Approaches for measuring performance of employees

Measuring performance of employees is the backbone of any organization’s

management. Business owners usually measure employee performance by
assessing how much contribution the employee is making to the firm’s growth.
This is conveyed to the employee at the time of their performance appraisal.
Performance appraisal refers to the evaluation of employees, providing them with
valuable feedback and creating a positive effect on future performance. Employee
performance depends upon a number of factors such as;

 conducive work environment

 work profile
 compensation
 bonus system
 job satisfaction
 company policies
 technology

These factors play an important role in determining the employee productivity and
hence the overall organizational development.

Different approaches of measuring performance

Organisations can use different strategies and approaches for the purpose of
measuring performance of their employees. The five major approaches are:

1. Comparative approach,
2. Attribute approach,
3. Behavioral approach,
4. Result Approach and
5. Quality approach.

Each of these approaches differ in characteristics and suitability. A firm can select
any one or a combination of these approaches on the basis of their business goals
and management type.

Comparative approach of measuring

performance
Comparative approach involves ranking an employee’s performance with respect
to that of others’ in the group. Individuals are ranked on the basis of highest to the
lowest performer. There are several techniques for comparative approach such as
forced distribution technique, paired comparison and graphic rating scale (Noe
2008). Forced Distribution technique involves ranking employees in groups.

For example a group of top performers constituting 10%, a group of average

performers constituting 40%, another group of good performers constituting 40%.
Finally, a group of low performers constituting the remaining 10%.

This ensures reward for the top performers. Given proper training and guidance
these top performers can be promoted to higher managerial positions. While the
poor performers are given chance for further improvisation or dismissed, if their
performance does not meet the standard requirements. This will in turn causes new
talent hire (Martocchio 2011).

The system ranks the employees on the basis of categorisation rules rather than on
their performance. In such cases employees with higher rankings would get better
pay than those with lower rankings though they may not deserve it.

In Paired Comparison Technique the organization compares one performer with

the other and assigns a score of 1 for the higher performer. The final performance
score is the summation of all the winning points.

Comparative approach is undertaken in case of firms with a small group of

employees with similar job profiles. Therefore, the disadvantage is that it is
unsuitable in case of firms with a large number of employees or a firm with
different job profiles. Also, since the scale is based on subjective judgment, there is
a high chance of bias (Taylor et al. 2007).

Attribute approach of measuring performance

In this system, the employees are rated on the basis of a specific set of parameters
such as:

 problem solving skills,

 teamwork, communication,
 judgment, creativity and
 innovation.

Graphic Rating Scale entails rating the employee on a scale of 1 to 5 (lowest to

highest). Mixed rating scale is a more layered form of measurement. In the first
step, the employee is rated as high, medium or low on a given set of parameters.
Each parameter is then broken down and scaled as above (+), equal (0) or below (-)
(Shaout & Yousif 2014).

The major disadvantage with attribute approach of performance measurement is

that of subjectivity. In other words it may be heavily reliant on the nature of the
evaluator. Another limitation of this method is that it is accurate at identifying only
the best and the worst performers. However, the advantage of this method is its
simplicity, because of which most organisations go with it (Landy & Conte 2007).

Behavioural approach of measuring performance

This is one of the oldest performance measurement techniques. The Behavioural
approach consists of a series of vertical scales for different dimensions of the job.
This can be done using BARS technique or BOS technique. The Behaviourally
Anchored Rating Scale (BARS) technique consists of five to ten vertical scales.
These scales are based on parameters (called “anchors”) which are decided
consensually from all employees. Employees are then ranked on each of the
anchors according to their performance.

On the other hand, Behavioural Observation Scale (BOS) is an recent version of

BARS. It provides a more specific description along with frequency in regards to
the employee behaviour for an effective performance. The overall score is the
average of all these frequencies. Although the Behavioral approach is suitable for
the reliability and accuracy, the major drawback in this approach is the voluminous
data that the managers have to remember. Supervisors tend to remember only those
behaviours that define closely to the performance scale which leads to a biased
rating (Bohlander & Snell 2010).

Result approach of measuring performance

This approach is a simple and straight-forward concept, wherein organisation rate
employees on the basis of employee performance results. The first type of result
approach is the Balanced Scorecard technique. This technique focuses on four
perspectives namely:

1. financial,
2. customer,
3. internal & operations and
4. learning & growth.

