MAPre 7 Performance Management Systems
UNDERSTANDING PERFORMANCE MANAGEMENT
Performance management, quite simply, refers to the process of
monitoring an organization’s activities to ensure that employees meet set
goals and objectives.
It encompasses priority setting, employee training, continuous
supervision, offering consistent, yet constructive feedback, performance
reviews, and suggesting remedial measures. Oftentimes, our view of
performance management has been restricted to the end-of-the-year
appraisal and feedback process. However, it has become apparent that
each human resources (HR) team must understand that the scope of
performance management goes beyond this.
One primary challenge to providing an all-inclusive performance
management definition is that it covers multiple activities for an even
greater variety of organizations, their models, and structures. To answer
the question, ‘What is performance management’, Michael Armstrong
and Angela Baron (1998) offer a very concise definition, which states that
it is: “a systematic process for improving organizational performance by
developing the performance of individuals and teams. It is a means of
getting better results from the organization, teams, and individuals by
understanding and managing performance within an agreed framework of
planned goals, standards, and competence requirements.”
At the heart of this definition lies the crucial link connecting the ability of
an organization to achieve its goals and the performance of the human
capital. This holds true irrespective of the type, structure, or size of an
organization.
Finally, performance management can be described as the system
through which organizations set work goals, determine performance
standards, assign, and evaluate work, provide performance feedback,
determine training, and development needs, and distribute rewards.
(Briscoe and Claus, 2008)
WHY IS PERFORMANCE MANAGEMENT IMPORTANT?
Here are eight reasons why organizations must be intentional about it.
1. Drives financial gain
Without pretense, the primary aim of any organization providing goods
and services is to make a profit. At the end of the day, employees must be
paid, shareholders rewarded for their investment, and opportunities for
expansion realized. If the company’s human capital is at maximal
functional capacity (not overworked or underutilized), it will have a direct
implication on raising levels of profit.
For example, when a salesperson hits their target, or the advertising team
comes up with a campaign with good conversion rates, there is no doubt
that this will increase income flow and improve the bottom line.
2. Encourages and motivates employees via recognition and rewards
A key benefit of performance management is that it arouses the
employees’ desire to do more. From C-level executives, through middle
management, individual contributors, and support staff, everybody has a
need to be recognized for their value. When this is done, employees are
spurred on to do more.
3. Prevents overlapping roles
Most people function best in a defined and safe environment. A
company's human resource performance management must enable this.
It should be clear to every worker what his or her objectives are, how they
fit into the big picture, and why things must be done in a particular way.
When more than one employee is assigned to a task, they must be
equally informed so that they are equipped to work together, achieving
the set target while avoiding interpersonal conflicts. On the other hand,
smaller goals and objectives should be assigned to individual members of
the team. This provides a deep sense of purpose and responsibility,
allowing him or her to work comfortably in their niche.
4. Increases employee engagement and productivity
The importance of a performance management system lies in that it
enhances engagement and productivity in employees. What does this
mean? Engagement in this context refers to how much the employee Performance management makes training targeted rather than
interacts with the company and its structures. Productivity defines itself in generalized, and most importantly, employee potential is optimally
terms of increased outcomes and Return On Investment (ROI). utilized to the advantage of everyone involved.

Consider a scenario where the HR manager shows interest in what the 7. Enables proper documentation and record-keeping
social media manager does only at the end of the year. Compare it with
We are witnessing a rapid shift from paper and filing cabinets
how much more of a concerted effort the social media manager would
documentation systems to faster, easier, and less burdensome digital
put in when promoting the company under a modern performance
ones. There are several digital performance management solutions that
management system. The company's vision, aims, and goals will be
help track every aspect of HR.
evident in each piece of content posted online in the second scenario.
These HR management tools provide a clear documentation process that
Employee engagement should cut across every aspect of work, even
can be stored and revisited when needed. It means you have a record of
down to whether people contribute to team meetings or not. In fact,
each employee's past performance at your fingertips. Promotions are
employees whose managers are actively involved in performance
scheduled and timely rewards are given, and even a history of errors with
management are three times more engaged than others.
administrative action is documented.
5. Makes room for idea generation
What Are the Objectives of Performance Management?
In a fast-tracked world, we can’t underestimate the importance of
Performance management is a strategy used in human resource
generating new ideas. A company’s sole aim might be to provide
management. There are several objectives of performance management
affordable housing. However, if there is no steady and inspiring stream of
systems. When these are met, it creates a successful strategy, which
ideas to sell to the public, there will be a plateau and eventual decline in
results in benefits for all involved. The objectives of performance
sales.
management include:
Now, with a functional performance management system, the burden of
1. Defining the organization’s goals and objectives
idea generation no longer rests solely on the owner or product
management team. Ideas can flow more easily, and in the right direction, Goal setting has proven to be a highly rewarding methodology in
because every worker knows that their inputs are welcome. Amazingly, organizations. The importance of goal setting goes beyond its impact on
this is not just limited to consumer products. Idea generation could also the employee but also affects management and the organization at large.
benefit the company, such as suggestions for a better working system, etc. In setting goals, an effective performance management system must
ensure that realistic, achievable, and cost-effective goals are set. It takes
6. Creates a platform for employee development
into consideration the strengths and weaknesses of the people involved.
