| PM 550MG006

550 MG 006 PERFORMANCE MANAGEMENT

Performance Management

Brief Overview:

Performance management is the process of continuous feedback and communication between

managers and their employees to ensure the achievement of the strategic objectives of the
organization.

The definition of performance management has evolved since it first appeared as a concept.
What was once an annual process is now transitioning to continuous performance management.
The goal is to ensure that employees are performing efficiently throughout the year, and in the
process, address any issues that may arise along the way that affect employee performance.

Traditionally, performance management has been a forward-looking solution based entirely on

hindsight. But organizational culture is evolving to one of continuous feedback powered by
technology, where managers can foresee problems based on current employee performance and
initiate any form of course correction to bring the employee back on track.

Performance management differs from talent management opens a new window in that the latter
is a set of initiatives taken to engage employees to retain them. Performance management, on the
other hand, is an initiative that guides employees towards establishing and achieving their goals
in alignment with the organization’s immediate and overarching goals.

Learning Outcomes:

At the end of the course, students will be able to among many others:

 Define performance management and be able to illustrate how a good performance

management system can improve an organization’s results.
 Explain the difference between a performance appraisal and performance management.

1|Page
  Have an insight into the performance management cycle and best practices, the features
of an effective performance management software, and the future of performance
management.
 Highlight how performance management focuses on both easily quantifiable skills and
those activities that are important but harder to objectively measure.

2|Page
 Course Content

UNIT I:

Meaning and concept of performance Management, features of Performance Management – Scope of

Performance Management – Importance of Performance Management Defining performance – Performance
dimensions, approaches to measuring performance, diagnosing the causes of poor performance –
differentiating task from contextual performance.

UNIT II:

Performance Management and Human Resource, Components of performance Management – Performance

bench marking – Performance Culture – Competence and Competency Analysis – job competency
Assessment – Team work and Performance.

UNIT III:

Appraisals, Introduction, need, skill required, the role of appraiser, job description and job specification,
appraisal methods, ratters errors, data collection, conducting an appraisal interview, follow up and
validation, present thoughts and future directions.

UNIT IV:

Performance management and employee development, personal development plans, 360-degree feedback as
a developmental tool, performance management and reward system, performance linked remuneration
system, performance linked career planning and promotion policy.

UNIT V:

Performance consulting, concept, the need for performance consulting, role of the performance
consulting, designing and using performance relationship maps, contracting for performance
consulting services, organizing performance improvement department.

NOTES…………………………………………………………………………………………….

3|Page
 UNIT 1

Meaning and concept of performance Management, features of Performance Management –

Scope of Performance Management – Importance of Performance Management Defining
performance – Performance dimensions, approaches to measuring performance, diagnosing the
causes of poor performance – differentiating task from contextual performance.

What is Performance Management?

Performance management is a corporate management tool that helps managers monitor and
evaluate employees' work. Performance management's goal is to create an environment where
people can perform to the best of their abilities and produce the highest-quality work most
efficiently and effectively.

Understanding Performance Management

A formal performance-management program helps managers and employees see eye-to-eye

about expectations, goals, and career progress, including how an individual's work aligns with
the company's overall vision. Generally speaking, performance management views individuals in

4|Page
the context of the broader workplace system. In theory, you seek the absolute performance
standard, though that is considered unattainable.

Performance-management programs use traditional tools such as creating and measuring

goals, objectives, and milestones. They also aim to define what effective performance looks like
and develop processes to measure performance. However, instead of using the traditional
paradigm of year-end reviews, performance management turns every interaction with an
employee into an occasion to learn.

Managers can use performance management tools to adjust workflow, recommend new courses
of action, and make other decisions that will help employees achieve their objectives. In turn,
this helps the company reach its goals and perform optimally. For example, the manager of a
sales department gives staff target revenue volumes that they must reach within a set period. In a
performance management system, along with the numbers, the manager would offer guidance
gauged to help the salespeople succeed.

Focusing on continuous accountability creates a healthier, more transparent work environment,

and emphasis on regular meetings can improve overall communications. Because performance
management establishes concrete rules, everyone has a clearer understanding of the expectations.
When expectations are clear, the workplace is less stressful. Employees are not trying to impress
a manager by doing some random task, and managers aren't worried about how to tell employees
that they are not performing well. If the system is working, they probably know it already.