The second approach is Productivity Measurement and Evaluation System

(ProMES). It is very effective in motivating employees for enhanced productivity
and measuring the feedback. It consists of four steps. The first step is to identify
the objectives which the organisation want to achieve. The second step measures
how well these objectives are made. While the third step involves how effective
are they in evaluating the employee performance. Finally, the last step gives
feedback to the employees. Organisations calculate an overall productivity score as
a summation of the performance scores of all these factors.

The main advantage of result-based approach of performance measurement is that

it converts strategy into operations with a more holistic view. It takes into
consideration the external environment of the job such as like customers and
learning and growth. It does not simply rely on financial indicators of job
performance. However the disadvantages are the lack of focus on human resource
aspect, and absence of certain key stakeholders in the indicators (Gomes & Romao
2014).

Quality approach of measuring performance

This approach focuses on improving customer satisfaction by reducing errors and
achieving continuous service improvisation. This approach takes into consideration
both person and system factors. Also employers take regular feedback on the
personal and professional traits of the employee from managers, peers and clients
to resolve performance issues. The Quality Approach mainly focuses on the use of
Kaizen process in order to continuously improve the business processes. The
advantages of this approach includes:

 assessment of both employee and system,

 problem solving through teamwork,
 use of multiple sources to evaluate performance and
 involvement of both internal and external factors

However practitioners of this approach believe that this approach does not
correspond with quality philosophy of an organisation (Noe 2008).

Benefits of using performance measuring

approaches
Organisations can use all these approaches together effectively to evaluate the
employee performance. This has positive impact on employees’ motivation and
they tend to perform better. They can identify their strengths and weaknesses and
work on improving their skillsets. Since the employees are well aware of the
organizational goals, they can also work on improvising their skills further to
achieve them. Employee performance enhances the communication between an
employee and the supervisor to discuss job duties and work related issues for a
healthy work environment. With the changing trend, more recent techniques and
approaches are being formulated to measure employee productivity and
organizational performance.

Performance measurement is the process of collecting, analyzing and/or reporting

information regarding the performance of an individual, group, organization, system or
component.. Definitions of performance measurement tend to be predicated upon an
assumption about why the performance is being measured.

Within the operations area, standard individual performance measures could be

productivity measures, quality measures, inventory measures, lead-time measures,
preventive maintenance, performance to schedule, and utilization. Specific measures could
include: Cost of quality: measured as budgeted versus actual.

Performance metrics. Performance metrics are used to measure the behavior, activities,
and performance of a business. This should be in the form of data that measures required
data within a range, allowing a basis to be formed supporting the achievement of overall
business goals.
PERFORMANCE MEASUREMENT
Improvement in individual, group, or organizational performance cannot occur unless
there is some way of getting performance feedback. Feedback is having the
outcomes of work communicated to the employee, work group, or company. For an
individual employee, performance measures create a link between their own
behavior and the organization's goals. For the organization or its work unit's
performance measurement is the link between decisions and organizational goals.
It has been said that before you can improve something, you have to be able to
measure it, which implies that what you want to improve can somehow be quantified.
Additionally, it has also been said that improvement in performance can result just
from measuring it. Whether or not this is true, measurement is the first step in
improvement. But while measuring is the process of quantification, its effect is to
stimulate positive action. Managers should be aware that almost all measures have
negative consequences if they are used incorrectly or in the wrong situation.
Managers have to study the environmental conditions and analyze these potential
negative consequences before adopting performance measures.

TYPES OF PERFORMANCE MEASURES

Performance measures can be grouped into two basic types: those that relate to
results (outputs or outcomes such as competitiveness or financial performance) and
those that focus on the determinants of the results (inputs such as quality, flexibility,
resource utilization, and innovation). This suggests that performance measurement
frameworks can be built around the concepts of results and determinants.
Measures of performance of a business usually embrace five fundamental, but
interlinking areas:

1. Money, usually measured as profit

2. Output/input relationships or productivity
3. Customer emphasis such as quality
4. Innovation and adaptation to change
5. Human resources

Within the operations area, standard individual performance measures could be

productivity measures, quality measures, inventory measures, lead-time measures,
preventive maintenance, performance to schedule, and utilization. Specific measures
could include:

1. Cost of quality: measured as budgeted versus actual.

2. Variances: measured as standard absorbed cost versus actual expenses.
3. Period expenses: measured as budgeted versus actual expenses.
4. Safety: measured on some common scale such as number of hours without
an accident.
5. Profit contribution: measured in dollars or some common scale.
6. Inventory turnover: measured as actual versus budgeted turnover.

