UNIT-5

Performance Management System

The performance management system is the systematic approach to measuring

the performance of employees. It is a process through which the organization aligns its
mission, goals, and objectives with available resources (e.g. Manpower, material, etc),
systems, and set the priorities.
Benefits of Performance Management

In today’s global environment where the market is evolving at a very fast pace, it is important
for an organization to understand the benefits of performance management. Therefore,
managing employee performance is the ultimate need of an organization. The employees are
considered an asset by the organization. The performance management  system serves
various benefits to the organization, which are as follows:
1. It supports providing data to find the skills and knowledge gaps of employees in
order to improvise them through training, coaching, and mentoring systems.
2. It motivates employees to take on new challenges and innovate through the
structure process.
3. It provides new opportunities to employees for their growth and development in
their professional careers
4. It defuses the grievances and conflicts among team members through a proper
performance evaluation system.
5. It assesses the employee’s performance fairly and accurately against the
performance targets and standards.
6. Employees would enable to provide better results because of clarity on their
performance targets.
7. Performance management system provides the platform to discuss, develop and
design the individual and department goals through discussion among manager and
their subordinates.
8. The underperformer can be identified through performance reviews and can raise
their skills levels objectively. It quantifies the learning needs through individual
development plans or performance improvement plans as well
What Are Performance Objectives?

Performance objectives are goals that employers define for employees to help achieve
business goals.  The purpose of communicating these objectives to employees is so that
employees can understand how their responsibilities and actions affect the overall business.
Furthermore, employers have a go-to guide as to how to assess an employee’s work at any
given time. 

When employees and employers discuss and outline key performance objectives, it allows
employees to gain a sense of ownership over their work.

Performance Objectives

#1 Quality

Customers, employees and stakeholders look for quality in a product and/or service. It’s one
of the primary attributes of what makes a customer value what your business offers, and in
turn, helps to reduce turnover. This means that your business offering must be consistent and
meet the standards and expectations every time. By focusing on quality, organisations can
help to eliminate waste, better satisfy customers and boost growth potential. One simple way
to ensure quality outputs is to automate and standardise processes. 

#2 Speed

Speed refers to the turn-around time between customer contact and business reply. Whether
it’s the speed of delivering a tangible good or resolving a customer complaint, it can make or
break a business and its reputation. It’s also a way to differentiate your business from the
competition. Given equal quality, the faster to market provider will win every time!
Automation tools help to eliminate bottlenecks, alert employees of potential problems in
advance, and produce results in a timely manner. 

#3 Dependability

Dependability comes down to being reliable and trusted by your customers. When a client
knows what to expect and that said product or service will be delivered as promised, they are
more likely to return and recommend your offering to others. It’s a key measurement as a
performance objective because it helps to ensure that employees are aligned with overall
business objectives. Automation tools can aid in ensuring a dependable service because you
can leverage big data to track progress and assess KPIs in real-time. 

#4 Flexibility

Markets and customers’ needs change on the fly. It’s up to a business to be able to remain
flexible and adaptive to meet such changing needs. There are many ways to remain flexible,
including: offering new products and features, expanding your current product’s capabilities,
changing the delivery speed or timing of an outcome, etc. With flexibility, you can gain
competitive edge. To remain flexible, you can leverage an adaptive operational mindset. For
starters, implementing a software solution to automate processes and track KPIs can help. For
example, you may notice that reports are not being submitted by deadlines, which could
signal a bottleneck in an approval process. You can apply technical resolutions to shift the
service back on track while mitigating risks. 

#5 Cost 

Naturally, customers may choose one product over another because of cost. It’s up to you as
CFO to help find ways to minimise costs and maximise profits. Optimising your operations
and processes can contribute greatly to lower costs. This way, customers can still trust your
business to deliver dependable, timely, flexible, and quality products, without having to
overpay. With automation tools, you can help to maximise productivity, which in turn, will
lower costs. You can also decrease errors through automation, which then saves on the cost
of fixing those errors.

What Is a KPI?

A Key Performance Indicator (KPI) is a quantifiable metric that reflects how well an
organization is achieving its stated goals and objectives.