A consistent performance management system invariably results in an
FROM THE EMPLOYEES’ PERSPECTIVE, GOAL SETTING:
active form of employee development. Discussing each employee’s role,
past performance, current efforts, strengths, and weaknesses gives you an Keeps them focused on the major objective/s
accurate understanding of what each employee can do. When combined
with a agile HR technology, it creates opportunities to steer employees in Maximizes individual performance and abilities
a direction best suited to their abilities and the company’s goals. Merges employee and organization goals
Identifies priority tasks
For the organization, goal setting is essential for:
Identifying flaws and weaknesses when goals are not met
Budgeting
Conducting performance appraisal
Reviewing general performance
2. Clarifying expectations for employees and managers
It is imperative that every organization makes its expectations known to
all involved. For example, expectations of monthly pay, working hours,
benefits, days off, etc., should be clearly defined. Beyond this, setting
expectations far above an employee's performance ability will only lead to
disappointment and burnout. However, there should be room for growth
and consistency. This clearly demonstrates the importance of a
performance management system.
When setting expectations:
Define what is expected of the employee. There should be no confusion
or ambiguity.
Document these expectations for easy reference.
Explain how beneficial it will be to both the employee and the
organization if those expectations are met. This may be learning a new
skill, undergoing training, improving workflows, increasing sales, etc.
3. Setting performance standards
One of the objectives of a performance management system is to set
performance standards. This can be done on a rolling basis, based on
previous employee performance, or based on the company's
expectations. Performance standards are necessary for proper work
evaluation. It's the backdrop against which employee work output can be
compared fairly. Without it, human resource performance management
might overlook suboptimal input, or may not recognize exceptional
performance, simply because there is nothing to compare it with.
4. Facilitating worker training and development of new job skills
A good performance management system highlights the abilities and
weaknesses of each employee and provides targeted training aimed at
benefiting both the employee and the organization.
A good way to go about this involves employees in the process from start
to finish. Ask them what skills they lack to perform their jobs optimally.
Figure out how these fit into the budget and training programs. Discuss
the benefit and application of these new skills and redefine set goals to
accommodate these skills.
5. Identifying barriers to achieving organizational goals
An effective system shows the weakness of existing structures in the
business. With constant monitoring, this can be detected early enough,
and intervention plans can be created.
For example, in an organization where the delivery of products is
outsourced, there are likely going to be some delays, mix-ups, and
damaged goods. Overall, daily delivery goals may not be met. Over a
month, and with proper monitoring, this discrepancy can be reported, the
transportation barrier identified, and practical solutions offered.
6. Creating an administrative framework for decision-making
Without an adequate, well-documented performance management
system, organizational heads will keep running in circles in the dark.
However, when an effective system is put in place, there is a better ability
to make informed decisions, set strategic goals, and implement effective
policies for the good of all.
7. Boosting employee performance through an effective reward
mechanism
A primary objective of a performance management system is to achieve
growth and to ensure that employees are encouraged and motivated. This
can easily be accomplished by establishing an effective reward system.
Logically, monthly remuneration should be enough motivation. However,
when exceptional performance is especially rewarded, it drives the entire
team to try to exceed such standards.
8. Increasing job satisfaction and employee retention
Few things come close to the frustration of having to hire new employees
every three months for the same tasks. It results in constant sub-optimal
output because of all the time wasted in getting new hires up to speed.
Sound performance management will result in increased job satisfaction,
and the best employees will stay on. This means that you will have a fine-
tuned selection of capable, skilled, and loyal employees in your
organization.
9. Inspiring new ideas and suggestions
Oftentimes, the best ideas come from unexpected sources. Of course,
there may be employees, product managers, marketing teams, and others
responsible for idea generation. Sometimes, an employee in a different
department, such as the sales team or UI/UX developers, might have a
revolutionary idea for the organization.
Performance management sets the stage for this. A worker who knows
that his contributions, no matter how small, are valued, will be unlikely to
hoard ideas or be hesitant to express them. Effective human resource
performance management results in idea generation.
10. Encouraging friendly competition
In a world where everyone receives the same treatment irrespective of
effort, there will be a massive decline in productivity. One of the
objectives of performance management is to encourage friendly
competition among teams and individuals. It all boils down to a reward
and recognition system. No one wants to be left out, or constantly
reprimanded, and while some people may shy away from the spotlight,
everyone enjoys recognition. Implement all the elements of a good
performance management system to instill healthy competition amongst
co-workers.
What Are the Elements of Performance Management?
The essential elements of performance management are the features that
every performance management system must display. We will look at the
key elements of a performance management system. Having at least five
of these is a good indicator of a successful outcome.
1. Longevity and consistency
Before making your performance management strategies public, some
vital questions must be answered.
CAN THIS SYSTEM BE SUSTAINED OVER THE NEXT FIVE YEARS?
WILL THIS APPLY TO EVERY EMPLOYEE WITHOUT BEING PARTIAL?