While financial measures of performance are often used to gauge organizational

performance, some firms have experienced negative consequences from relying
solely on these measures. Traditional financial measures are better at measuring the
consequences of yesterday's actions than at projecting tomorrow's performance.
Therefore, it is better that managers not rely on one set of measures to provide a
clear performance target. Many firms still rely on measures of cost and efficiency,
when at times such indicators as time, quality, and service would be more
appropriate measures. To be effective, performance yardsticks should continuously
evolve in order to properly assess performance and focus resources on continuous
improvement and motivating personnel. In order to incorporate various types of
performance measures some firm's develop performance measurement frameworks.
These frameworks appear in the literature and vary from Kaplan and Norton's
balanced scorecard to Fitzgerald's framework of results and determinants.
Kaplan and Norton's balanced scorecard approach operates from the perspective
that more than financial data is needed to measure performance and that
nonfinancial data should be included to adequately assess performance. They
suggest that any performance measurement framework should allow managers to
ask the following questions:

 How do we look to our shareholders? (financial perspective)

 What must we excel at? (internal business perspective)
 How do our customers see us? (customer perspective)
 How can we continue to improve and create value? (innovation and learning
perspective)

However, the balanced scorecard is flawed as it does not allow for one of the most
important questions of all:
• What are our competitors doing? (the competitor perspective)
Keegan proposed a similar, but lesser known, performance measurement framework
titled the "performance matrix." The performance matrix is more flexible, as it is able
to integrate different dimensions of performance, and employs generic terms such as
internal, external, cost, and noncost.

What are the different types of performace

measures?
There are five specific types of measures that have been identified, defined and will
be applied throughout Iowa state
government: input, output, efficiency, quality and outcome.
Input
Input measures monitor the amount of resources being used to develop, maintain,
or deliver a product, activity or service. Examples include:

 Money spent on equipment

 Number of employee hours worked
 Number of vehicles
 Facility costs
 Total operating expenditures
 Rental fees
 Number of full-time employees
Output
Output measures monitor “how much” was produced or provided. They provide a
number indicating how many items, referrals, actions, products, etc. were
involved. Examples include:

 Number of permits issued

 Number of pavement miles resurfaced
 Number of people trained
 Number of water leaks fixed
 Number of cases managed
 Number of arrests made
 Number of documents processed
 Number of clients served
Efficiency
Efficiency measures are used to monitor the relationship between the amount
produced and the resources used. This means that efficiency measures are created
by comparing input and output, see expressing measures with two or more
variables. There are two general types of efficiency measures: unit cost and
productivity. Unit cost is a comparison of an input to an output (i.e. resources
used/number produced). Productivity is a comparison of an output to an input (i.e.
number produced/resources used). Examples include:
Unit Cost
 Cost per license issued
 Cost per employee taught
 Cost per lane-mile paved
 Cost per client served
 Cost per document
Productivity
 Licenses processed per employee-hour
 Units produced per week
 Students taught per instructor
 Cases resolved per agent
 Calls handled per hour
Quality
Quality measures are used to determine whether customer expectations are being
met. These expectations can take many forms, including: timeliness, accuracy,
meeting regulatory requirements, courtesy, and meeting customer needs. The
expectations can be identified as a result of internal or external feedback.

The comparison of outputs is often used to create measures of quality. It may be

important to identify certain aspects (aspects / total outputs) about the services,
products or activities produced by an organization that are important to its
customers. This comparison of specific outputs to total outputs is used to create
measures of accuracy, timeliness and to determine the extent regulatory
requirements are met. Quality measures can also be derived from the evaluation of
customer feedback data. See expressing measures with two or more variables.
Examples include:

Timeliness
 Busy signal rate
 Percent of drivers licenses issued within one hour.
Accuracy
 Percent of applications requiring rework due to internal errors.
 Taxpayer error rate on tax returns.
Requirements
 Percent of wells meeting minimum water quality requirements.
 Percentage of clients that rated themselves as successfully rehabilitated.
Meeting Customer Needs
 Percentage of customers that rated service good, very good or excellent.
Outcome
Outcome measures are used determine the extent to which a core function, goal,
activity, product, or service has impacted its intended audience. These measures
are usually built around the specific purpose or result the function, goal, service,
product, or activity is intended to deliver or fulfill. An outcome measure should show
progress towards or achievement of agency mission or goals. See expressing
measures with two or more variables. Examples include:
 Highway death rate
 Crime recidivism rate
 Percent of persons able to read and write after attending a remedial
 education course
 Percent of entities in compliance with requirements
 Percent of clients rehabilitated
 Percent of cases resolved

DESIGNING THE PERFORMANCE

MEASUREMENT SYSTEM
A number of suggestions have been offered by various experts on the subject of
designing performance measurement systems. Below is a list of suggestions derived
from a number of these experts. Some of these apply to all measures and some
apply to a limited number of a firm's measures. A firm's performance measures
should:

 Be simple and easy to use.

 Have a clear purpose.
 Provide fast feedback.
 Cover all the appropriate elements (internal, external, financial and
nonfinancial).
 Relate to performance improvement, not just monitoring.
 Reinforce the firm's strategy.
 Relate to both long-term and short-term objectives of the organization.
  Match the firm's organization culture.
 Not conflict with one another.
 Be integrated both horizontally and vertically in the corporate structure.
 Be consistent with the firm's existing recognition and reward system.
 Focus on what is important to customers.
 Focus on what the competition is doing.
 Lead to identification and elimination of waste.
 Help accelerate organizational learning.
 Help build a consensus for change when customer expectations shift or
strategies and priorities call for the organization to behave differently.
 Evaluate groups not individuals for performance to schedule.
 Establish specific numeric standards for most goals.
 Be available for constant review.

Other recommendations for organizations that are developing performance

measures include:

1. Data collection and methods of calculating the performance measure must be

clearly defined.
2. Objective performance criteria are preferable to subjective ones.
3. Recognize that measures may vary between locations; avoid a "one size fits
all" mentality.

Wisner and Fawcett provide a nine-step process for developing a performance

measurement system:

1. Clearly define the firm's mission statement.

2. Identify the firm's strategic objectives using the mission statement as a guide
(profitability, market share, quality, cost, flexibility, dependability, and
innovation).
3. Develop an understanding of each functional area's role in achieving the
various strategic objectives.
4. For each functional area, develop global performance measures capable of
defining the firm's overall competitive position to top management.
5. Communicate strategic objectives and performance goals to lower levels in
the organization. Establish more specific performance criteria at each level.
6. Assure consistency with strategic objectives among the performance criteria
used at each level.
7. Assure the compatibility of performance measures used in all functional
areas.
8. Use the performance measurement system to identify competition, locate
problem areas, assist the firm in updating strategic objectives and making
tactical decisions to achieve these objectives, and supply feedback after the
decisions are implemented.
9. Periodically reevaluate the appropriateness of the established performance
measurement system in view of the current competitive environment
 12 Characteristics of Effective Metrics
Creating performance metrics is as much art as science. To guide you in your quest, here are
12 characteristics of effective performance metrics.

1. Strategic. To create effective performance metrics, you must start at the end point--with
the goals, objectives or outcomes you want to achieve--and then work backwards. A good
performance metric embodies a strategic objective. It is designed to help the organization
monitor whether it is on track to achieve its goals. The sum of all performance metrics in
organization (along with the objectives they support) tells the story of the organization’s
strategy.

2. Simple. Performance metrics must be understandable. Employees must know what is

being measured, how it is calculated, what the targets are, how incentives work, and, more
importantly, what they can do to affect the outcome in a positive direction. Complex KPIs
that consist of indexes, ratios, or multiple calculations are difficult to understand and, more
importantly, not clearly actionable.

"We hold forums where we show field technicians how our repeat call metric works and how
it might impact them. We then have the best technicians meet with others to discuss strategy
and techniques that they use to positively influence the metric," says a director of customer
management at an energy services provider.

3. Owned. Every performance metric needs an owner who is held accountable for its
outcome. Some companies assign two or more owners to a metric to engender teamwork.
Companies often embed these metrics into job descriptions and performance reviews.
Without accountability, measures are meaningless.