Performance-Management Programs

Although performance-management software packages exist, templates are generally customized

for a specific company. Effective performance-management programs, however, contain certain
universal elements, such as:

 Aligning employees' activities with the company's mission and goals. Employees
should understand how their goals contribute to the company's overall achievements.

 Developing specific job-performance outcomes. What goods or services does my job

produce? What effect should my work have on the company? How should I interact with
clients, colleagues, and supervisors? What procedures does my job entail?

5|Page
  Creating measurable performance-based expectations. Employees should give input
into how success is measured. Expectations include results—the goods and services an
employee produces; actions—the processes an employee uses to make a product or
perform a service; and behaviors—the demeanor and values an employee demonstrates at
work.

 Defining job-development plans. Supervisors and employees together should define a

job's duties. Employees should have a say in what types of new things they learn and how
they can use their knowledge to the company's benefit.

 Meeting regularly. Instead of waiting for an annual appraisal, managers and employees
should engage actively year-round to evaluate progress.

Features 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.

6|Page
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

7|Page
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 performance. 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

8|Page
abilities and an in-depth appreciation of their performance. Regular monitoring goes hand-in-
hand with feedback.

What Are the Objectives of Performance Management?

Performance management is a strategy used in human resource management. There are several
objectives of performance management systems. When these are met, it creates a successful
strategy, which results in benefits for all involved. The objectives of performance management
include:

1. Defining the organization’s goals and objectives

Goal setting has proven to be a highly rewarding methodology in organizations. The importance
of goal setting goes beyond its impact on the employee, but also affects management and the
organization at large. In setting goals, an effective performance management system must ensure
that realistic, achievable, and cost-effective goals are set. It takes into consideration the strengths
and weaknesses of the people involved.

From the employees’ perspective, goal setting:

 Keeps them focused on the major objective/s

 Maximizes individual performance and abilities

 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

9|Page
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 was 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.

10 | P a g e
5. Identifying barriers to achieving organization 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 is 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

11 | P a g e
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 Is the Scope of Performance Management?

The scope of performance management is almost as broad as its root, human resource
management. A performance management system has to conform to the overall organizational
structure. It should not be viewed in isolation, but rather as underlying the entire organization.
This ensures the fundamental aim of performance management systems, to ensure good work
from every department in the organization.

The scope of a performance management system encompasses everything people do at work –

from the vision and goals of the organization to the employees, their personal interest, the tasks
assigned to them, how they are executed as against the set standard, the employer's intent,
interests, and the company’s goals.

This covers such a broad framework that, to understand it effectively, we must look at it as two
halves of a whole.

1. Corporate performance management (CPM)

2. People performance management (PPM)

12 | P a g e
Corporate performance management (CPM) or enterprise performance management
considers the overall performance of the organization. It is a series of managerial strategies that a
business must apply to define its goals, design a working strategy, execute it,
periodically analyze its result, and utilize the information to make better decisions for growth.
The tools used in corporate performance management range from budgeting and product vision
to business models, etc.

On the other hand, people performance management (PPM) focusses on the employees within
the organization. It is the most challenging aspect of performance management as it involves a
larger number of people and a greater number of objectives. It deals with ensuring that
all factors align to perfectly fit into the overall aim of an organization.

Scope of performance management

The PPM system is one that will:

 Validate the employee selection process

 Identify employee training needs

 Give performance feedback and constructive criticism when necessary

 Determine employee reward and benefit

 Decide on the time and nature of promotion or demotion

All these are adequately represented in the performance management cycle, which has evolved
from the traditional, static form that ran as long as a year to a more continuous model with
broadly defined goals that can be reviewed. It has four phases:

1. Planning

In the planning phase, both CPM and PPM are involved. The management team initially meets to
determine the overall goals of the organization, and then the yearly or quarterly goals. This is
then shaped to the level of the employees, defining their roles and objectives. It also considers
the personal development goals of each employee. The planning phase is a goal-setting phase.
Getting the most out of this phase is easy by using the SMART guide. Simply put, goals must
be Specific, Measurable, Achievable, Relevant, and Time-bound.

13 | P a g e
2. Monitoring

This phase falls under the scope of performance management and is much more effective when
done regularly. Studies have shown that 63% of Gen Z employees want to receive frequent
feedback from their managers rather than just an end-of-the-year review. The management
checks in to understand the progress, roadblocks, existing and surmounted problems, ideas, etc.
In the monitoring phase, there is also room for redefining goals set during the planning phase.