IS IT WITHIN THE YEARLY ALLOCATED BUDGET?
Consistency is a primary element of performance management. An
employee should know what to expect annually. There should be no
sudden changes or discontinuity in the strategies applied. In addition, the
importance of treating each employee equally cannot be over-
emphasized. Why should one team be reprimanded more harshly than
the other? Or another be rewarded more for similar output? Nothing
demoralizes your staff more than a biased system.
2. Outcome management
Your human resources performance management system must be
equipped to manage outcomes. Tasks will not always be accomplished,
and goals will remain unmet. Depending on the expertise/learning
garnered across the process, these results may serve as stepping stones to
improved performance.
3. Planning and goal setting
Goal setting is an essential element in performance management. Goal
setting begins with company leadership, then moves downward to annual
and quarterly objectives, then to the department and team goals, and
eventually to individual tasks. These tasks must be in line with the
employees’ job description and abilities, and yet make room for creativity,
learning, and growth.
4. Communication
Communication, feedback, and regular reviews are a key aspect of
performance management. It also includes communication of goals and
strategies. It is necessary for a proper understanding of organizational
objectives, which will determine if personal objectives are aligned to
achieve the desired result.
5. Employee reviews
Feedback and reviews go hand-in-hand in performance management. One
is coming from the bottom to the top, the other from top to bottom;
however, both are assessing performance and giving ideas on a better
management strategy. Teams should be able to anonymously send in
reviews of their supervisors, etc. This way, there can be improved
leadership and a smoother relationship between co-workers. A system
where employees’ ideas are implemented is one where everyone wants
to contribute something useful.
6. Development and training
Another element of performance management is the training and
development of employees. This covers job skills such as software
management, providing courses, sending them for conferences and
training programs, etc. As trained and experienced workers climb up the
leadership ladder, they need to be replaced with newer employees. This
might create a period of reduced outcomes. A good way to minimize the
effect felt in the overall organization is the role of mentorship and one-on-
one training. Most of all, a well-documented workflow should be made
available to each employee coming into a new role in the organization.
7. Employee recognition and rewards
Your employees are like your primary customers. The same logic behind
bonuses, discounts, freebies, and other attractive packages offered to
customers works perfectly inside the organization.
We all want to feel appreciated, especially for stellar performances. There
is no single approach to a rewards and recognition system in
performance management. It could be in various forms, such as:
Recognition in front of peers and leadership
Leaderboards
Bonus pay
Gift items
Increased holiday length
Better insurance package
Better working environment
Gift cards
Shares in the company
Promotions
8. Regular monitoring and feedback
Traditional human resource management involves an annual performance
assessment. In contrast, regular monitoring at weekly, monthly, or
quarterly intervals ensures that no aspect of employee performance is
overlooked. It provides both a holistic understanding of an employee’s
abilities and an in-depth appreciation of their performance. Regular
monitoring goes hand-in-hand with feedback.
WHAT IS THE ROLE OF PERFORMANCE MANAGEMENT IN AN
ORGANIZATION?
The role of performance management in human resources is intrinsic to
the success of an organization. In fact, a study shows a strong positive
correlation between performance management and high-performance
organizations. There are several roles of performance management in an
organization:
1. Improving employee performance
Without performance management, there will be a progressive reduction
in effort on the side of employees. An effective system plays the role of
spurring employees to greater performance heights.
In every mix of individuals, one or two will always shine more brightly
than others. One of the roles of performance management in human
resources is to recognize, identify, and cultivate high-quality
performance/employees. When this is done, these employees can be
assigned more detailed tasks that have a direct effect on the company’s
growth.
2. Developing strong leaders
Leadership is a quality that is both inbuilt and acquired. Where there is a
well-developed performance management process, leadership qualities
such as team management, goal setting, accomplishment, harmonizing
work efforts, etc., will be brought to light. This way, an organization can be
a self-sufficient system that empowers its employees to become leaders
and places responsibility on them with a guarantee of high performance.
3. Removing weak links
Another unpleasant yet necessary role performance management aims to
accomplish is the removal of the weak links in an organization. According
to Billy Graham, “A chain is only as strong as its weakest link." This applies
equally to a team or an organization.
Performance management helps to identify the one employee who keeps
pulling the rest of the team down. Once identified, they can then be
provided constructive feedback, and training and development of
necessary skills can be provided, among other corrective measures. If
these measures prove futile, the performance management system in use
provides an objective indicator of that fact. At that time, human resource
management is responsible for lawfully terminating the contract of such
an employee. Failure to do so puts organizations at greater risk.
4. Ensuring employee engagement and satisfaction
Performance management systems are as much about the employee as
the employer. Employee engagement is a buzzword in human resource
performance management because of its proven benefits. Keeping your
workers actively engaged brings about productivity. Also, employees
should be kept as satisfied as possible. This includes job and remuneration
satisfaction and better working conditions.
5. Providing employees with a defined career path
Most high-performance employees will not remain comfortable at the
same career level for years. Career progression is becoming more
important now than ever. Defining career plans, and how they can be
achieved, falls under the scope of performance management and must
not be overlooked. Remember that if a high-performing employee is not
provided with opportunities for career growth, they will be tempted by
greener pastures.