For example, if one of your goals is to provide superior customer service, you could use a
KPI to target the number of customer support requests that remain unsatisfied at the end of
each week. This will measure your progress toward your objective.

Types of KPIs

1.Quantitative Indicators

Quantitative indicators are the most straight-forward KPIs. In short, they are measured solely
by a number. There are two types of quantitative indicators — continuous and discrete.
 Continuous quantitative indicators can take any value (including decimals) over a range and
may include measurements like Miles Traveled (for a mobile service or shipping business)
or Time Spent Per Call for call centers and help desks. Discrete quantitative measures are
whole numbers and include things like complaints, accidents, and customer acquisition nu
mbers. 
2.Qualitative Indicators

Qualitative indicators are not measured by numbers. Typically, a qualitative KPI is a

characteristic of a process or business decision.
 A common qualitative indicator that organizations regularly use would be an employee
satisfaction survey. While some of the survey data would be considered quantitative, the
measures themselves are based on the opinion of a person. Qualitative indicators tend to
focus more on experiences or feelings and the intangible value we place on them. 
3.Leading Indicators
Metrics used as a predictive measure of future performance. Leading indicators give early
indications of performance. These indicators “lead” to results by showing the progress you’re
making toward your goal.
Say your goal is to close 50 new deals, but your sales cycle is six months. You would want to
set leading indicators to help you see if you’re on track to meet your goal in the early months
while you’re still far enough ahead to make changes. By tracking these metrics, you can
monitor sales activity on an ongoing basis and see if your team needs to increase outreach
efforts to meet your Deals Closed goal.

 4.Lagging Indicators

An indicator of past performance that measures how we performed.

Eg customer satisfaction, no. calls attended.

Lagging indicators are used to measure results after an action has taken place in order to
reflect upon the success or failure of that initiative. Lagging indicators enable businesses to
determine whether their business decisions facilitated the desired outcome.

. The other issue with lagging indicators is that as they provide a historical view, it is
sometimes too late to make corrections to address shortfalls.

For example, a signed contract would represent a lagging indicator for a sales team but
potentially a leading indicator for a finance team. 

5.Input Indicators
Input indicators are used to measure resources needed for a business process or project. They
are necessary for tracking resource efficiency in large projects with a lot of moving parts, but
are also useful in projects of all sizes.
 Some examples of input indicators include staff time, cash on hand, or equipment required. 
6.Process Indicators

Process indicators are used specifically to gauge the performance of a process and, hopefully,
facilitate any needed changes. A very common process indicator for support teams are KPIs
focused around customer support tickets. Tickets resolved, tickets opened, and average
resolution times are all process indicators that shed light on the customer support process. In
this example, that data can be used to influence changes in the support process to improve
efficiency and response time or resolution time.
 7.Output Indicators
Output indicators measure the success or failure of a process or business activity. Output
indicators are one of the most used KPI types. Examples of output KPIs include revenues,
profits, or new customers acquired.
. 8.Directional Indicators
Directional indicators help determine the company’s success in comparison with
competitors, while practical indicators are specific to the company’s process within itself. .
9.Actionable Indicators

Actionable KPIs measure a company’s ability to enact change whether through political
action or a shift in company culture.

Actionable indicators measure and reflect a company’s commitment and effectiveness in

implementing business changes.. These metrics are used to determine how well a company is
able to enact their desired changes within specified time-frames.
10. Financial Indicator
Financial indicators are the measurement of economic stability, growth, and business
viability. Some of the most common financial KPIs include gross profit margin, net profit,
aging accounts receivable, and asset ratios.
 Financial indicators provide straightforward insight into the financial health of a company
but must be paired with the other KPI types mentioned in this article to provide a complete
picture.

What Are Performance Metrics?

Performance metrics are data used to track processes within a business.This is achieved using
activities, employee behavior, and productivity as key metrics.These metrics are then used by
employers to evaluate performance.This is in relation to an established goal such as employee
productivity or sales objectives.

What Is the Difference Between Performance Metrics and a KPI?

Performance metrics, or PMs, are measured within a certain area of a business. This tends to
be against a predesigned goal. That means that you receive a broader range of data than a key
performance indicator, or KPI.