3. Reviewing

At the end of the cycle, management must evaluate performance. Were goals met? Was there a
waste of the company's resources? How efficiently did employees achieve this goal? How can
this process be modified for better results? Did employees deliver an outstanding performance or
show leadership qualities? The reviewing phase is easier when proper monitoring takes place.

4. Rewarding

Without mincing words, this is a phase that must not be relegated to the backburner. It is crucial
not just to the employee but also to the employer in the long run. A reward system is a strong
motivator of better performance.

What Is the Importance of Performance Management?

In the past, there was hardly any emphasis placed on performance management
in human resource management. Fortunately, this narrative is changing rapidly as a culture of
employee-centricity evolves. Let us delve deeper to understand the importance of performance
management.

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.

14 | P a g e
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 interacts with the company and its structures. Productivity defines itself in terms of
increased outcomes and Return on Investment (ROI).

Consider a scenario where the HR manager shows interest in what the social media manager
does only at the end of the year. Compare it with how much more of a concerted effort the social
media manager would put in when promoting the company under a modern performance
management system. The company's vision, aims, and goals will be evident in each piece of
content posted online in the second scenario.

15 | P a g e
Employee engagement should cut across every aspect of work, even down to whether people
contribute to team meetings or not. In fact, employees whose managers are actively involved in
performance management are three times more engaged than others.

5. Makes room for idea generation

In a fast-tracked world, we can’t underestimate the importance of generating new ideas. A

company’s sole aim might be to provide affordable housing. However, if there is no steady and
inspiring stream of ideas to sell to the public, there will be a plateau and eventual decline in
sales.

Now, with a functional performance management system, the burden of idea generation no
longer rests solely on the owner or product management team. Ideas can flow more easily, and in
the right direction, because every worker knows that their inputs are welcome. Amazingly, this is
not just limited to consumer products. Idea generation could also benefit the company, such as
suggestions for a better working system, etc.

6. Creates a platform for employee development

A consistent performance management system invariably results in an active form of employee

development. Discussing each employee’s role, past performance, current efforts, strengths, and
weaknesses gives you an accurate understanding of what each employee can do. When combined
with an agile HR technology, it creates opportunities to steer employees in a direction best suited
to their abilities and the company’s goals.

Performance management makes training targeted rather than generalized, and most importantly,
employee potential is optimally utilized to the advantage of everyone involved.

7. Enables proper documentation and record-keeping

We are witnessing a rapid shift from paper and filing cabinets documentation systems to faster,
easier, and less burdensome digital ones. There are several digital performance management
solutions that help track every aspect of HR.

These HR management tools provide a clear documentation process that can be stored and
revisited when needed. It means you have a record of each employee's past performance at your

16 | P a g e
fingertips. Promotions are scheduled and timely rewards given, and even a history of errors with
administrative action is documented.

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.

17 | P a g e
Performance management helps to identify the one employee that 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.

18 | P a g e
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.

What is Performance?

Performance is the noun of the verb to perform that refers to the execution or accomplishment of
work, acts, feats, etc. In business it usually refers to the achievement of desired goals, and is the
result of the investments we make in our human capital and other assets. Our understanding of
performance needs to take into account the desired business behaviors and the valuable
outcomes produced by those behaviors. Analyzing and managing those behaviors is a key driver
of business success.

This leads to the question of, what are behaviors and how do we manage them? Again, business
people talk about these but rarely do we break them down into the component parts that we can
digest. Behaviors are made up of the observable actions and/or mental processes of the people

19 | P a g e
who perform the job. Observable actions are what we do, and mental processes are what we
think.

So how is this taxonomy useful in understanding our business and driving performance? It is
useful because it allows us to execute six simple steps:

1) Define the outcomes we want

2) Identify the behaviors that lead to those outcomes
3) Identify the observable actions that are part of those behaviors
4) Identify the mental processes that are part of those behaviors
5) Develop and implement processes and training programs that help enable the team to perform
those observable actions and mental processes
6) Measure the outcomes and adjust as necessary

While the details of this process may get more complicated depending on the organization, every
organization's efforts can be put into these categories. And figuring out what categories to set up
is where most organizations get into trouble.