6. Motivating and coaching employees
Performance management in human resource management must make
sure employees are motivated and coached. This is the role of
departmental managers and team leaders. However, the only way to
know if the head of a department has a significant impact on the
motivation of his members is through reviews and appraisals.
This is part of the role the performance management system is meant to
accomplish. A good performance management system guides how to give
feedback, encouragement, and criticism, and motivate different types of
employees.
7. Improving the organization’s bottom line
Lastly, performance management plays the role of improving the
company’s balance sheets by encouraging and ensuring better
performance. As ideas flow and productivity rises, as non-performers are
coached or exited from the company, the overall system starts to function
better, which has a direct impact on revenues.
PERFORMANCE MANAGEMENT FRAMEWORK
A performance management framework is a structured approach to set
organizational goals, chart plans, and assign targets to employees such
that it becomes a systematic process to achieve said goals.
Performance management frameworks are a way to incorporate all your
performance management practices within your HR operations in the
most structured way possible.
Five major types of performance management frameworks and how they
can help an organization achieve success and growth.
Employee performance management includes:
 Planning work and setting expectations
 Continually monitoring performance
 Developing the capacity to perform
 Periodically rating performance in a summary fashion
 Rewarding good performance.
L2. PERFORMANCE MANAGEMENT PLANNING AND IMPLEMENTATION
WHY NEED TO PLAN?
1. sets performance expectations and goals for the individuals and groups,
2. keeping pace with organizational objectives.
3. explain what employees need to do to accomplish their jobs
successfully
Performance Management Process
A performance management process monitors employees to ensure goals
are achieved at the end of that performance cycle.
The performance management process is continuous and repeated,
usually over a fixed period. Traditionally, the performance management
cycle covered the entire fiscal year. However, research has shown that
about 63% of workers prefer to receive performance reviews throughout
the year rather than at the end of the year.
What Is an Ideal Performance Management Process?
If you decide to implement the expansive process of setting up a
performance management system, then you must aim for the best
possible outcome. This is quite achievable once the right steps are taken.
First, we must examine and understand the expected outcome of an ideal
performance management process.
An ideal performance management process is one that creates a positive
and creative atmosphere where employees can take goal-driven
initiatives, produce stellar results, and ultimately get job satisfaction.
The performance management cycle gives you a better idea of how
employees can achieve their goals systematically, and the role
managers/HR can play in this process. There are four stages in the
performance management cycle. In order, they are:
1. Planning
In the planning phase, the goals to be achieved in that performance
management cycle are clearly defined. These goals must be in line with
the primary vision of the company, its value proposition, and its overall
objectives.
After outlining the goals for that cycle, management breaks it down into
achievable components. This is where each employee is assigned a
specific objective and goal to achieve. Proper communication of these
goals is essential. The ‘why’ of that goal and ‘what’ it is meant to
accomplish, and ‘how’ it benefits the organization in the long run, should
also be communicated to employees.
When planning the goals for a performance management process, each
goal should be a SMART goal meaning they should be Specific,
Measurable, Achievable, Relevant, and Timebound.
2. Monitoring
The monitoring phase is a vital phase in the performance management
cycle. Without this phase, it is impossible to have an efficient
performance management process. Monitoring could be done monthly,
quarterly, or even biweekly. There is no hard and fast rule except that it
must be frequent, precise, and useful when making decisions.
Examples of decisions that may be taken during the Monitoring phase
include:
Continuing with the already set goals without making any changes
Increasing or fast-tracking the goals for a particular team or employee
Extending the time given to an employee to achieve their objectives
Changing or augmenting set goals
Increasing the budget allocation
3. Reviewing
The reviewing phase comes towards the end of the cycle and depends on
the information gathered during the monitoring phase. Examples of what
to check for include: How well did the development team achieve its
goals? Was the PR team able to mitigate any damages? Was every
transaction documented?
Goals must be reviewed to assess the general performance of teams and
individuals.
4. Rewarding
The rewarding phase is the driving force of the performance management
process. Employees must be appreciated for a job well done. Teams
should be recognized for leading the board. An exemplary manager, team,
or employee should be applauded and rewarded as deemed necessary.
This kind of system puts more pressure on workers to do better in the
next cycle. Ultimately, it will result in the organization topping the charts.
Outcomes of a well-managed performance management process
An ideal performance management system is one that focuses on the
future while learning from the past. A good performance management
process must:
1. Drive accuracy
When creating or revising your performance management plan, you have
to make sure the results reflect the true picture of your organization. A
performance management plan that does not take real-time income,
expenditure, available manpower, etc. into consideration is not accurate
and cannot yield the expected results.
2. Ensure fairness
An ideal performance management system should be fair for all involved.
Sentimentality on the part of the HR manager or performance manager
should not creep in when making evaluations. Each worker must be
treated fairly according to their capabilities and purpose in the
organization. Fairness as a component of an ideal performance
management process means that rewards, goals, opportunities, or
corrections, as the case may be, must not be influenced by race, gender,
personal opinions, etc.