4. Actionable. Metrics should be actionable. That is, if a metric trends downward, employees
should know what corrective actions to take to improve performance. There is no purpose in
measuring activity if users cannot change the outcome. Showing that sales are falling isn’t
very actionable; showing that sales of a specific segment of customers is falling compared to
others is more actionable.

Actionable metrics require employees who are empowered to take action. Managers must
delegate sufficient authority to subordinates so they can make decisions on their own about
how to address situations as they arise. This seems obvious, but many organizations
hamstring workers by circumscribing the actions they can take to meet goals. Companies
with hierarchical cultures often have difficulty here, especially when dealing with front-line
workers whose actions they have historically scripted. These companies need to replace
scripts with guidelines that give users more leeway to solve problems in their own novel
ways.

5. Timely. Actionable metrics require timely data. Performance metrics must be updated
frequently enough so the accountable individual or team can intervene to improve
performance before it is too late. Some people argue that executives do not need actionable or
timely information because they primarily make strategic decisions for which monthly
updates are good enough. However, the most powerful change agent in an organization is a
top executive armed with an actionable KPI.

6. Referenceable. For users to trust a performance metric, they must understand its origins.
This means every metric should give users the option to view its metadata, including the
name of the owner, the time the metric was last updated, how it was calculated, systems of
origin, and so on. Most BI professionals have learned the hard way that if users don’t trust the
data, they won’t use it. The same is true for performance metrics.

7. Accurate. It is difficult to create performance metrics that accurately measure an activity.

Part of this stems from the underlying data, which often needs to be scanned for defects,
standardized, deduped, and integrated before displaying to users. Poor systems data creates
lousy performance metrics that users won’t trust. Garbage in, garbage out. Companies should
avoid creating metrics when the condition of source data is suspect.

Accuracy is also hard to achieve because of the way metrics are calculated. For example, a
company may see a jump in worker productivity, but the increase is due more to an uptick in
inflation than internal performance improvements. This is because the company calculates
worker productivity by dividing revenues by the total number of workers. Thus, a rise in the
inflation rate, which artificially boosts revenues—which is the numerator in the metric—
increases worker productivity even though workers did not become more efficient.

Also, it is easy to create metrics that do not accurately measure the intended objective. For
example, many organizations struggle to find a metric to measure employee satisfaction or
dissatisfaction. Some might ask users in surveys but it’s unclear whether employees will
answer questions truthfully. Others might use the absenteeism rate but this might be skewed
by employees who miss work to attend a funeral, care for sick family members, or stay home
when daycare is unavailable.

8. Correlated. Performance metrics are designed to drive desired outcomes. Many

organizations create performance metrics but never calculate the degree to which they
influence the behaviors or outcomes they want. Companies must continually refresh
performance metrics to ensure they drive the desired outcomes.

9. Game-proof. Organizations need to test all performance metrics to ensure that workers
can’t circumvent them out of laziness or greed or go through the motions to make a red light
turn green without making substantive changes. “Users always look for loopholes in your
metrics,” says one BI manager. To prevent users from “fudging” customer satisfaction
numbers, one company hires a market research firm to audit customer surveys.

10. Aligned. It’s important that performance metrics are aligned with corporate objectives
and don’t unintentionally undermine each other, a phenomenon called “sub-optimization.” To
align metrics, you need to devise them together in the context of an entire ecosystem
designed to drive certain behaviors and avoid others.

11. Standardized. A big challenge in creating performance metrics is getting people to agree
on the definitions of terms, such as sales, profits, or customer, that comprise most of the
metrics. Standardizing terms is critical if organizations are going to distribute performance
dashboards to different groups at multiple levels of the organization and roll up the results.
Without standards, the organization risks spinning off multiple, inconsistent performance
dashboards whose information cannot be easily reconciled.

12. Relevant. A performance metric has a natural life cycle. When first introduced, the
performance metric energizes the workforce and performance improves. Over time, the
metric loses its impact and must be refreshed, revised, or discarded.

"We usually see a tremendous upswing in performance when we first implement a scorecard
application,” says a program manager at a major high tech company. “But after a while,
performance trails off. In the end you can’t control people, so you have to continually re
educate them about the importance of the processes that the metrics are measuring or you
have to change the processes."