Introduction

Nowadays, the performance of companies is the first to be evaluated by investors around the

world as currently, the world has become smaller in a sense that businesses can be conducted

anywhere. Globalization facilitates business activities and high performance and in

eliminating the barriers existing in corporate trade and financial investment, businesses can

have a wider opportunity to grow. In addition, with the highest spread of generation in

technology, people who are interested and concerned in achieving their jobs from anywhere

are encouraged to look for any company around the world that shows high performance for

investment. Thus, the performance of the company is the most important to encourage the

people to come to it. And therefore, people who are responsible for running firms must

improve firm performance through new plan and procedures to update its operations and

20 | P a g e
transactions during its life cycle. Regarding to the importance of this subject of performance

of firms, this study considers the effect of performance in the business environment in

consistent to some measurement such as accounting-based measurement and market-based

measurement as discussed in the coming sections.

Firm Performance Definitions

Performance measurement refers to the process of measuring the action’s efficiency and

effectiveness (Neely, Gregory & Platts, 1995). Performance measurement is the transference

of the complex reality of performance in organized symbols that can be related and relayed

under the same circumstances (Lebas, 1995). In the current business management,

performance measurement is considered to be in a more critical role compared to

quantification and accounting (Koufopoulos, Zoumbos & Argyropoulou, 2008). This is

consistent with Bititci, Carrie and McDevitt (1997) who described performance management

as a process wherein the organization manages its performance to match its corporate and

functional strategies and objectives.

Additionally, the firm’s value can be described as the benefits stemming from the firm’s

shares by the shareholders (Rouf, 2011). The company’s performance can be viewed from the

financial statement reported by the company. Consequently, a good performing company will

reinforce management for quality disclosure (Herly & Sisnuhadi, 2011).

Firm Performance Importance

Performance measurement is critical for effective management of any firm (Demirbag, Tatoglu,

Tekinus and Zaim, 2006). The process improvement is not possible without measuring the

outcomes. Hence, organizational performance improvement requires measurements to identify

the level to which the use of organizational resources impact business performance (Gadenne

21 | P a g e
and Sharma, 2002; Madu, Aheto, Kuei and Winokur, 1996).

The firm’s success is basically explained by its performance over a certain period of time.

Researchers have extended efforts to determine measures for the concept of performance as a

crucial notion. Finding a measurement for the performance of the firm enables the

comparison of performances over different time periods. Nevertheless, no specific

measurement with the ability to measure every performance aspect has been proposed to date

(Snow & Hrebiniak, 1980).

Performance of a firm is significantly impacted by corporate governance and if the functions

are appropriately established for the corporate governance system, it attracts investment and

helps in maximizing the company’s funds, reinforcing the company’s pillars and this will

result in the expected increase in firm performance. In other words, an effective corporate

governance protects against probable financial challenges and facilitates remarkable growth

and therefore, corporate governance plays a key role in the growth of the firm performance.

Currently the impact of corporate governance upon the general firm well-being has been

examined (Ehikioya, 2009).

Firm Performance Measurement

Measurement of performance can offer significant invaluable information to allow

management’s monitoring of performance, report progress, improve motivation and

communication and pinpoint problems (Waggoner, Neely & Kennerley, 1999). Accordingly,

it is to the firm’s best interest to evaluate its performance. Nevertheless, this is a management

area characterized by lack of consistency as to what constitutes organizational performance.

According to Cameron and Whetten (1983), the importance of business performance in

strategic management can be categorized into three dimensions; theoretical dimension,

22 | P a g e
empirical dimension and managerial dimension.

Moreover, performance measurement is critical in performance management. Through the

measurement, people can create simplified numerical concepts from complex reality for its

easy communication and action (Lebas, 1995). The simplification of this complex reality is

conducted through the measurement of the prerequisites of successful management. On a

similar note, Bititci et al. (1997) contended that performance measurement is at the core of

the performance management process and it is of significance to the effective and efficient

workings of performance management.

In theory, the concept of performance forms the core of strategic management and

empirically, most strategy studies make use of the construct of business performance in their

attempt to examine various strategy content and process issues. In management, the

significance of performance is clear through the many prescriptions provided for performance

enhancement. Research dedicated to governance structures relationship with financial

performance was highly dependent on accounting-based indicators. Some studies have

adopted individual measurements (accounting-based or market-based measurements).

Although there are widely measurements of performance with many which it related to much

fields but we tried to execute this measurement regarding to corporate governance. Based on

our reading of much article that interconnection to corporate governance that we will provide

almost of measurements of firm performance form different perspective as it explains follows.