3. Have multiple feedback sources
A great performance management process acknowledges human error. A
good way to eliminate this error when making assessments is to have
more than one individual involved in some part of the review and reward
phase of the performance management cycle.
4. Encourage overachievers
Plateauing is a phenomenon that may arise in a performance
management system. But this is far from ideal. An ideal performance
management process in human resource management gives room for
additional goals, expressions of creativity, leadership skills, etc., that some
employees may have. In other words, it does not place a limit on the
workforce but encourages workers to climb high and climb fast.
WHAT TO CONSIDER DURING
PERFORMANCE PLANNING PROCESS?
RESULTS Refer to what needs to be done or the outcomes an employee
must produce.
Consideration of results needs to include the key accountabilities or broad
areas of a job for which the employee is responsible for producing results.
This information is typically obtained from the job description.
BEHAVIOR How a job is done thus constitutes an important component of
the planning phase.
DEVELOPMENT PLAN - an important step before the review cycle begins is
for the supervisor and employees to agree on a development plan.
At a minimum, this plan should include identifying areas that need
improvement and setting goals to be achieved in each area.
DURING THE PERFORMANCE PLAN EXECUTION STAGE, WHAT FACTORS
SHOULD BE PRESENT?
1. Commitment to goal achievement
2. Ongoing performance feedback and coaching.
3. Communication with supervisor.
4. Collecting and sharing performance data
5. Preparing for performance reviews
Then after identifying the factors,
WHAT IS NEEDED TO CONTINUOUSLY IMPROVE?
Although the employee has primary responsibilities for performance
execution, the supervisor also needs to do his or her share of the work.
Supervisors have primary responsibility over the following issues:
1. Observation and documentation.
2. Updates
3. Feedback
4. Resources
5. Reinforcement
L3: THE CONTROL FUNCTION OF MANAGEMENT
What is the controlling function of management? Also referred to as
'change management,' control management sets standards, measures
performance and takes corrective action. Control management is dynamic
– it responds to change and keeps company goals front and center.
The controlling function of management generally means organizational
control. That is, it is a process by which an organization (through its
managers) influences its sub-units and members in the process of
attaining organizational goals and objectives.
The Control Function of Management
After strategies are set and plans are made, management’s primary task is
to ensure that these plans are carried out or, if conditions warrant, that
the plans are modified. This is the critical control function of
management. Since management involves directing the activities of
others, a major part of the control function is making sure other people
do what should be done.
The management literature is filled with advice on how to achieve better
control. This advice usually includes a description of some type of
measurement and feedback process:
• The basic control process, wherever it is found and whatever it is
found and whatever it controls, involves three steps:
(1) establishing standards.
(2) measuring performance against these standards. and
(3) correcting deviations from standards and plans.
1. A good management control system stimulates action by spotting the
significant variations from the original plan and highlighting them for the
people who can set things right.
2. Controls need to focus on results.
This focus on measurement and feedback, however, can be seriously
misleading. In many circumstances, a control system built around
measurement and feedback is not feasible. And even when feasibility is
not a limitation, use of a feedback-oriented control system is often an
inferior solution. Yet, good controls can be established and maintained
using other techniques.
What is needed is a broader perspective on control as a management
function: this article addresses such a perspective. The first part
summarizes the general control problem by discussing the underlying
reasons for implementing controls and by describing what can realistically
be achieved. In the second part, the various types of controls available are
identified. The last part discusses why the appropriate choice of controls
is and should be different in different settings.
Why Are Controls Needed?
If all personnel always did what was best for the organization, control —
and even management — would not be needed. But, obviously,
individuals are sometimes unable or unwilling to act in the organization’s
best interest, and a set of controls must be implemented to guard against
undesirable behavior and to encourage desirable actions.
One important class of problems against which control systems guard may
be called personal limitations. People do not always understand what is
expected of them nor how they can best perform their jobs, as they may
lack some requisite ability, training, or information.
https://sloanreview.mit.edu/article/the-control-function-of-management/
OTHER REFERENCES :
1. See H. Koontz, C. O'Donnell, and H. Weihrich. Management, 7th ed.
(New York: McGraw-Hill, 1980). p. 722.
2. See W. D. Brinckloe and M. T. Coughlin, Managing Organizations
(Encino, CA: Glencoe Press. 1977). p. 298.
CONTROL PROCESS
One of the fundamental elements of the control function of management
is to monitor progress. Monitoring progress implies that you need a
standard against which to judge whether you are making progress. There
is a specific process that allows you to do this, known as the control
process.
The Four-step Control Process
The control process begins with the standard or goal to reach. This
portion of the control process is done during the planning phase of
management. The standard could be to improve sales by 14%, reduce
turnover in Q1 by 1%, improve our season win total by 4 games, reduce
batch rejection rates on manufacturing output, etc. This standard
includes both the end goal and more complex goals that require mileposts
along the way. For example, a 14% improvement in sales over the course
of a year means that monthly sales targets should also be monitored that
add up to the yearly goal. Measuring performance is also a step that
needs to be planned for during the first phase of the management
process. How will I keep track once I begin my plan?
