incomplete w ithout an

elaboration of compensation of executives. The executives are the top echelons of an
organization and they drive an organization. Its policies systems and processes including
deciding on employee compensation, Therefore, a valid question arises as to w ho decides
their compensation and how ? Executive compensation especially CEO compensation in
recent times has been under severe sociological microscope of governance experts,
government shareholders and general public the reasons are not far to seek inspite of
corporate governance mechanism. Control of an independent board and government
regulations, these executives/CEOs enjoy astronomical pay and lavish benefits. Ow ing to
this, the compensation of CEOs are increasingly c riticiz ed for lad: of linkage w ith
organizational performance and their ingenuity to tw ist and turn the legal and governance
mechanism to benefit them individually at the cost of the organization the shareholders and
employees (compensation of employees on an average are only a small fraction of CEOs

9.11 Review Questions

1. Explain the Principles of executive compensation.

2. Discuss the factors affecting executive compensation.

3. Discuss the important issues in executive compensation.



Learning Objectives

After reading this lesson you w ill be able to discuss

the competitive strategies and how international activities fit in

the incentives compensation for expatriates

10.1 Introduction

10.2 Purposes or Objectives of International Com pensation

10.3 The Pay Pyram id

10.4 Factors for Com pensation-differences between Countries

10.5 Com pensation Practices of Countries

10.6 Comm on Elem ents of Com pensation Packages of Expatriates

10.7 Term s and Conditions for Expatriate Em ployees

10.8 System s/Approaches in Global Com pensation

10.9 Summ ary

10.10 Review Questions

10.1 Introduction

There is w ide gap betw een w ages paid for comparable positions in different countries
due to different economic systems, development levels, political, traditions and cultures.
Not only do the w age sums differ, the w age structure also varies according to country.

10.2 Purposes or Objectives of International Compensation

Compensation serves several purposes:

(i) Should enable organization to attract potential candidates, should match local and
regional standards,

(ii) Internally equitable, externally competitive in order to retain, and system should have
ease of administration,

(iii) Stimulate performance behaviour for organization success,

(iv ) Programme should be in line w ith existing status hierarchy in the organization,

(v) Enable the organization to optimize its total w age level,

(vi) Compensate for inconveniences, and

(vii) Facilitate the transfer of international employees.

10.3 The Pay Pyramid

A complete pay programme incentive foundation is explained in the pay pyramid. We

may read the pyramid from bottom up.

Four systems (a, b, c, d) contribute something to economic rew ard:

(a) Basic pay, motivates for higher responsibility,

(b) Performance incentive to improve performance,

(c) Profit sharing bonus motivates tow ard team w ork in the organization, and

(d) Rew ard for extended service (seniority increases-increments) and encourages him
to remain w ith organisation.

Economic rew ards are combined w ith social and psychological rew ards. They also
serve broad objective as security, ctjuity and social justice. Thus different employee needs
are served.

10.4 Factors for Compensation - Difference between


Due to dif ferences in var ious countries, some fac tor s w hich have impact on
compensation are:

First, these differences are result of differences in prosperity and spending pow er of
the company. A related factor is the different tax and social security system in the

Secondly, the institutional framew orks w ithin w hich w age bargaining takes place are
quite different in countries. ln Germany and Sw itzerland bargaining takes place at the
national or industry level. The more negotiations are conducted at the national or
industry level, the more society w ill inf luence such negotiations. Where there is
increased dec entralization of negotiating framew ork dow n to company level, in
company specific issues become relatively more important.

Thirdly, cultural differ ences betw een countries have an important impac t. These
differences do not so much influence the rates of pay as the total apportioning of the
total sum betw een w ages, incentives and benefits and due to appraisal methods.

Fourthly, there may be considerable differences between organizations and industries.

This may be result of a deliberate policy, or differences in productivity labour capital
ratios and situations on the relevant labour market.

10.5 Compensation Practices of Countries

The overall compensation package often varies from country to country due to legally
mandated benefits, tax law s, cost of living, cultures and employee expectations. There are,
how ever, some common elements in compensation package. These include base salary
benefits, allow ances, incentives, and taxes. We share compensation systems in follow ing

(a) Americans

(b) Russians

(c) Japanese

(d) Middle-Eastern/Arabs

(e) Chinese



The basic compensation package in US comprises of a basic salary, a variable bonus

w hich is performance linked, long-term incentives (in cash) compulsory benefit contributions,
voluntary benefit contributions. The expenses the employee has to bear on this income are
Income taxes, social security, college expenses, private retirement savings, housing, car,
private medical and dependent care. Fixed bonus and perquisites are not there in American
compensation system. The standard of living being quite high, the total amount left w ith the
employee is not considerable as compared to the basic salary. The compensation system
is very performance-oriented.

Managers formally review employees past achievements compared to previously

agreed upon performance objectives on basis. Salary adjustments are proposed based on
a number of factors. Once approved by upper management, these actions are processed.

During the course of the fiscal year, further salary adjustments may be w arranted.
These salary actions are know n as interim increases and generally can be described in
three w ays:

Administrative Oversight is an adjustment to an individuals pay frequently occurring

shortly after the effective date of the annual merit increase.

Alignment is used to adjust the pay of individuals w hose salary is low in comparison
to the pay of similarly performing employees w ithin the peer group.

Retention is us ed to rew ar d employees w ho are critical to the succ ess of an

organizations mission or a specific pr ogramme or project. Performance may be
acknow ledged at any time during the year.


Having a good fixed salary is important to Russian employees and firms w ith non-
competitive salaries w ill have dif ficulty attracting, motivating, and retaining employees.
How ever, the optimal compensation package combines bonuses and non-monetary benefits
as w ell. in fact, it is often these latter tw o components that prove to be the deciding factor
w hen an employee chooses to join or leave a firm. The rationale to include all three
components mentioned above in a compensation package is discussed below.

Bonuses : Bonuses are a useful complement to straight salary, w hich prove to be

extremely effective in motivating Russian employees. System of employees w orking on a
bonus system created natural incentives for employees to w ork hard. As a result, w ith a
bonus system in place managers have to spend less time making sure employees w ere
w orking hard. For their part, employees like having a bonus system since it gives them
some control over how much money they make. How ever, most Russians dont like a
bonus to be more than about 25% of their fixed salary because on average Russians have
high uncertainty avoidance. in most cases bonuses range from 20 to40 percent of total
salary. The most common type of bonus is the payment of a thirteen month of salary if
firms met certain objectives. The more these bonuses are linked to performance, the more
useful they are.

Non-Monetary Benefits : Russians have traditionally received many non-monetary

benefits as part of their job. As a result, Russians seem to appreciate continuing this practice.
it appears to be beneficial for firms to spend some extra money on non-monetary benefits
rather than only increase salary. It is often non- monetary benefits that differentiate firms.
Non-monetary benefits have been found to be very helpful in retaining employees.


Japan has seniority-based w ages system, which have two features. First, the amount
of pay goes up according to length of service (seniority) and age. Second, w ages are not
set separately for individual jobs (w hile w ages based on jab ability are given by Japanese
companies in general, they are still closely correlated w ith seniority and age).

The w age systems of ordinary japanese companies divide w ages into those that are
paid every month (monthly w ages) and those that are paid in a special w ay. Bonuses that
are ordinarily paid in the summer and w inter and discharge allow ances that are paid w hen
a w orker leaves the company are typical examples of the latter type. Monthly w ages consist
of w ages for scheduled hours w orked and w ages for n0nscheduled hours w orked. The
former is made up of a basic salary plus allow ances, and the latter is w ages for w ork
outside of predetermined w orking hours (such as pay for overtime, holiday, and night w ork).
The core of w ages is the basic salary, w hich has been an age-linked w age that increases
according to age and years of service.

Basic salary is determined according to job-related qualifications and competence

ranks w ithin given job categories. Such a system begins w ith systematically classifying
and grouping the abilities needed to perform jobs w ithin a company. Wages are then based
on relevant Job related qualifications as w ell as grades w ithin those qualifications. Wage
incr eases (an inc rease in rank under a pers onnel grade s ystem) are determined by
performance ratings made by superiors. For this rating process, superiors assess w hether
w orkers are above average, average, or below average in terms of standards set according
to the number of years on the job.

Ordinarily, pay raises applying to the basic salary are given every year in April. These
are know n as periodic pay rises. For an age-linked w age system that basic assumption is
a w orkers job ability increases w ith aging, the amount of the basic salary moves up one
rank each time to correspond to an increase in the number of years of service. For a job
ability w age system, a raise depends on the outcome of a performance rating to gauge the
degree of improvement in a w orkers ability to do a given job. in this case, a pay raise based
on an upgrade or a pay raise corresponding to the difference in skills for the same grade is
implemented. Usually the basic salary is decided according to w age tables. A periodic pay

raise means step-by-step movement up the scale in these tables, w hile the term base
up refers to a pay hike that raises the flour of wage-table standards. Labor and management
at individual companies engage in w age negotiations every spring. These talks serve as
the mechanism for deciding the specifics regarding the amount of periodic pay raises for
individual employees and the base up amount.

Middle-Easterners/ Arab

Salaries in Saudi Arabia vary by nationality group as w ell as job level.

Benefits and Allow ances : in addition to base monthly salaries. Saudi companies
give benefits and allow ances to their Saudi and expatriate employees, These include a
housing allow ance, auto allow ance, food allow ance, and vacation tickets to home country,
school fees for managers children and others., Some benefits are mandated by Saudi
labour law, others are granted at the discretion of the company. Benefits may vary by job
level and employee nationality. GMS consultants are thoroughly familiar w ith Saudi benefits
schedules and are expert at matching benefits to company needs.

Bonus and Incentive Plans : Saudi companies are increasingly using incentive
bonus plans to motivate employees and rew ard good performance. The companies give
an annual bonus to their CEOaveraging 35 to 40 percent of his salary. Almost half the
companies give bonuses all the w ay dow n to w orkers on the shop floor.


The compensation in China before the reforms w as characterized by egalitarianism

at both enterprise and individual levels regardless of performance. Enterprises had no right
to set-up or change any w age scale, let alone to increase (or decrease) their total payroll. A
nationally unified w age system w as structured by the state in l956 for both blue- and w hite-
collar employees. Under this system, there w ere 8 grades for w orkers, I5 grades for technical
personnel, and 25 grades for cadres such as managers and administrative personnel.
Usually the highest pay received in an enterprise w as only tw o to three time more than one
in the low est, and the entry level w as very low. These minimal w age differentials reflected
the strong ideological and political influence upon w ork enterprises. Wage increases w ere
infrequent, occurring at intervals of several years, and commonly took the form of national

unified grade promotions for all employees. Not only w as the w age system egalitarian, it
also provided numerous benefits to employ ees, such as insurance, medical coverage,
public w elfare, non staple food, w inter heating subsidy, and a home leav e travelling
allow ance. These benefits helped to maintain the iron rice bow l and made the enterprises
mini-w elfare states.

10.6 Common Elements of Compensation

Packages of Expariates

The overall compens ation pac kage of ten w ill v ar y f rom c ountry to countr y.
Compensation programmes in global organization w ill differ due to differences in legally
mandated benefits, tax law s, cultures and employee expectation based on local practices.
The additional challenge in compensation design is the requirement that excessive costs
be avoided and at the same time employee morale be maintained at high levels.

There are, how ever, five common elements in the typical expatriate compensation
package. These include base salary benefits, allow ances, incentives and taxes.

Base Salary : Base salary is the amount of money that an expatriate normally receives
in the home country in the United States, this w as around S 175,000 for upper- middle
managers in the late 1990s, and this rate w as similar to that paid to managers in both
Japan and Germany. The exchange rates, of course, also affect the real w ages.

Expatriate salaries typically are set according to the base pay of the home countries.
Therefore, a German manager w orking for a US MNC and assigned to Spain w ould have a
base salary that reflects the salary structure in Germany. U5 expatriates have salaries tied
to US levels. The salaries usually are paid in home currency, local currency, or a combination
of the tw o. The base pay also serves as the benchmark against w hich bonuses and benefits
are calculated.

Benefits : Approximately one-third of compensation for regular employees is benefits.

These benefits compose a similar, or even larger, portion of expatriate compensation. A
number of thorny issues surround compensation for expatriates, how ever. These includes

w hether MNCs should maintain expatriates in home country benefit programs,

particularly if these programs are not tax- deductible;

Whether MNCs have the option of enrolling expatriates in host-c ountr y benefit
programs and/or making up any difference in coverage;

Whether hostc ountr y legislation regarding ter mination of employment affects

employee benefits entitlements;

w hether the home or host country is responsible for the expatriates social security

w hether benefits should be subject to the requirements of the home or host country;

w hich country should pay for the benefits;

w hether other benefits should be used to offset any shortfall in coverage; and

w hether homecountry benefits programs should be available to local nationals.

Most US-based MNCs include expatriate managers in their home-office benefits

program at no additional cost to the expats. lf the host country requires expats to contribute
to their social security program, the MNC typically picks up the tab. Fortunately several
international agreements betw een countries recently have eliminated such dual coverage
and expenses.

Additionally, MNCs often provide expatriates w ith extra vacation and with special leaves.
The MNC typically w ill pay the airfare for expats and their families to make an annual visit
home, for emergency leave, and for expenses w hen a relative in the home-country is ill or

Allow ances : Allow ances are an expensive feature of expatriate compensation

packages. One of the most common parts is a cost-of-living allow ance-~a payment for
differences betw een the home country and the overseas assignment. This allow ance is
designed to provide the expat w ith the same standard of living that he or she enjoyed in the
home- country and it may cover a variety of expenses, including relocation, housing,
education, and hardship.

Relocation expenses typically involve moving, shipping and storage charges that are
associated w ith personal furniture, clothing, and other items that the expatriate and his or
her family are (or are not) taking to the new assignment. Related expenses also may include

cars and club memberships in the host country although these perks commonly are provided
only to senior-

Housing allow ances cover a w ide range. Some firms provide the expat with a residence
during the ass ignment and pay all associated expenses. Others give a predetermined
housing allotment each month and let expats choose their ow n residence. Additionally,
some MNCs help those going on assignment w ith the sale or lease of the house they are
leaving behind; if the house is sold, the company usually pays closing costs and other
associated expenses. Firms such as General Motors encourage their people to retain
ow nership and rent their houses. In these cases, it is common to find the MNC paying all
rental management fees and reimbursing the employees for up to 6 months of rent if the
houses are unoccupied.

Education allow ances f or the expats children are another integral par t of the
compensation package. These expenses cover costs such as tuition, enrolment fees, books,
supplies, transportation, room, board, and school uniforms. ln some cases, expenses to
attend post-secondary schools also are provided. Hardship allow ances are designed to
induce expats to w ork in hazardous areas or an area w ith a poor quality of life. Those w ho
are assigned to Eastern Europe, China and some MiddleEastem countries sometimes
are granted a hardship premium. These payments may be in the form of a lump sum (5
10,000 to S 50,000) or a percentage (15% to 50%) of the expats base compensation.

Incentives: In recent years some MNCs have also been designing special incentive
programmes for keeping expats motivated. ln the process a grow ing number of firms have
dropped the ongoing premium for overseas assignments and replaced it w ith a long-time.

10.7 Terms and Conditions for Expatriate Employees

Some of the terms and conditions decided by management for expatriate employees
sent abroad for assignments/ projects are:

Period of posting.


Pay and allow ances:


(a) Basic salary-to be paid in India or abroad to be decided.

(b) Cost of living allow ance or DA in India not paid as this is applicable in India.

(c) Subsistence allow ance abroadvaries for countries.

(d) Local transportation-as per local assignment management in host country.

(e) Non-family station allow ance to be paid in India.

(f) Children allow ance-up to 2 children either in India or abroad if accompanied,

10.8 Systems / Approaches in Global Compensation

There are three approaches or systems in international compensation:

(i) The Budget System : This system takes in all costs incurred by employee in
both countries (home country and host country). These costs and the effects of the local
tax system, form the basis on w hich employees income is calculated.

The system is expensive to keep up as adjustments are to be made in high inflation

countries. If products and services are not available locally, it w ill involve costs of importing.
Further expatriates w ant other items in its place. It stirs up ill-feeling in host country nationals.

ii) The Balance Sheet or Hom e Net System : ldea is same that net sum must be
available in both countries. Net does not mean net salary after taxes and social security
contributions. it means the freely disposable income. The idea is that spending pow er must
be identical in both the countries. Consequently, allow ances w ill have to be made for costs
of living, housing and generally spending patterns.

Gross income in Netherlands:

Less pension premiums.

Less social security contributions.

Less income tax.

Less health insurance premiums.

Less housing costs.

Less car expenses.


Net Incom e in the Netherlands : Subsequently, a correction may be made to maintain

the spending pow er of the net disposable income (food, clothing, personal care, utensils,
leisure activities, etc.). Basic objective is maintenance of home country living standard plus
financial inducement. Home country pay and benefits are foundations of this approach.
Adjustments are made to home package to balance additional expenditure in host country.

The benefit of these systems is that expatriate is guaranteed his home- country
spending pow er. Three problems faced in applying this system are:

(a) Recalculating the salary from gross to net and vice versa.

(b) In grossing up the net income in the host country, there should be strictly identical
items (same car and housing). This is the difficulty.

(c) Can result in disparities betw een expatriates of different countries.

This is most common system in usage by multinational corporations.

(iii) The Local Going Rate System : Under this the expatriate is paid according to
standards in the host country. This system is mostly used for assignments to countries
w ith clearly higher compensation levels. it is based on local market rates. Its advantage is
that it identifies w ith host country and there is equity amongst different nationalities.

10.9 Summary
This lesson provided a discussion of international compensation and its strategic
role. The globalization of the economy necessitates companies investments overseas.
Well-designed expatriate compensation programs support strategic initiatives by attracting
and maintaining the best performers Effective expatriate compensation programs reduce
risk and promote expatriate families comfort w hile they are stationed at foreign posts. The
balance sheet approach minimizes financial risk to expatriates and various incentives and
allow ances promote comfort. We also discussed that successful expatriate compensation
programs facilitate returnees transition to domestic assignments.

10.10 Review Questions

1. Explain the objectives of international compensation.

2. Explain the difference countries compensation packages.



Learning Objectives

After reading this lesson you w ill be able to

Definition, concept, and features of performance management system

To understand the importance features of performance management system

To understand process of building performance management system

To study the Pillars of managing performance

To understand the performance theatre

To understand annual stock taking of performance

11.1 Introduction

11.2 Im portance of PMS

11.3 Features of PMS

11.4 Process of Building PMS

11.5 Dim ensions of PMS

11.6 The Four Pillars of PMS

11.7 Performance Management Theatre

11.8 Planning Managee Perform ance and Developm ent

11.9 Summ ary

11.10 Review Questions


11.1 Introduction

Performance management system (PMS) as a w hole is a series of activities consisting

of identification of critical performance dimensions, planning of performance, setting of
performance goals and objectives, review ing performance, sharing feedback, and finally
developing the future performance through training. PMS therefore is a set of tools and
techniques to improve the organizational performance. To sustain a competitive advantage,
organizations need to recruit the best-fit and at the same time to focus on their continuous
dev elopment so that they do not become redundant and obsolete in their skills and
know ledge. To develop people it is essential to focus on systematic know ledge and skill
renew al through organizational training and development. How ev er, this process must
succeed the PMS, as PMS helps in identifying the training needs, based on the performance

A w ell-designed PMS ens ures organizational s ustainability aligning employees

compensation to their level of competency and contribution. PMS provides opportunities
for concerted personal development and career grow th, bringing all the employees under a
single strategic umbrella. It provides equal opportunities to all cross sections of employees
of the organization to freely express themselves under structured conditions. To enable
this, it is essential to develop a technology intensive PMS. Such a system is instrumental
in automating the entire range of performance management functions, including systematic
appraisals, closing of skill gaps, and managing career and succession plans. Technology-
enabled PMS is expected to provide follow ing key benefits:

Faster time-to revenue w ith a pow erful, engaged w orkforce, reducing employee
turnover, rew arding star performers, and ensuring that every employee is w orking
tow ard critical objectives.

Focussed business agility to respond to competitive threats, duly aligning the w orkforce
to business goals, identifying and closing skill gaps, and creating succession plans
for critical roles.

Reduc ed ris k w ith simplified management, by r educing busines s disr uptions,

competitive threats,

Non-compliance, litigation, and lost business reputation.


PMS follow s the follow ing basic steps to effectively influence individual and team

Identification of behavioural goals

Measurement of current behaviour

Performing gap analysis

Closing the gap


For many organizations PMS is developed alter identifying critical success factors
(CSF).key performance indicators (KPI) and balanced scorecard (BSC). A large majority
how ever, focus on developing a BSC w hich for them serves as a PMS rather than a mere
performance improvement tool. In the context of the aforementioned organizations w e may
define PMS as a balanced set of CSFs and a limited number of KPls that help in measuring
organizational performance. Inadequately designed performance measures, as observed
by Neely et al. (l995) give rise to dysfunctional behaviour. Hence effective design of the
performance measures through appropriate identification of KPIs is more important for the
success of the PMS.

11.2 Importance of PMS

A system is a collection of parts (or sub-systems). All sub systems are integrated
into a system to achieve the overall goal of the organization. Organization is a system of
people. Systems have inputs processes, outputs, and outcomes, w ith continuous feedback
among these various parts. Change in any sub-system brings change to the entire system.
Within the ambit of such a definition of a system, the performance management process
too qualifies as a sys tem. Performanc e management sub-sys tems are integrated to
accomplish the overall goal of the organization.

Performance management involves thinking through various facets of performance

identif ying c ritic al dimens ions, planning, rev iew ing and dev eloping and enhancing
per formance and related competencies. it is simple, commonsensical and enjoyable.
Therefore performance management qualifies to be a system, as it is a set of techniques
and procedures for improving organizational performance. To sustain competitive advantage

an organization not only r equires recmiting the best people but also focusing on their
continuous development through an effective PMS. While development of people is possible
through ongoing training and development and skill and know ledge renew al, it must succeed
PMS, as PMS, inter alia, Establis hes the basis for identifying training and development

11.3 Features of PMS

Performance management is the day-to-day management of the performance of an

individual or a w ork-group, by both the immediate manager and the individual employees
themselves. To achieve this, organizations make use of a structured framew ork w ith a set
of conditions to manage the performance. As all these aspects are part of the system, i.e.,
sub-systems, performance management process qualities to be a system. In a globally
competitive economy, organizations need to gain competitive advantage by leveraging their
non-substitutable resources, that is, the human resources. In view of this, the role of PMS
assumes strategic importance. It must uphold its commitment to employee development
and mutually agreed performance standards.

In line w ith Bevan and Thompson (l992), the main features of PMS can be outlined as

1.Focus on Objective Setting : Objectives are the targets, w hich an organization

sets for its employees. They appear in the form of an action statement w hich starts w ith a
verb. Overall organizational objectives are decided at the strategic or corporate level. PMS
helps percolate these organizational objectives to the employee level and translates them
into individual targets.

2. Systems for Review of Objectives : Through the process of periodic performance

review, PMS helps keep track of achievement of objectives. Such a review system largely
depends on the type of PMS techniques used by an organization. It may be an age-old
Management by Objective (MBO) system or a 360 degree PMS (multidimensional) or a
more recent performance tracking technique like the BSC. Review of objectives helps in
performance control and initiates steps to correct deviation in performance or to revise the

3.Developing Personal Im provem ent Plan s : Sinc e PMS helps in individual

perfor mance monitoring, it ens ures developing of pers onal improvement plans f or the
employees. A particular employee may lack in performance or he/she may exceed the
given targets. In both the cases, it is important to design the personal improvement plan.
While in the first case, it may be important to provide performance counselling, training,
and development reinforcement, in the second case the employee may be motivated further
through a proper rew ard system.

4.Training and Developm ent : As the focus of PMS is to manage and develop
employee performance to sustain competitive advantage of the organization through proper
alignment it helps in identifying training and development needs. This fur ther helps in
developing need-based training and in measuring the return on investment (ROI).

Ensuring Form al Appraisal w ith Feedback : By introducing a formal appraisal

system, PMS helps in giving performance feedback to employees. Both negative and positive
feedback sensitizes employees and helps them to objectively analyze their shortfalls and
positive aspects. While shortfalls can countered by reinforcement and setting the right
direction, positive aspects can be used to leverage further employee development and
grow th by setting higher individual targets.

5.Com pensation Review : Performance based pay is the prevailing concept. PMS
used it in objective designing of compensation packages for employees, thus rew arding
good performance and reducing the variable pay (performance linked) of non performers.
This optimizing of the cost of compensation helps the organization to remain competitive.

6.Developing Co m petence-b ased Organizational Capabilit y : Competence

based organizational capability helps in appropriate organizational change, keeping pace
w ith competition. It also helps in human resource (HR) planning. PMS through qualitative
and quantitative appraisal can asses: the prevailing competency level of employees and
thus helps in organizational capability review.

11.4 Process of Building PMS

A PMS helps an organization to obtain and analyse relevant performance data in

order to track the performance of employees both at the individual and at group level. Individual

performances along w ith the overall performance of the organization help measure the
results or the level of achievement of business goals. To do this, w e have to first define the
performance review process, w hich follow s a combination of numeric and subjective rating
approach. A good performance review process assesses employee performance along
w ith the organiz ational performance.After effective design of the performance review process
it is desirable to decide on the review schedule w hich may be monthly, bi-monthly, quarterly,
six-monthly, or annual. It is alw ays desirable to complete the performance review s w ithin
the predecided time schedule. Subsequently it is necessary to develop a system to gather
reports and analyse the per formance data. Most of the or ganizations make use of
customized softw are for such purpose. Many softw are vendors develop their ow n softw are
for performance review, w hich they call E-PMS. How ever, it is advisable to avoid use of
generic E-PMS softw are, as often it may not be in accordance w ith the organizational
needs. For example, effective performance review s need to capture w hat is going on in the
business, and w ith the changes in the business need to assess how the existing PMS of
the organization needs to be altered or modified. A good performance review process also
facilitates objective HR decisions and avoids litigation.

11.5 Dimensions of PMS

Performance is w hat is expected to be delivered by an individual or a set of individuals

w ithin a time frame. Such performance expectation can be stated in terms of results or
effort, tasks, and quality, w ithin specified conditions under w hich it is to be delivered. PMSs
have many dimensions as follow s:

Output or result



Foc us


1.Output or Result Dim ensions : Results and outputs are the visible and measurable
dimension of performance. These give the status and summary of the finished and semi-
finished products and services. They descr ibe the results in terms of the measurable
standard, for example, achieving 95 per cent of the standard output in a shop floor engaged

in production of plastic moulded rifle butts. Some examples of results and outputs are the
number of new customers , Cost s av ings , production targets, sales targets, job
accomplishments, meeting deadlines, etc.

2.Inp ut Dim en sion :The input dimension cons is ts of tas ks and activ ities
accomplished by the individual. Broadly this is concerned w ith the nature of activities to be
undertaken, the time frame, the quality of inputs to be used, etc. Input dimensions of
performance can be better managed w hen the envisaged inputs are correctly used, properly
planned and implemented.

3.Tim e Dim ension : This dimension of performance is defined in terms of time

specific tasks, that is, tasks to be performed daily, w eekly, monthly, yearly, etc. Here the
time factor is important, as achieving the desired performance level w ithin specified time
frame is considered to be the target.

4.Focus Dim ension : Focus dimension of performance is measured in terms of the

performance focus, w hich could vary from employee to employee depending on the nature
of job responsibilities. For example, an HR executives performance focus may be defined
in terms of reducing the rate of attrition, Cost-effective design of compensation, developing
employees competence etc. Similarly, for a marketing executive, this could be new market
development, increasing the sales realization, etc. Thus depending on the nature of job,
performance focus may vary.

11.6 The Four Pillars of PMS

Human resources are the only sustainable competitive advantage for any organization.
Effective PMS through the process of HR integration, individually and also in groups, w ith
the organiz ation, ensur es its appreciation. Proactive PMS, ther efor e, makes human
resources more valuable, and w ith renew ed know ledge and skill, people become more
competent to perform better to perpetuate competitive advantage for the or ganization.
Ef fective PMS, among other s, also requir es implementation of pr oper performance
measurement s ystems, w hich c an success fully track the individual and group level
per formances. A ccor ding to Edw ar d E. Law ler III, the four pillars of PMS f ocus on
accomplishing the follow ing:

Define and agree on w hat performance the organization needs.

Guide the development of individuals so that they can acquire the skills and know ledge

needed to perform effectively.

Motivate individuals to perform effectively.

Provide data about the condition of the organizations human capital.

With these f our pillar s Emily in place, managers c an s uc cess fully manage

perfonnance, ultimately influencing the companys bottom line and overall success.

Pillar one -Defining Performance: The foundation of PMS is to determine w hat has

to be done and the process of doing the same. This is w hat w e call the stage of defining the

performance, that is, pillar one of PMS. Clear definition of performance helps employees to

focus their efforts, feel motivated and achieve business results. PMS should explicitly identify

the objectives and the w ays of measuring the objectives.

Pillar tw o -Guiding the Development of Individuals: The second pillar of PMS is to

develop the know ledge and skills of employees, to enable them to perform better. At the

outset this requires managers to identify the required competencies, its availability and lack

or gap in employees, and w ays of bridging such gaps through employee development.

Without this exercise, it is not possible to assess employers performance delivery.

Pillar Three -Managing the Motivation: The third pillar of PMS is motivation. Employees

perform only w hen they feel motivated. it requires direct linking of success to employee-

valued rew ards. Such rew ards, either intrinsic or extrinsic, can motivate employees. Rew ards

should be adequate enough to make a difference in the minds of the employees.

Pillar Four-Providing Feedback: Effective PMS requires immediate feedback w hich

helps employees understand their mistakes and initiate action to correct them thus avoiding

major performance disaster. To perpetuate a continuous ongoing performance feedback

process, many organizations make use of computerized or electronic PMS (E-PMS). The

E-PMS can keep record of individuals skill assessment and of all relevant information such

as know ledge, competencies, performance goals, personal development requirements,

etc. This E-PMS performance database becomes a useful source for employee feedback;

it also allow s managers to keep track of changes in employee performance over the years.

With these four pillars, PMS become effective in directing, motivating, and teaming
up, and enhancing the performance of the organization.

11.7 Performance Management Theatre

Effectiv e PMS maximizes organizational performance in core areas, success of w hich

cascades to performance improvement at all the levels of organization. The concept of
performance management theatre is based on the premise that communication is the key
to any business transaction; therefore, communication plays an important role in employee
performance. Thus, good performance precedes effective communication. Organizations
need to improve both the internal and ex ter nal communications to meet c us tomer
expectations. Communic ation performance is defined as performance management theatre.
Performance management theatre follow s certain stages:

Auditing of the existing strengths and w eaknesses of communication

Des igning tailor -made c ommunication sty le c ompatible w ith organizational


Analysis of existing communication abilities of people using a scoring device, and

tracking the changes required to meet customer expectations.

Designing communication performance development pr ogramme

Ensuring that employees get trained on communication performance

Evaluate post training employees communication perf ormance against standard


The term performance management theatre is used, as theatre, per se, is enjoyable
and informative, and w hen used as a tool for training and development, it becomes more
effective. Theatrical art improves the communication abilities of people, w hich can have
tremendous value addition to employees performance delivery.

11.8 Planning Managee Performance and Development

Now, lets take a brief but closer look at the three components of PFM Theatre. Planning
Manage: Performance and Development is the script of the performance, also the platform
or stage on w hich performance w ill be enacted much like a foundation. It is the preparation
artistic as w ell as logistical for performance to be enacted. Monitoring Manage: Performance
& Mentoring Manage: Development is the play or the performance that the manager conducts
w ith its highs and low s, moments of pain and ecstasy, excitement and tension that the
actors cherish most. It is, in fact, the Kurukshetra of PFM. This is w hat holds stakeholder
interest. Annual Stock-taking is the summation and the critique of the preceding show. The
lessons from it are to be heeded w hile planning for the next one, for the show to go on. In a
strip of Dilbert, the Ponty-Haired Boss says, Our executives have started their annual
strategic planning sessions .... This involves sitting in a room w ith inadequate data until an
illusion of know ledge is attained .Then w e reorganize, because thats all w e know how to

Planning, in our framew ork, is not w hat PHB, the Ponty-Haired Boss lays dow n.
Yes, it is annual and involves planning sessions; it w ould possibly mean sitting in a room,
but not necessarily w ith inadequate data; and certainly, w hat is planned is w hat w ill be

Planning performance of manages means that managers , infact, plan their ow n

performance. To create memorable performance, preparation is imminent. if thoughtful
pre-w ork, in the form of a w ell-understood, mutually agreed plan is not done, the outcome
of the entire performance w ill remain suspect. The cycle of PFM begins at the start of the
year, by establishing mutual expectations and plans for performance and development,
w ith each managee.

Mutuality is the fine thread that runs through the entire process of PFM: from planning
to stocktaking. An important assumption underlying PFM is that in the process of achieving
requisite organizational goals or targets, both the manager and the managee make important
and complementar y c ontr ibutions. They indiv idually and personally r ecogniz e such
contribution as their basic responsibility. Mutual expectation-setting and planning makes
responsibilities explicit for a specific period of timeusually a year, and prepares a road
map to oper ationalize these. Deliberations for expectation setting and planning
participatory in naturew ork best w hen both the manager and the managee first think
independently, in advance, about the contribution that they w ill individually make to the
ultimate performance output; and candidly share their ow n ideas as also their hopes and
fears. in an effective process, the manager and the managee interact and discuss all relevant
issues openly and logically, and arrive at a common ground of agreement, w ith empathy
and understanding. What, then, are the precise things that a Performance Manager needs
to do at the beginning of the year w ith each of the managees, to build a solid foundation?

1. Study Outcome of the Most Recent Stocktaking. This outcome contains several
pieces of information relevant to w hat goes into future expectations and plans:

(a) What the manage: actually did during the previous planning period. This must be
used to update the managees future Role Description so that it accurately reflects
the currently anticipated scope of the managees role.

b) Strengths and w eaknesses of the managee, and her development needs. This can
suggest w hat developmental assignments or projects, or increased or decreased
(or different) responsibilities for the future, must be built into the plans being devised.
This may also suggest to the manager, the special coaching or mentoring needs of
the managee.

c) What internal systems or procedures helped or hindered the managees performance.

Where it is w ithin scope of the managers role, the manager and the managee may
build in some special projects to improve these systems and procedures, or develop
new ones that w ill be more helpful.

d) In other areas, the manager may undertake to explore how organizational support for
the managees performance can be improved.

e) Helping or hindering forces in the teams external environment, w hich may need to be
counted in determining what performance expectations w ill be realistic and achievable,
but challenging during the plan period.

f) Data formulating performance indicators for the various responsibilities included in a

managees role description. In due course, taking together indicators developed for
all comparable managees, these may lead to some organization-w ide standards or
benchmarks for performance.

2. Review the Managees Role Description. For effective PFM, each managee
must have a current description of her role or position. A role description briefly, but clearly,
includes the role purpose, the responsibilities and tasks, the key contacts and relationships,
including the reporting

Relationships, the levels of author ity and autonomy the r equired skills and
competencies, etc. lt is intended to be a fairly stable document, but it also needs to be
review ed periodically to ensure that it is relevant, current and accurate at any given point in
time. The planning exercise is usually taken advantage of to carry out such a review. Role
description acts as a sound starting point for determining responsibilities and activities in a
performance plan.