The countless number of ways has been brought forward to measure financial performance

and among them are: measurement of performance as the level of Return on Assets (ROA),

Return on Equity (ROE), Tobin-Q, Profit Margin (PM), Earnings Per Share (EPS), Divided

Yield (DY), Price-Earnings Ratio (PE), Return on Sales (ROS), Expense to Assets (ETA),

23 | P a g e
Cash to Assets (CTA), Sales to Assets (STS), Expenses to Sale (ETS), Abnormal returns;

annual stock return, (RET), Operating Cash Flow (OCF), Return on Capital Employed

(ROCE), Labor productivity (LP), Critical business Return on Asset (CROA), Cost of Capital

(COC), Market Value Added (MVA), Operation Profit (OP), Return on Investment (ROI),

Market-to-book value (MTBV), Log of market capitalization, LOSS, Growth in Sales (GRO),

Stock Repurchases, Sales Per Employee (SPE), Return on revenue (ROR), Output per staff

(OPS), Cost Per Service Provided (CPSP) and Cost per Client Served (CCS), Superior to

cumulative abnormal returns (CARs), Profit Per Employee (PPE) and Return on Fixed Assets

(ROFA) etc. Most of these proposed measures have been utilized by studies regarding

governance.

Recently, special attention has been dedicated to determining the corporate governance

effectiveness through different measurement of firm performance, one that is related to the

production process, namely technical efficiency (e.g. Sheu & Yang, 2005; Bozec & Dia, 2007;

Destefanis & Sena, 2007; Lin et al., 2009; & Garcia-Sanchez, 2010). This is because the main

element of business organization is its operation function which refers to the transformation

of inputs into outputs, and wherein efficiency is very significant (Sheu & Yang, 2005).

Along the same line, Hill and Snell (1989) contended that the advantage of making use of

technical efficiency is its constitution of accurate measure and the disadvantages of other

measures such as financial ratios and Tobin’s Q as firm performance measure; the latter two

are very sensitive to the differences among accounting methods/manipulation of accounting

profit (Barth, La Mont, Lipton & Spelke, 2005).

24 | P a g e
Accounting-Based Measurements

Accounting-based measurement is generally considered as an effective indicator of the

company’s profitability and the business when compared to benchmark rate of return equal to

the risk adjusted weighted average cost of capital. The accounting-based measurement

indicators to the profitability of firms on the short term in the past years such as (ROA),

(ROE), (ROS), (PM), (ROI), (OCF), (EPS), (OP), (GRO), (ROCE), (ETA), (CTA), (STS)

and others as we will offer below.

The profit measure is criticized for its backward-looking element and its partial estimation of

future events in terms of depreciation and amortization. The rate of profit is measured by the

accountant, limited by standards established by the profession and is hence impacted by the

accounting practices like the various methods employed for the assessment of tangible and

intangible assets (Kapopoulos & Lazaretou, 2007).

Also, ROA, as an accounting-based measurement, gauges the operating and financial

performance of the firm (Klapper & Love, 2002). The measurement is such that the higher

the ROA, the effective is the use of assets to the advantage of shareholders (Haniffa

Huduib, 2006). Higher ROA also reflects the company’s effective use of its assets in serving

25 | P a g e
the economic interests of its shareholders (Ibrahim & AbdulSamad, 2011).).

According to Hutchinson and Gul (2004) and Mashayekhi and Bazazb (2008),

accounting-based performance measures present the management actions outcome and are

hence preferred over market-based measures when the relationship between corporate

governance and firm performance are investigated. As a result, a company showing a positive

performance through ROA, it indicates its achievement of prior planned high performance

(Nuryanah & Islam, 2011). Contrastingly, a negative person indicates failure of the planned

high performance which requires revision of plans to enhance short-term performance. The

negative performance results in investors’ (local and foreign) loss. The company therefore

has to update its objectives from time to time if it is desirous of competing in the market

place. The rest of the section provides extensive summaries of all accounting-based

measurements tested by researchers.

26 | P a g e
 UNIT II

Performance Management and Human Resource, Components of performance Management –

Performance bench marking – Performance Culture – Competence and Competency Analysis –
job competency Assessment – Team work and Performance.

What is Performance Management in Human Resources?