Monitoring performance might include creating a dashboard to monitor
performance indicators, but it might also include periodic check-ins with
members of the organization to see how they are handling the
implementation of the plan. Step three simply means comparing the
actual performance to the standard. Step four is a reboot to the planning
phase. In our sales analogy, let’s say that the yearly goal is a 14%
improvement. By the fifth month, the sales manager checks the progress
and sees that progress is slow, and they are only at 4%. The sales
manager decides that to reach the goal, they recommit marketing
resources to increase advertising. The progress was not up to the
standard, so an adjustment is necessary. The flipside of step four is that
even if progress is made toward the goal, adjustments might still need to
be made. Back to our sales analogy – five months in, and good progress is
made. The sales team has done well, and the organization has made 9%
towards the 14% goal. Even though progress is being made, a handful of
salesmen are burnt out. The manager decides that the team could use a
breather and decides to take all of the salesmen to an MLB baseball
game, and dinner and wine to celebrate the small victory towards the
goal. The salesmen are making progress, but they need an emotional
break. The manager recognizes this and commits resources (organizing)
to motivate (leading) the sales team to keep pushing. In this way, the
control function cycles back to the other functions of management.
Timing of Control
We just reviewed that one of the main elements of control is to monitor
progress and make adjustments. The second major component of the
control process is to guide the progress. This guidance can happen at
different times of the game plan you are pursuing. Control mechanisms
can be planned prior to implementation, during the implementation, and
afterwards, as a means to help future progress.
Feedforward control is putting in guiding rails prior to the implementation
of the game plan. Bateman and Snell (2013) define this as a control
process used before operations begin, including policies, procedures, and
rules designed to ensure that planned activities are carried out properly.
An example of a feedforward control mechanism is a manager who
requires hard hats, harnesses, and safety protocols during the
construction of an office building. These are policies that help ensure the
game plan will be carried out properly. This might also include a
commitment to nets outside of scaffolding in addition to requiring
harnessing for office construction.
Concurrent control is a change you make during the implementation of
the game plan. In many ways, concurrent control is a mini version of the
control process itself, done in a much shorter timeframe. This can include
serious issues, like stopping production when you see a leak in the tank,
to fine-tuning that you might do as you are harvesting a field like adjusting
the speed of the combine. In our road trip analogy, this is the slight
turning of the wheel as the road curves, or completely taking a detour
because your GPS says an accident is ahead. Reconciling your budget in
real-time as expenses come in is an example of concurrent control as you
make small adjustments to spending as a result.
Feedback control uses information from previous results to make
adjustments as you plan for future game plans. This is the core of
learning within an organization. This is the reason why NFL teams watch
game films the day after a game. This means reviewing what you did well
so you can keep doing it, to understand where you failed and what caused
it. Some organizations require a post-mortem analysis for every major
project they finish. What went wrong? How did we perform? The Wall
Street Journal reported in 2010 that Foxconn installed safety nets outside
of their Hebei, China factory after 10 employees jumped to their deaths.
Reports indicate that employees live in dorms outside the plant in terrible
conditions. This represents a feedback control process because their nets
were an attempt to curb the death problem. This is a good example of
feedback control, but not necessarily good management.
Types of Control
We have reviewed that control has a specific process to follow, and that
process can be executed at several stages during the execution of the
game plan. What needs to be further explored are the types of control
processes that managers have at their disposal. The basic definition of
control is that we want to make sure we are on track and to guide the
plan. Most control processes under this framework are formal
mechanisms, meaning management puts specific processes in place that
everyone can see and track. These would include bureaucratic and
market control processes. However, some control processes are
considered informal, known as clan control.
Bureaucratic control is an official policy or rule implemented in the
organization that is derived from the legitimate authority of the manager.
Bureaucratic controls would include examples such as requiring daily
reports on progress or inventory reconciliations. It could include
establishing sales revenue projections and implementing reward systems
around this metric. It would include establishing protocols regarding the
safety of heavy equipment operation or floor manufacturing at a factory.
Many of these safety processes are established by governmental
organizations such as OSHA or the EPA.
Market control is the use of external information to serve as a standard or
metric against which to measure internal progress. Consider the following
example. The marketing firm of an organization has designed a new
product and the goal is to garner 15% market penetration in the first year.
Prior to launching the product, they decided to bring in a consumer focus
group to provide feedback on the design. This feedback compels the
team to make some minor tweaks prior to the product launch. This team
has used an external element, that is the opinions of consumers, to make
sure they progress towards their goal of a successful launch. Finance and
trading organizations regularly used external controls around which to
make decisions on which assets to divest, and in which assets to invest.
This would include a trading strategy that establishes a standard that if
the price of oil falls 25%, the company should liquidate their position in
commodities to minimize losses.
Clan control consists of any form of informal influence that an
organization has on an individual that directs them toward the goals of
the organization. Clan control can derive from the cultural values and
beliefs of the organization that influence behavior. Clan control can also
be a more direct influence in the form of peer pressure. Consider the
example of an organization that places high value on integrity. Jane is an
accounting professional within the organization that refuses to violate a
small section of the tax code in an area where the language of the tax
code is gray. She decides to act on the conservative side and behave with
integrity because she knows that her decision aligns with the personal
values of her team leader, and if her integrity were questioned, she would
be less esteemed by her peers. One final note on clan control is that it
can wield either a positive or a negative influence on members of the
organization.