3. Establish Performance Standards or The Best Achievem ent Levels . This is

a problematic area. Managees do need to know w hat is expected of them, by their manager
and by their organization. There needs to be a clearly-defined, fair and accurate w ay of
assessing w hether performance achieved by the managee is high, medium or law, in
w hatever language it is couched. Performance standards respond to the key responsibilities
expected of the role incumbent. They lay dow n how fulfillment of these responsibilities w ill
be measured, in terms of the quality of the out- put, its quantity, timeliness and the cost, etc.

4. Design Special or Developm ental Assignm ents. These assignments dont cover
the core responsibilities included in a managees role description. As the title suggests,
these assignments or projects respond to the development needs of the managee, or the
systems and procedures or the processes that the managee uses to achieve expected
performance in core areas. Such assignments usually have tw o distinct components:

Systems-oriented Projects, w hich directly relate to expeditious fulfillment of the job

and are not part of the ongoing day to day tasks. These are one-time activ ities designed
to enhance task productivity or the w ork environment.

Individual Occupational or Professional Development Activities, intended to enlarge

or enrich competencies, know ledge, skills or attitudesuseful for the managees
present or the future position(s).

11.9 Summary

PMS is a set of techniques and procedures to improve organizational performance.

To sustain competitive advantage, an organization not only requires recruiting the best
people but also focusing on their continuous development through an effective PMS. While
development of people is possible through ongoing training and development and skill and
know ledge renew al, it must succeed PMS, as PMS, inter alia, establishes the basis for
identifying training and development needs.

11.10 Review Questions

1. Define Performance Management Systems (PMS). What are its main features?

2. How can w e develop a PMS? How PMS is linked w ith organizational strategy?


Learning Objectives
After reading this lesson you w ill be able to

Understand performance management and mentoring.

Learn about the hallmarks in mentoring culture.

12.1 Introduction

12.2 Research and Theory

12.3 Mentoring Culture

12.4 Summ ary

12.5 Review Questions

12.1 Introduction

Monitoring Manage: Performance and Mentoring Manage: Development (MMP and

MMD) is the heart and s oul of PFM. It is the perf orming phase. it links planning w ith
stocktaking. The primary purpose of monitoring and mentoring processes is to help the
manageer succeed. If the ongoing monitoring of managee performance is ineffective, then
truly speaking, managing is absent. if individual and team development is neglected,
leadership is not happeningand positive motivational forces w ill most likely be w eak or
non-existant. MMP and MMD component of PFM gives concrete meaning to the concept of
organizational supervis ion and oversight. Without it, either laissez faire prevails or the
managees w ork predominantly to avoid negative consequences. PFM w orks w hen hope,
rather than fear, is the driving force. Without effective MMP and MMD, performance planning
can be done, but plans w ill remain largely unexecuted; pers onnel appr aisal can be

undertaken, but it w ill create as w e know it does more problems than it w ill solve. in any
event, the synergy that synchronized PFM can bring about w ill remain unrealized.

MMP and MMD is also the most difficult of the three components of PFM. The formal
and informal managerial support, implicit in ongoing monitoring and managec nurturing,
calls for a high level of human skills and a positive mindset. The manager needs to use
every interaction w ith the managee as a potential opportunity for developing and motivating
an occasion to listen and to guide. Out of every such interaction the manager is more
know ledgeable about the managee and her situation, and the managee is w iser and more

12.2 Research and Theory

Connecting experience w ith research findings and theoretical constructs can

tremendously help build the performance managers confidence and commitment to any
system or style. Some concepts relevant to MMP and MMD aspects of PFM are briefly
described here.

A. Drivers of Organizational Perform ance: in todays complex and diverse context,

manages largely know ledge w orkers are the key drivers of organizational performance.
They are privy to critical information, w hich gives them lots of control on w hatever goes into
organizational success. Given demands and sensitivities of the increasingly discerning
stake- holder smedia, c ustomers, clients, and other partner s ev en small errors or
omissions can make all the difference betw een stakeholder perception of an organization
achieving its goal, or failing to do so. Certainly these perceptions can quickly affect the
image, goodw ill and credibility of organizations. Managers, therefore, must keep a tab on
their managees current motivation and behaviour in task performance:

As a managee joins an organization, her concern is to keep the new job. Most
managccs at this stage may not be too w orried about future career or competitive
performance. The behaviours that they manifest may be those of stable performers,
w ho are regular, disciplined and punctual.

Led yet again by the security motive, most managees avoid unnecessary risks and
try to perform at a minimum acceptable level, unless the manager is able to kindle
higher level needs and generate positive w ork motivation.

Where managers succeed in generating positive w ork motivation manages tend to

perform at more than a minimum level, depending on performance expectations that
managers communicate to them verbally or otherw ise.

Only w hen, through skillful coaching, couns elling and mentoring, managees are
enabled to feel secure and confident, and become self-motivated, do they begin to
use their initiative and enterprise, and their creative or innovative faculties. They can
then let their ambition take charge and become competitive high-performers.

As competent performance managers create mature and responsible teams w ith

their managees, these competitive high- per for mers bec ome cooperativ e and

B. Planning on the Left Side and Managing on the Right: About a quarter of a
century ago, Mintzberg spoke something of w hat w e know today as emotional intelligence
and spiritual intelligence. He did this on the basis of:

(a) His observational study of the w ork of five chief executives reported in The Nature of
Managerial Work in 1973 and in The Managers job and Folklore and Face in 1975.

(b) A study of 25 strategic decision processes reported in The Structure of Unstructured

Decision Processes co-authored w ith Duru Raisinghani and Andre Theoret.

(c) A series of studies c arried out under his supervision at McGill University on the
formation of organizational strategies.

C. Managerial Leadership: For Field Marshal Bernard Montgomery, Leadership is

the capacity and w ill to rally men and w omen to a common purpose and the character
w hich inspires confidence. An AMROP-HBS Study covering 237 CEOs in the United States
ranked attributes and mistakes of a successful CEO. These are adapted to highlight some
important attributes and mistakes of a leader manager at other organizational levels.


Communicating Organizational Vision and Strategy.

Know ing Customer Needs.

Championing Organization-initiated Change.


Anticipating Impact of Competition.

Creating an Environment that Fosters Risk-taking.

Understanding New Technologies.

An Understanding of Other Cultures and Languages.

D. Situational Leadership: in their book Leadership and thc One Minute Manager,
Blanchard, Zigarmi and Zigarmi elaborate a model of Situational Leadership. According to
them, A w hale manager is flexible and is able to use four different leadership styles:

Style 1: Directing. The leader provides specific instructions and closely supervises
task performance.

Style 2: Coaching. The leader continues to direct and closely super vis e task
accomplishment, but also explains decisions, solicits suggestions and supports progress.

Style 3: Supporting. The leader facilitates and supports subordinates efforts tow ards
task accomplishment and shares responsibility for decision-making w ith them.

Stage 4: Delegating. The leader turns ov er r esponsibility f or spec if ic tas k-

accomplishment, including decision-making and problem solving, to subordinates.

E. Perform ance Managers Change Agent Role: in PFM, a significant role of the
manager is as an agent of change in her w ork situation. Tandon enlists three roles that a
change agent can take her actual choice depending upon the problem at hand:

a) Expert: As an expert, the manager diagnoses problems and provides solutions. Similar
to the doctor-patient model, this entails a relatively passive role for the managee.
Competence and expertise of the manager are crucial. Implementation of change,
using this role, is largely dependent upon the expert pow er of the manager.

b) Catalyst: In the catalyst role, the manager stimulates and advocates change. The
managee is actively involved along w ith the manager in diagnosing problems and
developing solutions. Here the managers ability to re-educate and persuade the
managee is crucial to effective change.

c) Process-Consultant: in this role, the manager assists the managee in finding her
ow n solutions. The process-consultant role of the manager permits her to suggest a
process of changing, but not providing answ ers. Facilitative and persuasive strategies
characterize the managers behaviour in this role.

F. Organizational Hum an Relations: Some time ago. Chris Argyris futuristically

hypothesized certain changes forthcoming in organizational human relations policies and
practices in Human Relations: A Lack Into the Future:. These are of interest in the context of
PFM especially MMP and MMD. These predicted changes are briefly listed below :

From an approach that expects people alw ays to be friendly to the one w here people
feel free to dislike others as w ell as to be friendly. Argyris argues that it is unrealistic to
expect people to like one another all the time. He believes that freedom to express
honest hostilities, if done effectively, can enhance cooperative effort, and release a
lot of energy used up in w ithholding feelings.

From a view that human beings are the most important part of an organization to the
more realistic one that importance of human beings as part of an organization varies
under different conditions, According to Argyris, most self-responsible managees
consider the tensions and frustrations inherent in production bogies, budgets, etc.
as legitimate and understand the logic of organizational demands made on them.
The managees may even consider an undue expression of human resource primacy
as conscious manipulations that betray the managements basic lack of confidence
in the individual.

G. Pow er of Perception: Harold Leavitt in a sense, ranks perception above reality.

According to him, mbst people recognize that the w 0rldas-w c-seit is not necessarily
the same as the w orld-as-it-really-is. We answ er depending on w hat w e hear, not on w hat
is really said. We buy w hat w e like best, not w hat is the best. Whether w e feel hot or cold
depends on us, not on the thermometer. The same job may look like a good job to one of us
and a sloppy one to another. People see things differently. He asks the question d0es one
alw ays see w hat he w ants to see; or does he see w hat he is afraid he w ill sec, or both?

lf it is true that people behave on the basis of the perceiv ed w orld, and then
under standing peoples behaviour must inevitably involve unders tanding their Current

perception of the w orld. In inter-role relations, it is a grievous error to assume that everyone
w orks for the same or similar goals, or that facts speak for themselves. If different people
thus perceive things differently, how can a manager ever predict w hat behaviour or responses
to expect from the managees?

H. Equity Theory: According to Maslow s Hierarchy of Needs, ego or esteem is an

important need that people have. ln order to satisfy this need, people do assess their ow n
performance and behaviour in a situation, and depending upon their ow n estimation, accord
recognition to them. Most individuals set their ow n objective measures of performance or
behavior and their personal estimation is in relation to these standards. When they dont
find such measures, they compare their performance and behavior w ith similarly-placed
others. They make their assessment by comparing their ow n contribution to w ork, as also
the benefits that accrue to them, w ith the contributions and benefits of one or more others
w ho they believe to be similarly placed.

The Equity theory postulates that a person is motivated in direct proportion to perceived
fairness of the rew ards received by her for the amount of effort put in, in comparison w ith
certain others. When she perceives inequity in relative efforts and rew ards she feels
disheartened and demotivated in her w ork situation w hereas, in fact, no inequity may exist.

People, thus, compare their perceptions of tw o ratios:

(l) The ratio of their ow n outcomes to their inputs, to

(2) The ratio of comparable anothers outcomes to inputs.

I. Experiential Learning: Deliberate learning by the manager the managee, and the
organization from their experiencec0nsisting of their successes, failures, problems, and
challenges in course of their w ork is an important constituent of PFM. Every task that they
undertake is a natural or organic opportunity to learn. All other learning events are synthetic
and artificial. Experiential learning takes place through a sequential process presented by
David Kolb3 as the Learning Cycle.

Recognizing the signif icant concrete experience represented by successes, failures,

problems, and challenges in the course of w ork.

Reflective observation to reflectively reconstruct the significant concrete experience:

to observe, analyse and learn from in a detached manner.

Generalizing the lessons learnt from a number of concrete experiences and developing
personal theories through a process of abstract conceptualization. Abstract, because
these personal theories or concepts though learnt through concrete situations are
freed from situational characteristics and so constructed that these can be applied in
different kinds of relevant situations.

Trying out these personal concepts or theories developed in low -risk experimental
situations in the active experimentation mode to test their validity and to gain personal
confidence in using these in future concrete experiences.

J. Movers of Hum an Behaviour: According to Hackman, et al, there are three

psychological states that are critical in determining a persons motivation and satisfaction
on the job:

Experienced Meaningfulness. The individual must perceive her w ork as w orthw hile
or important by some system of values she accepts.

Experienced Responsibility. She must believe that she personally is accountable for
the outcomes of her efforts.

Know ledge of Results. She must be able to determine, on some fairly regular basis,
w hether or not the outcomes of her w ork are satisfactory.

K. Achievem ent, Affiliation and Pow er Motives: McClelland and his colleagues
did considerable research on w hat motives contribute to the success of a manager, and in
w hat w ay. They considered three motives significant to this context. These are:

Need for Achievement moaning the desire to do something better or more efficiently
than before.

Need for Affiliation meaning the desire to establish or maintain friendly relations w ith

Need for Pow er meaning the desire to have impact on others (not dictatorial pow er
but the need to be strong and influential).

L. Enriching Per form an ce thr ough Diversity: Or ganiz ations function in an

increasingly democratic multipolar w orld. According to Kouzes & Pozner it is no longer
possible for them w hether in business, government, or nonprofit sectors to thrive by being
responsive only to the w orld as defined by the elite. To be successful in a multipolar w orld,
leaders in all roles, at all levels and in all w alks of life, must learn to appreciate and value
diversity, not merely tolerate it, or manage it, as they say. They see diversity as a significant
consequence of urbanization follow ing the Industrial revolution of the early 1900s. They
believe that organizations being radically designed around processes, not functions, w ith
greater freedom of movement across boundaries w ithin and outside the organization are
they becoming more diverse. Diversity is an assetnot a threat. It not only promotes breadth
of tolerance and empathy but also helps us become more creative and innovative, more
adaptable and resilient, and enhances our capacity organizational as w ell as individual
to adapt and renew ourselves in a sw iftly changing the w orld. It prompts us to constantly
challenge our underlying assumptions in order to keep improving the process.

12.3 Mentoring Culture

More than ever before, organizations, large and small, are looking outside traditional
mentoring paradigms to raise the bar on the practice of mentoring by creating a mentoring

A mentoring c ulture continuously f ocus es on building the mentor ing capacity,

competence, and capability of the organization. A mentoring culture encourages the practice
of mentoring excellence by continuously creating readiness for mentoring w ithin the
organization, facilitating multiple mentoring opportunities, and building in support mechanisms
to ensure individual and organizational mentoring success.

In a mentoring culture, eight hallmarks build on and strengthen each other. All are
present, at least to some degree, how ever they manifest themselves differently depending
on the organizations previous success w ith mentoring. When each hallmark is consistently
present, the mentoring culture is fuller and more robust. As more and more of each hallmark
is found in an organization, the mentoring culture becomes progressively more sustainable.
These eight hallmarks are:

1. Accountability: Accountability enhances performance and produces long-lasting

results. It requires shared intention, responsibility and ow nership, a commitment to action
and consistency of practice. Accountability also involves very specific tasks:

setting goals,

clarifying expectations,

defining roles and responsibilities,

monitoring progress and measuring results,

gathering feedback, and

formulating action goals.

2. Alignment: Alignment focuses on the consistency of mentoring practices w ithin

an institutions culture. It builds on the assumption that a cultural fit already exists betw een
mentoring and the organization and that mentoring initiatives are also are tied to goals
larger than just initiating a program. When mentoring is aligned w ithin the culture, it is part
of its DNA. A shared understanding and vocabulary of mentoring practice exists that fits
naturally w ith the organizations values, practices, mission, and goals.

3. Co mm uni ca tio n: Communication is f undamental to achieving mentoring

excellence and positive mentoring results. Its effects are far-reaching; it increases trust,
strengthens relationships, and helps align organizations . It creates value, visibility and
demand for mentoring. It is also the catalyst for developing mentoring readiness, generating
learning opportunities, and providing mentoring support w ithin an organization.

4. Value and Visibility: Sharing personal mentoring stories, role modeling, rew ard,
recognition, and celebration are high leverage activities that create and sustain value and
visibility. Leaders w ho talk about formative mentoring experience, share best practices,
and promote and support mentoring by their ow n example add to the value proposition for

5. Demand: Demand for mentoring has a multiplier effect. When it is present, there
is a mentoring buzz, increased interest in mentoring, and self-perpetuating participation.
Employees seek mentoring as a w ay to strengthen and develop themselves and look for
mentoring oppor tunities. Mentor s become mentees and mentees become mentor s.
Employees engage in multiple mentoring relationships, often simultaneously. Demand spurs
reflective conversation and dialogue about mentoring adding to its value and visibility.

6. M ultiple M entoring Opportunities: In a mentoring culture, there is no single

approach, type or option for mentoring. Although some mentoring activity goes on in nearly
every organization, most need to w ork at creating a culture that concurrently advances and
supports multiple types of opportunities. For example,many organizations couple group
mentoring w ith one-on-one mentoring; the learning from one reinforces the other.

7. Education and Training: Continuing mentoring education and training opportunities

are strategically integrated into the organizations overall training and development agenda.
Existing training platforms support mentoring and vice versa. Opportunities for next step
and renew al education and advanced skill training are available for veteran mentors.
Netw orking and support groups meet regularly to exchange best practices and promote
peer learning.

8. Safety Nets: Mentoring cultures establish safety nets to overcome or avoid potential
stumbling blocks and roadblocks w ith minimum repercussion and risk. Safety nets provide
just in time support that enables mentoring to move forw ard coherently. Organizations that
proactively anticipate challenges ar e more likely to establish resilient and responsive
mentoring safety nets than those that do not.

12.4 Summary

Modern w orld of w ork requires everyone to be constantly learning to apply new

information, know ledge and skills. In that sense, w e all are learners, and w e could sensibly
choose to describe ourselves as such. Albeit, coaching and mentoring are only means to
an end, the overall purpose of coaching and mentoring can be defined as: To help and
support people to manage their ow n learning in order to maximize their potential, develop
their skills, improve their performance and become the person they w ant to be.

12.5 Review Questions

1. What do you understand by the concept of mentoring?

2. Monitor ing manage perf or manc e is one of the key aspect of perf or manc e
management. Disc uss.

3. What is the relevance of monitor ing and mentoring in the performance of an



Learning Objectives

After reading this lesson you w ill be able to

Understand the concept of performance review

Learn about the performance factors that an employer might evaluate during
the review process

Analyze w hy is a performance review an ongoing process?

Learn about the culmination of the performance review process.

Pr ovide the type of inf ormation y ou lear n during a perfor mance review

13.1 Introduction

13.2 Special Review s

13.3 Form s, Paperw ork and Signatures

13.4 Interview

13.5 How to Conduct a Perform ance Review ?

13.6 Preparing for the Presentation

13.7 Managing Risk Through a Better Perform ance Review Process

13.8 Measuring the Right Things

13.9 Summ ary

13.10 Review Questions


13.1 Introdcution

Performance Review is a kind of evaluation or appraisal of the performance of the

new ly appointed employee. Different employers have their ow n answ er to this question, as
you w ill see w hen you move from job to job. But in basic terms, a performance review is an
ongoing process that an employer follow s to evaluate an employees performance over a
given period of time.

After hiring an employee, the company immediately begins w atching that persons
on-the-job per formance. Us ually, this bec omes the res ponsibility of the employees
immediate supervisor or manager, but multiple managers might be involved.

In evaluating performance, managers look at many different factors, such as the

w orkers:

Ability to master job-specific skills

Ability to learn and follow company policies or w orkplace regulations

Timeliness and the ability to meet deadlines

Willingness to take on new responsibilities

Ability to take initiative

Ability to w ork w ell w ith others

Communic ation skills

Time and w orkload management skills

Of course, managers also consider many other performance factorssome positive

and some negative. For example, if the w orker frequently leaves w ork early, takes long
lunch breaks, uses company resources inappropriately, or is the subject of complaints by
fellow w orkers, these factors can definitely have a negative impact on a performance review.
On the other hand, if an employee consistently goes the extra mile to get things done,
solves problems effectively, and is respected by other w orkers, these factors can give a
positive boost to a review.

The review process is ongoing for several reasons. First, performance itself is ongoing,
not just an isolated event, so managers need to be ever-w atchful of w orkers and constantly
thinking about their level of performance. Second, the review process requires managers

to gather information and impressions about each employee, and it w ould be impossible to
do this effectively if not on a continual basis. Third, you can assume that a persons
performance w ill have its ups and dow ns; it w ouldnt be fair to pay attention to someones
performance only during a high or low period.

13.2 Special Reviews

As w e mentioned already, different companies take different approaches to the review

process. And w hile most companies handle performance review s as an ongoing process,
many employers also have special performance review s for special circumstances.

1. Probationary Review : Many companies hire new w orkers on a probationary

basis. This means that the new employee must perform successfully during a temporary
probationary period, usually lasting from one month to six months. During probation, the
w orker may be required to take certain types of training, to master fundamental tasks or
processes, to pass tests, to w ork w ith experienced employees on a team, or to complete
specific projects. During this period, managers w atch the new w orker carefully to determine
w hether he or she performs adequately. If so, the person is said to pass probation and
then continues w orking on a non-probationary basis. If not, the person may be released or
asked to go through another probationary period.

2. Rehiring Review : Sometimes, after terminating employment (w hether by quitting,

being laid off, or getting fired), an employee w ill go back to w ork for the same company. In
this circumstance, the employer may w ant to conduct a rehiring review, w hich is similar
to a probationary review. The rehired employee may be evaluated on factors such as attitude,
reliability, retention of certain skills, and so on. Failing such a review may result in termination
or retraining.

3.Self-review : In the self-review, the manager asks the employee to review his or
her ow n performance. This might involve filling out a questionnaire or responding to questions
in an interview. Self-review s are sometimes conducted as part of the companys review
process, so that managers can get the w orkers impressions of his or her performance
and discuss factors affecting them.

4. Peer Review : Like the self-review, the peer review is often part of the normal
review process. In the peer review, how ever, a manager asks one or more of the w orkers

colleagues to review that persons performance. Peer review s are not often done, how ever,
because they can backfire in several w ays. For instance, the contents of any peer review
should be kept totally confidential, but some peers may feel compelled to talk about the
review. This can have harmful effects. Also, if a peer has a problem w ith the person being
review ed, that fact might taint the review.

13.3 Forms, Paperwork and Signatures

For most managers, the hardest part of the review process is dealing w ith all the
paperw ork thats involved. Nearly all companies use various forms to track employee
perf ormanc e, inc luding a per iodic perfor mance review form, w hich a manager must
complete and present to the w orker at specified intervals. (Most commonly, companies
present performance review information to employees once each year.)

But in addition to this formalized review document, managers need to track other
kinds of documents during the review process. For example, if a w orker receives a
commendation or aw ard, a copy should be placed in the w orkers personnel f ile and
mentioned in the review. Similarly, how ever, if someone files a complaint against the w orker,
or if the person is involved in a dispute, this information should be documented for review
purposes, too.

Consc ientious manager s, in fact, keep notes about all their inter actions w ith
employees, and add those notes to each persons file. These notes are helpful not only in
compiling review s, but w hen disputes arise betw een an employee and the company.

13.4 Interview
The review process usually culminates in an interview, in w hich the manager presents
the review to the employee. As mentioned already, most companies perform these interview s
w ith each employee once a year. The interview might take place on the w orkers anniversary
date, for example.

At the interview, the manager gives the w orker a copy of the completed review form,
w hich lists categories of performance criteria (such as timeliness, ability to work w ith others,
etc.). The manager usually evaluates the w orkers performance in each relevant category,
and then grades the w orker on some sort of scale, such as 1 - 10. These grades are then
summarized and a total score is aw arded.

The interv iew is also w her e mos t c ompanies notif y w or ker s of changes to
compensation, benefits, or status. For example, if a company offers annual merit pay raises,
they usually take effect after a positive annual performance review. If a w orker has done
exceptionally w ell, the review might result in a promotion or other perks, such as a company

During the interview, the employee should have plenty of opportunities to respond to
the review, to ask questions, and to get clarification. The interview is also w here the manager
sets up a list of goals for improving the w orkers performance in the future.

13.5 How to Conduct a Performance Review?

Because performance review s can be highly emotional, especially for the employee,
it is best to approach a review w ith a specific agenda in mind. Plan in advance w hat you are
going to say during each part of the review. Be sure you can successfully deliv er the message
you intend regardless of the employees response.

1. Greeting : Start the review w ith a w arm greeting and perhaps some very brief
small talk to help relax tensions and create a more conducive atmosphere for the review.

2. Sum m ary : Be sure that the employee understands exactly how his or her overall
performance ranks. Summarize the overall performance first, and then explain w hat the
rating means. Dont announce any salary changes at this point. If you dont give the summary
at the beginning of the review, the employee w ill spend the rest of the review trying to figure
out w hat his or her overall performance is, based on your comments.

The employee may w ant to discuss the rating immediately after you offer it. Try to put
this off until you have been able to thoroughly rev iew the employees strengths and
w eaknesses.

3 .Strengths : Unless an employees performanc e is unsatisfactory, compliment

him or her on both major and minor strengths as they relate to their job. Avoid saying
anything negative until you have review ed his or her strengths. You can be either specific or
general in describing strengths.

4. Weaknesses : Unless an employees performance has been truly exceptional,

you should prov ide f eedback on ar eas of w eakness, or at least s uggest r oom for

improvement. In review ing w eaknesses, be as specific as possible. For example, rather

than saying you have a poor attitude cite a specific example of their behavior such as you
are often late for company meetings and several times throughout the year you complained
incessantly about company policies.

5. Feedbacks : After you have discussed an employees w eaknesses, you should

give him or her an opportunity to air their thoughts. Listen politely until the person is done.
Avoid being argumentative, but do let the employee know that his or her feedback has not
affected your review. For example, you may w ant to say, I understand that you dont agree
w ith w hat I have said, but my perception of your overall performance remains as I have
stated it.

6. Salaries : Recap the employees overall performance rating. Announce the new
salary, if any, and the date on w hich the new salary w ill be effective.

7. Closing : Unless the employees performance is substantially less than satisfactory,

try to end the review on a positive note. You might say The company and I very much
appreciate your w ork, and w e are glad to have you here!

8. Conduct Ongoing Observations and Measurem ents to Track Perform ance:

The operators supervisor w ould observe the number of high-quality prints, including staying
in contact w ith the Director of the Catalog Department.

9. Exchange Ongoing Feedback about Perform ance : Feedback is information

relevant to how w ell results are being achieved. Useful feedback is timely, feasible and
understood. Ideally, feedback address key activities to improve or reinforce performance.
Usually, the larger the number of sources giving feedback, the more accurate is the depiction
of events.

10. Conduct a Performance Appraisal (sometim es called perform ance review):

A performance appra isal (or review) includes documentation of expected results,
standards of performance, progress tow ard achieving of results, how w ell they w ere
achieved, examples indicating achievement, suggestions to improve performance and how
those suggestions can be follow ed. If the above steps in the performance management
process w ere follow ed, the performance appraisal is usually quite straightforw ard to carry

11. If Perform ance m eets Desired Perform ance Standards, Rew ar d for
Perform ance : If the apprais ee is due some form of rew ard, that is, recognition or
compensation, e.g., letter of recognition, promotion, letter of commendation, etc. ensure
that these are given. This step in the performance management process is often overlooked
w hen focusing on organization-w ide performance improvement, or on a major subsystem.

Lots of w orkers, however, are alw ays taken by surprise w hen their boss announces
that its time for your review. Because they dont understand the review process, or because
they fear that the company is looking for excuses to fire them, they approach this important
meeting w ith anxiety and dread. As a result, they fail to prepare properly and dont get as
much from the interview (and the review itself) as they could:

Your companys policies and practices regarding performance review s.

Your manager or Human Resources representative should be able to fill you in on the

If your company gave you an employee handbook, check it for information.

You need to know the follow ing information about the companys review process:

What schedule does the company follow for review s? For example, are review s done
annually, bi-annually, or on some other schedule?

Who is responsible for gathering the information for your review, w riting up the results,
and presenting the information to you?

Based on your position and responsibilities, w hat areas of your performance w ill
review s focus on?

What kinds of information, other than his or her ow n observations, w ill the review er
gather and use in compiling the performance review ?

Does the company have the option of asking you to do a self-review or asking your
cow orkers to do a peer review of your performance? If so, w hat sorts of information
w ill be collected from these review s?

What are some of the possible outcomes of the review ? Can a positive review result
in promotion or a pay raise? If a review show s that your performance lacks in some
respects, w ill the company help you improv e (for example, through tr aining or
mentoring) in those areas?

Can a poor r ev iew result in s us pens ion, demotion, or firing? Under w hat
circ umstances?

How w ill review s be presented to you? Will you get a copy of the w ritten review
document? Will you have a chance to respond to the review ? If the review is negative,
can you appeal it?

What does the company expect you to bring to the performance review presentation?

How much notice w ill you have before receiving your review ?

What is the companys policy for dealing w ith managers w ho fail to do review s, fail to
present review s to employees, or are late in presenting review s?

Know ing this information can help you prepare mentally for the review presentation.
Even more importantly, it helps you understand how the company uses review s, and your
options for dealing w ith review s.

13.6 Preparing for the Presentation

In most cases, w hen presenting a review to an employee, a manager w ill give some
advance notice that the meeting is coming up. A conscientious manager w ill try to give the
employee at least a few days notice, so he or she can prepare. If a manager summons you
at the spur of the moment and tries to present a performance review w ith no advance
notice, let him know if you arent comfortable w ith the arrangement, then ask to schedule a
meeting later. This w ill give you time to prepare yourself. Remember, even if the company
w ill not give you a copy of your review in advance, you are still entitled to some advance
w arning that the interview is coming, and you are entitled to prepare to the best of your
ability. If the boss balks or refuses, then take the issue up w ith Human Resources.

In many companies, how ever, you w ill have plenty of notice that review time is
imminent. For ex ample, your c ompany may do yearly perf ormance review s on each
employees anniversary. Or, the company may try to do all review s the same time every
year, such as in January. The best w ay to avoid surprises is to ask your manager or HR
representative w hen you can expect to receiv e your review.

In any case, it pays to be ready for the meeting w hen the boss presents your review.
Here are some tips that can help you prepare:

Put together a list of questions to ask during the review. Your manager may answ er
many of these questions during the presentation, but remember that the review is done
from the companys perspective, not your ow n. So, your manager may overlook one or
more performance-r elated issues that are important to you. If you w ant to dis cuss a
performance issue that is not covered in the review, bring it up.

Create a list of ac complishments. What do you see as your major achievements

during the review period? For example, did you successfully complete a big project? Did
you lead a team? Did you meet or exceed expectations in any w ay? If your manager or
fellow w orkers ever acknow ledged such achievements, bring some evidence of it to the
interview, in case your manager overlooks it, or in case you are asked to describe some
accomplishments yourself.

List your w ork areas that could stand improvement. A thorough review w ill cover
areas of improvementaspects of your performance that your manager thinks could be
improved. You w ant the boss to know that you are thinking about these issues, too. So
create your ow n list, and discuss themduring the review. Ask the manager about opportunities
for extra training, mentoring, or involvement in groups that are doing challenging new tasks.

Once you have these lists in hand, spend some time alone, rehearsing the w ay you
w ant to present them to your boss. It is important to look prepared and collected as you go
into the interview.

1. Som e Other Tips : There are tw o more important rules of thumb that every w orker
should keep in mind w hen sitting dow n to the performance review presentation.

No Surpr ises : This rule goes f or both the manager and the employee. When
presenting a review, the manager should never bring up any surprisesthat is, any issues
that have not been discussed before the interview.

For example, suppose that in the interview, your boss tells you hes very disappointed
in your inability to get along w ith a certain cow orker. This statement takes you by surprise,
because the boss has never discussed it w ith you before. Thats a no-no.

Similarly, suppose you w ere assigned to a project several months ago, w hich required
you to w ork longer hours, including some w eekends. You completed the project, but never

received any acknow ledgment or extra compensation for all the overtime that w as required.
If this assignment w as a problem, you should have discussed it w ith your manager at that
timenot w aited until your performance review.

So, dont save up issues for the review. Instead, approach the boss about problems
as they arise during the course of your normal routine. Conversely, if your manager gives
you any big surprises during the review, let him know that it is not appropriate to do so. Its
unfair to expect someone to address a problem after the fact; its better to discuss issues
w hile they are hot.

2. Salaries and Prom otions : In many companies, the review presentation is w hen
managers address issues of pay and position w ith employees. If a company typically offers
annual merit pay increases to its employees, for instance, your increase may be announced
to you during the review. How ever, all companies dont follow this routine.

The same is true of regular promotions. For example, if your company has a structured
career ladder and an accompanying pay scale, your manager may use the review to
informyou that you w ill receive a promotion and pay increase.Again, how ever, you shouldnt
count on this happening.

In any event, you should not use the review as an opportunity to ask for a raise or to
complain about your salary. This is especially true if the review show s that your performance
needs improvement. Doing so can give the boss the impression that you are more concerned
about your pay than about your job performance.

If your manager does not bring up the issue of compensation during the interview,
you should feel free to bring it up w hen the interview ends. Tell the boss youd like to discuss
your salary and position sometime soon, and see how he reacts.

13.7 Managing Risk Through a Better

Performance Review Process

A good performance review process is good not only to take important HR decisions
and alignment w ith organizational strategic objectives, but also to protect the company
from risk and add value to the business. Although promotions and transfer decisions are
the prerogative of management but in the event an employee alleges that management

decisions prejudiced his/her interest, it can be a contestable issue in a court of law and in
such cases, organization can defend their decisions if it is based on scientific performance
review. Thus proper documentation of performance is critical to helping HR departments
protect their companies from employee law suits. Well-documented performance review s
are often an employers first and, sometimes, last line of defense.

1. How can HR Help? : HR should be involved in defining the promotion criteria, and
selection criteria should be specific. This is important because vague selection criteria are
easier to attack. For example, one of the criteria may be interpersonal skills, w hen w hat is
really required is the ability to interface at an executive level or manage teams. A rejected
employee w ho received good interpersonal skills ratings but w ho had never interacted at
an executive level or managed teams might attack the decision as discriminatory.

HR should also review personnel decisions for compliance purposes. This should be
done before the decision is communicated to the affected employee(s). HR w ill get pushback
from business managers if HR tries to second-guess the decision after it has been made,
so it is important for HR to communicate its role, w hich is to review employment decisions
for consistency w ith past performance. The purpose is to protect the company and the
manager. I successfully used this tactic in the context of reduction in force decisions, and
noticed, as an additional benefit, managers making the extra effort to justify personnel
decisions. Some managers also expressed appreciation because they felt more secure in
making difficult choices.

Where employers have had good performance review systems in place, they are
frequently the prevailing party in discrimination cases. When employers w in, you frequently
see some or all of the follow ing factors relating to performance review s:

1. Performance criteria are consistently applied: The crux of a discrimination

complaint is unequal treatment. If the performance review process show s equal treatment
of all employees, it is difficult for an individual to claim discrimination. The major exception
of course is w here entire classes of protected individuals are treated unfavorably, such as
w hen minority employees consistently receive poor ratings.

2. Performance reviews note areas for improvement: Many times a general

performance rating does not tell the entire story. This is often the case w ith managerial or

supervisory jobs. For example, an employee w ho gets a satisfactory rating for overall
performance may need to w ork on specific skills to advance.

3. No grade inflation: When a performance review process allow s a manager to

be nice by giving everybody generally high ratings, that can be a source of trouble for the
employer. Employers have had success w here the performance review process drives a
ranking so that one employee can easily be compared against the other.