A KPI will use a specific metric to measure performance.

For example, a PM could measure the productivity of the warehouse and shipping department
compared to a set goal. Whereas a KPI would measure how fast the warehouse and shipping
department can turn an order into a delivery.
Performance Management Model (PCER)

The performance management process is intended to create an ongoing dialogue between the
supervisor and employee. The Division of Human Resources and Organizational
Effectiveness recognizes the PCER (Plan, Coach, Evaluate, and Reward) model for
facilitating the performance management process. Through this process, best practices are
utilized to create a performance plan, coach for successful completion of the plan, and
complete the annual performance evaluation.

 Plan: Performance Management begins when the supervisor reviews the employee's
position restriction, communicates competencies, creates goals, and discusses them
with the employee. This helps establish mutual understanding of the performance and
behavioral expectations.
 Coach: The supervisor provides coaching and feedback throughout the year to help
their employees successfully reach their goals. The goals and any other
documentation created during the Plan phase become a working document to be
referenced, and revised if necessary, throughout the performance review period. The
supervisor and employee can each create notes about employee performance at any
time which are tracked outside the Workday system.
 Evaluate: During the evaluation process, the supervisor may rely on multiple
resources, such as the employee self evaluation, performance notes created during the
year, accolades, and customer feedback to assess the employee's performance. The
supervisor meets with the employee to discuss the performance evaluation, explain
the ratings, and provide feedback about strengths and areas for improvement. The
supervisor then completes the evaluation in Workday and sends it to the employee to
review and acknowledge before formally closing the review in Workday.
 Reward: The supervisor recognizes and rewards performance at year-end and during
the year as merited.

Dimensions of Performance

Performance has many dimension:

Dimension # 1. Result and Output:

The most acceptable and measurable dimension of performance is result and output. It

describes the conditions of inputs which included raw material, working conditions, process

capabilities and talent of employees in the final form of product or service. It is necessary to

plan all the performance activities in a scientific and systematic manner so that the desired

result or output may be obtained.

Dimension #  2. Input:

This dimension deals with the activities to be accomplished by the employee. Performance

can be achieved if the nature of inputs can be managed without mistake, because performance

is a function of three sets of factors – ability, motivation and organizational support. If

anyone among these three factor is less the performance is to be poor.

Employee Performance = Employee Competence + Employee Motivation + Organisational

Support
Dimension #  3. Time:

Time is precious and very important dimension of performance. In the current scenario of

world, the performance management is time bound otherwise the survival of organisation is

not possible in the future. Performance of an employee in relation to a given role during

particular period of time under the set of circumstances operating at that point of time.

Therefore, time may become the target.

Dimension #  4. Focus:

Performance also has a focus dimension. For example in case of sales, profits and new areas.

Focus means attention, not only on own activities but should also keep close watch on related

activities.
Dimension #  5. Quality:

‘Quality is not destination but a journey’. Quality refers to doing the things right from the

first time rather than making and correcting mistakes in order to achieve total customer

satisfaction. It means quality is conformance to customer requirements, not goodness. Higher

is the quality greater is the satisfaction of customers. It is the responsibility of each and every

employee as well as management to build a quality standard which provides reasonable

customer satisfaction at economical cost. Quality is the core dimension of performance

management.
Dimension #  6. Cost:

The ultimate principle of purchasing is the low cost with best quality. Therefore cost

effectiveness is another dimension of performance management. It implies the capacity of a

business unit to produce a given commodity at a lower cost through more effective utilization

of existing resources. It is the process of cost reduction by improving efficiency of

operations.
Dimension #  7. Output:

Output relationships and analysis- It is relevant and essential to understand the input-output

relationships and analysis. The purpose of input-output analysis is to find out the

interdependencies and complexities of the economy in order to determine the conditions for

maintaining balance between demand and supply. It describes the inputs required to produce

the outputs of different sectors of the economy. It also involves the study of the exchange of

goods and services among industries.

What Is Competency-Based Pay?

Competency-based pay is a pay structure that compensates employees based on their skill set,
knowledge, and experience rather than their job title or position.  A competency-based pay
plan encourages employees to reach the pay rate that they want by taking charge of
improving their skills and work.