Too Much Control?
There is a final aspect of the control process that needs to be explored. At
what point does a manager put too many control mechanisms in place?
There is a range of control mechanisms that can be used – too few and
the manager would not be successfully monitoring or guiding progress,
too many and the employees will feel like they are being micromanaged.
Research shows that a manager who uses too few controls limits
creativity, innovation, and organizational learning (Bligh, Kohles, & Yan,
2018). This makes sense if the manager’s main role is guiding the
progress. Members of the organization don’t have the guidance and
feedback that foster these ideals. A manager who puts too many control
processes in place exposes the organization to lower levels of
commitment, higher turnover, and more job stress among members of
the organization (Bozeman, et al., 2001).
A manager has to appropriately balance the use of too much control and
not enough control. If we return to Socrates and the Sordite’s Paradox,
we can see that the extremes probably lead to negative outcomes. There
is a gray area that managers might consider a reasonable level of control.
CONTROLLING CONCERNS MONITORING AND INFLUENCING SEVERAL
TYPES OF PERFORMANCE:
Individual - measured by efficiency and effectiveness.
Group - Measured not by efficiency and effectiveness alone - but also to
determine whether interactivity reaches the level of team function.
Organizational- This concerns economic (financial, operational), social,
and environmental (non-financial) goals and objectives.
Controlling Consists Of The Following Steps:
Performance Standards
• Step 1 : . The standards should be in the form of goals and
objectives. These should flow from the organization's mission and vision.
The standards should be capable of assessment – specific and
measurable.
Measure Standards
• Step 2: to measure performance. The method for measuring
performance will vary based on what type of performance is being
measured. When measuring performance based upon types of metrics:
Leading metric: serves to predict the direction of the company in terms of
performance.
Pacing Indicator -- shows that the company is on track to meet its
identified standards.
Lagging Indicator -- demonstrates where performance has failed to meet
expectations.
A common form of comparison is an audit - the examination and
verification of records and supporting documents. Two common forms of
audit include:
A budget audit provides information about where the organization is with
respect to what was planned or budgeted for.
A performance audit might try to determine whether the figures reported
are a reflection of actual performance.
L4: MANAGEMENT CONTROL ALTERNATIVES AND THEIR EFFECTS
Management control is important for organizations because failures in
management control can lead to large financial losses, reputation
damage, and possibly even organizational failure.
Control systems have two basic functions:
Strategic control: the process of monitoring as to whether to various
strategies adopted by the organization are helping its internal
environment to be matched with the external environment. It allows
managers to evaluate a company's program from a critical long-term
perspective. (external focus)
Management control: includes processes for planning, organizing,
directing, and controlling program operations. (internal focus)
Management controls are necessary to guard against possibility that
people will do something the organization does not want them to do or
fail to do something they should do (behavioral orientation).
FORM OF CONTROL & FACTORS THAT LEAD MANAGER TO CHOOSE ONE
OF THE OBJECT OF CONTROL
• Result control – focused on results produced
• Action control – based on action taken
• Personnel and cultural control – focus types of people employed and
their shared norms & values
RESULT CONTROL
• Pay-for-performance
• Employees will be concerned about the consequences of their actions
or decisions, encouraging employee empowerment.
• Effective motivator – vs – greed & short-termism
• Reward – sometimes beyond monetary compensation  job security,
promotions, autonomy
• Meritocracies rewards are given to the most talented and hardest
working employee rather than the longest tenure or the right social
connections.
• Incentive is used to performance
CAUSES OF MANAGEMENT CONTROL PROBLEMS
The causes can be classified into three main categories:
Lack of direction
Employees do not know what the organization wants from them.
Motivational problems
Individual and organizational objectives do not naturally coincide:
individuals are self-interested.
Employee fraud and theft are the most extreme examples of motivational
problems.
Personal limitations
They may be caused by a lack of requisite intelligence, training,
experience, stamina, or knowledge for the task at hand.
Some jobs are not designed properly.
CHARACTERISTICS OF GOOD MANAGEMENT CONTROL
Good control means that management can be reasonably confident that
no major unpleasant surprises will occur. It must be future driven and
objectives driven.
Out of control describes a situation where there is a high probability of
poor performance.
Perfect control would require complete assurance that all physical control
systems are foolproof and all individuals on whom the organization must
rely always act in the best way possible. Control loss is the cost of not
having a perfect control system. Optimal control can be said to have been
achieved if the control losses are expected to be smaller than the cost of
implementing more controls. Assessing whether good control has been
achieved must be future-oriented (no unpleasant surprises in the
future)and objectives-driven (because the goals represent what the
organization wants). But still it is difficult and subjective to determine
control as ‘good’.
CONTROL PROBLEM AVOIDANCE
There are four avoidance strategies (to eliminate the possibility of control
problems):
Activity elimination
Managers can sometimes avoid the control problems associated with a
particular entity or activity by turning over the potential risks, and the
associated profits to a third party. Transaction Cost Economics: whether
specific activities (transactions) can be controlled more effectively through
markets or internally.