13.8 Measuring the Right Things

The ideal performance management system is one that energizes the people in an
organization to focus effort on improving things that really matter - one that gives people the
information and freedom that they need to realize their potential w ithin their ow n roles and
that aligns their contribution w ith the success of the enterprise. Many systems fail to achieve
this ideal. One of the root causes of failure is over-complexity - it is the death knell of a
per formance management s ystem. Detail can sw amp us eful inf ormation, par alyz ing
decision-making. The effort of collecting the data can outw eigh the benefit of having the
information. This scenario guarantees disenchantment for staff and a system that atrophies
from under use. Systems fall prey to over-complexity because organizations themselves
are complex. Except in the most streamlined, most tightly engineered organizations, many
levels of management interact across functions in the pursuit of w hat has to be done
(WHTBD). Responsibility for WHTBD is too often diffuse and a typical reaction to this is a
system, w hich measures minutiae and further obscures the underlying reasons for good
or bad performance.

The good new s is that you dont have to re-engineer your organization before you can
operate an effective performance measurement system. All you need to do is stick to tw o
guiding principles:

Measure w hat matters

Keep it simple

1. Measure w hat Matters : This is easy to say but difficult to do. One w ay to check
for yourself w here to focus your measurement effort is to plot w hat you, your team or your
organization actually do on a value matrix similar to the one in figure 1. The activities in the

top right box - highly valued both by customers and stakeholders or shareholders - are the
ones to measures, to focus on, to (w ith apologies to North American readers) beaver aw ay
at. If your analysis show s much of your current effort to be focused in the dog box, - no
value to anyone - youre not alone. Experience show s some senior managers spend up to
an amazing 80% of their energy on corporate hygiene - the ac tivities that keep an
organization ticking but dont contribute to its prime functions. Identifying this is the first step
in doing something about it. This matrix also tells you w hat sort of measures to apply:

Focus on measures w hich w ill help you w ork hard to improve value from both the
customers perspective and the shareholder s perspective, e.g. process: new product
development, measur e: time to market.

Concentrate on generating more value for the shareholder, dont let the process
become a w hite elephant, gobbling your resources but not contributing value to you.
e.g. process: customer service, measure: customer retention.

Keep these process es lean, dont let them pr olif erate. E.g. process : tr easury
management, measure: cost of service vs. value created.

Make sure that you dont w aste any effort, outsource, and let someone else w alk the
dog for you. E.g. process: pensions administration, measure: w ho cares as long as
it gets done?

2 .Keep it Sim ple : The second guiding principle has three elements. The measuring
system should be:

simple to operate

simple to understand
simple to action

For a system to be simple to operate, data collection must be easy, distribution must
be timely, and the information should be easy to manipulate. Make sure that information
demands are matched by ability to deliver. Simple needs can be easily met by low technology,
manual systems. Complex needs have to be supported by systems investment: dont get
stuck in a situation w here you force your front line staff to spend significant time gathering
and manipulating data - this takes minds of WHTBD: if salesmen spend too much time on
call reporting, they have less time for making calls. For a system to be simple to understand,
information must be clearly presented and there must be as little of it as possible.

Clear presentation can take many forms. Perhaps the most elegant is to compare
your actual performance against w hat you w ere expecting - your forecast - indexed as 100.
Good performance w ill alw ays give you a number greater than 100, and bad performance
less than 100. What could be simpler? Volume of information can be kept under control by
having cascades of measures at different levels in an enterprise. This balances the need
for actionable information at all levels w ith the absolute imperative never to overload anyone.
The check question is w ill the person r eceiving this information do anything w ith it
themselves? If the answ er is yes, make sure they get it. Without it, they w ill never be able
to take action. In practice, guarantees that a measurement system w ill be simple to action
go beyond the gifts of the meas ur ement sy stem alone. This is determined by an
organizations modus operandi, management style, appraisal and rew ard system, etc. For
example, tw o health service managers are told to cut costs by 5/5. One w orks hard and
achieves the goal. The other decides that the target is too difficult and overspends. The
achiever is told to w ork even harder to save more next year; the budget buster is given
more money. Message, forget the targets, chaos equals cash.

13.9 Summary

The ideal performance management system is one that energizes the people in an
organization to focus effort on improving things that really matter - one that gives people the
information and freedom that they need to realize their potential w ithin their ow n roles and
that aligns their contribution w ith the success of the enterprise. Many systems fail to achieve
this ideal. One of the root causes of failure is over-complexity - it is the death knell of a
per formance management s ystem. Detail can sw amp us eful inf ormation, par alyz ing
dec ision-making.

13.10 Review Questions

1. What is a performance review ?

2. List three performance factors that an employer might evaluate during the review

3. Why is a performance review an ongoing process?

4. What is a self-review ?

5. What is usually the culmination of the performance review process?



Learning Objectives
After reading this lesson you w ill be able to

To understanding the concept of annual stock taking

To understand the Stock taking performance

To understand the appraising for recognition and rew ard

14.1 Introduction

14.2 Annual stock taking

14.3 Stock taking perform ance

14.4 Stock taking potential

14.5 Appraising for recognition and rew ard

14.6 Advantages of Rew ards

14.7 Getting to grips transm uting learning into action

14.8 Summ ary

14.9 Review Questions

14.1 Introduction

Annual stock-taking of performance is basically a performance audit function, w hich

apart from usual employee evaluations, emphasizes on measuring the proper alignment of
performance results w ith the organizational and employees grow th. For organization stock
taking of performance helps in achieving the goals by optimizing employee performance,

duly identifying their strengths and w eaknesses. For employees on the other hand it helps
in providing guidanc e to perfor m the jobs and also help in defining the car eer path.
Performance audit is a more holistic term, as it encompasses the examination, operation,
and procedures of the management system to assess w hether the organization is achieving
economy, efficiency, and effectiveness in the employment of available resources.

Most of the organizations frame their ow n performance audit manual and conduct
such audit through their in-hous e resource pool. For major organizational change and
development decisions, how ever, at times, it may be necessary to hire external experts for
dec is ional ac curacy. Of ten w e misc onstrue perf or mance audit as perf or manc e
meas urement, but they are diff er ent. Per for mance audit is more holis tic than the
performance measurement, as the latter is more activity focussed.

14.2 Annual Stock Taking

Stock taking is an appraisal, especially the performance appraisal, for the purpose of
assessing accomplishments, prospects, etc., of a business organisation.

Employee evaluations can be extremely ef fective and motivating, benefiting your

bus ines s as muc h as your employ ees. The key s to a s uccessful payoff are clear
communication of your business goals and carefully and consistently charting employee
grow th.

For your business, evaluations offer a tool to help achieve your goals by optimizing
staff performance and identifying your organizations strengths and w eaknesses, one
employee at a time. For your employees, evaluations can provide guidance on how best to
perform their jobs and help define their career path.

14.3 Stock Taking Performance

The most important motivator for professionals is not money, but feedback. Evaluations
can be cumbersome and time-consuming, but theyre the best w ay to develop your staff
and help them grow. While employee evaluation processes and frequency vary depending
on an individual business needs, there are some common practices to follow.

1. Clarify Expectations : You must first define expectations before you can determine
w hether or not they are being met. A business has to ask itself: w hat is the behavior w e
w ant to rew ard? What are our objectives and how are w e going to meet them?

Those expectations are communicated through job descriptions, w hich need to remain
up to date. Sometimes, employers dont keep job descriptions cur rent or theyre not
representative of the nature of the job, says Rebecca Hastings, information center manager
for the Society of Human Resource Management. The more detailed and the more often
job descriptions are updated, the better.

For Elena Sw eda-Neff, human resources manager w ith UHY Advisors in Los Angeles,
aligning job expectations w ith performance evaluations presented challenges. Her firm had
grow n through acquisition, w ith five independent firms gradually becoming one. Each of
UHYs 12 locations had its ow n evaluation process.

To develop a unified approach, UHY defined five categories for business success:
know ledge capital; client service and engagement management; practic e development;
people management and professional leadership; and policy compliance.

So now, everything in the evaluation process is tied to these five categories, beginning
w ith job descriptions, Sw eda-Neff says.

The job of more closely aligning expectations w ith job descriptions also recently fell
on Richard Laveroni, human resources director for the Oakland offic e of RINA Accountancy
Corp. and a member of the CalCPA Human Resources Committee. When some of RINAs
staff communicated a desire for more specific feedback during their evaluations, Laveroni
started at the beginning of the process.

In the past, the evaluation didnt exactly jibe w ith the job description, Laveroni says.
But w eve now made the job description areas part of the evaluation w ord-for-w ord.

Set Goals : Many human resource professionals recommend employees w rite a

goal-setting document at the beginning of an evaluation cycle. The manager, supervisor or
human resources representative should review the goals to ensure consistency w ith the
companys evaluation process.

Goal setting documents are a great tool because w hen the manager and employee
sit dow n w ith it, youve already made a contract for performance, Richardson says.

The document should be unique to each employee, even if tw o or more have the
same title or similar duties. Tw o people doing a similar job by title may have very different
projects and expectations, Hastings says. You w ant to make sure each employee is
coached and counseled on w hat is expected of them.

To help ensure consistency and fairness, Richardson advises to keep goal-setting

SMARTspecific, measurable, achievable, relevant and timely.

At RINA, employees state their goals for the upcoming six months. Progress on those
goals is then one aspect of the employees tw ice-yearly evaluation.

At Rothstein Kass, employees w rite a self-review tow ard the end of the evaluation
cycle that helps us see w hat an employees perceptions are and how that aligns w ith
managements view s and perceptions, Gellas says. Self-review s also provide a forum for
the employee to inform the manager of some achievement or performance that maybe the
manager w asnt aw are of.

For Sw eda-Neff, the goal-setting process is meant to be a confirmation of performance

expectations. Its a dialogue really. Its important that an individuals career goals are
rec ognized w ithin the f irms bus ines s strategy, she says . You c an express y our
expectations as much as you w ant, but unless its relevant to w hat the employee w ants,
youre not going to get very far.

Most partners of business organizations stress the importance of a participatory

approach in Monitoring and Evaluation (M&E), w hich is often based on self-assessments.
How ever, there has to be a combination of internal and external M&E procedures. Internal
procedures tend to take place more frequently and are generally more participatory. They
are then validated by external assessments.

Well-planned and structured procedures and responsibilities are seen as a useful

w ay to make regular assessment and follow -up actions so that corrective measures are
taken on a regular basis. This means that monitoring and evaluation procedures (as reports,

meetings, w orkshops, visits, etc.) are carried out regularly on a predetermined schedule.
At SHG and cluster level M&E is mostly done on a monthly basis (sometimes also w eekly)
and at organisation level they use to take place quarterly or annually.

Reports (w eekly, monthly and annual) are the normal tool used for M&E. Moreover,
case studies and regular visits of projects and homes of organisations members are
practiced as a valuable tool.

The partners collect both quantitativ e and qualitativ e information, and their M&E
systems differ to a great extent depending on the kind of information they focus upon.
Mostly, economic indicators are used to gather quantitative information w hile social and
cultural indicators are used to assess qualitative impacts. Apart from these, the gender
aspect is given high importance in the impact assessment.

Some organization partners develop the monitoring systems including indicators in a

participatory process during the planning stage itself. Agreed PME formats are follow ed for
this purpose. An annual w ork plan w ith details is prepared in a participatory manner and
used as the framew ork for monitoring.

14.4 Stock Taking Potential

The purpose of Stock taking potential is to make an analysis as to w here w e stand

and not to find the potential of racing w ith others. The process of Performance Management
is comprised of three important parts (1) Planning Managee Performance and Development:
(2) Monitoring Managee Performance and Development and (3) Annual Stock Taking. These
occur in a specified sequence.

Planning is made at the beginning of the year w hile monitoring and mentoring is
continued throughout the year as the plans are executed. Stocktaking takes place at the
end of the year. Each one of these phases requires certain concrete actions by the managers
and the managee. Both these parties (manager and managee) provide appropriate inputs
by keeping the w hole process in perspective.

The w hole process of the performance management can be approached in a different

mode. Planning, review and stock taking can happen throughout the year, more specifically
at the time of periodic review during the monitoring and mentoring phase. As such, these

three phases are dynamic and a continuously interact w ith one-another. The plans are
periodically review ed and feasibility is tested the context of changing events and influences
that could not be adequately forcing. Since the process involves in both the managers and
the managees, it has a participatory character.

Performance standards naturally cascade from organizational mission, goals, strategy

and oper ational plans. Since per for mance management aims to impr ove quality of
coordination among people in the organization, role-w ise performance plans and expectations
must flow from both. Organizations mission, strategy and operational plan, and individual
managees role and his/her contribution to organizational process are cardinal inputs to
performance plans. The performance plans of all the managees in the organization must
finally add up to the organizational goals to be achieved during the year. Managees
performance and development plans are subjected to monitoring and mentoring. Without
cogent plans, f or task accomplis hment, it is not possible to decide a benchmark to
achievement against set goals. Mentoring and development draw s it direction from both
development plan and requirements.

Mentoring can also include briefing the managee before each training and development
activity both on the job and off the job. Briefing focuses on the managee learning agenda.
Debriefing the managee crystallizes his/her learning achieved during the training.

Stocktaking potential of both periodical and annual attempts to continuously assess

the extent of w ork as w ell as learning opportunity that have been optimally avail by the
managee. Inputs to stocktaking are provided by performance plans, monitoring and mentoring
records. Stocktaking also provides several inputs to future performance plan. Review in
task assignments, task s ystems and tools are also possible through stoc ktaking. An
assessment of managees development needs of future tasks and responsibilities is done
more realistically to stocktaking.

The purpose of stock taking also remains to:

Recommend stock taking potential for the next period.

Ensure that combination of quantifiable indicators and qualitative analysis w orks

w ell.

Finally, stocktaking w orks better if the goals and achievements are clearly formulated.

It is also recommended that the policy makers for an organisation should set clear
policy/goals/targets in the areas of the:

Research and development

Third cycle


Life long experience

Flexible learning paths

Social dimension, and

To w ork further on implementing the organizations plan for recognition

14.5 Appraising for Recognition and Reward

Prioritize recognition for people and you can ensure a positive, productive, innovative
organizational climate. Recognize people to say thank you and to encourage more of the
actions and thinking you believe w ill make your organization successful. People w ho feel
appreciated are more positive about themselves and their ability to contribute. People w ith
positive self-esteem are potentially your best employees. These beliefs about recognition
are common among employers even if not commonly carried out. Why then is recognition
so closely guarded in many organizations?

Time is an often-stated reason and admittedly, recognition does take time. Employers
also start out w ith all of the best intentions w hen they seek to recogniz e employee
performance. They often find their efforts turn into an opportunity for employee complaining,
jealousy, and dissatisfaction. With these experiences, many employers are hesitant to
recognize people.

Recognition is scarce because of a combination of several factors. People dont

know how to provide it effectively, so they have bad experiences w hen they do. They assume
one size fits all w hen they provide recognition. Finally, employers think too narrow ly about

w hat people w ill find rew arding and recognizing. These guidelines and ideas w ill help you
effectively w alk the slippery path of recognition and avoid potential problems w hen you
recognize people in your w ork place.

1. Guidelines for Effective Recognition : Decide w hat you w ant to achieve through
your recognition efforts. Many organizations use a scatter approach to recognition. They
put a lot out there and hope that some efforts w ill stick and create the results they w ant. Or,
they recognize so infrequently that recognition becomes a dow ner for the many w hen the
infrequent few are recognized.

Instead, c reate goals and action plans that recogniz e the actions, behavior s,
approaches, and accomplishments you w ant to foster and rew ard in your organization.
Establish recognition opportunities that emphasize and reinforce these sought-after qualities.
If you need to increase attendance in your organization, hand out a three-part form, during
your Monday morning staff meeting. The w ritten note thanks employees w ho have perfect
attendance that w eek. The employee keeps one part; save the second in the personnel file;
place the third in a monthly draw ing for gift certificates.

1. Fairness, clarity, and consistency are important. People need to see that each
person w ho makes the same or a similar contribution has an equal likelihood of receiving
recognition for her efforts. Irecommend that for regularly provided recognition, organizations
establish criteria for w hat makes a person eligible for the recognition. Anyone w ho meets
the criteria is then recognized. As an example, if people are recognized for exceeding a
production or sales expectation, anyone w ho goes over the goal gets the glory. Recognizing
only the highest performer w ill defeat or dissatisfy all of your other contributors.

For day-to-day recognition, youll w ant to set guidelines so leaders acknow ledge
equivalent and similar contributions. Each employee w ho stays after w ork to contribute
ideas in a departmental improvement brainstorming session gets to have lunch w ith the
department head.

This guideline is w hy an employee of the month-type program is often unsuccessful.

The criteria for results and the fairness of these criteria are not clear to people. So, people
complain about brow n-nosing points and the bosss pet. The programs cause discontent
and dissention w hen the organizations intentions w ere positive.

As an additional example, it is important to recognize all people w ho contributed to a

success equally. A CEO I know perpetually announced recognition for major projects at the
company holiday celebration. Without fail, he missed the names of several people w ho
contributed on the project. With the opportunity for public recognition past, people invariably
felt slighted by the post-banquet thanks.

2. Recognition approaches and content must also be inconsistent. Contradictory?

No, not really. You w ant to offer recognition that is consistently fair, but you also w ant to
make sure your recognition efforts do not become expectations. As expectations, your
recognition efforts become entitlements. Bad new s.

As an example, a company owner provided lunch for all staff every Friday to encourage
team building and positive w ork relationships. All interested employees voluntarily attended
the lunches. He w as shocked w hen a group of employees asked him for reimbursement to
cover the cost of the lunch on days they did not attend. I w asnt shocked; the lunches had
become an expected portion of their compensation and benefits. Sincere recognition had
turned into entitlement.

3. Inconsistency is encouraged in the type of recognition offered also. If employees

are invited to lunch w ith the boss every time they w ork over-time, the lunch is an expectation.
It is no longer a rew ard. Additionally, if a person does not receive the expected rew ard, it
becomes a dissatisfier and negatively impacts the persons attitude about w ork.

14.6 Advantages of Rewards

1. Six Sigma Team Recognition And Rewards: In Six Sigma architecture, having
a rew ards and recognition policy in place is equally important. In bringing about changes in
the system smoothly, rew ards and recognition can play a very important role. If employees
feel that their initiatives are being recognized, they w ill come forw ard w ith suggestions for
improv ement.

If a person w orking on a particular process has some problems, and if they feel
encouraged to make suggestions, they w ill be interested in taking a change further. They
w ould feel that the change is for the better and that it w ill not be of any harm to their status
in the organization. If the person in question studies the process properly, comes up w ith a

good idea and is recognized for the effort, they w ill feel involved in the entire process and
accept the new process easily.

Rew ards could be in the form of small gifts in front of colleagues or cash rew ards to
a certain level. The other advantage of having a rew ard policy is that it w ill encourage others
to participate in the process as w ell.

How ever, it should not create a w inner-and-loser scenario in the organization.

2. Different Levels of Rewards: There could be different rew ards for different levels
of people. Rew ards can be for certain achievements in the project or for a unique initiative.
For Green Belts, depending upon the size of the project and if it has been implemented
perfectly, rew ards such as gift certificates or cash rew ards can be very motivating.

Along w ith this, recognition of employees achievements in front of their peers is much
more effective than even a monetary amount. Efforts should be made to c ongratulate
employees in team meetings for the efforts that they make on a project.

3. Salaries and Bonuses for Black Belts: For Black Belts and Master Black Belts,
companies can tie their salary or bonus structure to the various benefits that they have
brought about from their various projects. Productivity, reduced losses and improved quality
can be factors to determine their rew ards.

For one and all any rew ard, big or small, is motivating enough if handed over w ith
acknow ledgement from management and colleagues. Even Quality leaders, Champions
and CEOs should be recognized for their efforts.

At the completion of the Six Sigma Project, having a luncheon celebration w ith all
employees w ill prove motivating to the team.

4. Six Sigma Team Involvement: The involvement of team members and other
employees in the planning and execution of a program is very useful. To engage people in
such efforts, a recognition program is in order. HR can play a relevant role in this process.
With the support of the HR department, teams can set up the appropriate sys tem for
rew arding and recognizing their employees.

With their support, senior management can set up the structure for compensating or
rew arding employees w ith raises or bonuses. They can even help in developing a non-
monetary rew ard system.

Rew ard and recognition is a very important and useful part of Six Sigma architecture.
The proper, careful and systematic use of the same can prove to be very motivating for the
employees and ultimately lead to success of the Six Sigma project.

14.7 Getting to Grips - Transmuting Learning into Action

To get a grip over the organizations rew ards and recognition the human resources
leaders endeavour to step betw een compensation committees and top management to
negotiate executive compensation packages that address concerns about excessive pay
w hile sufficiently rew arding CEOs for performance. Executives w ho understand the impact
of factors such as company performance, size, and the hiring landscape for new executives
in their industry can share that information w ith members of compensation committees.
They also can analyze the strength of the compensation benchmark studies that consultants
assemble. A relationship betw een human resources leaders and compensation committees
provides w orkforce management w ith an opportunity to assume a higher profile in the

1 Accountability - Getting a Grip on Results : The development of a thorough

understanding of, and a mature relationship w ith ones accountabilities in the w ork place is
an essential competency for success in any organization. While this is true at any level, it
becomes increasingly so as one moves into the leadership and senior leadership realm.
Yet despite the fact that accountable behaviour and fostering a culture of commitment are
prerequisites to organizational success, the w ord itself is still w idely misunderstood and
misapplied. Be prepared to change your view s on w hat it is to be accountable, how to
become more accountable and how to build a more accountable culture around you.

The c oncept and experience of accountability need rejuvenation. We hear that

corporations need to be more accountable, teachers need to be more accountable, and
employees need to be more accountable. Youd almost think w e understand each other
w hen w e use this term. Yet unless w e clarify accountable to w hom, for w hat specific results,
and w ith w hat consequences, accountability remains an illusion.

This tool is referred to as an Accountability Agreement and includes some key features
that many of us dont think of w hen w e agree to take on an important new accountabilities,
inc luding the ever pres ent critical support requirements and the hoped f or positive

Accountability and empow erment are inseparable.

The accountability is about assigning after-the-fact blame and in its place offers a
six point practical theory of accountability, namely:

Accountability is a statement of a personal promise.

Accountability for results means activities arent enough.

Accountability for results requires room for personal judgment and decision-making.

Accountability is neither shared nor conditional.

Accountability for the organization as a w hole belongs to everyone.

Accountability is meaningless w ithout consequences.

2. Transm uting Learning into Action : The managers introduce a tool specifically
designed for the w orld of knowledge workers in an empow ered w ork place, w here judgment,
discretion and influence play a far more instrumental role in success then the activities
encompassed by often out dated job descriptions, relics of the command and control era of
management. Any coach or leader that understands and can model these principles w ill
have a distinct advantage over those that do not.

14.8 Summary

There is enormous literature on the subject that chronicles the kinds of problems
those organizations, managers and managees have experienced encountering appraisals,
as w ell as finding multifarious solutions to these problems. The fact that these problems
have not show n any signs of aborting might suggest an inherent misfit betw een appraisals
and the rest of organizational functioning.

14.9 Review Questions

1. Explain the Methods of appraising for recognition and rew ard.

2. Explain the advantage of rew ard.



Learning Objectives

After reading this lesson you w ill be able to

Different types of teams and their requirement

Building and heading high performance teams

15.1 Introduction

15.2 Team Perform ance Managem ent: Goal-Setting and Pay for Perform ance

15.3 Types of Team

15.4 Perform ance Measures

15.5 Team Com pensation: A Broad Overview

15.6 A Prescriptive Model

15.7 Operational Definitions

15.8 Operational Zing

15.9 Building and Leading High Perform ance Team s

15.10 Sum mary

15.11 Review Questions

15.1 Introdcution

In todays organization tw o trends are visible. First, there is a trend tow ards organizing
the w ork around teams rather than around individuals: in many organizations teams have
become the main building block (Guzzo & Shea, 1992; Kozlow ski & Bell, 2003). A second
trend is that more and more organizations have developed some kind of pay for performance

plan, w hich is usually centered around the individual as opposed to the team (Prendergast,
1999). So, on the one hand, employees are stimulated to w ork together by organizing the
w ork around teams, w hile, on the other hand, it is mainly the individual w ork that is stimulated
via individual level rew ards. These trends may conflict and thus reduce the effectiveness of
a pay for performance plan. This raises the question how to design a pay for performance
plan that overcomes these problems?

15.2 Team Performance Management : Goal-Setting

and Pay for Performance

Pay for performance plan should support the performance goals of a team and/or an
individual team member, thus goal attainment should result in the attainment of a financial
rew ard. The use of performance goals as a performance management technique is based
on the goal-setting theory of Locke & Latham (1990). The principle idea in this theory is that
goals can have a direct influence on performance: performance goals ar e immediate
regulators or causes of task or w ork performance (Locke & Latham, 1990, pp. 253). So
bas ically, the question is how to combine these diff erent perf ormance management
techniques for the performance management of teams . The objec tive of a pay f or
performance plan is to support the perfor mance goals of a team and individual team
member s.

1. Uniform versus Team -specific : One of the problems in the example w as w hether
to design a uniform plan or a team specific plan. Besides more practical issues like the
clerical burden a pay for performance plan entails, the fundamental question here is w hether
it is possible to support team goals, w hich are by definition team-specific, w ith a uniform
pay for performance plan.

A truly uniform plan (i.e., w here the same indicators, w eights and targets apply to all
teams w ithin the organization) is not likely to be able to support the performance goals of all
teams in an organization. A truly team-specific plan (i.e., a pay for performance plan that
varies per team on issues such as the number of indicators, type of indicators [e.g. financial/
non-financial] and targets, the levels at w hich indicators are assigned and the w eight of
indicators) on the other hand, is probably best able to support the team goals, but w ill result
in a much higher clerical burden, w hich is not desirable either. Thus, a pay for performance

plan should combine elements of these tw o extremes, but how ? (i.e., w hat should the
criterion be?). Keeping in mind the assumption that a pay for performance plan should
support the performance goals, the key issue here is that there should be a clear link
betw een goal attainment and bonus attainment resulting from a pay for performance plan.
In terms of the expectancy theory (Vroom, 1964), this w ould mean that attainment of a
performance goal should be instrumental for the attainment of a (valued) bonus. Ideally, the
instrumentality w ill be one, w hich w ould be the case if the performance goal indicators and
pay for performance indicators as w ell as the goals set on those indicators w ould be the
same How ever, in practice this is hard to realize. A less stringent requirement is that the
performance goals and the pay for performance indicators should correspond: the higher
the correspondence, the stronger the link betw een goals and rew ards. For example, the
team performance goal is to increase market share w ith an x percentage, and the pay for
performance indicator is turnover generated in the market where the team operates. Although
goals and pay for performance indicators are different, goal attainment w ill most probably
result in a higher score on the pay for performance indicator.

Summarizing, an important criterion for deciding the extent to w hich a pay for
performance plan can be designed uniformly across the organization is the extent to w hich
the (team specific) performance goals and the (uniform) pay for performance indicators
correspond w ith one another. In other w ords, performance goals and pay for performance
indicators have to fit together in terms of content. This can only be determined on a case-
by-case basis . If the correspondence is low for some teams, or even w orse, if goal and pay
indic ators conflic t w ith one another, a more team-specific pay for performance plan is desired.

2. Team Based Perform ance and Pay

This fact sheet gives introductory guidance. It:

assesses the advantages and disadvantages of team pay

sets out the requirements to be met

show s how systems should be introduced and managed

concentrates on the team rew ard process for managerial, technical and professional

Includes the CIPD view point.


3. Nature of Team s : Characteristics of an effective team are that:

it exists to attain a defined purpose

individuals are committed collectively and personally

Individuals reinforce each others intentions to pursue team purpose.

The purpose of teams:

are concerned w ith results and building relationships.

remains to develop teams and to remove and overcome barr iers to eff ective

in surmounting obstacles, remains to build trust and confidence.

15.3 Types of Team

Orga nization al team s: a top management team, bound together because it

contributes to overall objectives.

Work teams: self-contained and permanent, deliver ing output. They focus on
achievement of common purpose and are a function of common purpose and are a function
of individuals w orking w ell.

Project teams: brought together to complete a task. Once the task is complete, they

Ad hoc teams: set up to deal w ith a problem. They are short lived and operate as a
task force.


1. Core Values and Management Style

Top management should:

believe that good team w ork w ill make a significant contribution

believe that superior team performance deserves to be rew arded financially

devolve authority to teams

Give scope for teams to manage themselves.


2. Team Characteristics

Team pay w orks best if teams:

stand alone w ith agreed targets and standards

have autonomy

are composed of people w hose w ork is interdependent

are stable

are w ell-established and make good use of complementary skills

Are composed of flexible, multi-skilled team players w ho are capable of expressing a

different point of view if it is for the good of the w hole.

3. Incentives:

For team pay to w ork w ell:

everybody must understand and accept the targets

the rew ard must be clearly linked to effort and achievement

the rew ard must be w orth striving for

performance measures must be fair, consistent and acceptable

everybody must be able to track performance in relation to targets and standards

the team must influence its performance by changing behaviour or decisions

the incentive formula must be easily understood

rew ard must closely follow accomplishment

the scheme must be appropriate

the scheme should be carefully designed, installed, maintained and adapted to meet
changing circumstances.

4. Reward Processes

Rationale : Team rew ard aims to reinforce behaviour, w hich leads to effective
teamw ork. It encourages group endeavour rather than just individual performance. It can
be argued that pay systems, w hich encourage the individual, do not foster teamw ork. In
addition, it is argued that managers treat team members as individuals only, rather than

relating to them in terms of w hat the team can achieve. An appropriate balance has to be
struck betw een individual performance and the individuals performance in a team.

Fundamentals : We all do w hat w e are rew arded for, w hether in a team or as an

individual. When considering team-based rew ards there are tw o fundamental questions to
be asked. Should teams be rew ar ded by financial means , non- financ ial means or a
combination of the tw o?

Most team rew ard systems emphasise team pay rather than non-financial rew ards.
Pay is an important form of recognition and a motivator. How ever, the ultimate team rew ard
is recognition of the successful completion of a task. Employees are more in favour of non-
financial than financial rew ards for teamw ork.

Teams r espond to all types of rew ard from pay, bonuses, public recognition, to
satisfaction w ith team accomplishment, w ell being derived from strong w ork relationships
and increased responsibility.

Context : Pay strategies for team w orking are diverging. There are companies that
are devising incentives such as coupled team and individual bonuses, w hile others are
flattening pay differentials and putting little emphasis on incentives.

Before team pay is considered, it is necessary to ensure basic pay is right.

Hierarchical pay structures are inappropriate for team w orking. It is difficult to foster
team spirit if individuals are concentrating on promotion.

Reward mix : There can be up to three elements in a rew ard package:

Individual - a basic salary but varied in relation to performance or skill/competence.

Team - related to the achievement of team targets.

Organisation - related to business performance - measured as profit or added value.

These may be in the form of cash or shares.

M anaging Team Reward : It is important to define the role of management and

teams. Equally, it is important to decide on performance measures and determine how
these can be used to advantage:

M anagement role: Management must:

conduct an initial needs analysis

analyse current practice

define individual and team rew ard philosophy

consider team pay reinforcement and non- financial rew ards

create a collaborative climate

identify critical success factors

involve all employees

communicate the benefits

train employees and team leaders to optimise team performance

provide team-building training

help individuals improve their skills

monitor and evaluate

audit the costs and ensure the scheme is self-financing

promote the value of non-financial rew ards

recognise team accomplishments w ith appropriate action.

Teams role: Teams must:

participate in the schemes design and modification

define critical success factors and performance measures

set objectives

identify accomplishments

monitor and evaluate team performance

establish priorities

analyse the financial rew ards and decide on improvements

conduct peer review s of individuals


identify training and development needs

suggest improvements to the scheme

promote non-financial rew ards.

15.4 Performance Measures

Per formance measur es s hould be s elected as the basis for setting goals and
evaluating results. There are tw o types of performance measures:

Output/outcome, w hich includes:


achievement of goals and standards

the integration of inter-team efforts.

Input/process, w hich includes:

the levels of know ledge and skills

the quality of interactions and collective effort

involvement in decision-making

planning and goal-setting

self-directed measurement and control of performance

the resolution of conflict w ithin the team

the flexibility of the team to adapt to unforeseen problems.


Team pay can:

encourage co-operative w ork and behaviour

clarify goals and priorities at team and organisational level

emphasise a flatter and process-based organisation

act as a lever for organisational change

encourage flexible w orking and multi-skilling

offer a fairer perceived payment system


collectively improve performance and team process

encourage the less effective to meet team standards

develop self-managed and directed teams.


Team pay can:

diminish individual self-w orth

mask individual team contribution

compel individuals to conform to oppressive group norms

result in low output w hich is sufficient only to gain a reasonable rew ard

cause difficulties w hen developing performance measures w hich are fair

s hif t problems of unco- operative behaviour fr om individuals in teams to the

relationships betw een teams

prejudice organisational flexibility - cohesive and high-performance teams may be

unw illing to change.

1. Action Plan

assess the need for, and determine if the organisation is ready for, team rew ards.

identify teams.

set objectives.

consult employees.

consider the options, either team pay and/or non-financial rew ards.

design the scheme w ith employees help.

communicate details.

conduct training in managing team rew ards and in team-building.

introduce team rew ards.




It is essential to develop and introduce team pay w ith great care. The complementary
impact of non-financial rew ard should alw ays be acknow ledged. Good teamw ork may be
enhanced by the rew ard system but there are other w ays of developing it.

Descr ibe and think of the organisations functions as processes carried out by
interlocking teams:

Devise communications w hich develop identification.

Emphasise the key values of constructive teamw ork.

Ensure the purpose and objectives of teams are clearly defined.

Create teams that are largely self-managed, w here short-term objectives are set and
performance is measured.

Take care to appoint and train team leaders w ho w ill achieve results and develop the

Use training to improve team processes.

Set overlapping or interlocking team objectives in the form of targets or projects to be


Assess individual performance, and team player effectiveness, on results.

Set up cross-functional teams w ith a brief to get on w ith the job.

Some Key Points : Our latest rew ard management survey found that around 27%
of employers operate a team-based bonus plan. By sector, voluntary sector employers
(33%) are more likely to use such an arrangement.

Formal team bonuses are more common for senior managers than manual staff.

Most employ ers now manage indiv iduals pay progression by linking it to an
assessment of an employees performance and examining the skills and competencies
that they apply in their job. This approach is the most popular method of determining salary
rises for senior staff, middle/first-line managers and non-manual non-management staff.

In 1995, the IPD conducted in-depth research into team rew ard. The findings included:

(a) it is not possible to prescribe a standard model or approach as there are so many
different types of teams and schemes.

(b) There are stringent conditions for the introduction of team pay - this is thought to
account for the small number of schemes in the survey.

(c) The mechanics of the team pay schemes ar e less impor tant f or suc cess than
management style, culture and the w orking environment.

(d) Teams are able to plan and implement their ow n improvement programmes if they
receive feedback and meet regularly to discuss performance.

(e) Over 50% of organisations w ith team pay believe it is improving performance.

For many people, the extent to which team pay should replace individual performance-
related pay is an unresolved issue.

Alongside team bonus, some organisations are introducing, or considering, individual

skill or competence rew ard for personal contribution.