What Is the Difference Between Competency-Based and Traditional Pay Plans?

The main difference between competency-based and traditional pay plans is employee
potential. Because traditional pay plans are based on an employee’s job title and position,
their pay can be limited by their ability to move up in seniority at their organization.
However, in a competency-based pay plan, employees are able to increase their pay potential
by improving on their skills and gaining knowledge related to their field.

Pros
  Individual self-motivation: Instead of basing pay on seniority and job level, the
employee achieves as much as they’re willing to and is rewarded for it.
 Company-wide motivation: Competency-based pay encourages a culture of self-
motivation and self-improvement within the company. It can create a company of
employees who are actively seeking to improve their skills and finding new ways
to contribute to the company. Competency-based pay helps to tie your company’s
culture directly to the success of the company.
 Increased transparency: Employees will better understand what they have the
potential to earn with a competency-based pay system and what skills they need to
acquire to reach the pay they desire. 
 Reduced turnover: Employee turnover is costly for a company, and a
competency-based pay plan curbs that by helping employees feel that their skills
and knowledge are important to the company, which improves retention.
Cons
 Greater pay subjectivity: As your company strays away from a traditional pay
system, things become more open to interpretation and
TEAM based compensation

 Teams have become a popular way to organize business because they offer companies
the flexibility needed to meet the demands of the changing business environment.
While many companies have been quick to organize their workforce into teams, they
have not been as eager to implement team-based compensation systems.

INCENTIVE PROGRAMS FOR TEAMS

 Goal-Based Rewards
 Merit-Based Rewards
 Gain Sharing
 Profit Sharing
 Discretionary Rewards
With more businesses than ever moving toward team-based work structures, team-based
reward programs have become essential. These types of incentive plans are often
performance-focused and can be either monetary or non-monetary, but the overall goal is to
encourage team participation and productivity. While there are many different types of team-
based incentive programs, the following plans are among the best.
1. Goal-Based Rewards

Some of the most popular team-based reward programs involve goal-based rewards. These
types of incentive programs reward teams only when they reach a preset goal. These can be
either short-term or long-term goals and can include such things as reaching an established
amount of sales, securing a particular number of contracts within a certain time frame, or
reducing waste by a set percentage within a predetermined amount of time. Goal-based
reward programs are highly effective in encouraging teamwork, motivation, and effort.

2. Merit-Based Rewards

Unlike goal-based incentive programs that reward teams when they reach a certain goal,
merit-based programs reward teams for putting forth exceptional effort. These types of team-
based reward programs are a bit subjective in the sense that managers or supervisors
determine whether or not teams are deserving of a reward. As stated in an article posted
by Forbes, ambiguity is never a good thing when it comes to team-based incentive programs.
There should be clear guidelines as to what constitutes exceptional behavior and engagement.

3. Gain Sharing

Gain-sharing is a type of team-based reward program that rewards teams for measurable
accomplishments in non-financial areas. One example of this is a bonus given to a team for
increasing levels of customer satisfaction by a certain percentage from one year to the next.
Another example of this type of program is a bonus given to a team for improving an
essential shipping or receiving procedure. The goal of gainsharing programs is motivating
teams to improve various areas of business operations.

4. Profit Sharing

Profit sharing reward programs are similar to gainsharing programs in that they provide team-
based rewards to teams for exhibiting exceptional behavior. The difference between these
two programs is that while gain sharing programs offer bonuses to team members, profit
sharing programs pay them a certain percentage of the company’s overall profits. Profit
sharing plans encourage high levels of team performance, which can ultimately increase a
company’s success.