The performance of the organization is always a difficult topic. Each top manager likes the
comparison of the organization with the main competitors on the market. Each top manager likes
the comparison with the market benchmark. The organization always finds measures, which are
better than the competitors’ ones.

However, it says nothing about the performance of the company. It says nothing about the
performance of employees. The organization has to set the performance standards; the system
measures employees against defined standards.

The performance management (in Human Resources) is a complex HR tool to set goals, follow-
up of goals, identifying the development needs and the potential. Additionally, it includes
the performance appraisal, which closes the whole cycle and sets the new one.

27 | P a g e
The performance management is not about measuring doing things. It is about setting clear,
and challenging goals (SMART) and it is about the regular evaluation of the progress. The
system pushes managers and employees to cooperate on achievements.

The HR has to design the performance management system, which is clearly and
visibly connected with the strategic agenda of the organization. The employees will not follow
the unrealistic and useless goals. They will not do their best to achieve targets. They will try to
avoid goals. Managers do not follow the unrealistic targets; they prepare excuses. The system
looks impressive, but it misses its main goal – to support the growth of the business and building
the talent and performance pipeline in the organization. Also, it can limit Employee Turnover.

The performance standards are the essential part of the whole system. HR has to cooperate
with managers on the definition of the performance standards for each job position in the
company. The performance standards are a must for the fair measurement of employees. They
have to know and understand the basic requirements.

The performance standards should be reviewed on a yearly basis. HR and managers should
evaluate the performance appraisal results against the performance standards. They should be
raised, if it is needed. Meeting the performance standards is not a basis for the excellent result.
The excellent results in the performance management are based on bringing something extra,
which enriches the organization.

The standards define the way for measuring the performance. The standards make the
performance management fair to employees. They support the fair calibration of performance
appraisals. Managers have to provide the evidence about the real performance of their teams.

The performance management has to improve the organization. Meeting the standards is not
about the improvement; it is about the status quo. The organization without the development
slowly dies. HR has to bring the tool, which pushes managers and employees in their creativity.
The strategic agenda has to be challenging and realistic. The goals have to follow the strategic
agenda. The excellent employees make the strategic agenda the reality.

28 | P a g e
What is Performance Management?

Performance management is a communication-based process between a supervisor and an

employee occurring throughout the year, to plan, monitor and review the employee's
performance, objectives, goals, and overall contribution to the organization. Essentially,
performance management is what organizations undertake to increase their success and maintain
a competitive edge.

The main aim of performance management is to foster an environment in which people and
teams take ownership of their development and that of their companies. Specifically,
performance management is concerned with accomplishing individual goals under corporate
settings and ensuring that each employee works toward these.

A lot of components are necessary for successful performance management in any organization.
If you are the one looking for the key components of a thorough performance management
process, here is your halt. We have done all the legwork to make a list of important elements of a
performance management system.

Components of Performance Management

Components of a successful performance management system are as follows:

Performance Planning

This is the first critical component of any performance management process. During this period,
employees determine the objectives and major performance areas that can be accomplished
within the confines of the performance budget over a year. The performance budget is
established after a mutual agreement between the reporting officer and the employee.

Performance Appraisal and Reviewing

In most organizations, appraisals are conducted twice a year in mid-year reviews and annual
reviews held after the fiscal year. The appraisee begins by providing self-completed evaluations
on the self-assessment form and defines their accomplishments over time in quantitative terms.

The assessor provides final grades for the employee's quantifiable and measurable
accomplishments following the self-assessment. The whole review process requires active

29 | P a g e
engagement from both the employee and the appraiser to determine the root reasons for
performance gaps and how they might be closed. This was mentioned in the section on
performance comments.

Rewarding superior performance is critical since it determines an employee's work motivation.

An employee's outstanding performance is publicly acknowledged and rewarded during this
stage. It is a very sensitive time for an employee since it directly impacts self-esteem and
success-oriented. Any contribution acknowledged by a company assists an employee in
effectively overcoming setbacks and fulfils the demand for love.

Constant Performance Feedback

Performance Feedback, followed by personal counselling and performance facilitation − The

performance management method places a high premium on feedback and counselling. This is
when the appraiser informs the employee of areas for development and provides information on
whether the employee is performing at the desired level of performance. The employee gets open
and honest feedback and identifies the person's training and development requirements.

The appraiser takes all necessary means to ensure that the employee achieves the organization's
desired goals via effective personal counselling and coaching, mentorship, and individual
representation in training programs that build competencies and increase overall productivity.