Automation
The use of computers, robots, expert systems, and other means of
automation to reduce their organization’s exposure to some control
problems. Automation can provide only a partial control solution at best.
Limitations are: feasibility, cost and the replacement of control problems
with others.
Centralization
Centralize decision-making in some areas of their companies at specific
points in history to improve control.
Risk sharing
Sharing risks with outside entities can limit the losses that could be
incurred by inappropriate employee behaviors. Risk sharing can involve
buying insurance to protect against certain types of large, potential losses
the organization might not be able to afford. Or share risks with an
outside party is to enter into joint venture agreement.
CONTROL ALTERNATIVES
If control problems cannot be avoided, management controls must be
implemented.
WHAT ARE FINANCIAL CONTROLS?
Financial controls are the procedures, policies, and means by which an
organization monitors and controls the direction, allocation, and usage of
its financial resources. Financial controls are at the very core of resource
management and operational efficiency in any organization.
Required Processes
The implementation of effective financial control policies should be done
after a thorough analysis of the existing policies and future outlook of a
company. In addition, it is important to ensure the following four
processes are completed before implementing financial control in a
business:
1. Detecting overlaps and anomalies
Financial budgets, financial reports, profit & loss statements, balance
sheets, etc., present the overall performance and/or operational picture
of a business. Hence, while formulating financial control policies, it is very
important to detect any overlaps and/or anomalies arising out of the data
available. It helps in detecting any existing loopholes in the current
management framework and eliminating them.
2. Timely updating
Financial control is the essence of resource management and, hence, the
overall operational efficiency and profitability of a business. Timely
updates of all available data are very important. In addition, updating all
management practices and policies concerning the existing financial
control methods is also equally important.
3. Analyzing all possible operational scenarios
Before implementing a fixed financial control strategy in an organization,
it is important to thoroughly evaluate all possible operational scenarios.
Viewing the policies from the perspectives of different operational
scenarios – such as profitability, expenditures, safety, and scale of
production or volume – can provide the necessary information. Also, it
helps establish an effective financial control policy that covers all
operational aspects of the organization.
4. Forecasting and making projections
While implementing a financial control policy, forecasting and making
projections are very important steps. They provide an insight into the
future goals and objectives of the business. In addition, they can help
establish a financial control policy in accordance with the business
objectives and act as a catalyst in achieving such goals.
IMPORTANCE OF FINANCIAL CONTROLS
1. Cash flow maintenance
Efficient financial control measures contribute significantly to the cash
flow maintenance of an organization. When an effective control
mechanism is in place, the overall cash inflows and outflows are
monitored and planned, which results in efficient operations.
2. Resource management
The financial resources of an organization are at the very core of any
organization’s operational efficiency. Financial resources make available all
other resources needed for operating a business. Hence, financial
resource management is crucial in order to manage all other resources.
Effective financial control measures hence are crucial to ensure resource
management in an organization.
3. Operational efficiency
An effective financial control mechanism ensures overall operational
efficiency in an organization.
4. Profitability
Ensuring an organization’s overall operational efficiency leads to the
smooth functioning of every organizational department. It, in turn,
increases productivity, which comes with a direct, positive relationship
with profitability. Hence, establishing effective financial control measures
ensures the improved profitability of any business.
5. Fraud prevention
Financial control serves as a preventative measure against fraudulent
activities in an organization. It can help prevent any undesirable activities
such as employee fraud, online theft, and many others by monitoring the
inflow and outflow of financial resources.
Examples of Financial Controls
1. Overall financial management and implementation
Placing certain qualification restrictions and employing only certified,
qualified financial managers and staff working with the formulation and
implementation of financial management policies
Establishing an efficient, direct chain of communication among the
accounting staff, financial managers, and senior-level managers, including
the CFO
Periodic training sessions and information sessions among accounting
staff, etc. to ensure being updated with the changing laws and evolving
business environment concerning business finance
Periodic, thorough financial analysis and evaluation of financial ratios and
statements wherever fluctuations are significant
Delegation of financial duties in a segregated and hierarchical fashion in
order to establish a chain of operation and efficiency via specialization
2. Cash inflows
Stringent credit reporting policy for all customers before entering into a
creditor-debtor relationship with them
Periodic reconciliation of bank statements to the general ledger in
addition to annual reporting for more efficient financial control
Establishing a periodic review policy with all existing customers that the
business establishes a creditor-debtor relationship with. It ensures the
ongoing creditworthiness of customers and eliminates the probability of
bad debts
Support files and backups for all financial data in a separate secured
database with access only permitted to senior management staff
3. Cash outflows
Automatic/subscription payments to be monitored and requiring proper
authorization in order to control extravagant business expenditure
Maintaining a vendor database with detailed purchase records with
restricted access in order to monitor cash outflow efficiently
Periodic reconciliation of bank statements to the general ledger
Clear and precise expense reimbursement policy to be maintained,
including detailed expense reports and receipt verifications in order to
curb extravagant business expenses and employee fraud.