Many organisations are including team w orker capability as a key input factor in
performance management systems.

Some individuals ex pres sed the opinion that team pay is either inadequate or
inappropriate for performance improvement. Other forms of rew ard should be used instead
of, or in conjunction w ith, team pay.

CIPD Viewpoint : CIPD believes that team rew ard is a just and equitable w ay to
acknow ledge the contribution made by people as team members or individuals. It allow s
organisations to demonstrate that they value teams and individuals w ho perform w ell and
those high levels of performance are important. Team rew ard can help focus the priorities
on quality, customer service, innovation and co-operative w ork.

But improving team performance cannot be left to the rew ard system alone. The
quality of teamw ork depends on:


Structure and operating processes


Performance management

Management style

Employee development programmes.

Rew ard systems, how ever w ell-conceived and effective they may be, are not a
substitute for good management.

The CIPDs and other research have show n that team pay has been more talked-up
than practiced. The introduction of team-based pay can fail due to ill-timed communications
and poorly defined teams.

How ev er, it s hould not be dismiss ed as another flav or of the month. Many
organisations truly believe it w orks w ell for them but there are strong arguments against
relying on team pay alone. Consideration should be given to supporting team pay w ith non-
financial rew ards - such as through recognition.

As a result of developments in business strategy and changes in organisational

structure, more employ ers ar e becoming interested in the concept of team w orking.
Alongside a grow ing emphasis on teams for operational purposes, employers are also
beginning to consider the implications of this approach to w orking for the design and operation
of pay systems.

Why Team Working? : This report examines the evidence and issues related to
team w orking and team pay w ith particular reference to w hite-collar employees. It aims to
inform organisational decision-making in these tw o areas. The report knits together three
strands of information: published sources on team w orking and team pay; an analysis of
IES and other survey data that has included questions on team w orking and team pay; and
interview s w ith a small number of employers w ho have established a link betw een team
w orking and pay.

A number of pressures suggest that an increasing number of employers may be

orienting tow ards team w orking and, by implication, team based pay systems. The key

factors identified are: the flattening of organisational structures, the resultant need for greater
task and skill flexibility, and changes in business imperatives w hich are emphasising better
quality, and cost reductions. Team w orking as a means to reduce absenteeism and turnover
through enriching jobs is very much a secondary factor.

What is Team Working? : The report identifies a number of different types of team.
These can be broadly categorised as either permanent or temporary teams depending on
their purposes and structure.

Temporary teams include project teams, start-up teams and problem solving teams,
and are often cross-functional in nature. Permanent teams are more likely to be organised
around a core business process (eg customer delivery) or function (eg marketing). Evidence
of teams organised on a product, market or geographic basis w ere also found.

Despite the variety of teams, several common features of teams are revealed: a
maximum size of 12 to 15 people, a high level of task and skill inter dependenc e and
measurable outputs.

Team type often determines the choice of payment scheme. For example, temporary
teams are more likely to have bonus arrangements w hereas permanent teams may have
skill or competence based systems.

Team working; little team pay : Formal team w orking is still in its early days across
most organisations. A recent IES survey found that around 40 per cent of organisations had
intr oduced formal initiatives to encourage team w orking and that these tended to be
organisation w ide rather than for one specific occupational group.

Although there is increasing interest in team w orking most of those firms adopting
this approach w ere still using individual or organisation w ide pay schemes (such as merit
pay or prof it-sharing). Only ten per cent of those w ith formal team w orking initiatives
supported this w ith team bonuses or skill based pay (tw o of the more common forms of
pay associated w ith team w orking).

Our review of UK practice show ed that w hen employers talked about team pay, w hat
they meant w as that they w ere adapting their existing individual pay systems to reinforce

the idea of team w orking. In these companies, virtual teams had been created based on
products, markets or processes but w here team w orking criteria w ere clearly not being

It w as apparent that the appraisal process w as being used to manufacture a team

culture partly in response to the failure of the individual based pay system, w hich tended to
accentuate competitive behaviours. Team pay in the UK is still strongly rooted in individualised
payment systems and being shaped by these and w hat w e are seeing is, in practice, a
pseudo team pay w here the fiction of teams is being created before the reality of team-
w orking exists. This is despite the fact that team pay is more likely to deliver the benefits
associated w ith greater team w orking.

Explanations : The study suggests that the rarity of team pay approaches in team
w orking environments may be explained by tw o reasons. Firstly, organisations are seeking
to develop and embed these w orking practices some time before they consider linking
them to pay, and from this perspective there may be a lag in the introduction of appropriate
pay systems. The second interpretation is that this gap betw een w ork systems and pay
systems is more to do w ith the ad hoc nature of UK management in the area of pay. In other
w ords, far from being used in a strategic w ay (as HRM theory suggests), pay is being
managed in a highly reactive fashion.

Employer Issues : Employers considering the introduction of team pay need to

undertake an audit of their organisation, to assess the readiness for such a step. The
report takes employers through a number of questions that can be used to conduct such a
review (eg are the outputs to be rew arded the result of team or individual efforts? Are team
measures linked to business strategy?)

The study suggests that one of the potential future constraints to the real gains to be
made from greater team w orking and team pay is management style. A traditional command
and control type style is likely to be inappropriate in a team w orking environment and this
implies that organisations may need to concentrate on the selection and development of
appropriate managers for these roles.

15.5 Team - Compensation: A Broad Overview

Team compensation is a w ay of rew arding performance in team settings. That is,

individuals are rew arded based on the performance of the team as opposed to individual
performance. There are different kinds of compensation such as a portion of base pay,
other financial rew ards such as gain-sharing and non-financial rew ards such as movie
passes and gift certificates. Effects on the w orkers, design issues, and implementation
issues w ill be addressed.

Organization: Teams are defined as groups of individuals w ho w ork together to

develop products or deliver services for w hich they are mutually accountable (Mohrman,
Cohen, and Mohrman, 1995). Becaus e of this new s hift in or ganiz ational structure,
employees are being Organizations have been using teams more and more to carry out
different functions in the asked to w ork w ith others and their collective performance is
evaluated. Traditionally, employ ees have been compensated based on their indiv idual
performance, but now they are being evaluated based on how their teams perform. Therefore,
it does not seem to make much sense to compensate employees individually based on
how their w hole team performs. Therefore, organizations are moving tow ard compensating
individuals based on team performance. Team compensation is often referred to as team-
based rew ards or team-based pay. Caudron (1994) w rites that people learn to behave in
certain w ays based on the rew ards they receive. Therefore, in order to convey to people
that they w ant them to produce more in teams, reinforcement of behaviors that lead to and
sustain team performance is necessary. Oliver (1996) agrees by stressing that individual
bonuses w ork against the team, lessening the team spirit.

Some examples of differ ent forms of team-based rew ards are: a portion of the
individuals base pay, other financial rew ards such as gain-sharing, and non-financial rew ards
such as recognition and praise. Gain-sharing combines pay for performance and employee
involvement; as performance improves, employees share financially in the gain generally
monthly or quarterly (Masternak, 1993).

In surveys of the Fortune 1000 companies in 1990 and then in 1993, team-based pay
has increased its prevalence and usage in organizations from 59% to 70% in three years
time (Anfuso, 1995b). Anfuso, how ever, w arns that only 1 to 20% of the w orkforces in these
organizations receive team-based incentives.

The move to group incentives, affects some individuals in different w ays. Honeyw ell,
Dickinson, and Poling (1997) created both a group and individual incentive system in a
university setting w ith 20 undergraduate students in psychology classes. In the individual
incentive system, a 10-member group received a base pay of $1.00 plus some incentives
dependent upon the number of cards sorted in 20-minute sessions. In this condition, each
individual earned $0.005 for each card sorted after 400. In the group condition, incentives
w ere based on the group average w here all subjects earned $0.005 for each card w here
the group average exceeded 400. Those in the individual condition earned more than those
in the group condition. It was concluded that under a group incentive system, top performers
decrease their performance w hen their earnings are reduced by poor performers. While
poor perf ormer s continue to per form below average bec ause they benefit from the
performance of other members. Honeyw ell, how ever, w arns that this may not be the case
in an organizational setting.

Another example of how incentives affect individuals w as given by Welbourne and

Cable (1995). They believe that if companies stress the organizational role of the employee,
then the employee w ill view their incentives as entitlements based upon that membership
role. This w ill de-emphasize the personal role w here they only think about themselves
and not about the organization as a w hole. This helps the organization in that it increases
the amount of commitment from the employee. Team pay has also been associated w ith
an increased level of motivation (Oliver, 1996; Sheridan, 1996; Verespej, 1996; Yeatts, 1997).

Answ ers to questions about how team compensation usually affects w orkers are not
foc used on as much as how team pay affects how they w ill behav e in teams that

consequently af fec ts the teams r esults . As mentioned earlier, f ocus on indiv idual
performance bonuses w orks against conveying the message of a team-based culture (Oliv er,
1996). Haw k (1995) contends that a company needs to be prepared to support organizational
changes in order to rew ard the new behaviors and results produced. This allow s them to
become capable team members. Therefore, it is recommended that team-based rew ard
systems should be implemented in order to reinforce team behavior.

As mentioned earlier, various forms of team-based rew ards are used in organizations.
Ultimately, they fall into three categories: a proportion of their base pay, other financial
rew ards, and non-financial rew ards. Caudron (1994) states that 5-10% of the base pay is
usually a sufficient amount to rew ard individuals. Gain-sharing, defined more specifically, is
another type of financial rew ard that shares group improvement in productivity, cost savings,
and quality w ith each employee in the group (Shuster & Zingheim, 1992, p. 166). Other
types of financial rew ards are lump-sum aw ards w here individuals receive an amount of
money that is independent of their base pay, discretionary bonuses given to teams based
on after-the fact judgment of their performance, and profit sharing w here the employees
share a percentage of the organizations profit (Shuster & Zingheim, p. 166). Finally, non-
financial rew ards are another alternative. For example, organizations may aw ard teams by
recognizing them for exceeding expectations on the job (Shuster & Zingheim, p. 165).
Additional examples include coffee mugs, T-shirts, and plaques (Flynn, 1996; Gross, 1995,
p. 134).

Many organizations have tried to enact some form of team-based rew ard system.
For example, Portsmouth Hospital NHS Trust (PHT) has enacted a team rew ard system
for senior management. Six clinical directorates w ere responsible for their ow n cross-
functional teams. In an attempt to prevent goals from each team contradicting one another,
the board of directors decided to replace individual pay in favor of team-based pay in the
form of a non-recurring annual bonus. The bonus is determined by the chairperson and
non-executive directors w ho must assess w hether the senior managers have met the
objectives. They find that there are draw backs to the program in that the individuals w ere
no longer recognized w hich tended to de-motivate individuals w ho contributed to the teams
performance. Therefore, other forms of non-financial rew ards are being considered to
remedy that situation (Oliver, 1996).

Rank Xerox (UK) Ltd. give team bonuses to sales, management, and engineering
staff. Their performance criteria are based on customer satisfaction, sales revenue, and
market share. The compensation manager explains that it w as important to link employee
objectiv es to company goals. The teams performance is measured against the teamrevenue
target and the market share. The bonus is paid quarterly but not to poor performers (Oliver,

1. Design Considerations : There are many considerations in the designing of the

new compensation plan. After the alignment of pay w ith strategy, culture, and competencies
of the employee, then the next step is to determine the type or types of team in a particular
organization. There are three types of teams that Gross (1995, p. 25-38) identifies. The first
is the parallel team that is defined as a part-time team that can be temporary or permanent
that employees participate on in addition to their normal activities (Farrell & Pagoaga, 1995).
An example w ould be a team that convenes to discuss safety issues. The second type of
team is a process team that carries out the w ork processes and is done collectively by
members of a team. An assembly cell in a manufacturing organization is an example. A
project, or time-based team, is the third type of team and is the opposite of a parallel team
in that members w ork full-time for the duration and until completion of a project. An example
is a team for designing new cars. A fourth type is a hybrid organization that includes a
mixture of the teams described above. How ever, the focus of the design discussion is on
the first three types of teams mentioned.

Another consideration that the organization should take into account is the number of
job categories in an organization. The concept is termed broad banding, or encompassing
more jobs into few er bands, and it is used to determine the number of pay grades (Gross,
1995, p. 65). The narrow er the band, the few er the differences, and the greater the equality
of pay opportunity among the people w ithin that band (Gross, p. 66). After determining the
bands, one must determine the parameters used to pay every job. This is the base pay for
each job. Setting base pay is usually based on market pricing and job evaluations. Market
pricing indicates w hat others in the market w ould pay for the same job. Job evaluations
assess w hat skills and w ork is involved in a particular job (Gross, p. 69-70). Also, one must
determine the total pay allocated to the base pay.

The next step in the design of a team-based compensation system is the performance
appraisal stage. The criteria upon w hich the rew ards are given are necessary in order to
create the link betw een strategies and rew ard (Anfuso, 1995a; Anonymous, 1995a; Farrell
& Pagoaga, 1995). Gross (1995, p. 87) states that an organization must define the
performance criteria of their employees. There are four criteria used in measuring team
performance. The first is a demonstration of behavioral competencies that are personal
attributes and behaviors such as attitude, motives, and traits that pr edict longer-term
success (Gross, p. 46). The second criterion is the acquisition and/or the demonstration of
skills and know ledge (Gross, p. 88). Thirdly, there needs to be an achievement of specific
objectives w ithin a specified period of time, best know n as management by objectives
(MBOs) (Gross, p. 89). Finally, the results (quantitative or qualitative) are used to measure
the performance of the team (Gross, p. 89).

These criteria are different depending on the type of team present in an organization.
The parallel teams w ould primarily use the MBOs approach follow ed by the demonstration
of behavioral competencies and the results of the team effort. In a process team, the primary
criterion used is the demonstration of behavioral competencies follow ed by the acquisition
of skills and know ledge and results. Finally, in a project team, the most important criteria is
w hat the results are follow ed by demonstration of behavioral competencies and the
achievement of specific objectives in a specified period of time (Gross, 1995, p. 89).

Another component of pay is the increase in base pay. Individuals w ill sometimes ask
for raises and in a team-based environment, it is much more difficult. One reason for the
difficulty lies in the fact that different types of teams require different w ays in w hich to
handle the demands to increase base pay. (Gross, 1995, p. 123).

Different Approaches to Increase Base Pay as a Function of Team Type:

Team Type Increase Approach

Parallel Merit Increases are desired w ith team and regular job performance

Process General Wage Increase

Skill-based Pay

Pay tied to demonstration of Competencies

Peer Evaluations that assess the team members contribution to the performance of
the entire team

Project Merit Increases are desired w here the demonstration of required skills and
competencies are the criteria used to determine w hether or not an increase is in

The third component of pay is recognition. Recognizing team results is very important
in the sense that it can motivate team member s and increas e the teams lev el of
cohesiveness (Gross, 1995, p. 129). If team members are praised for a job on w hich they
all contributed, their teamw ork w ill be reinforced. Recognition can actually have more of a
motivating effect that reaches into the future (Pascarella, 1997).

Pascarella states that non-monetary rew ards such as plaques, trophies, vacation
trips, and small gifts can be the best incentive for team members. Pascarella emphasizes;
how ever, that the most important part of this kind of recognition is that management must
give it w ith sincerity. Nicholas (1994) also does not recommend cash. He believes that
cash is usually a less effective motivator than rew ards that are custom-tailored to the team.
Cash needs to be an ample amount in order to be an effective motivator. Gross (1995, p.
135) states that if a cash rew ard is given, it has to be a fairly large amount of at least $250,
preferably $500.

In implementing recognition, the organization must r ew ard teams that exceed

objectives, they must determine w ho is eligible, and they should have several levels of
recognition. For example, appreciation non-cash rew ards, aw ards for significant

financial contribution, and aw ards for extraordinary financial results (Gross, p. 141). It
is recommended that non-cash rew ards be the primary type of recognition for all team
types, and cash be the secondary rew ard for parallel and process teams but not for project
teams (Gross, p. 140).

The fourth main component of a compensation plan is the incentive plan. There are
nine basic elements to an incentive plan that Gross (1995, p. 149) recommends assessing
beforehand. These are eligibility to receive incentives, participation, measurement, alignment

of team and organizational goals, funding, timing (shorter time betw een payoffs is better
because it raises motivation), benefits, administration, and evaluation of the w hether or not
the plan needs changes.

Implementation of a rew ard system is the next step after identifying and assessing
the differ ent pay components . Gross (1995, p. 191) recommends three phases to
implementation. The first phase is labeled feasibility, w hich asks w hether the strategy in the
organization is feasible at the stage, they are in currently. It includes planning, environmental
assessment, readiness diagnostic, and the compensation strategy. The second phase is
the design phase and it includes the design concept, the design components, testing of the
compensation strategy, transition approach, union participation strategy, and administrative

The third phase is the actual implementation of the program and it includes education/
communication program, organizational integration, and ongoing monitoring. As mentioned
earlier, it is important that the organization be ready to implement the new compensation
system. The team design needs to be stable before implementing a new pay structure. For
example, Bartol and Hagmann (1992) state that the organization must stress communication
and flexibility. There must be management support of teams; the culture must be one of
cooperation; and there also needs to be strong administrative support that records team
performance. Only after these elements are in place should an organization attempt to
design and implement a team-based compensation system.

Bartol and Hagmann (1992) also have their ow n design considerations for team-
based pay plans. First, there must be a link to the organizations strategy. Team goals
should be subsumed under the organizations overall goals and objectives. Pay should be
aligned w ith the accomplishment of those objectives. A performance measurement system
also needs to be established. It is imperative that there are explicit measures of how w ell
the team is performing in reaching the des ired goals. These measures usually include
such factors as productivity and quality. This is impor tant in meeting goals and also
measur ing how muc h the team members should be paid according to their measured
performance from the predetermined criteria. Another important design consideration is
the allocation method to the team members.

Bartol and Hagmann suggest three methods of distributing rew ards. They are equal
payments to all members of the team; differential payments to team members based on
their contribution to the teams performance; and differential payments determined by a
ratio of each group members base pay to the total base pay of the group. The first method
fosters cooperation, w hereas the second method may result in some members feeling
slighted. Bartol and Hagmann recommend that a measure of cooperation and teamw ork
must be built in to this plan if used.

The thir d r atio method ref lec ts the mar ket rates of the jobs . The las t design
consideration is the payment method. Team rew ards should be kept separated from base
pay so that the team member know s that their rew ard is strictly because of the performance
of their team.

The reason for team pay is that hopefully some positive results emerge. Bartol and
Hagmann (1992) posit some results from a w ell-developed compensation plan. The first is
improved productivity. Better results are reported for those using team incentives than those
using individual incentives in a team environment. These results seem to be long-term, as
w ell. They also suggest that there is improved employee satisfaction w ith the job and pay.
This is due, in large part, to the improvement of their skills through teamw ork and to the
greater control over their pay than in the past. Another result is reduced costs. Production
costs are often decreased as employees perform more effectively and efficiently as a team.
There is also reduced turnover and absence, because employees feel that they have a
stake in the production, and they are more satisfied. An advantage to the customers is that
the product is improved and the service quality is improved. This is because the employees
start becoming w ell versed in the operations of the team and can, therefore, identify some
of the important product and service improvements that can be made.

Saunier and Haw k (1994) define teams in a different w ay than seen previously
discussed. They define four teams through the nature of team membership and the length
of time that a team needs to be in place. The nature of team membership is divided into
dedicated and non-dedicated. Dedicated team members essentially do 100% of their w ork
w ithin a single team. Non-dedicated team members also perform other w ork or w ork on
other teams. Length of relationship can be permanent, w here the team performs ongoing
w ork, or the organization expects the team to function in its current form for an extended

period of time (beyond one business cycle). Or it can be temporary, w here the w ork can be
accomplished in a defined period of time (one business cycle or less). Four teams arise:
dedicated permanent, dedicated temporary, non-dedicated permanent and non-dedicated
temporary. Different rew ard systems are used for these different teams. Part-time teams
are most effectively rew arded w ith discretionary bonuses or non-cash rew ards. Full-time
teams should be told at the beginning how they w ill be paid (Flynn, 1995).

More specifically, dedicated permanent teams should be rew arded on the w ork of the
team and include all team members. Dedicated temporary teams, on the other hand, should
be rew arded based on team performance in cycles that match a teams w ork. In non-
dedicated teams, incentives should be issued only after careful consideration over the
nature and importance of the teams w ork. If the w ork is critical, then team-based incentives
should be considered to emphasize the value of the w ork. Non-dedicated temporary teams
may be provided with discretionary spot awards, after-the fact, for superior team performance
and results (Saunier & Haw k, 1994).

Because more and more organizations are moving tow ard the use of teams to do
most of the w ork, a shift in the w ay that w orkers are being compensated are in order. No
longer is it appropriate to rew ard employees strictly on how they perform individually w hen
they are no longer performing individually. Their performance is based solely on how the
team performs. Therefore, organizations need to start compensating individuals based on
how their team performs through team-based rew ards.

Under w hatever circumstances, the compensation plan must be one that can be
communicated easily to the employees. Another consideration that must be taken into
account is fairness. Fairness is subjective, but it can be remedied by having employees
participate in the design of the compensation plan (Anfuso, 1995b; Anonymous, 1995b;
Thornburg, 1992). In a hospital setting, it is important that all units are w orking tow ard the
same goal, so there needs to be a consistency in team rew ards that ensures that this
happens. With many teams across units, this is often very difficult (Farrell & Pagoaga,

There ar e many consider ations that one must consider before implementing any
kind of team-based rew ard system. For example, there are a number of prerequisites to an

effective teaming environment that creates a foundation for the rew ard system. These are:
interdependent jobs; acc urate and objective meas ures of the teams per for manc e;
management support for teams, the organizational culture emphasizes cooperation among
the team members at all levels; there are effective communic ation skills and flexible channels
betw een managers and employees; a flat organizational structure that is ideal in fostering
a team approach, because there are few er levels of hierarchy; a small group size that
facilitates communication and cooperation; no union or positive union-management relations
that forces a hierarchy on the organization; there is strong administrative support that records
per formanc e based on team ac complis hments ; and ther e ar e v ar iable exter nal
environmental factors that have flexibility to deal w ith changing technology (Bartol & Hagmann,

After the decision that the team is ready for some kind of team-based rew ard system
(Mohrman et al., 1995, recommend a year), the first consideration must be that the goals of
the team are aligned w ith the goals of the organization. There are tw o important aspects of
this alignment of goals. The first aspect is the importance that all the members of the team
are all w orking tow ard the same goal. Secondly, those goals must be aligned w ith those of
the organization (Mohrman et al., 1995, p. 201). An extension is to say that the pay must be
in line w ith the strategy also. Culture also needs to be aligned w ith pay so that employees
can glean w hat is important to the organization in terms of its values (i.e., teamw ork) (Haw k,

One must not f orget the individual in a team. The rew arding of individuals is still
important, but it must be combined w ith some sort of team-based rew ard as w ell. The
most effective recognition programs are those that recognize outstanding individuals but
also rew ard the collaborative efforts of the team (Parker, 1994). Ideally, individual rew ards
should rew ard the fact that the employee has been a team player. Parker states that this
helps to foster an environment of cooperation and collaboration.

2. Individual versus Team Rew ards : Another problem the organization encountered
w as related to the optimal proportion of team rew ards to individual rew ards, i.e. w hat
combination of indiv idual and team r ew ards is optimal f rom a team performance
management perspective? We suggest to approach this question by looking at the effects
of individual and team rew ards on team members behaviour on the one hand, and on the

type of behaviour that is requested for executing the team task on the other hand. Individual
and team rew ards, just as goals, are thought to have different effects on team members
behaviour (e.g. Weldon & Weingart, 1993). Individual rew ards stimulate team members to
focus on their ow n tasks, thereby stimulating individualistic behaviour and running the risk
of losing sight of the team interests. Team rew ards, on the other hand, focus individual
team member s attention on teamw ork, thereby s timulating cooper ation among team
members, w hich might go at the expense of a focus on individual tasks. Thus, the level of
task interdependence plays an important role in determining the mix of individual and team
rew ards. This relation betw een task interdependence and type of rew ards has been the
subject of several studies (e.g. Miller & Hamblin, 1963; and Rosenbaum, Moore, Cotton,
Cook, Hiesser & Gray 1980), and w ill be discussed in the next section.

Relative versus absolute distribution : The third problem that appears from the
example has to do w ith the distribution method of rew ards. The organization in the example
uses a ranking system, w hich means that, in this case, individual team members are ranked
against each other based on their score on some pay for performance indicator. Depending
on the relative score, rew ards are distributed among team members. From the perspective
of an organization, the advantage is that the amount of money to be spent on bonuses can
be fixed, w hich eliminates uncertainty as to the expenses of a pay for performance plan.
How ever, from a perspective of team performance management, this distribution method
has one large disadvantage, as it makes the team members w ho are ranked against each
other negatively interdependent, thereby creating competition. Creating competition betw een
team members w ho have to cooperate for the completion of the w ork is counterproductive.
If teams are ranked against one another, instead of team members, competition w ill be
created betw een these teams. This w ill not cause problems if the teams that are ranked do
not need to cooperate for the completion of the w ork (e.g., teams in a football competition),
how ever, if these teams depend on one another to complete the w ork, as w ill often be the
case in an organizational setting, a ranking system may be harmful. On the other hand, pay
for performance plans can create more supportive types of interdependence that support
the behaviour required by the w ork at hand (e.g. Miller & Hamblin, 1963; Rosenbaum et al.,
1980). If, for example, a team is characterized by a high level of task interdependence,
w hich forces team members to w ork together for task completion, a pay for performance
plan s hould s timulate cooperation among team members , by making team members

positively interdependent on one another to attain a pay for performance bonus. So the
interdependence created by a pay for performance plan should be congruent w ith the level
of task interdependence.

3. Goals and Pay for Perform ance, Cooperation or Com petition : Closely related
to the former problem, a final problem that emerges from the example is how to combine
goals and pay for performance. In the example, team goals are present that create positive
inter dependence betw een team members, thereby stimulating team members to w ork
together. The current pay for performance plan, on the other hand, creates competition
betw een team members, thereby giving the opposite signal w ith regard to the desired
behaviour. So the interdependence created by a pay for performance plan should fit w ith
the interdependence created by the performance goals.

15.6 A Prescriptive Model

Summarizing, the effectiveness of a pay for performance plan for teams seems to
be dependent on tw o main design questions:

1. How to design pay for performance indicators that fit w ith the team goals and goals of
individual team members in terms of content, i.e. how to attain content fit?

2. How to assign the pay for performance indicators to teams and/or individual team
members, i.e. w hat type of rew ard interdependence is optimal given the levels of goal
and task interdependence?

Thes e ques tions, w hich refer to the effectivenes s of c ombinations of spec ific
characteristics of a team task, performance goals, and pay for performance plan. The
general idea behind this model is that if (a) the goal and pay indicators fit together in terms
of content; and if (b) the levels of goal and rew ard interdependence fit together in terms of
signals they give on des ir ed behaviour; and if ( c) the levels of goal and r ew ard
interdependence fit w ith the level of task interdependence, the combination is more effective
than if one or more of these fit-requirements are not satisfied. Thus, the extent of fit or misfit
betw een the elements constitute the independent variables in this model, w hereas the
dependent variable refers to effects of variation on these independent variables, i.e. the
effectiveness of the combination of the three elements This combination may impact many

elements of effectiveness, such as team performance, team interaction processes and

affective responses.

1. The extent to w hich the plan enhances team interaction processes that facilitate
team performance, such as cooperation, and the extent to w hich the plan motivates
and satisfies team members.

2. The extent to w hich the plan enhances team performance, w here performance can
both be measured w ith objective variables such as output or financial results, or w ith
more subjective variables as internal and external customer satisfaction.

The question now is how to design a pay for performance plan so that these different
constructs fit together. It appears that the fit betw een task, goal and rew ard interdependence
plays a prominent role in the design of a pay for performance plan for teams. At present, a
complete theoretical framew ork on optimal combinations of these constructs is lacking,
although elements of such a theory of fit exist.

15.7 Operational Definitions

Task interdependence has been defined as the extent to w hich team members have
to exchange information and/or means for the completion of their contribution to the team
task, and can be classified as low or high. Further, w e know that the difference betw een
low and high task interdependent teams is related to the amount and necessity to exchange
information and means for the completion of the team task. Yet, these tw o levels of task
interdependence have not been defined. We propose the follow ing definitions of low and
high task interdependence:

Low task interdependence is the situation w here team members hardly depend on
information or means from each other for the completion of (their part of) the team task.
Although team members may exchange information or means w ithin the scope of task
completion, the dependence on this information and/or means is not critical: Even w ithout
this information and means satisfying levels of task performance can be achieved. For
instance, telemarketers exchange information on specific advice or tricks on how to deal
w ith customers, although they can complete their task w ithout this information as w ell.

High task interdependence is the situation w here team members critically depend on
information and/or means from each other for the completion of (their part of) the team
task, i.e. absence of this information and/or means hampers the achievement of satisfying
levels of task completion or makes task completion impossible. An example w ould be the
members of a surgery team where the surgeon cannot complete his task w ithout information
on the patients situation and anesthesia provided by the anesthetist.

15.8 Operational Zing Change through

Performance Management

The Zing meeting facilitation system is an electronic environment that helps people
create new know ledge, make better decisions and w ork faster. It enables quiet people to
actively participate. It encourages and captures creative thinking and innovative ideas. It
can even be used to simultaneously w ork w ith other groups across the w orld. Organization
needs to participate to believe it. It can be used for a broad range of applications including:

Creativity & Innovation Workshops

Problem Solving

Decision Making

Structured Consensus Building

Focus Groups

Strategy / Operational / Process Development Sessions

Perfect for that aw ay day !

Making conferences and seminars truly interactive

A typical Zing session involves anything fr om 6 - 100 people, using keyboards

connected to central computer w ith the output displayed using a data projector. This can be
ex tended via the Internet to allow up to multiple sites and individual computers be
simultaneously connected. Meeting participants only need to be able to use one finger
typing to take part.

Very successful sessions have been run w ith up to 10 people sharing a keyboard so
the pow er to make effective use of very large group meetings can be easily seen. Zing
sessions can make use of the follow ing processes:

Open questioning

Parallel thinking

Rapid ideas creation

Simultaneous input

Sorting / Grouping / Prioritizing

Key ideas and themes identification

Developing these key ideas and themes

Plan of action w here applicable

Process steps capture and documentation

Fully facilitated

To bring these benefits:

Get everybody involved

Supports objective, fact based, decision-making

Increases output of group w ork

Builds teams faster, saves time

Encourages new ideas & creativity

Generates MORE ideas, faster

1. Zing : Zing is an interactive w ireless keyboard technology using collaborative

softw are for meeting and learning. Its an electronic envir onment that helps everyone
contribute - not just the extraverts. Ideas are captured and developed in real time.

No need for flip charts of post-it notes. Zing w orks w ith groups of 8 to 180.

Interactive conferences


Problem solving

Consensus building

Partnering w orkshops

Focus groups

Strategy development sessions


Using Zing gave our conference a real buzz and helped make it by far the best
w eve done. It made the event more interesting because it helped stimulate debate and got
more people participating. It made the feedback easier because it kept the discussion going
so w e captured much more data. (And for once the event ran to time!).

15.9 Building and Leading High Performance Teams

In order to understand the competencies needed to build and lead high performance
teams, it is helpful to first define a team. Here is a simple but effective description from The
Wisdom of Teams (Harvard Business School Press, 1993.)

A team is a small number of people w ith complementary skills w ho are committed to

a common purpose, performance goals, and approach for w hich they hold themselves
mutually accountable.

Using this definition, w e can outline three important competencies for the effective
team builder and leader.

Promoting understanding of w hy a group of people need to be a team. The team

needs to understand its shared goals and w hat each team member brings to the
team that is relevant and crucial to its overall successes.

Ensuring the team has adequate knowledge to accomplish its task. This includes
information relevant to the teams goals and individual job competencies.

Facilitating effective interaction in such as way as to ensure good problemsolving,

decision making and coordination of effort.

Characteristics of Highly Effective Teams

To better understand how these competencies create effective teams, lets examine
some characteristics of highly effective teams:

1. An effective team understands the big picture: In an effective team, each team
member understands the context of the teams w ork to the greatest degree possible. That
includes understanding the relevance of his or her job and how it impacts the effectiveness
of others and the overall team effort. Too often, people are asked to w ork on part of a task

w ithout being told how their role contributes to the desired end result, much less how their
efforts are impacting the ability of others to do their w ork. Understanding the big picture
promotes collaboration, increases commitment and improves quality.

2. An effective team has common goals: Effective teams have agreed-upon goals
that are simple, measurable and clearly relevant to the teams task. Each goal includes key
measurable metrics (that are available to everyone on the team), w hich can be used to
determine the team effectiveness and improvement. Understanding and w orking tow ard
these common goals as a unit is crucial to the teams effectiveness.

3. An effective team works collaboratively: as a unit. In an effective team youll

notice a penchant for collaboration and a keen aw areness of interdependency. Collaboration
and a solid sense of interdependency in a team w ill defuse blaming behavior and stimulate
opportunities for learning and improv ement. Without this s ense of interdependency in
responsibility and rew ard, blaming behaviors can occur w hich w ill quickly erode team

2. Roles of the Effective Team Leader

In order to encourage this level of collaboration and interdependency, the team leader
must provide the necessary support and structure for the team, starting with putting together
the right people. Team members should be selected and their tasks assigned w ith their
natural skills in mind. Not every person is capable of doing every job.

The team must also have the resources and training required to develop the skills
needed to do their jobs. This includes cross-training. Cross-training gives team members
a greater aw areness of how their jobs are interdependent, increasing the teams flexibility
and improving response time.

The quality of the teams response is highly dependent on the timeliness of the
feedback received from the teams leader, other team members and customers. Receiving
timely feedback is crucial to the effectiveness of the team. The effective team leader ensures
that feedback reaches the entire team on its goals and metrics, as w ell as feedback to
each individual team member. This feedback must be received in time to make adjustments
and corrections. Often, feedback is received too late to have any practical value in the

moment, and consequently, it feels like criticism. While it might be useful for future planning,
it does not promote immediate corrections in performance.

3. High Performance Team Building

A critical element in the establishment of a team is the development and acceptance

of the team charter. The team charter defines the task, scope and boundaries in w hich the
team w ill operate. In one sense the charter is the teams licens e to oper ate. Either
organizational leaders or individual teams can create the team charter. No matter w hich
approach to charter development is used the organizations leader or leadership group still
must approve the team charter.

There are a number of elements that are necessary for the creation of any team.
These include: tw o or more individuals, a common team goal, and the necessary resources
of time, materials, space, and perhaps money needed to accomplish and then sustain the
goal. High Performance teams learn and demonstrate behaviors that are not exhibited by
most teams. These characteristics represent the essential elements of High Performance

In most organizations teams ar e for med to either make dec isions or implement
decisions. Decision making teams are usually made up of individuals w ho provide a variety
of expertise and experience. Teams formed to implement decisions already made by others
are usually selected to represent an area of influence or authority needed to achieve a
successful implementation. High Performance Teams are expected to both decide how
change is to occur and to be responsible for implementing the change. Selecting team
members for High Performance Teams needs to take this dual role into consideration and
choose both individuals w ho are thought leaders and influencers in the organization and
individuals w ho have varied backgrounds and experience.