Performance Improvement Plans

At this level, a new set of goals and a new deadline for achieving those goals are defined for an
employee. The employee is informed explicitly of the areas in which they are expected to
improve, and a specified date is also provided by which they must demonstrate their progress.
This strategy is prepared and authorized jointly by the appraise and appraiser.

Potential Assessment

Potential appraisal lays the groundwork for lateral and vertical staff mobility. Evaluating
potential employees gives critical information for succession planning and job rotation. Potential
evaluation is accomplished via competence mapping and other assessment procedures.

30 | P a g e
Timings

Generally, performance reviews are mostly conducted annually due to which it become so
dreadful and longer in duration. Hence, because of the nature of the performance management
systems, such reviews are undertaken maybe on quarterly or even monthly.

These techniques on timings lead to situations where employees take the initiative to come to
supervisors to discuss both issues and ideas more openly, and come up with resolutions sooner
before it becomes a crisis.

Conclusion

Effective performance management may assist you in ensuring that all of your staff work
together toward a common objective. Unfortunately, majority of the employees have a problem
with the review and constant feedback system. However, with a clearly stated overarching
purpose, employees will understand how their efforts contribute to the company's overall
success. This contributes to improving individual, team, and organizational performance and
productivity.

Performance Bench Marking

Brand benchmarking is a process of measuring the performance of a company’s products,

services, operations, processes against other companies - recognized as best-in-class - or the
wider marketplace.

The most common metrics for benchmarking include cost per unit, time to produce,
product/service quality, effectiveness, time to market, customer satisfaction and loyalty, brand
recognition.

Benchmarking against leading companies will gather insights to help you understand how your
brand compares, even if they’re in a different industry, or have a different audience.

Benchmarking is a process for obtaining a measure - a benchmark. Simply stated, benchmarks

are the “what”, and benchmarking is the “how.”

31 | P a g e
Why is benchmarking important?

Implementing a benchmarking process will help your business get stronger. Processes will be
more efficient. Quality improved. You’ll save money, while increasing revenue. Studying best-
in-class companies, identifying why their processes work so well, will enable continuous
improvement within your business.

That could mean updating a product feature to meet or beat a competitor’s product.
Implementing a social media management tool for scheduling your social messaging.
Introducing training days for your team.

Benchmarking will help your business…

 Improve your processes, operations, procedures

 Measure how effective your past performance is

 Identify how your competitors operate

 Improve efficiency and reduce operating costs

 Improve product/service quality

 Increase customer satisfaction and loyalty

Monitor performance

Look at current benchmark metrics in order to identify industry standards that you should strive
to meet or surpass. Benchmarking is an ongoing process, with performance monitoring playing a
crucial part.

Competitive analysis

By comparing your performance with that of your competitors - what they’re doing right and
what they’re doing wrong - you’ll identify areas in your business that can be improved. Gaining
the competitive edge.

32 | P a g e
Goals

No doubt you’ve already determined your business goals, but benchmarking goals are different.
They’re about improved performance of your company processes. They’re competitive. But, as
with your business goals, they must be achievable.

Don’t forget, they must be SMART - Specific, Measurable, Achievable, Relevant, Timely

SMART goals - Specific, Measurable, Achievable, Relevant, Timely.

 Specific - real numbers, real deadlines - who, what, where, why?

 Achievable - are your goals challenging, yet possible?

 Measurable - how will you track and analyze your progress?

 Relevant - do you have the resources to achieve your goal?

 Timely - when do you intend to reach your goal?

Make your goals unrealistic, and you’re going to fail.

33 | P a g e
Benchmarking classifications

There are several forms of benchmarking. I’ll concentrate on the primary ones.

Internal benchmarking

Can an internal process be more efficient?

Collect data on your performance at different times - days, week, months, etc. - or during
different situations- during a PR crisis, product launch, event - and find the areas that are
weakest. Processes that can be improved, such as converting leads to customers, onboarding new
team members, etc.

The advantages of internal benchmarking are that you have access to all the

data you need, and it’s a quicker process.

The disadvantage?

You’re limiting your success, if you don’t go outside your business/industry, and learn from top
performers.

Competitive benchmarking

How do your competitors’ processes and operations function?