5. Discretionary Rewards

Sometimes referred to as spot rewards, team-based discretionary rewards are given to team
members based on team performance and outcomes. While these reward programs may
sound very similar to some of the programs discussed above, rewards given in discretionary
programs are not dependent on predetermined goals. Much like merit-based reward
programs, managers or supervisors decide whether or not a team is deserving of a
discretionary reward.
 GAIN SHARING INCENTIVE PLAN
(sometimes referred to as Gain sharing, Gainshare, and Gain share):
Gainsharing is best described as a system of management in which an organization seeks
higher levels of performance through the involvement and participation of its people. As
performance improves, employees share financially in the gain. It is a team approach;
generally all the employees at a site or operation are included.
According to HR-Guide.com, gains sharing is:

A system of management in which an organization seeks higher levels of

performance through the involvement and participation of its people. As performance
improves, employees share financially in the gain

Gainsharing plans typically involve a team of employees working together to achieve specific
goals. The team works together to identify ways to improve performance and then
implements those changes. As the team’s performance improves, the gains are shared among
the team members ypes of Gain Sharing Plan

Gainsharing programs are divided into three categories: The Scanlon Plan, created by Joe
Scanlon in the 1930s, The Rucker Plan, and Improshare.

1. The Scanlon Plan

The Scanlon Plan is the original Gainsharing program. It was developed by Joe Scanlon in
the 1930s and is based on the idea that employees are motivated by a sense of fairness. Under
this plan, employees are encouraged to suggest ways to improve productivity. These
suggestions are then implemented by management. The gains from the increased productivity
are shared among all employees, regardless of their position or seniority.

2. The Rucker Plan

The Rucker Plan was developed in the 1950s by Dr. Elton Rucker. This plan is similar to the
Scanlon Plan, but it uses a different method to calculate the gains that are shared among
employees. Under the Rucker Plan, each employee is given a score based on their
performance. The higher the score, the greater the share of the gains.

3. Improshare

Improshare is a more recent Gainsharing program that was developed in the 1990s. This plan
is based on the idea that employees are motivated by a sense of ownership. Under this plan,
employees are given a stake in the company’s success. The gains from increased productivity
are shared among all employees, regardless of their position or seniority.
Advantages of Gainsharing

Improved Morale

Gainsharing programs can improve employee morale by providing a financial incentive for
employees to suggest ideas to improve productivity. Additionally, Gainsharing can help to
create a more positive work environment.

2. Increased Productivity

Gainsharing programs can increase productivity by encouraging employees to suggest ideas

to improve productivity. The implementation of these ideas can lead to increased productivity
and reduced costs.

3. Reduced Costs

Gainsharing programs can reduce costs by encouraging employee Reduced Costs

Gainsharing programs can reduce costs by encouraging employees to suggest ways to

improve productivity. The implementation of these ideas can lead to increased productivity
and reduced costs.

4. Improved Quality

Gainsharing programs can improve quality by encouraging employees to suggest ways to

improve productivity. The implementation of these ideas can lead to increased productivity
and improved quality.

What are the disadvantages of Gainsharing?

Gainsharing programs can have some disadvantages. Gainsharing can create a sense of
competition among employees, which can lead to conflict. Additionally, Gainsharing
programs can be difficult to implement and manage. Additionally, Gainsharing programs can
create a sense of entitlement among employees.

What Is a Profit-Sharing Plan?

A profit-sharing plan is a retirement plan that gives employees a share in the profits of a
company. Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an
employee receives a percentage of a company’s profits based on its quarterly or annual
earnings. A profit-sharing plan is a great way for a business to give its employees a sense of
ownership in the company, but there are typically restrictions as to when and how a person
can withdraw these funds without penalties.
Types of Profit-Sharing Plans

#1 – Cash Plan

The employees covered under this plan are given cash or stock of the organization or
company at the end of every year or quarter, as the case may be. Thus they are given instant
results of their efforts in the organization. The main disadvantage of this type of plan is that
the employees are taxed on this additional income as a regular income.

#2 – Deferred Plans

The profit-sharing is directed into a specific fund known as the trust fund, which provides the
rewards to the employees at a later date, often on the employees’ retirement. Accordingly,
immediate taxation on the employees’ incomes is avoided under a deferred plan. Further, the
qualified investment plan provides employees with various investment choices. Also, the
retirement pay increases as and when the contribution increases.

#3 – Combination Plan

As the name suggests, this plan is a combination of both the plans mentioned above, which
pays a part of the contribution in cash periodically, and part of the contribution is deferred
into a trust fund to be paid at the time of retirement.