While High Performance Teams can be implemented to achieve any signific ant
business purpose, they are most often formed to achieve dramatic improvements w ithin
processes. Processes are a series of activities that have a starting point and an ending
point. In business the trigger or starting point of a process is often a customer order or
request and the end point is the satisfaction of that order or request. High performance
teams are usually cross-functional, that is, the teams are composed of representatives

w ho understand one or more of the collection of activ ities that are performed by the process.
A High Performance Operating Team w ill usually have a Process Ow ner w ho coordinates
the teams activities and is the communication interface w ith the organizational w orld beyond
the team.

4. Coaching

Coaches play an essential part in the development of High Performanc e Teams.

Coaches w ork w ith the team sponsor to develop the team charter. Coaches teach essential
elements of High Performance Team Building and establish the initial team agenda. Coaches
help the teams through the process of establishing team norms and getting organized.
Coaches lead team building exercises and are present during team meetings to encourage
High Performance Team behavior. Coaches are not team leaders or meeting facilitators.
Coaches are experienced team builders and consultants w ho intervene only w hen teams
become stifled, frustrated, or lost.

15.10 Summary

This research focuses on pay for performance plans that have at least one indicator
at a low er level than the organization as a w hole, and have a regular nature, i.e. targets on
indicators; evaluation of target attainment and bonus payment should take place on a regular
basis. In modern organisations tw o trends are visible. On the one hand, employees are
stimulated to w ork together by organizing the w ork around teams, w hile, on the other hand,
it is mainly the individual w ork that is stimulated via individual level rew ards. First, there is a
trend tow ards organizing the w ork around teams rather than around individuals: in many
organizations teams have become the main building block. A second trend is that more and
more organizations have developed some kind of pay for performance plan, w hich is usually
centered on the individual as opposed to the team. So, these trends may conflict and thus
reduce the effectiveness of a pay for performance plan.

15.11 Review Questions

1. What do you understand by the concept of pay for performance?

2. Write a note on the goals and rew ards interdependence.

3. What do you understand by the organizational teams and their performance?



Learning Objectives
After reading this lesson you w ill be able to

To understand the performance management through orgainsation change

To learn the EFQM model in orgainsation change

To understand the evaluation of performance management scale

16.1 Introduction

16.2 Perform ance Managem ent and Organizational Change

16.3 Evaluation of Perform ance Managem ent by Scales

16.4 Use of Perform ance Matrix and Models for Organisational Change

16.5 EFQM Model

16.6 Sum m ary

16.7 Review Questions

16.1 Introduction

Performance Management Systems have traditionally been view ed as instruments

forre-freezing the organisation or consolidating gains resulting from a change program.
Unfortunately, the rate and extent of change currently expected of organisations in Australia,
North America and the UK allow s no time for re-freezing. Can a Performance Management
System be introduced in this climate? This paper purports not only that it can, but that w hen
it is; it fortifies the change program by co-coordinating all the other initiatives w ithin it.

Successful introduction is how ever subject to tw o important conditions: that it is seen

as an integral part of the change program and that it is tailored to address specific employee
and organisational needs.

16.2 Performance Mangement and Organisational Change

1. Integrating the System into the Change Program : Line managers understand
the importance of the myriad of activities that make up the change program. They must see
the Performance Management System as having similar importance and urgency as other
activities in the change program. Unless they do, the system w ill never be implemented
and its pow er to fortify the change effort w ill be undermined.

Implementation requires that the system compete effectively w ith other deadlines
associated w ith the change program. Line managers understand the importance of the
deadlines and give them priority. Unless the system is given similar priority it w ill suffer.

Performance management fortifies change by identifying duplication of effort and

initiatives that are pulling the organisation in opposing directions. Inefficiency results from
duplication. The presence of initiatives w orking in opposition can lead to disintegration,
confusion, mistakes, low morale and cynicism. These are all enemies of a successful
change program. For example; duplication occurs w hen tw o positions in the structure are
designed to provide the same customer w ith a near identical service; opposition results
from a pay structure that rew ards quantitative targets, w hich can only be achieved by
compromising Corporate or Business Objectives.

The Performance Management System can be integrated into the Change program
by using it to develop a Performance Oriented Culture, enhancing the capacity of line
managers to lead change and supporting them as they do so.

2 . Using the Performance Managem ent System to build a Perform ance Oriented
Cultur e : Within a Perfor mance Oriented Culture, employees w illingly w ork tow ard
achievement of organisational goals. They also w ork w illingly to satisfy their clients. They
do both w ith minimal control needed by management. Such a c ulture requires that
employees be committed to Corporate Objectives, empow ered to achieve them and trust
their organisation to treat themfairly. An effective Performance Management System delivers

all these requirements by establishing links betw een Corporate and individual performance
and by building trust in the organisations rew ard systems.

3. Use the System to Enhance Change Leadership : Change Management must

be led from the top of an organisation and this leadership cascaded dow n through every
level of management. Individual line managers w ill have varying capabilities and inclinations
to accept this role as leader. An effective Performance Management System both encourages
and supports them as they do so. Both making them accountable for implementing the
system and raising their expectations of w hat it can do encourages them. Accountability is
achieved by a stipulation in their ow n Performance Agreement that they appraise their
immediate subordinates before their ow n contract can be review ed. Unfortunately, past
exper ience has caused many manager s to have low expec tations of a Perfor mance
Management System. Unless they are made to value it as a useful management tool, they
w ill not c ommit s ufficient time and energy to it and it w ill quickly degenerate into an
administrative encumbrance. To value it, they need to be reassured that this system, unlike
those they have used in the past w ill actually w ork.

4. Support Line Managers as they im plement the System : Line managers need
support to implement Performance Management in any environment but particularly in one
that is changing rapidly. Training, documentation and decision-making support from senior
management can provide that support. The last of these is particularly important if effective
implementation requires the manager to make unpopular decisions.

5. Tailoring the System to Em ployee and Organisational Needs : Too often

Performance Management is introduced because it is considered a good thing for any
organisation w ithout identifying the specific outcomes it can achieve for a particular company.
Attempting to do so during a busy change program can cause more problems than it corrects.
One result of this is that managers become cynical, seeing the system as simply another
useless bureaucratic encumbrance. A more common problem occurs w hen protagonists
believe that any single sy stem can deliver all the collective outcomes of Performance
Management: feedback, developmental advice, pay equity and alignment of Corporate and
individual performance. They forget that no one system w ill do these entire w ell, w ith the
result that the system falters in the very areas w here it may have been most useful.

6. Recognise Organisation Specific Conditions : A successful system avoids

this failure by recognizing organisation specific contingencies relevant to its introduction:
issues that it needs to address, c haracter istics that may impact on its success and
complementary strategies w ith w hich it should be aligned.

These contingencies w ill drive critical design decisions: w hose performance is to be

appraised? Who is to do the appraising? What w ill be measured to judge performance?
And w hat use w ill be made of performance information?

There are no universally right answ ers to these questions. For example, the use of
bottom up or 360-degree appraisal may provide usef ul feedback to managers in an
organisation that has established shared values but generate spiteful rubbish in one that
has high levels of industrial unrest. Similarly, employees w ill be more tolerant of being
measured if they believe that the system w ill bring equity to pay structures that they currently
perceive as unfair.

16.3 Evaluation of Performance Management by Scales, for

Organisational Change
For making any change in the existing HR structure in any organisation there may be
used the technique of evaluation by the use of scales. Here are some of the practical
means, used for performance research using rating and ranking system. While technical
details of various validated scales have been discussed in general lessons, here scale
constr uctions and measurement tools are more need based for cor rect evaluation of
performance. Some of these are illustrated below :

1. Results-based Scale : For this scale, w e need to develop a statement on the

critical result, w hich helps us to get the expected output and then administer on the selected
employees w hose performance evaluation is done. Using a Yes/No type of statements,
w here No indicates 1 and Yes indicates 5, w e calculate the average of critical results
(CRs) and then compare the ratings on a 5 point scale.

2. Measurability Scale : For this scale result/measure(s) are objectively quantified

in terms of cost, quality, and timeliness using a 5-point scale, w here 1 indicates not at all
and 5 indicates to a very great extent. Performance rating is done based on the score
assigned for each such identified measures.

3. Monitoring Scale : This scale is used to track the w ork to ensure that it is actually
accomplished. For example in case of any critical results data, it is important for the rater to
authenticate the source of the data, to understand w hether it is just a sample or it need to
be collected, w ho w ill collect the data and w ho w ill receive it, etc. Here again a 5-point
scale, starting from Not at all to To a very great extent is used.

4. Feedback Scale : This 5-point scale measures performance feedback on the

critical result areas to assess an employee.

5. Exceeds Expectations Scale : The exceeds expectations criterion assesses

on a 5-point scale, w hether employees performance meets the expectation measure. To
understand, w hether more efforts or skill are required, on the part of employees, to achieve
a high performance score. This helps in better quantification of degree of efforts.

6. Linked w ith Goals Scale : This scale evaluates the extent to w hich the result is
valued by the organization. It compares the critical results and measures performance
against organizational goals.

16.4 Use of Performance Matrix and Models for

Organisational Change

Developing a performance matrix and emulating examples of w orld class performance

excellence models help HR researchers to scientifically list the action plans for improving
performance management systems of an organization.

Thomas F. Gilbert (2003) based on his research, contributed immensely in this area.
Performance Matrix is a construct of performance system, w hich sequentially illustrates
decisions to be taken for improving performance management systems in an organization.
A simple model of performance matrix deals w ith three levels policy, strategy and tactics.
Some authors also call it performance-engineering model (PEM). Like thr ee levels, this
simplified performance matrix or PEM has three stages, i.e., stage A, stage B and stage C.
Stage A considers identification of accomplishments, decision on important requirements
together w ith decision on unit of measurement and finally developing standards. In stage B,
w e consider measurement of opportunity duly identifying critical performance improvement
plans, measuring and analyzing it. In stage C w e analyse methods of accomplishment
using environmental methods, people programmes and management action.

Based on the above inputs, in line w ith Gilbert (2003), a sample performance matrix
or performance engineering model can be draw n as under:

Ex emplar y per for mance is the w orth of the his toric ally best instanc e of the
performance. PIP is a conceptual tool, w hich gives us the basis for comparing potential
opportunities to improve performance. Comparing tw o w orth indices expresses it, i.e.,
exemplary (w hich is the standard) and exemplary w orth index. Suppose we w ant to measure
PIP for the outbound caller in a call center. An average outbound caller makes 40 effective
calls in a day and each call ensures business w orth Rs. 80, w hile the total cost per day for
the company is Rs. 2,000. The exemplary index is indicated as Wav, w hich is (40 x 80)/
2000 = 1.6. Suppose an exceptional outbound caller makes 80 successful calls in a day
(w ith all other data remaining the same). In that case the exemplary w orth index is indicated
as Wex = (80 x 80)/2000 = 3.2. In this case w e can compute the PIP of the average outbound
caller as Wex/Wav, i.e., 3.2/1.6 = 2.

This is an excellent guide for managers to keep a track of w hich decisions they must
make and also in w hat sequence.

Some other examples of Performance Matrix for the w hole organization can be draw n
after Excellence Models of EFQM, Malcolm Baldrige and Singho.

1. Shingo Prize Model : The Shingo Prize Model lists criteria, practices, techniques
and processes, w hich can be incorporated by an organization to achieve w orld class level
of quality, cost, delivery and business results. Such suggested practices and techniques
may not be applicable for every organization. It has to be strategically incorporated, keeping
pace w ith organizational specific needs. In fact it is replication of Toyota Production System,
by a w ell-know n Japanese Industrial Engineer, Dr. Shigeo Shingo. The model is know n as
Shingo Prize Model, because to promote the aw areness of Lean Manufacturing concepts
and the w orld-class philosophy of business performance, this prize w as established in
1988. Adoption of this model in performance management practices enables an organisation
to focus on improvements on core manufacturing and business process to achieve w orld-
class business performance. The model is illustrated below :

16.5 EFQM Model

The European Foundation for Quality Management (EFQM) Busines s Excellence

Model is yet another example of w orld class Performance Management Model. This 236
Performance Management: Sys tems and Strategies model is a nine-box bus iness
excellence model, intended to help an organisation to conduct self-assessment in measuring
their performance results in terms of financial, customer satisfaction, people satisfaction
and impact on society. Leadership, policy and strategy, people management, resources
and process management act as enables to improve the performance results. This model
is illustrated below :

3 Malcolm Baldrige Criteria for World Class Perform ance : ISO 9000 based
documentation of quality management systems of an organisation can be extended to
Baldrige criteria f or perf ormance excellence framew ork. Thus this model enables an
or ganisation to integr ate their quality management sy stem w ith their per for mance
management system. Based on ISO 9001, this framew ork is explained as under:

The Business Management System (BMS) or Performance excellence framew ork,

using Baldrige criteria requires same documentation like quality documentation system of
ISO 9000, excepting some practices, w hich are additionally provided. Such additional
practices in Baldrige criteria are as under:

Strategic planning process

Customer focused operating system

Operating system

Teamw ork structure and guidelines

Administration of compensation and recognition systems

Advanced quality-planning process for bringing new products to market.

The existing corrective and preventive action system (ISO 9000) by default evolves
into a continuous improvement system.

16.6 Summary

Performance of the organization is completely dependent on the performances of its

processes. In fact, in any organization, its performance is equal to the sum of the performance
of its processes. Processes are the sequence of cross-functional activities performed by
people and machines, w hich combine valuable resources to convert inputs into outputs.
ISO 9000 documents define a process as a Set of interrelated or interacting activities,
w hich transforms inputs into outputs.

16.7 Review Questions

1. What do you understand by the performance of the organization?

2. Write a note on the uses of performance matrix and models.

3. What do you understand by the EFQM Model?

4. Write a note on the use of scales for evaluation of performance evaluation.



Learning Objectives
After reading this lesson you w ill be able to

To understand the measuring performance

To learn the measurement of performance

To understand the control chart for performance measuring

17.1 Introduction

17.2 Measuring Perform ance

17.3 Measurem ent of Quality of Performance

17.4 Selection Perform ance Measurem ent Criteria

17.5 Integrated Perform ance Measurem ent System s

17.6 Use of Control Charts for Measuring Perform ance Variation

17.7 Measuring Perform ance through Ranking and Rating

17.8 Summ ary

17.9 Review Questions

17.1 Introduction

Performance Management can, under the right conditions, be intr oduced during
change. It is conditional on due consideration being given to both the role it is to play in the
overall change program and the peculiarities of the organisation it serves. This w ill not
necessarily be easy. How ever, once in place, a system that meets these requirements w ill
both fortify the change effort and, most importantly, begin to rebuild a vibrant performance
oriented culture in w hich employees w illingly strive tow ard organisational goals.

It is pertinent to note here that any decision for change in any organisations HR is
taken after proper appraisal, evaluation and measurement of the performance of individual
employee. Measuring is the act of assigning numbers to properties or characteristics. We
measure to quantify a situation, to regulate, or to understand things w e see. We measure
w ith gauges and instruments or simply counting things. Managing performance is highly
dependent on w ell-designed performance measurement system, w hich provides a clear
linkage betw een strategy and human behaviour.

Performance of the organisation is completely dependent on the performances of its

processes. In fact, in any organisation, its performance is equal to the sum of the performance
of its processes. Processes are the sequence of cross-functional activities performed by
people and machines, w hich combine valuable resources to convert inputs into outputs.
ISO 9000 documents defines a process as a Set of interrelated or interacting activities,
w hich transforms inputs into outputs. These activities require allocation of resources such
as people and materials. It is processes, w hich provide the linkage betw een organizational
level goals and the w ork performed by employees. Processes can be measured effectively.
Measurements may be applied to many aspects and attributes of processes and the critical
few are; time, quality, cost (financial), and scale.

Performance measures can help us understand and improve performance. It is

exciting to measure, to benchmark, and to stretch to do better. It is important that performance
measures be as direct as possible. To improve attendance, measure attendance. To improve
cycle times, measure cycle times. The more directly we can measure, the better. There
are tw o types of studies: enumerative and analytical studies. Enumerative studies are
those that show how things are but have no value in predicting. Taking a census is an
enumerative study. Analytical studies are used to study a process and show w hat that
process is capable of doing in the future unless something changes that process. Dr.
Walter Shew hart (1931), a pioneer in statistical process control, said a process consists of
equipment, methods, materials, and people being blended to produce output in a given
environment. Hence to improve performance, better process measurement techniques
are most important.

Statistical Process Control helps to quickly detect the occurrence of assignable cause
or process shifts so that investigation into the process and corrective action there upon

can be taken before any non-conforming units are manufactured. Assignable causes are
those, w hich may occur due to improperly adjusted machines , operators error s and
def ectiv e raw materials or other inputs. These cause some variability in the quality
characteristics. A process that is operating under assignable causes over and above change
causes is said to be out of control.

That measurement of process is an integral part of performance management system,

is evident from the figure below :

17.2 Measuring Performance

Many types of methods can be used for performance measurement. Any performance
measures focus on three aspects, i.e., inputs (management, strategies and resources),
outputs (products produced, services rendered) and outcomes (impact). We can further
analyse inputs at more precision level in terms of thoroughputs, i.e., timeliness and reach
of the resources. Which method fits the organisational requirement has to be assessed by
the HR Managers. Here, how ever, w e have illustrated the general features and pros and
cons of various methods for appreciation. Various measurement techniques are listed as

Qualitative/quantitative measurement

Observation/Subjective response

Methods for collecting information

Naturalistic observation of behavior stream - w hats happening w here and w hen at

w hat frequency

Structured observations


Interview s


Performance trials

Fitting trials

Observing traces of behaviour Etc.

Evaluative criteria

Frequency of problems

Completion of tasks


Elapsed time

Rate of performance

Accident rate

Energy utilization



Frequency of complaints


17.3 Measurement of Quality of Performance

Just measuring perf ormance is not enough. Since major HR and various cross-
functional decis ions ar e taken based on the perfor mance meas urement, quality of
measurement need to be ensured. Follow ing terms are intertw ined w ith the measurement

Reliability - measurement technique does w hat it is supposed to do

Sensitivity - technique is able to capture differences in performance

Validity - apply to all the cases of concern

Pow er - categorical, ordinal, interval

Comparing results and methods ensure reliability, w hich may be inter rater and intra
rater. If the measurement is reliable then by default stability is ensured. Sensitivity is the
test in different settings and users. Validity avoids sampling bias and replicates the same

17.4 Selection Performance Measurement Criteria

Most commonly used performance measurement criteria are:

Production Counts

Personnel Data

Judgmental Methods

Work samples Methods

Production counts measure w hat a w orker produces on the job. The w orker w ith the
higher production count is assumed to be the better w orker. How ever, for many jobs, it may
not be feasible to measure performanc e in ter ms of pr oduction counts. This is more
applicable for managerial jobs. This apart, there is some possible danger in production
count method. It might change the behaviour of the w orker. They may get pre-disposed to
achieve higher results at the cost of job related stress, w hich in turn may be detrimental to
decrease overall job performance. It may also create The Hawthorne Effect, i.e., deliberate
change of behaviour to create fabourable impression. More important is that production
counts by default may not be attributable to w orkers performance. There may be other
fac tors , w hich influence w orkers perfor manc e. In suc h cas es produc t count as a
performance measurement tool may utterly defeat the purpose. For all these problems
production count should be used as a stand-alone method for performance measurement.

Another popular w ay to objectively measure job performance of employees is to use

information from the personnel data. What could be the type of information that needs to be

couched from personnel data largely depends on the raters w ay on interpreting good
per formance. It is necessar y to dev elop a personnel index based on the identified
performance criteria and then match the information to measure the performance based
on the employees data. The biggest problem in this case is attributable to raters failure to
understand the criteria and too much leniency on some narrow parameters like; absenteeism,

Absenteeis m as perf or manc e meas ur ement c riteria is of ten us ed by many

organisations and based on the respective employees absenteeism data, performance
rating is done. The biggest problem is to define absenteeism by the rater. How it is defined
may greatly affec t the job per formanc e. Sec ondly absenteeism may not be normally
distributed and hence as a w ork performance variable, it may create difficulty. Finally,
measures of absence are largely unrelated - on a year to year basis and hence such data
is having low reliability.

17.5 Integrated Performance Measurement Systems

The process of combing different attributes of the organisation w ithin a hierarchical

str ucture is called an integrated Performanc e Measurement Framew or k (PMF). PMF
establishes direct linkages betw een the top-level measures (such as Shareholder Value
Added (SVA) and the action plans of the entire organisation. These collectively add up to
the achievement of the established goals. Performance measurement criteria are different
for various levels. Strategic meas ures capture the value of stakeholders investment
benchmarking w ith other competitors. Tactical measures are key performance indicators,
w hich collectively capture the overall performance of the enterprise and act as predictors
of future success. Operational Measures, or In-process and Output measures, are used
for monitoring, control and improvement of the basic w ork processes of the enterprise.
This w e have illustrated w hile explaining the performance matrix.

Statistical Methods of Performance Measures

Statistical methods can help us in performance measures, if w e broadly adopt the

process approach as advocated by Dr. Walter Shew hart (1931). Tw o main aspects of
statistical methods deal w ith statistical distributions and statistical control.

Right at the outset, HR managers should understand statistical concepts on variation,

including statistical distributions and statistical control. HR managers should also understand
special causes, common causes, and control charting. In addition, they should clearly
understand the concept of manipulation w ith a process.

Workers perform the operations in the system. Variation study demonstrates how
w orkers in a given process are capable of performing. . This natural pattern of variation
shows w hat the process is capable of doing to improve the w ork performance. If the process
is in control, then performance of w orkers w ould be in its natural capability, or else
performance w ill be less than the expected levels or standards.

17.6 Use of Control Charts for Measuring

Performance Variation

To measure the variation in performance, w e can make use of statistical methods,

developing control charts. The control chart is a tool for on-line process control, w idely
used for the detection of assignable causes of variation. It is graphical display of a sample
quality measure versus sample number (or time). The c hart show s a centre line that
represents the average value of the quality characteristic corresponding to the in-control
state. Tw o other parallel horizontal lines, called the Upper Control Limit (UCL) and the
Low er Control Limit (LCL), are also show n on the chart. Control charts compute control
limits and values that fall outside the control limits (outside the UCL and LCL) are considered
as signals of special causes and must be investigated. Good performance measures are
also assessed using statistical methods for run charts. When the results are plotted, values
are observed in relation to the center (median) line.

In any process, proper checks through control charts are exercised at strategic points.
In the case of measurable quality characteristics a pair of control charts - one for X bar to
control the average level of the process and the other for R to control dispersion are used.
Many quality characteristics are not measured on a numerical scale. In these cases, w e
may judge each unit of product as either conforming or non-conforming on the basis of
w hether or not it pos sesses certain attributes, or w e may count the number of non-
conformities (defects) appearing on a unit of product. Control charts for number of defects
or of defectives are used in such situations. As long as the points plot w ithin the control

limits, the process is assumed to be in control and no action is necessary. How ever, a point
that plots outside of the control limits is interpreted as evidence that the process is out of
control and investigative and corrective action is required to find and eliminate the assignable
cause or causes responsible for this behaviour.

Control Charts for Measuring Performance Attributes

Similarly for measuring attributes, attribute control charts like p, np, u, c, are also
used. The Proportion Defective Chart (p-chart) is used to control the proportion of defective
product in samples taken from a process. This chart is also referred to as the fraction
nonconforming or fraction defective chart. P-chart or fraction defective chart is defined as
the ratio of the number of defective items in a population to the total number of items in that
population. The sample fraction defectiv e (p) is defined as the ratio of the number of defective
units (d) in the sample to the sample size n, i.e., p = d/n, w here n is a sub-group size. If
L.C.L. is negative, it is taken as zero.

The Number Defective Chart (np-chart) is an alternative chart that may be substituted
for the p-chart. The underlying distribution for the np-chart is the binomial. In the case of the
np-chart, the sample s ize must be constant. Rather than calculating the propor tion of
defective items in a sample for plotting on a p-chart, the np-chart allow s the actual number
of defective units to be plotted directly. This eliminates the need for one calculation (p)
thereby decreasing the probability of an error. The np-chart also is somew hat easier for
production operators to understand.

C-chart or control charts for nonconformities are used to control the average number
of defects per inspection unit in samples of fixed size. The inspection unit may be one item
or multiple items. The underlying distribution for the c-chart is the Poisson. A defective (or
non-conforming) unit is a unit of product that does not satis fy one or more of the specifications.
Each specific point at w hich a specification is not satisfied, results in a defect or non-
conformity. In this case each sub-group consists of a single unit and c w ould be number of
defects observ ed in one unit. It should be remembered that each inspec tion unit must
alw ays represent an identical area of opportunity for the occurrence of defects.

U-charts (sometimes referred to as rate charts) deal w ith event counts w hen the
area of opportunity is not constant during each period. The steps to follow for constructing

a u-chart are the same as a c-chart, except that the control limits are computed for each
individual quarter because the number of standard units varies.

All these control charts, one w ay or the other, help us to measure the performance
standards in quantitative terms.

We are illustrating these concepts using the follow ing Figure.

These apart, histograms (for spread of data), Pareto Graph (80/20 rule, i.e., 80%
improvement in performance can reasonably be expected by eliminating 20% of the causes
of unacceptable quality or performance), process capability study etc. are also very effective
for quantitative performance measurement.

A histogram is a graphic display of resource utilisation and it is show n using coloured

vertical bars to indicate over-utilisation and under-utilisation of resources over a period of
time. Pareto Principles are bas ed on a vital few tr ivial many. This is because of
interdependence and inter -relationship in motiv e strengths. HR managers c an make

extensive use of both Histograms and Pareto Graph in other HR research areas also.
Process capability is a statistical measure of the inherent process variability for a given
characteristic. The process capability index is the value of the tolerance specified for the
characteristic divided by the process capability. Process capability indexes include the
w idely used Cpk and Cp. A process capability index can only be calc ulated from data collected
w hile the process is in control. Hence w hen performance variability is w ithin control, w e
can develop a capability index measuring process capability as p the average proportion
defective produced by the process w hen it is operating in control. Therefore, if a p= 0.0016
it indicates that on average 99.84 percent of the product produced by this process w hen it
is operating in control is acceptable, w hile 0.16 percent are defective.

17.7 Measuring Performance through Ranking and Rating

Perf ormanc e meas urement through rating and ranking s ystem is again another
important area for HR researc hers. Ratings s ystem meas ure w orkers per formance
compared to some set standard. The rating is done listing desired objectives, skills or traits
alongside a scale, w hich may be 1-5, poor to excellent type. For making the ranking process
simple, w e normally make use of easy-to-read type of scale, keeping in view the basic
scale construction norms, as detailed earlier. This, how ever, significantly depends on the
judgment of the rater. Commonly w e find use of subjective rating or observer rating scales.
Subjective rating scales are psychophysical and it measures response to environment
quantitatively. It is basically designed on ergonomic principles and developed through a
process of empirical testing. Because of ordinal measurement of response, reliability and
validity of such type of scales can be tested. Observer Rating Scales are used in real time
for establishing a scoring algorithm for overall activity. This scale requires task analysis to
break dow n task into components and assign scoring algorithms for each task component.
To ascertain the degree of fit, one must obtain both an outside evaluation (observer rating)
and a subjective evaluation (subjective rating). Different types of scales, w hich are used for
performance rating, are as under:

1.Measuring Performance through Graphic Rating Scales

This is the single most common w ay of evaluating w orker performance. Here the
manager or the rater can directly judge quality of performance of employees on a specific
response scale. Response Scales may be:

Continuous Scales: Which computes score measuring the distance from one end
of the scale.

Verbally Anchored Scale: Here some discrete categories are anchored on either
end of the scale w ith the range of abilities. Nature of verbal anchor scales varies w ith
the specificity of the verbal anchors.

Numeric Scales: In this scale verbal anchors w ith a numerical range w ithin each
category are show n.

Graphic Scales are simple to use, and allow for computation of scores to compare
w orkers on overall job performance. How ever, problems w ith graphic rating scales are
enormous. If such problems are not taken care of, the w hole purpose of performance
rating may be defeated. For not defining precisely the anchors, such scale may sometimes
be ambiguous. Raters may use the scale in different w ays, w hich may raise the problem of
validity (w hen tw o w orkers are rated by different raters). How ever, such problems now -a-
days are eliminated significantly using various behaviour based scales, w hich help us to
assess specific w ork related behaviours. Some of the behaviour-based scales are illustrated
below :

Several alternate measurement methods and systems have been developed over
the years including Management-By-Objectives (MBO), Behaviorally Anchored Rating Scales
(BARS), The Mixed-Standard Scale (MSS), quantitatively measurable performance criteria,
and the use of multiple raters or 360-degree feedback.

2. Measuring Performance by MBO Method

Per formance management systems utilising Management- By-Objec tives (MBO)

strategies requires managers to set the mutually agreed upon, observable, measurable
objectives and goals for the employees and their bosses. Each level of the organization
sets goals that complement those set at the next highest level. In many cases, individual
monetary rew ards (bonuses, merit increases, etc.) are tied to MBO goals (Wright, 1994).
One criticism of the management-by-objectives strategy is that employees tend to focus
on attaining their objectives to the detriment of their other, non-measured responsibilities.
Edw ards, Borman, & Sproull characterize MBO as one of the greatest management illusions.
The technique simply increases pressure on the individual and is self-defeating (1985).

3 Measuring Performance by BARS Method

Behaviourally Anchored Rating Scales (BARS) are descriptions provided on appraisal

forms and surveys w hich describe a precise level of performance. These are designed to
reduce the rating error s of conventional sc ales . The sc ale includes the number of
performance dimensions, like; leadership, teamw ork, communication, initiative, adaptability,
BARS w ere developed w ith the hope of improving rater accuracy by providing job-related
behavioral anchors and altering the format of rating scales. BARS anchor each rating interval
w ith descriptions of a behavioral incident. BARS eliminate the confusion and common error
caused by open-ended rating scales (i.e., w hat is the difference betw een satisfactory and
good?). Another advantage provided by BARS is that they focus the appraisal on behavior
rather than personality characteris tics (Brow n, 1985). Unfortunately, w hile behavioral anchors
offer specificity in setting performance levels, research has indicated that BARS offer no
performance measurement superiority over conventional systems . They are also time
consuming and difficult to develop-especially if there are many dis similar job slots. To develop
BARS for just one job, that job must be separately and carefully analyzed and performance
levels must be described in detail for several of the jobs areas (Edw ards, et al., 1985).

Behav iorally A nchored Rating Sc ales: Similar to graphic r ating scales, but uses
specific behaviors to anchor the scale. The development of BARS requires extensive input
from supervisors in order to determine w hich behaviors are task relevant and assess some
important aspect of job performance. The c are taken in developing the BARS helps to
reduce across supervisor variability.

4.Measuring Performance by MISS Method

The Mixed-Standard Scale (MISS) is considered superior to BARS in reducing halo

and leniency errors. MSS disguises dimensions and ordinal relationships among items so
that the rater cannot detect an order of merit in the items. In the MSS, all items are presented
in random order and raters must respond w ithout know ing w hether a low, medium or high
rating for a particular item has a positive, neutral or negative correlation to performance.
Raters are required to choose one of the follow ing three responses for each item: the
ratees performance is low er (or poorer) than the item description (-); the ratees performance
fits the item description (0); or the ratees performance is higher (better) than the item
description (+). This format provides for error counts that can be used to identify rater

errors, systematic rating tendencies, and ambiguous dimensions, thereby providing the
opportunity for rater feedback. MSS can be used w ith multiple raters. Despite its advantages,
many raters experience frustration w ith this system, and it has little industry support
(Edw ards & Sproull, 1983).

Whether a Mixed Standard Scale (MSS) is good, average and poor performance is
assessed w ith respect to specific job related behaviors. A number of different items are
used to assess each performance dimension. For example, an MSS for police officers
might measure the dimensions of Judgement, Relations w ith Others, and Job Know ledge.
The advantages of the MSS are they refer to concrete, observable behavior, and they require
relatively simple judgments on the part of the supervisor.

5. Measuring Performance by BOS Method

The Behavioural Observation Scales (BOS) w as developed by Latham & Wexley

(1977) w ho believed that both graphic rating scales and BARS require supervisors to make
vague judgments. The BOS is a list of critical behaviors, w hich the supervisor has to rate
in terms of fr equenc y. Items indicate either desired or undesir able aspects of w ork

6.Measuring Performance by Ranking Systems

Ranking sys tems take a mar kedly different approach, by comparing employees
against one another and then assign a rank order. This is similar to grading system in the
classroom. Here w e do not apply a set standard to all employees, the best performer can
determine w here everyone else fits in. This system promotes healthy competition among
employees and w hen reinforced by an effective incentive programme, it even develops
cascading effect on productivity enhancement. There are various types of tanking, w hich is
primarily decided based on the organisational need and nature of data:

Forced Distribution: It divides the w orkforce into categories: High Performance,

Average Performance, and Low Performance. This distribution is know n as forced
as only a small percentage of w orkers can receive high or low rankings. The forced
distribution helps to solve the problem of supervisors w ho like to rate the vast majority
of w orkers at the highest level.

Full Ranking: Here instead of sorting w orkers into general categories, w e do a

complete rank ordering of all employees, so that no tw o w orkers are at the same
level of job performance.

Paired Comparison M ethod: This method rank orders w orkers by comparing each
w orker to every other w orker, thus forcing the rater to make relative judgments.
How ever, operational difficulty may be experienced in case w e have more employees.

Which type of ranking method is more suitable in a given situation w ill depend on
number of factors. For example, degree of efforts, w hich HR managers may like to put for
ranking and the intended usage of ranking results, are tw o primary factors to decide suitability
of a ranking method. Forced distribution may be extremely necessary in cases w here
decisions like lay-off etc. need to be taken.

7.Measuring Performance by Comparing with Job Performance Rating


We really do not have any consensus on effectiveness of a job rating system. Despite
its numerous flaw s, Graphic-rating scales are still considered effective. Perhaps for this
reason, psychological thought process of the individuals w hile filling out the rating forms
has now become more important than the type of rating system. Many organizations use
only a single measure of job performance. In such cases , it becomes difficult to find
converging or diverging evidence to authenticate judgmental ratings. This is w hy using inter
rater reliability to estimate validity is cons idered more appr opriate for meas uring job
performance. How ever, if w e are able to define job performance very precisely, performance
measures are likely to become more accurate. HR managers need to take guard against
possible rating errors like: Halo, Leniency and Range distortion. Halo errors stem in general
impression of the rater about the person being rated. Leniency errors may either result in
rating all very high or very low. Range restriction errors fail to make fine distinctions betw een
the performances of employees doing similar nature of job. These apart at times there may
be memory distortions of the rater, in cases w hen a rater requires rating a large number of
employees. To take guard against all these problems, Schmidt, Hunter, McKenzie & Muldrow
(1979) have suggested quantifying the value of job performance, using standard deviation
as a measure. This method assess the difference, in money terms, betw een the value of
an average w orker and the value of an exceptional w orker

8. Measuring Performance by Multiple-rater and 360-Degree Feedback

Multiple-r ater and 360-degree feedback instruments ar e better perf ormance

assessment alternatives to eliminate errors in performance measurement. Multiple rater
feedback is different from360-degree feedback. 360-degree feedback collects and analy ses
inputs from the employees immediate boss, peers, and direct reports, s uppliers and
customers (if applicable). Some organizations also do collect self-rating inputs from the
employee concerned. Multiple-rater feedback on the other hand consists of more than one
rater, usually four or more. It is not necessary for the multiple raters to collect inputs from all
sources, like w hat w e do in 360-degree feedback. Numerous research studies like London
& Beauty (1993). Pollack & Pollack (1996) have proved that multiple assessment tools are
more reliable and valid for performance measurement.

17.8 Summary

These activities require allocation of resources such as people and materials. It is

processes, w hich provide the linkage betw een organisational level goals and the w ork
performed by employees. Processes can be measured effectively. Measurements may be
applied to many aspects and attributes of processes and the critical few are; time, quality,
cost (financial), and scale. Performance measures can help us understand and improve
performance. It is exciting to measure, to benchmark, and to stretch to do better. It is important
that performance measures be as direct as possible.

17.9 Review Questions

1. Explain the selection performance measurement criteria.

2. Explain the measuring performance through ranking and rating .



After reading this lesson you w ill be able to

To understand the concept rew ard management

To understand the Employee relations

To learn the strategic rew ard management

18.1 Introduction

18.2 Reward Management

18.3 Strategic Rew ard Managem ent

18.4 Em ployee Relations

18.5 Strategies for Managing and Minim izing Cynicism about Change

18.6 Summ ary

18.7 Review Questions

18.1 Introduction

This lesson provides insider details on job evaluation schemes, anti discrimination
legislation, motivation and the other logistical choices required for rew ard management.
Considered a classic by some in the field, their book offers quite a granular discussion of
grade and pay structures, performance management, contingent pay and even the use of
consultants. The Rew ards Management System is a multi product system that provides
transaction-based rew ards management.

18.2 Reward Management and the Management of Change

1. Reward and Recognition

People will forget what you said,

People will forget what you did,
But people will never forget
how you made them feel.

1. Why bother w ith Rew ard and Recognition?

Rew ard and Recognition plays a part in at least these areas

Employee Satisfaction: influencing retention and motivation

Performance Management: creating a w orkplace environment that provides

positive reinforcement of behaviours necessary to achieve results and business

2. Whats the difference betw een rew ard and recognition?

Recognition = reinforcing behaviours

Rew ard = rew arding results

3. Whats the difference betw een formal and informal rew ards?

Formal = part of a predetermined program

Informal = spontaneous

4. What can a Project Manager do?

Potential strategy:

discover and implement some quick hits to gain immediate improvement (most
likely informal rew ards)

develop and implement longer-term improvements ( infor mal and f ormal

rew ards)

5. What are the success criteria of rew ard systems?

As part of Employee Satisfaction, here are criteria for successful rew ard systems:

match the rew ard to the person

match the rew ard to the achievement

be timely and specific

As Performance Management, here are some suggested criteria for successful rew ard

Rew ard systems need to have a positive impact on behaviour:

1. Contingent on achieving desired performance levels rather than on merely doing certain

2. Meaningful and valuable to the individual

3. Based on objective and attainable goals

4. Open to all, and not based on a competitive struggle w ithin the w orkplace (everyone
can w in)

5. Balanced betw een conditions in the w orkplace (extrinsic) and fulfillment of individual
needs and w ants (intrinsic)

Rew ard systems need to focus efforts on serving the customer (internal or

Rew ard systems need to enhance collaboration w ithin the w orkplace

A popular slogan for managing and evaluating success criteria is SMART Specific,
Meaningful, Achievable, Reliable, Timely.

6. What type of rew ard is most effective?

One study suggests that informal rew ards are the most effective. Further, these
motivating techniques w ere ranked as the top five:

The manager personally congratulates employees w ho do a good job

The manager w rites personal notes about good performance

The organization uses performance as the basis for promotion

The manager publicly recognizes employees for good performance

The manager holds morale-building meetings to celebrate successes

Tactics for implementing an Informal rew ard system include:

Linking to organizational goals

Defining parameters and mechanics

Obtain commitment and support

Monitor effectiveness, and change w hen the rew ards are no longer special

Link to formal rew ards programs

7. Rew ard systems are not exclusively the realm of managers

Systems can include structures that allow for peers to recognize each other. For
many people, peer rec ognition is mor e impor tant than recognition by managers or
cus tomers.

8. Basics for Effective Rew ards and Recognition:

Use the persons name

Strive to be timely

The compliment is the only topic discussed

Make it specific so the person know s w hy they are getting the recognition

Describe how w hat they did helps the organization; how it w ill be used

Follow -up a verbal compliment w ith a note

Make it public if appropriate, especially if the performer could serve as a resource to


9. Tw enty Tips for No-Money Rew ard and Recognition:

Post a thank-you note on the employees or team members office door.

Have your director calls an employee or team member to thank him or her for
a job w ell done, or has the same per son visit the employ ee at his or her
w orkplace.

Greet employees and colleagues by name w hen you pass their desks or pass
them in the hall.

When discussing an employees or a groups ideas w ith other people, peers,

or higher management, make sure you give credit.

Acknow ledge individual achievements by using peoples names w hen preparing

status reports.

Name a continuing recognition aw ard after an outstanding employee.

Ask five people in your department or company to go up to the person sometime

during the day and say {your name} asked me to thank you for [the task or
achievement]. Good job!

Write five or more Post-it notes thanking the person for a job w ell done and
hide them among the w ork on his or her desk.

Have lunch or coffee w ith an employee or a group of employees you dont

normally see.

Make a thank you card by hand.

Lunch outings for the entire group as an everyone-pays-his-ow n-w ay event.

The value is in the going, so encourage but dont forc e anyone w ho isnt
comfortable going w ith the group.

A personal letter of thanks to the employee or team member from the CEO/
senior manager for a significant contribution (you might need to get the
information to this person before the letter can be w ritten).

Let the person you are recognizing know w hat you are doing or requesting on
his or her behalf (i.e., send the person a copy of your requesting memo). Even
if upper management doesnt approve the request, the person w ill know you
w ere trying.

Clippings of special articles on a topic you know is meaningful to the individual.

Attach a note to relate the articles to something that is special to the person.

Share verbal accolades. Dont forget to forw ard voice mail messages that
compliment a team member s w ork.

Ask a person to teach or share his accomplishment w ith others as a w ay of

recognizing the persons ability and role.

Ask a person for advice or her opinion; this demonstrates respect.

Recognize an individuals accomplishments in front of peers yours or theirs.

Practice positive nonverbal behaviours that demonstrate appreciation.

Make a large calendar that can be posted. Call it the celebration calendar and
use Post-Its and w ritten notes of recognition tacked onto specific dates to
honour contributions made by team members.

10. Tw enty Tips for Low -Cost Rew ards and Recognition:

Staff performance evaluation and management system does not force the payment
of any of the rew ards below. Managers how ever could opt to pay such rew ards out of their
discretionary fund or their ow n pocket)

Movie Tickets.

Sees Candy gift certificates.

Book of Stamps.

A framed memento/letter/certificate.

Inscribe a favorite book as a gift.

Balloons decorated w ith appropriate messages.

Purchase a plant or flow er arrangement w ith appropriate message.

Buy the person something to use in his or her hobby.

Candy bar aw ards w ithin a team or department. Choose something meaningful

and make it tradition: examples include Mr. Goodbar aw ard for the ABAZABA
team aw ard.

Lunch-on-me coupons.

Take the person to lunch as a form of thanks or to mark a special event.


Doughnuts, bagels, or rolls as an early morning starter.

A funny trophy that is passed among team members based on inside criteria.

Submit the persons name for a Wall of Fame aw ard. This w ill result in a one-
time increase on their pay.

Gift Cer tificates or v ouchers that can be used at local department stores,
specialty shops, or local merchants; especially appropriate for ones that can
be easily assessed during the w orkday.

Something engraved w ith the persons name, such as a pen set, business
card holder, plaque, or portfolio.

Paid subscription to a professional magazine or new sletter.

A small contribution to their favourite charity in the persons name.

Authorize a non-standard stationary item; set a maximum limit.

Authorize time-off; full day or half-day.

2. Reward Systems

Compensation policies can be a high or low visibility aspect of staffing polic y. Compare
the furore over directors and nurses pay. Contentious statements frequently heard include
I am not paid enough or our w age costs are placing the firms products at a disadvantage
or w hy should I do her w ork, shes on a higher grade than me or management have
aw arded themselves a 20% increase. On a 100,000 p.a. thats 20,000. We got 3% on
our 19,000 p.a. pay - its peanuts for monkeys.

1. Wage-work Exchange/Bargain: Pay is an exchange betw een the individual or

group and the employer. The negotiation may be individual or collective (w ages set for a
group), public or private (covered by the press or agreed in conversation or by letter),
unilaterally determined by management or bargained over w ith a national representative
body (the TGWU). The rew ards can be fixed e.g. as a national minimum w age. It is important
to recognise that w ages/rew ards are not completely determined in logical, co-ordinated
w ays. In fact it is vital to comprehend the various ways they are determined. The management
w ill typically w ant to r ationalise struc tures of r ew ards and contr ol/administer these
systematically. They develop rew ards policies and payroll systems must be implemented.
People are paid according to rules internally and externally defined e.g. by the tax authorities
(PAY E).

Pay and rew ards are personal matters and a sourc e of muc h irritation, w orry,
disappointment and conflict. Who w ould deny a nurse a good living w age? We do compare
the rew ards of a nurse w ith other educated and skilled groups in the economy - teachers,
engineers, computer pr ogrammers and such comparisons are loaded w ith emotional,
irrational, public triggers.

2. Rewards, Performance and Organizational Membership: In the decade of the

TQM and competitive advantage imperative, discussions about rew ard systems continue
to link actual rew ards directly to employee performance, outputs and productivity. The
proposition is that if employees have a performance-related incentive then they w ill perform
better. In the 50s and 60s management learned that for blue collar employees, payment
systems based on piece rates, incentive bonuses and other systems of payment by results
carried overheads of employee resentment, separation, haggling, manipulation and conflict.
Have new lessons been learned or w ill past mistakes be revisited?

3. Contingent Reward: Here the leader/executive management/organisation provides

rew ards if, and only if, subordinates perform adequately and/or try hard enough. It contracts
exchange of rew ards for effort, promises rew ards for good performance, recognizes
ac complishments.

4. Cash-like and Non -cash Rewards: Rew ard management extends to fringe
benefits and indirect compensation. A package may include basic pay, insurances, health
care, company discounts, performance or merit elements, car leasing and usage, share
options, training grants, paid holidays and pension arrangements. For overseas staff these
benefits may include housing, schooling and flights back to Blighty. The mix will vary betw een
companies, sectors and countries and may depend on environmental conditions such as
the tax system e.g. in Germany or availability of public health care in Indonesia. In examining
rew ards w e must remember at all times that employee pay and other benefits are a cost. In
the competitiveness, profit, cost relationship those running a business w ill seek to control
costs and indeed if possible substitute for labour that might be seen to be too costly or

5. Pay-offsin the Employer-Employee Relationship: As an employee Iam naturally

self-interested in my pay and rew ard also my w orking conditions, job satisfaction, stress
levels, opportunities, hours and relationships w ith others. Rew ards management gives
beyond pay - for most people it is about the quality of my w orking life. Of course in a

situation w hether there are few job opportunities or w here I am relatively unskilled and need
a local paid job, I may subordinate my higher aspirations for significant job satisfaction for
mere acceptance that I have a job. The job itself may be trivial even uncomfortable - but the
social relationships betw een the staff at w ork may transcend the more mundane aspects.
For many w orkers - the job is a means to an end. If something better comes up they can
move on.

In 1972 Enid Mumford recommended a classification of contracts w hich provides a

framew ork against w hich to appraise a rew ards package. The Mumford contracts are:

Task Structure

Efficiency/Rew ards

Know ledge and skill

Psychological factors

Ethical factors

We must also consider the detail of the legal contract of employment, the obligations
of employers and employees under the law and the characteristics of particular terms and
conditions of employment. In doing this w e can recognise that a shift pattern, a redundancy
protection provision and w hether or not a bonus is an earned right or a discretionary item
for managerial decision.

Pay and Compensation

Pay is an important feature of human resource management - after all, it is the main
reason w hy people w ork. It is a sensitive and controversial area that has been extensively
debated at both practical and theoretical levels. In the US the term compensation is used
to encompass everything receiv ed by an employed individual in return for work. For example,
Milcovich et al (2001: 6) state that:

Employees may see compensation as a return in exchange betw een their employer
and themselves, as an entitlement for being an employee of the company, or as a reward
for a job w ell done (original emphases).

The rew ard or compensation people receive for their contribution to an organisation
includes monetary and non- monetary c omponents. Remuneration does not simply
compensate employees for their efforts - it also has an impact on the recruitment and
retention of talented people.

The term rew ard management covers both the strategy and the practice of pay
systems. Traditionally, human resource or personnel sections have been concerned w ith
levels and schemes of payment w hereas the process of paying employees - the payroll
function - has been the responsibility of finance departments. There is a trend tow ards
integrating the tw o, driven by new computerized packages offering a range of facilities.
There are tw o basic types of pay schemes, although many organisations have systems,
w hich include elements of both:

Fixed levels of pay: Wages or salaries, w hich do not vary from one period to the
next except by defined pay increases, generally on annual basis. There may be scales
of payments determined by age, responsibility or seniority. Most w hite-collar jobs
w ere paid in this w ay until recently.

Reward linked to performance: The link may be daily, weekly, monthly or annualised.
Payment for any one period varies fromthat for any other period, depending on quantity
or quality of w ork. Sales functions are commonly paid on the basis of turnover; manual
and production w orkers may be paid according to w ork completed or items produced.
Catering staff typically relies on direct payment from satisfied customers in the form
of service charges or tips (gratuities).

Both methods w ork smoothly, provided that scales are easy to understand and the
methods of measuring completed w ork are overt, accurate and fair. How ever, there has
been considerable dissatisfaction w ith the management of pay on both sides of the
employment relationship. In recent years, attempts have been made to remedy the situation
through new systems and a greater reliance on performance-related pay.

18.3 Strategic Reward Management

Strategic rew ard management involves the formulation and implementation of an

equitable rew ard system that is congruent w ith the organisations strategic objectives.
Employees should be compensated and rew arded for the time and effort they put into
w ork. Rew ards can be either intrinsic or extrinsic. How ever, it is important w hen designing,
implementing and using a rew ard strategy, that it meets both individual and organisational
needs. Contemporar y rew ard strategies inc lude employability pay, person-based pay,
market-determined pay and team-based rew ards.

Strategic rew ard management is a vital part of the total SHRM process as it supports
the achievement of strategic objectives through the communication of desired behaviours
to employees. It also elicits a clear link betw een individual performance and organisational
performance and thereby acts as a catalyst for positive organisational cultural change.

Strategic rew ard management process consists of four building blocks: base pay,
performance pay, employee benefits and non-financial rew ard. With enormous change in
the labour markets and employment contracts, rew ard systems today have also evolved.
How ever the follow ing points are w orth consideration:

1. A Total Rewards Approach: A total rew ard package approach needs to account for
all such factors. Wages and salaries are

a cost inclusive to the cost of sale

an investment - money spent on a factor of production in the hope of a return

a crucial environmental variable - offering incentive, stimulating motivation,

promoting job satisfaction, status or conflict.

2. Pressures on Reward Systems

product markets and the need to remain competititive

balancing low labour costs w ith the abilitity to attract, retain and motivate the
right staff

labour mobility (Europe)

disparities in living standards (Oxford Street and the City vs Harrow, Leeds,
international referencing of salaries (multi-national firms and the Euro/global

decisions to locate new production plants in low w age economies

new technologies blur dif ferences betw een w hite/blue collar, office and factory

team-working, multi-skilling and flexibility invalidate the rate for the job rew ards
approach. New technology increases the need for multi-skilled, able problem-

3. Job/Salary Structures: With a stable product/service and technology, standard job-

evaluated rates/grades provide a predictable pay policy structure. Job content and
performances can be analysed and slotted into grades. How ever innovation, project
and matrix management and employee flexibility are emphasised in turbulent, fast
mov ing, high-tech s ituations . Individual contributions need to be identif ied and
monitor ed.

Within such organisational conditions individually-based, performance or merit-related

pay is attractive to 1990s management over large job-evaluated pay structures. There is
much talk about flexible, individually-focused pay packages.

How ever in reality reality they may be less prevalent, an illusive aspiration to the
mass of employees. Some groups, sales people, project managers, managers in the global
firm may have flexibility and mobility in their rew ards package. They can take their rew ards
w ith them - w hatever project they move on to. So questions arise as to how far pay packages
need to be flexible? Should they take account of seniority? How can rew ards properly reflect
skill elements and performance assessment? Variable, individual factors may comprise a
low or high proportion of total pay.

The biggest issues for management are: 1. How much to pay? and 2. How to control
pay costs overall?

4. The Wage-Salary Divide: Wages are traditionally the pay of manual, blue-collar
w orkers differentiated from salaries - flat rate payments to non-manual, w hite collar
employees. Distinctions blur in the mid 90s but access to fringe benefits and other
differences in income continue to differentiate managers and professionals from
manual and routine non-manual staff.

Since 1970 many organisations have moved to single status terms and conditions of
employment or some harmonisation of differences. various European governments have
supported such moves via centralised, multi-employer collective bargaining systems. In
Britain the influence of US and Japanese examples has been more prevalent.

5. The case for single status systems: harmonisation sends out a message to minimise
us and them separation. At Rover in the UK it is only w ithin the last tw o years that
factory staffs no longer have to clock in. Staff is still hourly paid how ever - compared
to monthly paid managers. Yet instead of a hierarchy of staff canteens - one for each
level of management or section of specialist staff, there is now one staff restaurant
for all. All staff including managers w ears the same company-provided w ork clothing
w hen in the factory. All staff refers to each other as associates. Long service staff
may are rew arded by the use of a company lease car. The company has declared a
job for life policy i.e. no compulsory redundancy, guaranteed retraining, good
severance for those intending to go. Some of these changes seem cosmetic but all
go to the heart of the contracts as defined by Mumford (op cit).

In the present competitive environment, rew ards administration has seen development
of profit sharing and share ow nership schemes. The rationale for financial participation is
to promote organisational ow nership and commitment. These developments how ever need
examination particularly in the light of the controversy over directors salaries and employee
sales of shares issued.

6. Is there such a thing as a M arket or Going Rate? Is there a free flow of labour to
an equilibrium position, w hich establishes a going rate? Simple economic theorising
may determine that levels of remuneration w ithin one firmcannot be low by comparison

w ith other employers . Competition w ill dictate they should not be uneconomically
high unless the organisation w ants a reputation as a desirable employer.

Indeed inw ard investment by foreign firms into the UK is partly due to the low er
comparative w age costs e.g. by German or French standards.

7. Reward Systems and Strategic Policy: Wages and salaries are:

a cost inclusive to the cost of sale

an investment - money spent on a factor of production in the hope of a return

a crucial environmental variable - offering incentive, stimulating motivation,

promoting job satisfaction, status or conflict.

8. Is there such a thing as a M arket or Going Rate?

Is there a free flow of labour to an equilibrium position, w hich establishes a going

rate? Simple economic theorising may determine that levels of remuneration w ithin one
firm cannot be low by comparison w ith other employers. Competition will dictate they should
not be uneconomically high unless the organisation w ants a reputation as a desirable

9. Factors: Remuneration policy must embrace factors such as:

the firms objectives, its finances, cash flow, profitability, state of the labour
market, supply and demand for labour, government regulations on pay, grow th/
contraction expected, personal aspirations of the w orkforce.

scarcity of supply of skills and tightness of the labour market.

recruitment and retention are important

labour mobility and market activity in response to pay differentials

life style (locals vs. cosmopolitans)

ability to prosper in horizontal and vertical labour markets

associated costs of moving - physical and psychological

loyalty tow ards current employer

sense of security, w illingness to face change

attraction of benefits, w ork relationships, organisational values


10. Cash Nexus versus Contribution and Value: Pay can be seen as a cash nexus
i.e. you come here to w ork, give your time, apply your skill and produce things. We
employ you as a factor of production and your career or w ider life concerns are
outside the scope of our responsibilities as an employer.

Obviously this is a crude position to be compared to the place that rew ard systems
play in supporting long-term membership of an organisation and how they feel they are
valued in themselves not just as a commodity.

Rew ard systems compensate for levels of w ork done and also:

for performance, age, length of service, as a motivator, to protect employees

against external inflationary pressures

passing on a share in company profitability - this proposition is one to evaluate!

11. Employment M arkets: Employment markets do not function like stock or commodity
exchanges w here small changes in supply and demand have immediate effect.

Wage earners generally look for:

equity - a felt-fair rate for the job

relativity (fair differential) justified dif ferences betw een the rew ards of individuals

a steady income

12. M a nag ing Sa lary Systems: the implementation of salar y policy to pr ovide
systematically administered, fair and equitable salaries relating and reconciling career
aspirations in terms of current and potential earnings and personal commitment to
total organisational objectives. It aims to:

support the attraction and retention of suitable staff

develop job/rew ard structures that are equitable w ith consistent relativities
betw een differently valued jobs

adjust structures to reflect external inflationary effects

ensure rew ards/cost structures accommodate to changes in market rates,

organisational change etc

rew ard performance and responsibility and provide for progression.

keep salary/w age levels and differentials under review and assis t in the
monitoring and control of salary/w age costs

develop and operate a system that are seen to be fair

We can see therefore that there are many aims and the possibilities for contention
betw een goods rew ards for employees and keeping costs under control are legion.

13. Salary administration tasks:

Designing pay structures for individuals and groups to give internal equity in
grades, earnings and competitiv e rates of pay. Avoiding the chaotic, anomalous,
arbitrary or uninformed determination of pay

Research into the makeup of rew ards/earning packages suitable for staff in
different locations/parts of the w orld. Vetting salary review s e.g. merit aw ards
to provide some overall control over departmental manager discretion.

ensuring clear lines of authority for rew arding and confirming salary changes
and issuing salary guidelines vis a vis departmental payroll costs, maxima for
increments etc

use of a range of devices/techniques including job evaluation and progression


The centralisation/ decentralisation of control issue and be readily seen. It is important

also that w e do not confuse salary admin w ith payroll admin.

14. Grade Structures: A typical structure consists of a series of grades (minimum to a

maximum scale) to w hich jobs are allocated often by job evaluation.

Ranges and overlaps betw een grades have implications for entry into jobs, promotion
and transfers.

the range must have room to allow for progression - an employee progressing
on some criteria to the top of their scale unless promoted out of the grade first.

people in similarly-graded jobs perform differently and should be rew arded


junior scales may range from a minimum to 15% above the minimum. A higher
spread (say 50%) may be expected for more senior jobs w ith more job content.
An experienced person may be valued more highly than a new or poor performer
in the next grade up - so overlap may be 25-50%.

A structure incorporate a differential betw een mid-points for each scale (normally
about 20% of the low er grades mid-point) to enable progression on promotion to a higher

15. Pressure to Up-grade: Re-grading is alw ays a sensitive matter. A rachett effect is
apparent. There is press ure f or up-grading from staff and even depar tmental
managers w ho identify w ith their staff. There is seldom pressure to dow n-grade. No
member of staff seeks this for themselves. It is senior management w ho take action
to reduce salary costs. Such action may mean job losses and re-allocation of duties
- job enlargement, job enrichment perhaps - but w ith a less that proportional lift in
rew ards.

In a situation of low unemployment (labour shortage) managers w ill be pushed to

regard a job if its content changes. Job incumbents argue that its value should be higher;
the market salary is uncompetitive. It may be that the w hole salary structure needs up-
dating periodically to reflect cost of living changes. Such up-dates are additions to cost.
Commercially, w e w ant to know w here the productivity gains w ill come from.

The salary review argument is based on the assumption a company w ants or indeed
has a responsibility to protect its employees from external economic forces e.g. inflation. In
the recessions of the 1980s and 1990s companies and indeed government have sought
to refute such arguments. Across the board pay increases in many casts have been less
than the rate of inflation. The emphasis has been more on flexible and individually oriented
rew ards policies. Systems, w hich rew ard outstanding individual performance, are more in
vogue to maintain the individuals loyalty and motivation.

16. M anagerial Consistency: Within a large business w ell-defined salary progression

proc edures ensure managerial consistency across the firm in relating pay and
increases to performance/merit. The policy lays dow n bands/rates for progression
according to job content, merit, experienc e etc. Entry points into the grade, merit
increments etc may be fixed by the system. There are many variations:

fixed scales may operate w ith automatic progression by age, length of service
etc w ith no managerial discretion

semi-fixed scales w ith progression to a bar at w hich some individuals stop

w hilst others progress through at a performance-related rate.

dual track schemes w ith fixed scales but different lines of progression for
different performances e.g. above average, average, below etc, decided by
managerial judgment.

variable progression w ith managers exercising discretion w ithin guidelines e.g.

w hat proportion of staff r eceive increments and in w hat amounts w ithin
departmental budget for salary increases.

17. Issues: These are ex amples of issues in salary administration. They raise many
issues and arguments.

Is there a need for junior grades?

What social expectations or norms do these represent?

Within a grade-based, rigid salary structure can individual merit and differences
in performance really be recognised by differentiating rew ards?

Should w e be rew arding people for seniority - how long they have been here or
should w e rew ard on the basis of w hat they can do/have achieved?

Are salary increases that are limited by fixed departmental budgets really fair
to the good performers trapped w ithin that department?

18. Salary bu dgets: planned allocations bas ed on programme plans/activity levels,

number/ty pe of staff required perhaps accounting f or general and incremental
increases and forecasting staff mobility (promotions/turnover) and effects of salary
costs (balance of new /low er-paid recruits).

Felt-fairness (perceived equity) and sound differentials are important considerations.

Problems occur w ith salary structures such as attrition and drift. Differentials can be

18.4 Employee Relations

The study here discusses one of the key human resource (HR) issues in current
w orking life, namely employer- employee relations. It also looks at the process of the
development of employer-employee relations in an organization-w ide change process, more
specifically in quality improvement initiative. It presents empirical findings and implications
fr om a qualitative, longitudinal Finnish cas e s tudy on the implementation of quality
management thinking and practices. It suggests leadership-oriented development strategies
for employer-employee relations and better utilization of HR. It proposes that the progress
in the development of labor-management relations is based on an incremental ideological
change, w hich is a leader-driven learning process. Incremental change in the w orkplace
mentality leads to increasing trust and cooperation. It implies that in the development of
labor-management relations, vis ible leaders hip and good leadership skills are needed;
managers need sensitivity for seeing the right time and know ing the right w ays for building
mutual trust. Leadership actions, in turn, give support to traditionally more passive human
resource management actions.

HRM: Pay-offs in the Employer-Employee Relationship

Enid Mumfords classification of contracts (1972) w idens our appreciation of rewards

in employment. The contracts are defined in terms of pay-offs - w hat is valued by employer
and employee in the organizational membership-rew ard relationship.

1. Who am I?

How does my thinking on management and employee rew ards reflect in the design
of rew ards systems and managerial discussions about incentives even today?

2. Comparison with the Contract of Employment

The Mumford contracts are experienced w ithin a legal relationship. The employee
w orks under a legally defined contract of employment.

General obligations, shaped by common law and statutor y regulation, may be

summarised as follow s:

(a) Employee Obligations: The employee must:

Work faithfully w ith s kill, care and c ommitment for the employer in the
employers time.

Respond co-operatively to reasonable, law ful instructions w ithin the scope

defined by their job and general membership of the organisation.

take care of themselves and others in carrying out their duties and give due
regard for their employers interests

(b) Employer Obligations: The employer must

give only reasonable, law ful instructions

ensure the health, safety and w elfare of the employee are safeguarded.

pay agreed w ages for w ork done - w hen these are due and according to
agreements on how the rew ards are calculated.

Recognize the crucial importance of good communication, treating the employee

w ith respect and w ithout discrimination on ground of race, ethnic origin, and

Abraham Maslow and Human Motivation

Students of business management at sometime or other get introduced to Maslow s

ideas on motivation and peoples needs. Some scholars get w eaned off the ideas w ith
arguments that Maslow s concepts are too simple, an inadequate explanation of human

Have you notic ed how in textbooks on human resource management w e hardly speak
of the employee as a person? We become staff - personnel, human resources. Actual
people w ith lives inside and outside of w ork - w hich need not be referenced alw ays by our
job role - are somehow neglected. Our feelings, interests, values, desires, w orries - are
gloss ed over. The real person is put behind a veil. Even the manager - the target of
management textbooks - is hardly addressed as a unique person w ith individual w ays of
construing w hat he/she experiences and does.

Managers w ho decide things about others seldom comprehend the biography of those
they employ in anything other than superficial, generalised and often w rong w ays. Sometimes

the individual employee or group is reduced to a type - a stereotypical classification (albeit

academically defined). Who are these academics anyw ay - to so categorise?

Dec isions are made on the basis of scores and categorisation res ulting f rom
psychometric tests. Do not w e really comprehend the uniqueness of the individual nor how
he/she brings together (integrates) that collection of positions and behaviors w hich is the
self ?

1. M aslowsNeed-Satisfaction M odel: This simple descriptive account of human needs

suggests that if some experiences a chronic deficiency in terms of a needs being
satisfied - then this need w ill drive (motivate) that persons behaviour. The model
suggests that if a need is functionally absent from a person then has either:

been gratified and is in equilibrium for that person. Behaviour and resources
are no urgently focused tow ards its fulfillment or

the need is s ubordinated - in the sense that dominant low er needs are
insufficiently gratified and higher needs have not yet emerged.

A persons level of gratification w ithin this hierarchically integrated framew ork w ould
be represented by a horizontal line across all needs, and grow th w ould be represented by
that horizontal line moving upw ards through all needs.

NOTE: Maslow s scheme is an ordinal scale - not amenable to being quantified. Its
value is a heuristic abstraction. It is the general idea, the overall shape - that has some
descriptive and analytic interest. Maslow s theory is w eak on exact points of transition. You

can (and he does) for illustrative purposes speak of someone being 85% s atisfied in
physiological needs, for instance, but so far as I know there isnt a test, w hich provides a
quantified measure of gratification across, needs.

Physiological Needs: We have a need from the moment of conception/ birth for
basic sustenance: food, drink, w armth etc. These are fundamental survival matters. The
list may well also include needs arising frombody hormonal levels/cycles or stresses placed
on the body organism from everyday stimulus or sensory deprivation that w e experience.
At such a level - the individuals natural inclination e.g. as an extrovert or introvert may be
at play - w ith greater or lesser needs for stimulus to be satisfied.

Physiological tiredness may be chronic and the infant goes to sleep. The adult how ever
- may be driven by cognition - grit and determination to succeed - so stay at the w heel until
they crash out.

Maslow did not explore such detail of instances but it is important that w e do not
ignore possible physiological needs and deficiencies in relation to influences on behaviour

Safety/ Order Needs: From basic physiological needs, Maslow now proposes higher
order needs arguing that once basic needs are relatively w ell gratified (in form of equilibrium
w ithin the person), new needs emerge. The next level he categorised as safety needs
w hich relate to the individuals need for protection, security, stability, reliance on orderiness,
freedom from fear and anxiety, need for certainty, structure and predictability and so on.

We can see that children exhibit these needs. So too is the case w ith adults.

Social (Belongingness and Love) Needs: With physiological and safety needs in
equilibrium w ith no chronic deficiency, there is scope for expression of higher social needs.
This broadly fits in w ith our general notions of human development from childhood into
adulthood. The need remains w ith us albeit that its colour and intensity may change.

Social need involves affection and belongingness - giving and receiving affection in
relationship w ith others. When an individuals social need is not satisfied, he/she may feel
separate, isolated, distanced from others - friends, colleagues, lover, and family. Much
depends on ability to tolerate being alone (high safety need or high self-actualisation

perhaps). Someone w ith low toleration may yearn for w arm relations w ith others - a place
in the group/family. The need to be socially w anted/accepted may drive behaviour to this
end. This need for affection is real, necessary, and important for many and lack of fulfillment
may bring loneliness, rejection, friendlessness, rootlessness and anomie.

Esteem Needs: Maslow argued (apart from pathological exceptions), that a need
exists for stable, verified self-respect (self value) or esteem of others (other-value). The
need references recognition by self and others of strengths, competencies, achievements,
personal adequacy, and mastery. These enable confidence w ithin the domain of action that
involves others. Reputation or prestige (respect or esteem from others). This need is met
by being valued by others w ho give attention, attribute status, and offer recognition and
appreciation. We feel and are recognised by others as w orthy/importance. We are able to
establish our dignity and self-concept. Our self-confidence is supported and verified. This
need closely reflects w hat Goffman referred to as Front.

Thw arting of self-esteem needs produces f eelings of being s nubbed, ignored,

degraded, inferior and pow erlessness. Thus this particular category is underpinned by the
low ever safety/order and social levels of need.

Maslow saw the construction of healthy self-esteem stemming from everyday signs
and signifiers that communicate respect from others. This is thus more fundamental than
explicit fame or adulation.

Self-actualization: This category is less a need than a final development stage for
the person. Maslow s aw that low er needs may be satis fied but that discontent and
restlessness may remain for the individual.

Musicians must make music, artists must paint, poets must w rite if they are to be
ultimately at peace w ith themselves. What humans can be, they must be. They must be
true to their ow n nature. This need w e may call self-actualization.

Expectancy or Instrumentality Model of Motivation

Expectancy theory is associated w ith the work of Vroomand Law ler/Porter (and others
prior to this). Vroom applied concepts of:

Expectancy: If I tried could I do it?

Instrumentality: if I did it w ill I attain the required outcome?

Valence (a subjective value): do I really value the available outcomes?

These ar e ex press ed as probabilities . Path-goal relationships are w or ked into

explanation of motivation and performance at w ork.

The expectancy model seeks to elicit factors that shape the effort that someone puts
into their job? Law ler/Porter focus on

value of rew ards/outcomes i.e. their attractiveness to the individual. For any person
there is a range of outcomes that they desire. Some may hold aversion/negative
value. Maslow for Law ler/Porter reflects the needs suggest positive rew ards w ith
each person typically having a stable profile of preferences over time. This notion is
akin to subjective utility.

a subjective probability that these rew ards w ill result from effort i.e. the persons
perception of the likelihood of reward success if he/she puts in the effort. This combine
the probability that rew ards depend on performance and that performance depends
on effort.

Further the expectancy model seeks to elicit factors affecting the effort-performance
relationship. Law ler/Porter argues that effort is not synonymous w ith performance. The
important matters are:

the catch all of ability (including personality traits) - individual differences: intelligence,
skills, aptitudes etc and

Perceptions of role (activities and behaviours the person feels they should be engaged
in to do the performance successfully).

The w ell-know n Law ler/Porter diagram of expectancy relationships is as follow s:


The model suggests that people at w or k are motiv ated to per form because of
expectations as to perceived payoffs or r ew ards arising f rom that performance. The
desirability of these (valence), perception of expectancy and force of expression are intrinsic
to the person. Each one has their view of w hat is challenging or interesting, important to
self-esteem and regard for extrinsic payoffs - pay and material rew ards.

Expectancy depicts a subjective not other-defined objective reality. It is how you/I

see the w orld around use. Our perception of the w orth of the payoffs available and attainable
affects the degree of motivation.

The model provides a plausible, w ork-a-day explanation for w orker motivation to

perform and w hat might drive this. Its usefulness encourages various questions.

1. What conscious decisions w ill individuals make about how they should/w ill behave in
a particular situation?

2. How do their construe and express their norms and values? What do they see as
valued available, payoffs from doing the required job?

3. What is their perception of the effort (type and amount) needed to attain the specific

4. What is not really available and w hy? What is their assessment of the probability of
securing the payoff they w ant - if they put in the effort?

Understanding and Managing Cynicism about Organizational Change

Executive Overview

Change is all about us. But many of its targets remain cynical about its impact and
importance. Cynicism about organizational change often combines pessimism about the
likelihood of successful change w ith blame of those responsible for change as incompetent,
lazy, or both. Data from a new empirical study, and from previously published research,
suggest numerous factors that contribute to the development of such cynicism. These
include a history of change programs that are not consistently successful, a lack of adequate
information about change, and a predisposition to cynicism. Results also s uggest that
cynicism about changes has negative consequences for the commitment, satisfaction
and motivation of employees.

Many managers and employees in hundreds of organizations have experienced the

struggles, successes, failures, and frustrations that go along w ith changing the w ay business
is done. Innovations involving production quality, customer service, reengineering, right-
sizing, culture, and teamw ork follow a regular pattern: introductory fanfare, follow ed by
tough times of implementation, ending w ith something less than complete success, just in
time for the next major change to begin. The level of enthusiasm for new initiatives varies
from person to person and from hierarchical level to hierarchical level. Those at the top
may view changes as interesting challenges or as appropriate and timely responses to
changing competitive conditions. Those low er dow n may see them as necessary evils or
as the incomprehensible actions of a top management group out of touch w ith day-to-day

Cynicism about change involves area of loss of faith in the leaders of change and is
a response to a history of change attempts that are not entirely or clearly successful it
arises in spite of the best intentions of those responsible for change, even rational decision
makers w ho care about the w ell-being of employees and value their ow n reputations.

The resulting cynicism about or ganizational change is distinct fr om skepticism.

Skeptics doubt the likelihood of success, but are still reasonably hopeful that positive change

w ill occur. It is also distinct from resistance to change, w hich results from self-interest,
misunderstanding, and inherent limited toler ance for change. Cynicism about change
involves a real loss of faith in the leaders of change and is a response to a history of change
attempts that are not entirely or clearly successful. It arises in spite of the best intentions of
those responsible for change, even rational decision makers w ho care about the w ell-being
of employees and value their ow n reputations.

Importance of Cynicism about Organizational Change

Cynicism about organizational change can become a self-fulfilling prophecy if cynics

refuse to support change. Their lack of support may bring about failure or very limited
success. The failure then reinforces cynical beliefs, w hich further inhibit the w illingness to
try again. Few changes can be mandated from the top and put into place w ithout the need
for much acceptance from employees. The success of many innovations depends upon
discretionary commitment and follow -through. Cynicism, then, is an important barrier to

At length and in great detail, respondents recounted a history of previous failures and
offered their insights on w hy the earlier actions had not been successful. These insights
seemed to center on managements lack of effort or on managements lack of ability.

Cynicism about change can spill over into other aspects of w ork life. People w ho
have become cynical may lose their commitment or motivation to w ork. Absences and
grievances may increase. This has important implications for planning and managing change
processes in organizations. For example, the know ledge that 25 to 40 percent of the w ork
force w ills probably response cynically to the next announcement of planned change should
focus the attention of managers on appropriate communication strategies for minimizing
cynicis m.

Development of Cynicism about Organizational Change

In 1989 Kanter and Mirvis published The Cynical Americans: Living and Working in an
Age of Discontent and Disillusion, w hich show ed that 43 percent of Americans are cynical
about the intentions and honesty of other people in general, leading to their decreased
participation in such citizenship behaviors as voting in elections.

Since few organizations are totally and consistently effective in making changes,
there is enough evidence in the reality of peoples organizational lives to support their cynical
view s. Thus, the general predisposition may evolve into a specific cynical belief about
organizational change as a direct result of their experience w ith changes that are not
consistently successful.

Other employees probably enter the organization w ithout the general predisposition
to be cynical. Nevertheless, some of them develop cynicismin response to the organizations
history of change efforts that are not completely successful and to their selective association
w ith other employees w ho hold similar view s. People w ho are responsible for making
organizational change can do little if anything about the cynical predispositions of some

Therefore, it is more practical to try to limit its impact on behavior, and its spread
through a group of employees.

Persistence of Cynicism about Organizational Change

Attitudes such as cynicism about organizational change function in several w ays.

Cynicism may simply help people make sense of puzzling events in their environment. For
example, people may be confused w hen changes are announced w ith much fanfare, but
w ith little groundw ork explaining w hy the changes are necessary. Or they may be confused
w hen, despite major announced changes in strategy, their immediate job duties and w ork
environment remain the same.

To provide themselves w ith a greater sense of understanding, the employees may

conclude that the changes themselves are a sham, or that the people making the changes
dont know w hat they are doing. People may rationalize failure or a lack of follow -through by
concluding that those responsible for the change dont really care. In addition, people w ho
are cynical about organizational change may fill in information gaps w ith the explanation
that things must not have gone w ell. If things had been a success, they reason, they w ould
have heard about it. In creating information to help them make sense of their w orld, people
feed their cynicism about change.

Cynicism about organizational change may also serve a defensive role, protecting
people from unpleasant thoughts, such as that the company is experiencing ser ious

problems. Such thoughts open people up to feelings of vulnerability and loss of personal
control over important things like job security.

If people believe instead that only their particular leaders dont know w hat they are
doing, they can avoid personal responsibility for problems and hold out hope that a new
group of leaders may be able to do better. If they also believe that change efforts orchestrated
by their current managers are doomed to failure, they can avoid feeling disappointed w hen
changes are not completely successful.

18.5 Strategies for Managing and Minimizing

Cynicism about Change

Some of the suggestions that follow are similar to suggestions for dealing w ith
generalized resistance to change. How ever, most address issues of credibility and the
relationship betw een employees and change agents. As such, they differ from such
strategies as negotiation, manipulation, cooptation, and coercion suggested elsew here.
The suggestions build on some of w hat is now know n about cynicism, credibility, and
transformational leadership.

Keep People Involved in Making Decisions that Affect Them

Over tw o-thirds of the respondents in this study reported that they w ould like a high
degree of participation in decision-making, but only 28 percent of those classified as cynical
reported they w ere highly involved. Involvement means different things to different people,
but employees must believe that their opinions have been heard and given careful and
respectful consideration. More substantive forms of participation in decision making tend to
be associated w ith higher commitment. Participation also provides opportunities to receive
more information, so it is not surprising that more involvement is assoc iated w ith less
cynicis m.

Apply Strategies to Manage and Minimize Cynicism about Organizational


1. Keep people involved in making decisions that affect them.

2. Emphasize (and rew ard) relationship-oriented behavior for supervisors.


3. Keep people informed of ongoing changes: When, w hy, how

4. Enhance the effectiveness of timing.

5. Keep surprising changes to a minimum.

6. Enhance credibility:

use spokespersons w ho are liked, trusted and credible;

use positive messages that appeal to logic and consistency;

use multiple channels and repetition.

7. Deal w ith the past. Acknow ledge mistakes, apologize, and make amends.

8. Publicize successful changes.

9. Use tw o-w ay communication in order to see change from the employees perspective.

10. Provide opportunities for employees to express f eelings, receive v alidation and

Emphasize and Reward the Supervisors for their Efforts to Communicate

The supervisor acts as the spokesperson and agent of the company in relationships
w ith workers. Supervisors are frequently the main channels through w hich information does
(or does not) flow. Consequently, supervisors w ho foster tw o-w ay communication and good
w orking relationships, and w ho show consideration and respect for w orkers, can help
minimize cynicism about organizational change. In our study, the lack of communication
and respect for ones supervisor (and ones union representative) w as strongly associated
w ith cynical beliefs.

Keep People Informed

People need to be fully informed and educated about the necessity for change, the
progress and problems associated w ith ongoing change processes, and the results of
change programs. Information minimizes employees opportunities to fill in the blanks of
missing information, and makes it difficult to conclude that most or all changes have been
failures (unless, of course, this is the actual outcome of change attempts). If there are

many public ized changes producing good results, and if rare failures ar e honestly
acknow ledged, the need to blame is lessened, pessimism is reduced, and cynicism about
organizational change is minimized.

Enhance the Effectiveness of Timing

People need information most w henever they are likely to be surprised by events. A
sudden announcement of a new program to reduce quality rejects, for example, w ould
catch most employees unaw are. Among their questions: Why is the program necessary?
Why this particular program? Why now ? Why here, and not some other location? Whatever
happened to the last program that w as supposed to improve quality? If these questions are
not thoroughly answ ered at the time the program is announced, people begin to fill in their
ow n answ ers, either independently or through interaction w ith co-w orkers, most of them
equally uninformed.

Keep Surprises to a Minimum

It is best to avoid surprising people at all. People w ho feel more informed and involved
are less likely to possess cynical attitudes. Routine notice about w hat is happening, and
especially w hy it is happening, and prevents anyone being caught off guard. If it is impossible
to thoroughly lay the groundw ork before announcing a change, extreme care should be
taken at the time of the announcement to provide answ ers to questions. Managers may
have to anticipate questions and provide information, rather than relying on employees to
voice their concerns.

Managers or others w ho are announcing change w ill be more believable if they are
generally w ell-liked, seen acknow ledgeable about the subject matter, possessed of high
pow er and status in the organization, and trustw orthy.

Enhance Credibility

Persuading people to change their beliefs involves providing new information that
contradicts or attacks present beliefs. Credibility is determined by the extent to w hich such
new information is believed by its audience. Cynicism cannot be moderated or changed by
timely information unless that information is believed. A message is more likely to be made
believable by using:

Credible spokespersons: Managers or others w ho are announcing change w ill be

more believable if they are generally w ell-liked, seen as know ledgeable about the
subject matter, possessed of high pow er and status in the organiz ation, and trustw orthy.
In the organization w e studied, managers alw ays acted as company spokespersons,
even though most of the w orkforce w as unionized and union officials played a
significant role in change efforts.

Sometimes, managers began asking union officials and other hourly w orkers to share
the podium during formal announcements and presentations to add to the credibility of the
message and depict real involvement on the part of employees. Unfortunately, the manager
alw ays took the lead during the presentation by doing most or all of the talking, using a
pointer, and answ ering all questions. The hourly w orkers w ere usually given the role of
placing and removing slides from the overhead projector, w hich created an image of the
employees as subordinate and did little to enhance the credibility of the message.

Positive logical appeals: Even w hen a spokesperson is not particularly w ell-liked

or trusted, credibility is enhanced if he or she presents the message seriously and
sincerely. A positive approach that emphasizes benefits is preferred to a negative
approach that emphasiz es dire consequences. Logical appeals, rather than emotional
appeals that play on fears or insecurities, are desirable. Consistency in w ords and
deeds is important too. The employees w e inter view ed regarded some of the
managements actions as illogical, among them extensive quality tours, conducted
to convince visitors from headquarters that the plant w as making substantial progress
on its continuous quality improvement goals, w hile at the same time employees w ere
required to produce low -quality parts in order to meet production goals.

M ultiple channels and repetition: The use of a variety of channelssuch as the

organizations new sletter, memos, formal meetings, and casual conversations w ith
know ledgeable peoplehelps ensure that every one has a chance to receive
information through his or her most preferred medium. People differ in their ability to
understand w ritten and spoken communications. Tw o to four repetitions help increase
understanding and retention of a message. During the period of our research, the
company made and evaluated a number of changes. Employees w ere kept informed
through a series of meetings and new sletters. Each new sletter briefly summarized

all the information in previous new sletters. Thus, employees w ho had missed meetings
or earlier new sletters could easily catch up by reading the summary section.

Admitting mistakes and then taking quick action to rectify negative consequences w ill
enhance a managers c redibility. If mistakes caused hardships or bad feelings among
employees, an apology is also in order.

Deal with the Past

Despite the best intentions of managers and the use of appropriate and timely
communic ation strategies , cynicism about change among some employees may prove
highly resistant to modification. Enhancing credibility among the cynical may require w hat
Kouzes and Posner refer to as recovery efforts. Borrow ing from w hat is know n about
how organizations recover a customers confidence after a service failure; they discuss
techniques for how managers can recover credibility after they have lost it. Because not all
attempts at change are completely successful, managers w ho are responsible for any
past failure lose credibility, just as organizations that fail to provide adequate customer
service lose customer confidence.

To regain credibility after failure, managers must first accept responsibility and admit
that they made mistakes. Those w ho fail to do this are more likely to be view ed as dishonest
(as w ell as incompetent), especially by those w ho are already cynical. Admitting mistakes
and then taking quick action to rectify negative consequences w ill enhance a managers
credibility. If mistakes caused hardships or bad feelings among employees, an apology is
also in order. People can be very forgiving w hen mistakes are admitted, apologies offered,
and actions taken to correct or prevent further problems.

According to Kouzes and Posner, this approach can w ork w ell even in the face of
repeated mistakes or failures. Of course, even the most forgiving and non-cynical people
may become disenchanted w ith a long record of failure. The best prevention for the onset
of cynicism about organizational change is successful, w ell-publicized change. But since
organizations and human beings are not perfect, mistakes are inevitable and corrections
essential. Until the past is accounted for, that is, until someone admits the mistake, people
may find it difficult or impossible to let go of mistrust and cynicism.

Publicize Successful Changes

Employees can become more optimisticand less cynic alabout futur e change
attempts if they are made aw are of past successes. In the present study, many change
efforts were announced w ith great fanfare, but their final evaluations were never announced.
Many employees assumed that the attempts had failed and been replaced by new programs,
although in reality some successful changes had occurred. Cynicism persisted in the
absence of information to counter it.

See Change from the Employees Perspective

For managers, the problem in regaining credibility may also lie in understanding how
employees view change and success. If managers are unaw are that a change created a
hardship for employees, or are insensitive to that hardship, they may fail to understand that
employees view the change as a partial success at best. A manager w ho is unaw are that
an action created a hardship can hardly be expected to accept responsibility or apologize
for it.

A change undertaken in the plant w e studied w as elimination of the executive dining

room. In an effort to break dow n barriers betw een management and hourly employees,
managers began eating lunch in the employee dining room. Unfortunately, most managers
sat alone or at tables w ith other managers. Employees saw this voluntary segregation as a
sign that managers felt themselves superior to employees, w hen w hile managers felt they
had taken a big step in the direction of egalitarianism.

Strategies for managing cynicism must also address its defensive function by giving
people opportunities to air their feelings publicly, receive validation about their feelings and
receive sincere reassurance that steps w ill be takenor have already been takento
alleviate their concerns.

Provide Opportunities to Air Feelings

Strategies for managing cynicism must also address its defensive function by giving
people opportunities to air their feelings publicly, receive validation about their feelings, and
receive sincere reassurance that steps w ill be takenor have already been takento
alleviate their concerns. This approach requires tw o-w ay communication and cannot be
accomplished via memos or even by face-to-face meetings that do not include open, honest

dialogue. People w ho maintain their c ynicism about organizational change because it

functions as a defense mechanism w ill probably respond positiv ely to reassuring messages
that address their fears.

For example, people need evidence that most responsible for changes are pursuing
a consistent, w ell-thought-out strategy (i.e., that management really does know w hat it is
doing). People may also need reassurance that their jobs are not in jeopardy or that they
w ill receive the training and support needed to adjust to announce changes. Details about
the hows and whys of job security, training and/or support make the reassurance more
believable. Of course those responsible for change must exercise great integrity by not
promising more than can be delivered. Broken promises can only confirm and intensify
cynicis m.

Providing the Employees Timely, Appropriate, and Credible Information

The strategy to manage the employ ees conc ern, unrest or c ynicism about
organizational change can be better managed by involving and providing them- timely,
appropriate, credible information. Cynicism can be minimized by admitting mistakes w hen
they oc cur, apologizing, and quickly taking appropr iate cor rective action. Tw o- w ay
communication, w hereby managers become aw are of employee perceptions of change
and their feelings about it, is critical to success.

Addressing peoples fears helps them let go of their concerns long enough to give
change a chance of success. Those responsible for change must ultimately decide for
themselves the value of the time and effort necessary to reduce existing cynicism.

18.6 Summary
The focus is on the aims and philosophy of rew ard management and the nature of a
rew ard system. But because rew ard is very much about performance, the lesson should
be read in conjunction w ith the next tw o lessons so that the full picture of rew ard and
performance management can be obtained.

18.7 Review Questions

1. Explain the various employment relations and involvement strategies.

2. Discuss the concept of strategic rew ard management.



Learning Objectives

After reading this lesson you w ill be able to

To understand concept of 360 degree feedback

To understand the assessment development centers

19.1 Introduction

19.2 Managem ent Style and 360 Degree Feedback

19.3 360 Feedback and assessment

19. 4 Assessm ent Development Centers

19.5 Summ ary

19.6 Review Questions

19.1 Introduction

Giving feedback on management style is one of the more dif ficult tasks of organizational
change. For better or w orse, changes in mission, organizational structure, pay systems
and w ho gets hired may affect you personally, but the changes are not directly about you.
With receiving feedback on your management style, it not only affects you personally, it is
personal. Its no w onder that despite its popularity, implementing systems that give feedback
on management style must be done w ith caution given the sensitive nature of the data and
the possible defensiveness of the employees w ho receive it.

19.2 Management Style and 360 Degree Feedback

Until the later 1960s, feedback on management style has usually come from the top
dow n. Either as part of a yearly performance appraisal, or after a particularly disastrous
event at the company, a manager has received feedback from their boss either as (1) part
of a heated exchange of v iew s just before the manager is fired or (2) heard vague,
uncomfortably said nothings about improving relations w ith people.

This started to change w ith the advent of sensitivity groups, or T groups in the
1960s. During these sessions lasting several days, employee froma variety of organizations
came together to learn how people felt about each other in a group.

The main focus w as on personal grow th and development. Because of this focus,
employees came back to their w orkplace intent on acting differently and better tow ards
their fellow employees. Unfortunately, T groups w ere not successful in the long run because
managers w ho came back to the same w ork environment that either didnt rew ard such
new, more caring behaviors or w ere overw helmed by other managers acting the same old
w ay. In response to this, the various consulting groups and institutes that ran T-groups
began to focus their feedback sessions on work behaviors and management style. Through
various exercises, situations and discussions, participants behaviors w ere compared to
national norms, and received counseling and feedback on how to improve.

Starting in the 1980s, a new w rinkle to this approach w as developed. As the idea of
increasing employee influence and autonomy (employee empow erment) became popular,
the thought arose that a manager ought to receive management style feedback from more
than one source, from those w ho knew them best: their subordinates, their boss, their
peers and themselves. This information w as usually gathered via numerical surveys and
open-ended questionnaires. This feedback from the entire circle that knew someone became
know n as 360 feedback.

Options for Implementation

There are three options for implementing 360 feedbacks, each more comprehensive
and pow erful in promoting change, both organizational and personal:

1. Send a few managers to an outside consultancy for assessment and feedback. In

this option, managers may hand out survey to w hom they know (and expect to get
feedback w ith minimal negative information) the data collected by the consultancy,
and the managers receive an offsite training and feedback session w ith similar
managers from different companies. This approach has been derogatively called
sending the fair-haired boys to charm school.

While this approach has its merits, its major deficiency is the same problem that T-
groups had: a few individuals are changed, the overw helming mass of management is not,
and the systems and processes that encourage old behaviors are still in place.

2. The second approach is to bring such a program in-house, w here many managers
receive 360 feedbacks. In this approach, the feedback can be more systematic for
tw o reasons: (1) surveys are handed out to all subordinates and peers rather than
those w ho have been volunteered by the person receiving feedback. This tends to
reduce sampling bias of just giving it to those w ho might give just good feedback;
and (2) the implementation of this process can be from the top of the organization
dow n the bottom. This has the advantage of allow ing upper management to be an
example of w illingly receiving such feedback and encourage them to be both models
of behavior and coaches to those underneath them.

3. The third approach involves all of the second approach, and also deals w ith systems
issues. Where 360 degree feedback alone can only deal w ith problems caused by
individual behavior, it by itself does nothing for the systemic causes of problems,
such as organizational structure, inappropriate and distorted measurement systems,
company-w ide lack of skills, or performance apprais al and pay problems. 360 feedback
can serve both as a catalyst to help management realize the systematic causes of
organizational problems, and can be part of the solution, so that management style
becomes in harmony w ith other organizational changes senior management is trying
to make.

Questions to ask before you Start

A w ord of caution here: questions about implementing 360 feedbacks are easy to ask
but not so to answ er. Often times, management assumes the answ ers but does not openly
discuss them w ith the result being much chaos and confusion dow n the road.

Among these are some of these questions are:

1. How ready is your organization ready to handle 360 feedbacks?

Often times, organizations may be w illing to pay consultants to assist them in

implementing such a system, but the organization needs to be prepared. At times, soft
skills tr aining in communication, leaders hip, management style, meeting management
etc. is useful in preparing management. Teambuilding activities might also be useful, as
w ell as a general organizational climate survey to determine the context of implementation
and find any additional issues beyond management style that might be a problem.

2. Who needs to agree?

Who w ill be the decision-making body about 360 feedbacks? Will it be the head of the
organization, or Human Resources, or a cross-section of employees from a variety of

3. Who w ill be involved?

Which employees are to be the focus of the 360 feedback, and w ho w ill provide it to

4. Is this voluntary or m andatory?

Will some employees be offered the opportunity to receive this feedback, w ill everyone
receive it, or w ill just management receive the feedback?

5. What m ethods and m easurem ents w ill be used?

Will employees just fill out numerical surveys, or w ill this information be supplemented
w ith observations and interview s? Will the report be just a graph, a summary of high need
for change survey items, or w ill there be a w ritten report w ith recommendations? To w hat
extent w ill this report be personalized and hand-crafted vs. being automated?

6. To what extent w ill the data be collected anonym ously and/or confidentially?

While the intent may be to keep the survey data anonymous, if w ritten comments or
interview data are also included, the data may have to be altered to avoid making obvious
conclusions about w ho communicated w hat. In addition, management mus t ans w er

questions about per sonal, confidential data that might be accidentally revealed during
interview s.

7. What w ill be done w ith alleged violations of laws, ethics or policies?

Though this may not be the intent of 360 feedback, on occasion information is gathered
that suggests violations of legal, ethical and company codes of conduct. A horrendous
example of this w ith one of our clients several years ago w ere allegations made that a
single w oman had become pregnant by a manager and received a promotion to keep her
from making a fuss.

8. What inform ation w ill be public?

At first blush, you might think that all data w ill be private, but does that mean that
ones ow n supervisor cant see the data and the report? Will group and company averages
be made public w ithout them being broken dow n into individual scores?

9. What consequences will there be?

Will they receive additional coaching and counseling, training, or be terminated or re-
assigned? Will the 360 feedback be the sole determiner of this decision?

10. What logistics and support w ill be necessary to m ake this successful?

To w hat extent w ill the data be collected electronically (via the Web or intranet) or on
paper? What administrative and technical support w ill be necessary?

11. What system s changes w ill accom pany this organizational change?

As stated before providing feedback on management style in and of itself can only be
part of organizational change and can rarely stand on its ow n. As a result, one must ask
how and w hen 360-?degree feed- w ill back be incorporated into training, selection and pay
decis ions.

Ten Commonly Asked Questions about 360 Degree Feedback

1. What is 360-degree feedback?

360 feedback, also know n as 360 degree feedback or multi-rater feedback, is a method
to give information to a person, generally in management on his or her management style
and/or performance by more than one group of people.

2. What uses does it have?

Its usually used just for development purposes, but can also be a part of performance
appraisal. If its used for selection, performance appraisal and the like, it may be subject to
the usual law s and regulations regarding tests and other selection instruments.

3. Who should receive this kind of feedback?

Sometimes it is used for the person w ith obvious problems, though this is usually a
mistake. As most behavior of people is influenced by others, it is often best for teams of
management to be given feedback, rather than just one or tw o individuals. If the w hole team
goes through this process, its a good idea for the manager of the team to get this feedback
as w ell. Not only does he or she heavily influence w hats going on, it provides a good
example for team members to follow.

4. What conditions increase its chances for success?

Good planning pays off.All participants, w hether it is the person receiv ing the feedback,
the describers and any other w ho might receive the 360 report should agree on the ground
rules going forw ard as far as anonymity, use of, distribution of reports, follow -up, etc. Agreeing
on these ground rules may take some time, but is w ell w orth it.

The 360 instrument should be w ell constructed, follow ing our usual recommendations
on this subject, including avoiding agree-disagree scales.

5. Who usually describes the person?

Usually the feedback comes from four aspects: the person being described, their
peers, their manager, and their subordinate. Sometimes feedback can also come from
internal and external customers.

6. What kind of data is collected?

Sometimes 360 data is only collected in numerical form, w here describers use a 1-
5 scale to rate various behaviors. Though this is necessary, its insufficient to get needed
details. These data should be supplemented w ith open-ended questions asked on the 360
survey, and interview s by the consultant as w ell. Without these data sources, it may be
hard to give specific examples of problem behaviors to the person being described.

7. Who should see the data?

There are really three questions here: Who should see the raw data, w hich should
see the consultants summary, and w ho should know the plans for correcting problem
behaviors. No one, except for the consultant, should see the raw data. There is just too
much of a chance for misuse by someone in the organization.

Who should see the consultants summary is an open question. At times, w e have
given our summary and recommendations only to the person being described, though w e
dont recommend this. At other times, w e have shared our summary w ith the persons
manager. At the very least, the persons manager should see the persons plan for action,
as he or she is the per son responsible to follow through on his plan. We also have
encouraged our clients to share their 360 data w ith their subordinates, and ask for their
help in changing their behaviors.

8. How should w e plan for 360?

After hiring the consultant, management must w ork w ith him or her to establish the
ground rules for the 360: w ho w ill participate, and in w hat manner, how the ensure anonymity
w ith sufficiently large groups of describers, to w hat extent the behaviors measured reflect
the competencies desired by the company, etc.

After the data are collected, the consultant should w ork w ith management to develop
a feedback plan: w here it w ill be, how much time it w ill take, how to track action plans, how
much coaching is needed, etc.

9. What are the follow -up steps?

At the very least, a series of steps, with resources and timelines should be established
and c ommunicated to the person and the persons manager. In addition, profess ional
coaching can be a useful adjunct.

10. How is 360- degree feedback integrated into coaching?

360- Degree feedback is an excellent beginning for coaching, w hether the coaching
is done by a consultant, by the persons manager, or done jointly. The 360 feedback data

allow s us to pinpoint problems, so the coaching that w e provide is more effective. The
same instrument used to obtain the feedback might also be used as a w ay of measuring



The 360 combines input from supervisors, peers, and direct reports to provide a
broad perspective on an employees strengths and developmental needs. It has also been
used extensively as part of an organizations performance appraisal system.

In addition, the aggregate data (cumulative results for a group) provide an organization
w ith crucial information for effective strategic planning, overall training needs, improved
team building and effective customer service.

These days, the question should be, Who isnt using 360s? Not that they are being
used necessarily w ell, but that is a separate issue. Most Fortune 500 companies have
been using some form of multi-rater system for over 15 years. It is found less commonly in
smaller organizations, and it is just beginning to migrate beyond North America.

On an individual basis, a multi-rater processeither from an online assessment or

through the more involved structured interview processcan be invaluable for someone
embarking on a coaching program. It is useful to conduct a second round (that 720 degrees)
nine to tw elve months later.

A number of factors need to be considered before pursuing any organizational 360-

degree feedback program. The data collected MUST be based in clear and concis e behaviors,
criteria and competencies. The design elements and communications are as important as
the implementation. Some other questions to be answ ered are:

Is the organization ready?

Is there trust?

Is the purpose clear?

How w ill the data be used?


How can a multi-rater assessment leverage the coaching experience for ones clients?

It allow s ones client to gain perspectives from others in an objective, non-threatening,

confidential manner.

It provides the individual w ith qualitative and quantitative data for self-reflection and
enhanced aw areness.

It assists in identifying the indiv idual dev elopment needs and action items the
organization deems important.

It can help to expose patterns of behavior, both positive and negative, especially w hen
used in conjunction w ith other assessment tools.

It creates a platform and language for dialogue betw een coach and client.

It ensures that the coach has separate objective data, thus avoiding acceptance of
the clients interpretations at face value.

When initiated and implemented properly, it engages the support of others in the

Further, for the executive assessment needs of an organisation leveraging Internet

technology can provide w ith the most comprehensive asses sment of human potential
available from one source, together w ith expert feedback and associated consultancy
services. The assessment center conducts:

Computer-based Testing:

1. Asses sment

2. Face-to-Face and Online Feedback

3. Analysis and Research

4. Associated Consultancy Services

Assessment Portfolio:

1. Psychometric Assessment

2. Assessment of Capability and Potential

3. Performance Assessment

19.4 Assessment Development Centers

1. Assessment Centres: How can you make sure you have the right people w ith the
correct skills, abilities and personality to fit your organisation?

The use of assessment techniques enables you to search for the particular skills and
values that your organisation needs. Research has show n that assessment centres based
ar ound c ompetency -focused ex erc ises are the most acc urate pr edictor of f uture
performance. There are some private centers w hich s uccessfully undertaken design,
development and facilitation of assessment centres for a range of blue chip clients including
major companies, major contractors and leading organizations.

2. Difference between an Assessment Center and a Development Center: Both

assessment centres and development centres use the same techniques, how ever a
development center is typically used in-house w ith existing staff and leads to on-
going development w hereas an assessment center is used primarily for selection.
For more information on development centres see our separate section.

3. What is an Assessment Centre?: An assessment centre is a process. It is not a

place. It has several candidates, usually four to tw elve candidates are observed
together. Multiple exercises are used to get an opportunity to observe behaviour of
the candidates. Then an observation is made by trained observers. A systematic
assessment process is used based on competencies. The candidates are able to
demonstrate their skills and abilities, not just only talk about them. It helps in producing
a yes / no decision for an organisation.

4. Assessment Center Design: Your assessment center from Iridium w ill be tailored
to your ex act needs taking into account your or ganizations culture and the
competencies that you value. If necessary w e w ill w ork w ith you to put a competency
framew ork in place. As w e are truly independent you have a w ide range of different
exercises to chose from: developed by ourselves as w ell as sourced externally.
Alternatively w e can design bespoke exercises for you.

Typical assessment centre exercises include:

competency based interview s,

fact finding,

in-tray exercises,

group discussions,

analysis and presentation exercises either individually or in a group,

negotiation exercises,

individual presentations,

indoor and outdoor building exercises,

numerical reasoning tests,

verbal reasoning tests.

5. Personality Questionnaires and 360 Degree Feedback: Now a days many

consultants are accredited users of a range of personality questionnaires that can be
included in your assessment center. The most commonly used questionnaire is OPQ.
One can also get the facilities of 360-degree feedback if required.

6. Assessor Provision and Training: Some consultancies provide assessors and/or

can train your staff to assess at a tailored half day assessor training w orkshop.

7. Outcomes: The outcome from an assessment centre is a balanced judgment on

each candidate enabling a selection to be made. Iridiums consultants are trained to
facilitate the moderation of scores at the end of an assessment centre.

19.5 Summary

360 degree appraisal has become very popular. It has been felt for long that one
persons assessment of another cannot be free of biases. In addition, w ith the focus on
customers (both internal and external) and emphasis on softer dimensions of performance
(leadership, innovation, team w ork, initiative, emotional intelligence, entrepreneurship, etc.)
it has become necessary to get multiple assessments for a more objective assessment.
The 360 degree appraisal is a multilateral assessment and feedback system (MAFS).

19.6 Review Questions

1. Explain the assessment development centers.

2. Explain the concept of 360 Feedback and assessment.



Learning Objectives
After reading this lesson you w ill be able to

Understand the evaluation result of a performance measurement in the form of

a balanced scorecard

Learn about the balanced s corecard, a measurement system that enables

organizations to clarify their vision and strategy and translate them into action

20.1 Introduction

20.2 Balanced scorecard approach

20.3 Benefits of balanced scorecard

20.4 The HR scorecard approach

20.5 How to develop HR Score-card

20.6 HR Scorecard Key Benefits

20.7 HR com petencies

20.8 How HR can becom e a strategic partner?

20.9 Summ ary

20.10 Review Questions

20.1 Introduction

Becoming a strategic partner to the enterprise requires an alignment betw een HR

and the enterprise at all levels (strategy, resource allocation, budgeting, reporting). New
management practices must be adopted to help position HR as a strategic partner to the

enterprise. Achieving the status of a strategic enterprise partner requires the implementation
of tools, and the adoption of practices not supported or readily available from the majority of
current HRMS suppliers. Implementation of a HR Scorecard provides the HR organization
w ith a proven set of tools that w ill help link and align HR priorities w ith enterprise strategy.
The successful integration and adoption of the HR Scorecard w ill enable the HR organization
to articulate and measure their strategic contribution to the enterprise in concert w ith overall
corporate strategy.

20.2 Balanced Scorecard Approach

A new approach to strategic management w as developed in the early 1990s by Drs.

Robert Kaplan (Harvard Business School) and David Norton. They named this system the
balanced scorecard. The balanced scorecard approach provides a clear prescription as
to w hat companies should measure in order to balance the financial perspective.

The balanced scorecard is a management system (not only a measurement system)

that enables organizations to clarify their vision and strategy and translate them into action.
It provides feedback around both the internal business processes and external outcomes
in order to continuously improve strategic performance and results. When fully deployed,
the balanced scorecard transforms strategic planning from an academic exercise into the
nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follow s:

The balanced scorecard retains traditional financial measures. But financial measures
tell the story of past events, an adequate story for industrial age companies for w hich
investments in long-term capabilities and customer relationships w er e not c ritical for
success. These financial measures are inadequate, how ever, for guiding and evaluating
the journey that information age companies must make to cr eate future value through
investment in customers, suppliers, employees, processes, technology, and innovation.

The balanc ed sc or ecard suggests that w e v iew the or ganiz ation fr om four
perspectives, and to develop metrics, collect data and analyze it relative to each of these

Learning and Grow th Perspective

Business Process Perspective

Customer Perspective

Financial Perspective

1. Learning and Growth Perspective

This perspective includes employee training and corporate cultural attitudes related
to both individual and corporate self-improvement. In a know ledge-w orker organization,
people the only repository of know ledge are the main resource. In the current climate of
rapid technological change, it is becoming necessary for know ledge w orkers to be in a
continuous learning mode. Government agencies often find themselves unable to hire new
technical w orkers, and at the same time there is a decline in training of existing employees.
This is a leading indicator of brain drain that must be reversed. Metrics can be put into
place to guide managers in focusing training funds w here they can help the most. In any
case, learning and growth constitute the essential foundation for success of any knowledge-
worker organization.

Kaplan and Norton emphasize that learning is more than training; it also includes
things like mentors and tutors w ithin the organization, as w ell as that ease of communication
among w orkers that allow s them to readily get help on a problem w hen it is needed. It also
includes technological tools; w hat the Baldrige criteria call high performance w ork systems.
One of these, the Intranet, w ill be examined in detail later in this document.

2. Business Process Perspective

This pers pective ref ers to internal business pr ocess es. Metrics based on this
perspective allow the managers to know how w ell their business is running, and w hether
its products and services conform to customer requirements (the mission). These metrics
have to be carefully designed by those w ho know these processes most intimately; w ith
our unique missions these are not something that can be developed by outside consultants.

In addition to the strategic management process, tw o kinds of business processes

may be identified: (a) mission-oriented processes, and (b) support processes. Mission-
oriented processes are the special functions of government offices, and many unique

problems are encountered in these processes. The support processes are more repetitive
in nature, and hence easier to measure and benchmark using generic metrics.

3.Customer Perspective

Recent management philosophy has show n an incr easing r ealiz ation of the
importance of customer focus and customer satisfaction in any business. These are leading
indicators: if customers are not satisfied, they w ill eventually find other suppliers that w ill
meet their needs. Poor performance from this perspective is thus a leading indicator of
future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of

kinds of customers and the kinds of processes for w hich w e are providing a product or
service to those customer groups.

4. Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and
accurate funding data w ill alw ays be a priority, and managers w ill do w hatever necessary to
provide it. In fact, often there is more than enough handling and processing of financial
data. With the implementation of a corporate database, it is hoped that more of the processing
can be centralized and automated. But the point is that the current emphasis on financials
leads to the unbalanced situation w ith regard to other perspectives. There is perhaps a
need to include additional financial-related data, such as risk assessment and cost-benefit
data, in this category.

Balanced Scorecard (BSC) is a concept helping you translate strategy into action.
BSC starts from the company vision and strategies from here critical success factors are
defined. Measures are constructed that aid target-setting and performance measurement
in areas cr itical to the str ategies . Hence, Balanced Scorecar d is a performance
measurement system, derived from vision and strategy, and reflecting the most important
aspec ts of the business. The Balanc ed Scorecard (BSC) c oncept supports strategic
planning and implementation by federating the actions of all parts of an organization around
a common understanding of its goals, and by facilitating the assessment and upgrade of

Traditional performance measurement, focusing on external accounting data, w as

quickly becoming obsolete and something more w as needed to provide the information
age enterprises w ith efficient planning tools. For this purpose Kaplan & Norton introduced
four different perspectives from w hich a companys activity can be evaluated:

Financial perspective (how do w e perceive our shareholders?)

Customer perspective (how do w e perceive our customers?)

Process perspective (in w hat processes should w e excel to succeed?)

Learning and innovation perspective (how w ill w e sustain our ability to change
and improve?)

For creating a Balanced Scorecard, one has to identify a vision. Where is the
organization going? By identifying strategies you learn about how you w ill get there. Define
Critical Success Factors and perspectives, w hich mean you have to ask w hat w e have to
do w ell in each perspective. Thereafter ask how do w e measure that everything is going the
expected w ay? Then it is necessary think about evaluating your Scorecard. Consider how
do w e ensure that w e are measuring the right things? Based on this w ork you should
create action plans and plan reporting and operation of the Scorecard. How do w e manage
the Scorecard? Which persons should have reports and w hat should the reports look like?

The picture show s a very general example of a Scorecard. Where are w e going? The
vision: We should dominate the market. How ? By focusing on cost efficiency, high quality
and by investing in new technologies. In w hich perspectives should w e excel at w hat?
Responsibilities and action plans for achieving targets set are defined. You can easily create
a Scorecard, but to create a manageable scorecard is a completely different thing!

20.3 Benefits of Balanced Scorecard

The benefits of applying Balanced Scorecard can be summarized as follow s:

Balanced Scorecard helps align key performance measures w ith strategy at all levels
of an organization.

Balanced Scorecard provides management w ith a comprehensive picture of business


The methodology facilitates c ommunication and understanding of business goals

and strategies at all levels of an organization.

The balanced scorecard concept provides strategic feedback and learning.

Balanced Scorecard helps reduce the vast amount of information the companys IT
systems process into essentials.

20.4 The HR Scorecard Approach

Once integrated, the HRScorecard aligns support functions w ith the business strategy
illustr ating:

The strategic impact of HR s er vic es and pr ojects and enables HR to

demonstrate its value through

More than short-term financial outcomes. Adopting the HR Scorecard as a

strategic management

System ensures that HR view s all of its activities in terms of their contribution
to the organizations

Goals. By developing a strategic program for measuring and managing Human

Capital, HR executives have the opportunity to spearhead the development of
better strategic management.

20.5 How to develop HR Score-card

If structured properly, adopting the HR Scorecard w ould allow the HR organization to

take the initiative, instead of being reactiv e to the demands of the enterprise. A comprehensive

approach that c reates strategic alignment betw een HR and the enterprise at all levels
including strategy, resource allocation, budgeting, reporting is absolutely essential.

Developing the HR Scorecard as a new management process provides the foundation

to make HR a true strategic partner and enable the enterprise to realize the full value of its
human capital.

The first step in establishing HR as a strategy focused organization requires the

development of a HRScorecard that can be linked to enterprise strategy and achieve perfect
organizational alignment. Successful project execution requires a HR Scorecard, w hich is
a management sys tem projec t that demonstrates a high level of user f riendlines s. All
scorecard users should be able to manage scorecards unaided by IT specialists or pow er
users. Training must be straightforw ard to accelerate adoption, and information must be
accessible w ithout a tedious navigation process.

The HR Scorecard development process w ill entail the completion of several processes
using the follow ing methodology:

1. Development of a Solid Strategy: Development of a solid strategy that is aligned

w ith the enterprise strategy is a keystone to success. Without a solid strategy, success
is unobtainable. How ever, w ithout execution, a solid strategy is meaningless.

2. St rat egy M a ppi ng: Development of a str ategy map, including selec tion of
performance measures, establishes targets, establish objectives, identify initiatives
and identify ow nership to deliver the strategy.

3. Establish M easures for each Objective: After translating strategy into objectives,
managers and employees must know if and w hen objectives are being achieved.
Therefore, each objective is given at least one measurement that is included in the
Key Performance Indicators.

4. Cascading of Scorecard: Keeping in mind operational, management and front line

employees does the actual w ork that makes strategies happen. Organizations must
develop Scorecards at every level so that each person can see how his or her specific
responsibilities align and contribute to the higher-level goals.

5. Scor ecar d Im pl em en ta ti on : Finalize Scorecard des igns and dev elop an

implementation plan.

6. Post Implementat ion: After the Scorec ards are deployed, managers need to
periodically re-examine their existing core processes to ensure they are linked to the
corporate strategy.

20.6 HR Scorecard Key Benefits

Formulate HR strategy that is aligned w ith the overall corporate strategy

Clarify the vision/mission of the organization

Create a consensus and ow nership of the strategy in the management team

Improve communication of the strategy across the enterprise

Prioritize HR initiatives by linking activities to business goals

Helps support functions identify and communicate their unique strategies

Create a framew ork for initiative prioritization and budgeting

Align measurement w ith business goal achievement

Measure HRs strategic contribution in concrete and clearly understood terms

Provide real time graphical display of Key Performance Indicators

Successful Execution

Research conducted by the Harvard Business School demonstrates that overall only
one out of every ten companies that formulate strategy can effectively implement it. Many
factors make it difficult to implement strategy today. The pace of change continues to
accelerate, technology changes frequently and the w orkforce is more diverse and mobile
than ever before. While the business w orld continues to evolve, management systems
have not kept up. The majority of measurement and management systems w ere designed
to meet the needs of a stable, incrementally changing w orld not the needs of todays dynamic
economy. Statistics confirm that a Balanc ed Scorecard approach has emerged as the
most effective w ay of managing and executing enterprise strategy.

20.7 HR Competencies
Business Partner Competencies

Know s mission

Understands business process and how to change to improve efficiency and


Understands clients and organizational culture

Understands public service environment

Understands team behavior

Communic ates w ell

Possesses the ability to be innovative and create a risk taking environment

Applies organizational development principles

Know s business system thinking

Possesses good analytical skills including the ability to think strategically and

Possesses the ability to build trust relationships

Links HR to the organizations mission and service outcome

Change Agent Competencies

Understands business process and how to change to improve efficiency and


Understands clients and organizational culture

Understands public service environment

Understands team behavior

Communic ates w ell

Assesses and balances competing values

Know s business system thinking

Applies information technology to human resource management

Possesses good analytical skills including the ability to think strategically and

Designs and implements change process

Uses consultation and negotiation skills including dispute resolution

Possesses the ability to build trust relationships

Possesses marketing and representational skills

Uses consensus and coalition building skills

Demonstrates customer service orientation

Leadership Competencies

Understands team behavior

Communic ates w ell

Assesses and balances competing values

Possesses good analytical skills including the ability to think strategically and

Uses consultation and negotiation skills including dispute resolution

Uses consensus and coalition building skills

Understands, values and promotes diversity

Practices and promotes integrity and ethical behavior

Why HR Scorecard?

Do you find yourself having to deal w ith the fallout of strategy decisions dictated by
the senior management team?

Do these decisions include anything from restructuring, dow nsizing or rightsizing to

a merger or acquisition? HR in many instances is being asked to execute decisions
w ith vast people implications but is not being provided the opportunity to influence the
original decision. A top concern of Human Resource executives is, How do I get to
the management table? Recent research at the Balanced Scorecard Collaborative
confirms that many HR organizations lack the tools and the science to elevate support
and administrative functions to a strategic level. They are often unable to describe,
manage, or measure human capital as a strategic asset in a w ay that earns them a
place at the table.

20.8 How HR can Become a Strategic Partner?

Align HR and the enterprise at all levels (strategy, resource allocation, budgeting,

New management practices must be adopted to help position HR as a strategic

partner to the enterprise.

Make use of HRMS and HIRS.

Implement HR Scorecard to link and align HR priorities w ith enterprise strategy. The
successful integration of HR w ith enterprise strategy can be understood by measuring the
strategic contribution of HR to corporate strategy.

20.9 Summary

The HR scorecard is a measurement as w ell as an evaluation system for redefining

the role of HR as a strategic partner. It is based on the Balanced Scorecard framew ork
developed by Kaplan and Norton and is set to revolutionize the w ay business perceives
HR. Based on various studies, it can be concluded that fir ms w ith more eff ective HR
management systems consistently outperfor m the competition. How ever, evidence that
HR can contribute to a firms success doesnt mean it is now effectively contributing to
success in business.

20.10 Review Questions

1. What is a balanced scorecard? What are its different perspectives?

2. Explain how a BSC is related to the vision and mission of an organization?

3. What are the various benefits of a BSC?

4. Explain the term HR competencies and detail areas of such competencies.

5. Explain HR scorecard. How can it be developed? What are the key benefits?


Learning Objectives
After reading this lesson you w ill be able to

Aims and Objectives


What is a Case Study?

21.1 Introductions

21.2 What is a Case Study?

21.3 Exam ple of a Case Study

21.1 Introduction

In studying Performance Management Systems, it is imperative to understand the

corporate practices. Here w e have discussed about an important case w ith far reaching
implications on performance management issues. Students are advised to carefully go
through the case and understand the performance management issues. Get any doubts
clarified from your instructor.

21.2 What is a Case Study?

A case is a short description, in words and numbers of an actual management situation.

A typical case consists of number of pages of prose description w ith some quantitative
materials (figures), exhibits, organization charts, graphs or tables. The use of cases for
advanced management education started at Harvard University in 1908.

Case Study is a systematic w ay of helping students to learn from experiences. Such

studies are intended to serve as the basis for class discussion and not as an illustration of
either good or bad management practices. They are not intended to be a comprehensive
collection of teaching material. They provide a useful backbone to a programme of study.

21.3 Example of a Case Study

Venkat w as the Works Manager of Yami Engg. Ansari w as w ith the company as
Finance Manager and Head of the Accounts & Finance Division reporting to the Works

Ansaris general attitude w as to be tightfisted w ith financial matters. He w as alw ays

conscious of the need to conform to company policy and procedures and he firmly opposed
any deviation from policy, but w as often w illing to explain the reasons for his view. He prided
himself as a man of principles. Venkat, Works Manager, w as the type that w anted to take
action regardless of past practice or policy. He considered himself as a resulted-oriented

The differing attitudes of the Works Manager and the Finance Manager had led to the
conflict on past occasions and Venkat had w arned Ansari on tw o occasions that if Ansari
could not carry out his instructions he was free to search for a job elsew here. Ansari argued
his case w ith a measure of success stating that his approach w as proper and that in
financial matters the policy guidelines had to be observed.

One afternoon Venkat approached Ansari and said, Here is an incentive plan for the
maintenance group. I am notifying it today and introducing it from tomorrow. Have a look at
it. Ansari appeared to be surprised. He had not know n that an incentive plan w as being
contemplated for maintenance w orkers , as the c ompanys policy till then w as to pay
incentives only to direct production w orkers. Nevertheless he took the plan w ith him and
returned to Venkat a couple of hours later. You cant introduce this plan straightaw ay. Said
Ansari to Venkat, and added, We have to give this some more thought. Our maintenance
costs are too highly mainly due to lack of adherence to norms on consumption of spare
parts. This incentive plan givers no w eightage to consumption of spare parts. Further, it w ill
only add to maintenance costs w ithout any real benefits to the company.

Venkats reaction w as one of anger, You understand nothing of incentive plans, he

retorted and added, and spare parts consumption is high due to poor quality of spares
bought by the materials department. Anyw ay, I dont intend to w aste time on this w ith you. I
am notifying this incentive plan today.

An altercation follow ed and the arguments of both Ansari and Venkat became so loud
that it attracted the attention of others in the hall, outside Venkats office. I am the boss
here, screamed Venkat and added, If you cant w ork w ith me and obey my instructions,
you are free to leave your job and go elsew here.

A few moments later Ansari w as back in his office, tired and sullen. He called in
secretary and said, No, I have no option, please w rite dow n. He dictated his letter of


1. Discuss the leadership style used by Venkat. How effective is his style? What changes
w ould you advise?

2. To w hat extent w ere Ansaris needs being considered? What kind of organizational
climate w as created?

Solution to the Case


This is basically a case of restraining leadership but to some extent it also brings out
issue relating to motivation of subordinates.

The fact of the case reveals:

1. The difference in the basic approach to leadership as betw een Venkat and Ansari.
Ansari is conservative in outlook, opposed to deviations from policy and a man of
principles, w hereas Venkat tends to ignore company policy and practices in an effort
to be result-oriented.

2. Ansari expects a role w hereby he can state his differences w ith his superior. He is
also capable of convincing his superior by expressing his point of view successfully.

3. Venkat is autocratic in his approach. He appears to be a person w ho concentrates

authority and decision making in himself and view s leadership as a matter of issuing
orders and believes that subordinates must obey them unquestioningly.

4. The situation as revealed by the facts of the case is one of conflict betw een the
subordinate and superior mainly due to the leadership style adapted by the superior.

5. Venkat does not consider it necessary to involve his subordinate in decision-making

or explain the rationale of the reasons for w hich he w ishes to make changes in respect
of the incentive scheme, deviating from company policy.

6. There is no effort on the part of Venkat to answ er the doubts raised by Ansari on the
demerits of the proposed incentive scheme clearly and cogently.

7. The conflict leads to a decision by the subordinate to quit the organization.

Leadership style used by Venkat

Venkats leaders hip style is autocratic and authoritarian. An authoritarian leader

concentrates all authority and decision-making pow ers on himself. There is no participation
by his subordinates in the decision making process, they simply do w hat they are told to do.

An autocratic leader believes that his leadership is based on the authority conferred
on him by his position and that his subordinate should follow instructions unquestioningly.

Autocratic leadership leads to lack of confidence and insecurity in the subordinate

and stifles creativity and innovate ability of his subordinate. The autocratic stifles subordinate
development and organizational effectiveness.

How effective is Venkats style?

Venkats style is not effective, view ed from the point of view of the leadership that a
Works Manager should provide. In fact it is Venkats style that has led to major conflicting
situation w ithin the organization betw een him and the Finance Manager, w hich had also
attracted the attention of other persons in the organization. This is bound to lead to a sense
of fear among all the persons in then organization and also frustration due to lack of
opportunity and fear on the part of subordinates to express a view different from that of their

Venkats style of leadership w ill lead to resentment and over a period resistance to
his orders. Further, the style adopted by Venkat w ill lead to his subordinates show ing no
active interest in their job, becoming hesitant in taking initiative and depending upon the
bosss instructions. All these factors can defeat the purpose for w hich Venkat is attempting
to modify the incentive scheme.

What Changes would you advise?

The facts of the case reveal that Ansari w as alw ays cognizant of companys policies
and procedures. He had the ability to argue his view point w ith a measure of success and
w here he differs from his superior, he w as w illing to state the reasons about his differences.
In this situation Venkat should have adopted a participative style of leadership w ith trust and
confidence in Ansari so that communication w ith him is open and teamw ork is build up.

To be effective leader, Venkat should have a greater measure of confidence and trust
in his subordinates, help them in the development of methods to achieve organizational
objectives and also encourage participation.

The fact of the case show that Ansari is w illing to explain to his superior his points of
view s on matters w here he differs from his superior. He seeks the freedom to discuss
matter s; his objective is to inter act w ith his s uperior w ithout f ear, bearing in mind
organizational goals.

The lack of communication that underlines the leadership style of Venkat and the
sense of insecurity that stems from the leadership adapted by Venkat had an adverse
impact on the feeling of pride that Ansari has. Pride is a pow erful and valuable motivator
and w hen this is stifled, the subordinate feels frustrated.

Ansari expects a measure of involvement in decision-making. Involvement satisfies

ones ego and self-esteem. But in the present situation Ansari is denied the opportunity for
involvement in decision-making.

Ansaris needs for motivation are not satisfied to any extent. This is the reason w hy
he decides to leave the organization.

Venkats style w ill lead to a climate w hen the subordinate refuses to participate in the
decision-making process. Subordinates w ill in this situation become yes men and refuse

to confidently accept authority delegated to them. In this environment, group effectiveness

w ill be low. In the final analysis this adverse climate w ill not provide a conducive atmosphere
for Venkat to be an effective leader w ho can function comfortably and achieve results
competently. Venkats claim that he is a result-oriented manager w ill be self-defeating if he
does not direct the organization to a participative style of leadership.

Example of a Case Study (open-ended)

Case Study-DEVS BANK

Devs Bank is an excellent example of a highly successful organization, w hich has

been able to maintain its success using an incremental adjustment process w hile operating
in a rapidly changing environment. During the 1980s and 1990s, changes occurred in the
environment of Australian financial institutions. These included rapid deregulation of the
financial services sector by the Australian Labour Government. The critical moves involved
w ere the floating of the Australian dollar, progressive removal of restrictions on competition
betw een banks, building societies, merchant banks, and other institutions w hich offer financial
services, and grant of new banking licenses including licenses to 16 foreign-ow ned banks
to operate in Australia.

From its inception as Hill Samuel Australia in the early 1970s, the banks strategic
focus w as merchant banking (investment banking). In 1980, the bank commenced a process
of diversification. But, w ith deregulation in the 1980s it diversified further, building up strength
in specialist markets, particular ly in high value-added niches (mar ket s egments) like
corporate services, bullion and commodities. The pace of diversification quickened by the
mid 1980s w ith the bank entering into a range of new areas including retail domestic banking,
equity investments, property and leasing. Grow th took place by w ay of both development
and acquisition. Devs remains one of Australias most successful and profitable banks. So,
how did Devs executives manage the needed organizational change?

Change in Devs has been a process of constant adjustment. One executive described
it this w ay: We never stay still, but w e dont change in quantum leapsour corporate
culture w ould preclude that. Running a business on partnership concepts means that policy
decisions are not dramatic, they evolve. The rapid grow th in Devss product range w as
accompanied by a quadrupling of staff strength in the 1980s. The number of business-

product units, or clus ters, increased to almost 30 by the late 1980s, presenting an
increasing problem of co-ordination in a collegial/partnership system w here unit heads
nominally report to the managing director.

The increase in size and complexity created problems of co-ordination. The obvious
answ er w as to create additional structures, systems, and controls, but this w as foreign to
the collegial values of the bank, w hich is staffed mainly by highly qualified professionals.
The strategy adopted w as to formulate a goals and values statementan articulation of
deeply held values about cultural and business behaviour, including how the process of
change should be managed. The statement is essentially a set of values and norms and
internal controls that substitute external control systems. Developing business units into
highly autonomous profit centres and then creating cross-functional synergies through more
systematic communication by management across these centres supplemented the efforts
for co-ordination.

But w hat w ere the methods adopted at Devs to bring about these changes? There
w as increasing convergence on a consultative style of management. The consolidation of
the style is reflected in the frequent use of the executive committee as a forum for discussion
of major issues and decisions. The collegial style w as symbolized by the fact that the
managing director shared the same open-plan office.

Interestingly enough, w hen first-line and middle-level managers w ere asked for their
perceptions of the banks leadership style, they saw it as substantially more directive than
consultative. All fifteen respondents w ho rated the managerial style this w ay indicated that
they thought this directive style w as appropriate. We need strength and decisiveness at
the top, one commented. Consistently, some w ho rated the leadership style as consultative
believed that the style w as not directive enough for the present environment. This is an
interesting c omment becaus e it challenges one of the basic ass umptions of the
organizational development movementw hich people desire to be consulted on issues
relating to organizational strategies. In a turbulent external environment, how ever, they may
prefer decisive leadership.

Devs does not have the all-encompassing human resource systems typical of some
organizations. It follow s an organic, developmental approach, aptly summarized by one

executive as follow s: w e recruit the best from universities and graduate schools, give them
on-the-job training and pay them top money. We are a meritocracy. We try to provide a
flexible organizational environment w here people can achieve. The policies are w ell suited
to a flat organizational structure w here specialist skills can be developed w ithin small w ork
teams, closely related to the product-market interface. It is not expected that Devs w ill
change the basic tenets of the meritocracy system. How ever, there w as sufficient evidence
during the study to indicate that the bank may need to consider more systematic approaches
to its human resource policies in the future.

The priority areas in human resource practices w ere:

Recruitment and s election (c orporate image of an employer is important; use of

psychological tests and the policy of grow ing our ow n from graduate trainees is a
key strategy)

Performance appraisal (an essential mechanism for tracking goal achievement and
helping in determining rew ards)

Rew ards and compensation (We pay w ell)

Organization and development (goals and values statement, team building, monthly
new sletter, etc.)

The question that naturally arises is how the bank w as able to maintain an incremental
strategy and achieve such outstanding results in such a dynamic environment? Its success
appears to have been mainly a function of its small size as compared to the other banks
and its combination of diversified niche strategies coupled w ith a loosely linked flexible
or ganization. Its short c ommunic ation chains and collegial-w or kfor ce culture led to
considerable flexibility in responding to changing market demands. These are strengths,
w hich larger organizations seek to emulate through the formation of decentralized, strategic
business units.

Devs Bank has been successful in operating this w ay so far. As the bank grow s
further, the executives w ill have to assess w hether these strategies can continue to prove
adequate. Nevertheless the case demonstrates that participative evolution can be an effective
change strategy even in a turbulent environment, at least for a relatively small, highly
specialized, and successful niche player such as Devs.*

This case extrac t is from Blackw ell Cases in Human Res our ce and Change
Management (Paperback) edited by John Storey (1995).

Devs Bank Case Analysis


This case study illustrates how Australia based Devs Bank could achieve success in
a rapidly changing environment making use of incremental adjus tment process. It w as
observed that during 1980s and 1990s, financial sectors reforms in Australia had intensified
competition in domestic banks. The spate of competition further got accentuated for entry
of foreign banks inAustralia. To keep pace w ith such competitiv e spree, Devs Bank, leveraging
the advantage of deregulation, changed its business focus, shifting fromtheir core merchant
banking operation to value added niche specialist markets, like; corporate services, bullion
and commodities. The bank had to increase the pace of diversification further extending its
activities to new areas like equity investments, property and leasing. Such incremental
adjustment process further got a boost by acquisition, w hich took Devs Bank, to the status
of one of the most successful and profitable banks of Australia. Obviously experience of
Devs Bank is now an important example before us to emulate.

Incremental adjustment process in a changed environment w ould not have been

possible for the bank w ithout strategic management of human resources. In any change
process it is inevitable. During the process of adjustment, Dev s bank sustained the
partnership concepts making their policy decisions as evolving one. To sustain rapid grow th
Devs Bank had to quadruple its staff members, increase its business product units to 30
clusters and then faced the challenge of increased coordination. Instead of going through
the normal process of creating additional structures and systems, taking the advantage of
qualified professionals, the bank chose to produce goals and values, enunciating certain
values and norms to develop a corporate culture and business behaviour, for autonomous
internal control. This w as further supplemented by developing strategic business units
(autonomous profit centers) and cross-functional synergies, i.e., converging to a consultative
style from their erstw hile collegial style.

Methods adopted by Macqurie Bank to bring about the changes, keeping pace w ith
the changing deregulatory environment can be identified firstly as managing by consultation.

This is opposite to directive style. This style primarily reflects extensive use of committee
for discussion and decisions on major issues. In any organizational change process, more
particularly in alike situation of Devs Bank, it is quite likely that people w ould like consultation
in organizational strategies. This how ever, may not be correct w hen external environment
is turbulent. In such cases decisive leadership may be a better option.

To w h at ext ent do es Devs Bank pr actice Strateg ic Hum an Res our ce

Managem ent? Use evidence from the article and the course to support your

During the process of change Devs Bank did practice strategic human resource
management. It not only focused on sustainability in a changing competitive environment
but also on grow th. Mahey and Law lon (1998) argued that there are three challenges, w hich
an organization has to w ithstand to sustain and gain competitive advantages. These are;
challenge of managing intangible assets, managing strategic change and innovation. Devs
bank had to face all these challenges due to rapidly changing financial sectors environment
in Australia. They could successfully respond to such challenges through practice of strategic
human r es ourc e management. Inc reas ing conv er genc e on cons ultative s ty le of
management through executive committee facilitated the bank to focus on strategic changes
through team working. We even find the trace of using life cycle model (Kochan and Baroach,
1985) by the bank during this change process. This the bank defines as organic development
approach. They not only recruited the best from universities and graduate schools but also
trained them on the job and paid them top money. Such practice of meritocracy further got
reinforced by creating a culture of achievement. Flexible organizational environment, flat
organizational structure, small w ork teams also furthered the meritocracy. Some of the
other models of SHRM, about w hich w e find evidence in Devs Bank, are use of best practice
view, pioneered by Huselid, 1995; Becker and Gerhart, 1996. In this model 18 key practices
are covered, bundles of w hich make one organisation to achieve sustainable competitive
advantage over the other. David Guest and Angela Baron (2000) study indicates it pay to
pursue best practice view of SHRM. Some of the best practices, like; induction training,
formation of work improvement teams, performance related pay, regular appraisals, equitable
HR policies, etc. are follow ed by Devs Bank.

Similarly w e als o find integration of best-fit model of SHRM pioneered by Buller (1988)
in Banks HR practices. They have integrated the environmental changes in their HR policy
responses to truly derive benefit from SHRM.

Reflec tion of res ourc e-based approac h to SHRM, pioneered by Pr ahalad and
Hammond, 1990; Storey (1995); Muller (1998), etc. is also traceable to banks practices.
Devs bank leverages bundle of tangible and intangible resources around their products and
services, integrates various skills, technologies and business process to get competitive

Based upon your findings m ake recom m endations on the next stage of
developm ents tow ard enhancing the strategic m anagem ent of people w ithin the
bank paying attention to the changing business environm ent.

Despite all these achievements, responding to the changed environment, the bank is
needed to re-look into their HR practices, as some of the HR practices need to be more
strategic. Follow ing recommendations are appropriate:

In recruitment and selection, corporate branding or image building is very important.

Recruitment process needs to be reinforced making use of psychological tests. Graduate
trainees should have career progression path, so as to give a message grow ing our ow n.
Even though they pay top money, there is no indication w hether the bank track goal
achievement and align the same to determine rew ards, making use of an ef fective
performance appraisal system. Hence just telling w e pay w ell do not spell out how strategic
is their rew ards and compensation structure.

Similarly, organization development initiatives also do not indicate about creating a

culture of shared value, extending the scope of consultative decision making beyond the
executive committee (by developing team culture), introducing a monthly new s letter are
some examples of required HR strategies.

Even though the bank c ould achieve outstanding performances by incremental

strategy, so far, w hich could be attributed to its relative small size (compar ed to their
competitors) and diversif ied niche strategies in a flexible organization and collegial w orkforce
culture, to sustain it in the long run, the bank require to be more strategic in their HR practices
for strategic management of people.

How can an organization such as the bank evaluate the success of the personnel
and HRM interventions?

Best w ay to evaluate the success of the personnel and HRM interventions is to go for
Organizational Diagnostic Survey, Balanced Score Card, HR Score Card, etc. There are
several other overriding objectives for most HR functions right now : improving efficiency;
adding greater value; and demonstrating this value to the businesses they support. Devs
Bank could make their HR functions highly effective by: defining their missions, analysing
their environments, s haping their s trategies and consequential activities and then
embedding processes to keep this process fresh.

This apart the bank can create strategic measures of success by creating processes
to guide internal HR consulting activity; crafting new performance measurement tools for
HR; re-shaping functional structures to fit activities; analysing and managing Stakeholders
and relationships; contracting w ith internal customers; contributing to business planning
and facilitating decision-making; aligning HR information to key business decision areas;
diagnosing business needs and underlying problems; designing interventions w hich are
explicitly business-linked; identifying, assessing and managing risks; creating cost-benefit
models for HR interventions; prioritising interventions and managing resource allocation;
managing project implementation; meas uring HR interv entions and their impac t; and
measuring internal customer satisfaction. Thus the bank can evaluate the success of the
personnel and HRM interventions follow ing the above approaches.


With above guidelines, now try the follow ing case studies:

Case Study Exercise 1

ABC Limited

ABC Limited w as a large paper manufacturing company in South India. The major
departments of the factory w ere;

(a) Chemical Process ing

(b) Pulp Department


(c) Paper Machine Department (PMD)

(d) Finis hing Depar tment

(e) Grading, Winding and Packing Department

(f) Quality Control Department

PMD w as the heart of the factory w here processed pulp w as fed into the paper
machines. At first, a w et w eak paper w as formed w hic h w as subsequently dried and rolled.
Tw enty eight w orkers w orked in the PMD in four groups- each group attending one machine.
The nature of the w ork on each machine w as such that all the seven w orkers had to w ork
in cooper ation. Because no indiv idual task could be specified, the group w as made
responsible for the w ork turned out by them. All the tw enty-eight w orkers in the FMD had
been w ith the company for over ten years. The company did not have any incentive w age
system for any class of its employs. They w ere all given straight salaries w ith nominal
annual increments. The annual increments w ere sanctioned each year in a routine w ay. It
w as the policy of the company that the increments should not be stopped unless the
concerned department head recommended such an action. Mr. Ruba w as placed in charge
of the PMD a year ago. Though Mr. Ruba w as new comer, He proved himself to be a very
competent person. The management noted that he w as very aggressive and enthusiastic
and knew his job w ell. At the end of the year, w hen increments w ere due to be sanctioned,
he recommended to the management that increments due to eleven men in his department
should be stopped, in his opinion they w ere lazy and inefficient. The eleven men concerned
belonged to all the four groups operating in the department. The management, though
puzz led about the action rec ommended by Mr. Ruba, ac ted upon it and stopped the
increments due to the eleven men concerned. The management w as aw are that such an
action w as the first of its kind in the history of the company and could lead to strained
relations betw een the management and the employees.

Soon af ter the ac tion w as taken, the eleven employ ees c onc erned made a
representation to the management requesting them to let them know w hat w as w rong w ith
their w ork as to w arrant stopping of their increments. There w as also some unhappiness
noticed among other w orkers in the company. The management w as naturally concerned
and tried to further ascertain the detailed reasons from Mr. Ruba. When Mr. Ruba could not

pin point the reasons, the management suspected that Mr. Ruba recommendations w ere
based on his impressions rather than the facts.


1. Evaluate the situation prevailing at this point of time in ABC Ltd.?

2. Was the action of the management proper?

3. As Management (Chief Executive) w hat advice, if any, w ould you give to Mr. Ruba?

4. How w ould you (as Chief Executive) handle the representation?

2. Case Study : Managing by Objectives

Managing by objectives is nothing new in our polic e department her e, said

Commis sioner Vishnu Kumar of the Metropolitan Police. We have alw ays established
objectives tow ard w hich everyone in our department strives. Our job is varied and diverse
but encompasses the maintenance of law and order, firmly but fairly; in addition, w e have to
protect human lives and property; and also to be the conscience and spirit of the general
w elfare of the millions of people w ho inhabit our city and call it home. Every man is aw are of
these objectives in our department and know s he w ill have to strive tow ards it. Now, I am
fully aw are that, being a service operation, w e cannot measure by the yardsticks of profits,
costs, sales, or product output, as is done in manufacturing concerns. How ever, I reiterate
very strongly that this does not mean w e are not managing by objectives. Ask anyone in my
department! Commissioner Kumar w as speaking to a management consultant w ho had
come over to discuss w ays and means of improving the efficiency of the police force by
introducing management by objectives in his department.


l. Do you think Commissioner Kumar is engaging in managing by objectives? What, if

anything is missing?

2. What w ould you suggest the Commissioner to do?


Model Question Paper





Tim e: Three hours Maxim um: 100 Marks

PART A (5 x 6 = 30 Marks)
Answ er any FIVE Questions.
All Questions carry equal Marks.

1. What are the important objectives of Performance Management?

2. What are the importances of Performance planning?

3. What is couselling? And its uses for performance.

4. Discuss the various discretionary benefits for employees.

5. Define Performance Management Systems (PMS). What are its main features?

6. What do you understand by the concept of mentoring?

7. Write a note on the goals and rew ards interdependence.

8. Define the selection performance measurement criteria.

PART B (5 x 10 = 50 Marks)
Answ er any FIVE Questions.
All Questions carry equal Marks.

9. Explain the various dimensions of w orkplace and the relevance of w orkplace to

performance of employees.

10. Briefly explain the steps in the performance appraisal process?

11. Ex plain the concept of competency. How competency development helps in

compensation design.

12. Discuss the important issues in executive compensation.

13. Explain the difference countries compensation packages.

14. List three performance factors that an employer might evaluate during the review

15. What do you understand by the performance of the organization?

16. Explain the various employment relations and involvement strategies.

PART C (1 x 20 = 20 Marks)

17. Managing by Objectives

Managing by objectives is nothing new in our polic e department her e, said

Commis sioner Vishnu Kumar of the Metropolitan Police. We have alw ays established
objectives tow ard w hich everyone in our department strives. Our job is varied and diverse
but encompasses the maintenance of law and order, firmly but fairly; in addition, w e have to
protect human lives and property; and also to be the conscience and spirit of the general
w elfare of the millions of people w ho inhabit our city and call it home. Every man is aw are of
these objectives in our department and know s he w ill have to strive tow ards it. Now, I am
fully aw are that, being a service operation, w e cannot measure by the yardsticks of profits,
costs, sales, or product output, as is done in manufacturing concerns. How ever, I reiterate
very strongly that this does not mean w e are not managing by objectives. Ask anyone in my
department! Commissioner Kumar w as speaking to a management consultant w ho had
come over to discuss w ays and means of improving the efficiency of the police force by
introducing management by objectives in his department.


l. Do you think Commissioner Kumar is engaging in managing by objectives? What, if

anything is missing?

2. What w ould you suggest the Commissioner to do?