Unlike competitor analysis, where a brand tries to gain the competitive edge by jumping into
areas missed - new features, countries to target, etc., competitive benchmarking involves the
gathering of insights to show how their processes work, compared to yours. And, will identify
industry performance standards.

Compare products, services, processes, methods. You’ll identify your position in your industry,
and how to increase productivity and success.

For example, what’s customer sentiment - positive, negative, neutral - towards your competitor’s
brand? What are customers saying in comments, reviews, social posts? Collect this data and
then, if it’s better than your internal results, work out how to improve those areas in your
business.

34 | P a g e
Strategic benchmarking

Strategic benchmarking is when you compare your performance with best-in-class performers.
Your data collection shouldn’t be limited to your own industry. You’ll be looking at brands that
have proved successful in a particular process.

This type of benchmarking will help with overall performance of your business. It looks at your
long-term strategies, compared to other brands. Suggested improvements that result from
strategic benchmarking are not quick fixes. You’ll be considering your core competencies, new
product development, etc.

Performance Benchmarking Process

The benchmarking process doesn’t have to be difficult. I’m going to share the key steps
involved, which work across all industries.

Successful benchmarking is quantitative and qualitative. You’ll be comparing your business with
competitors, and with organizations outside your industry. It’s a process that requires the support
of your entire company.

It’s not a quick fix. And it’s not magic. Updating your CRM software won’t turn you into IBM.
But it will motivate change in your company. You’ll collect insights that if managed, will bring
about improvements.

Here’s the process to follow...

The plan

You’ll need to get top management onboard, and prepared to allot time, manpower, money.
You’ll also need their involvement to support any major changes that are a result of your
benchmarking, such as new product development, training, purchasing new tools.

Choose processes that are integral to your company’s success. Those that give you the
competitive edge. They need to be measurable, so you can determine the metrics to be compared.

Perform SWOT analysis to determine your company’s strengths, weaknesses, opportunities, and
threats, compared with those of your competitors.

35 | P a g e
SWOT analysis - Strengths, Weaknesses, Opportunities, Threats.

Don’t forget the knock-on effect. If you change one process, how will it affect other processes?
Fix one and break another, is not the way to go.

Now you have to choose a benchmark to compare with. It could be from an organization such as
a competitor, or an organization in a different industry, country, region, etc. But, ensure that it’s
a top performer in the process you’re looking to evaluate/improve.

The collection of data

You’ll be collecting data from several sources. From the company you wish to benchmark
against, and data that’s publicly available - websites, press releases, publications. When
researching, consider market research, surveys, questionnaires, onsite/telephone interviews, etc.

Using social media analytics, you’ll also be able to gather information from online
conversations, blogs, forums, review sites. Information that will reveal sentiment towards a
brand, consumer feedback on products, services, and processes.

36 | P a g e
Benchmarking example - customer service

Wanting to improve customer service, a brand should compare its processes with those of its top
competitors. The successful ones. Identify what they’re doing that’s working.

Online or brick and mortar business, identify how are they talking to customers? What language
are they using? Do they use ‘how to’ videos to help customers?

The analysis

All relevant data collected, it’s time to analyze.

Data visualization tools are going to help your process. It’s way easier for people to understand
images, than pages of numbers.

Identify the gaps in your processes - compared to the organization your benchmarking against -
where your performance is letting you down. What’s caused this gap - manpower, time, wrong
tools, etc.?

How is brand X getting their product to market quicker than you? How does brand X
manufacture their product cheaper than you?

Time to implement

You’re going to need a plan of action.

You’ve found the gaps, and you know how to fill them. It’s going to mean potentially big
changes, and you’ll need your bosses and your team onside. Ensure you have the resources you
need to implement the improvements.

Once everything is in place, you’re on your way to a winning benchmarking process.

Ongoing evaluation

It doesn’t stop. Ever.

For your benchmarking to be successful, you have to monitor regularly. What progress has been
made? How have the changes impacted your business processes? Do you need to make changes
to improve further?

37 | P a g e
I’m going to take a look at how marketers will benefit if they follow a digital benchmarking
process…

Benchmarking marketing

Benchmarking your marketing strategies, enables you to evaluate whether they’re as good as
they can be. You’ll need to start by reviewing your existing activities. Tracking the frequency of
campaigns. Engagement rates. Results they bring - conversions, new customers, open-rates, etc.

Having collected all your data, you’ll be able to make improvements and increase ROI.

First up, collecting the data. Follow these seven steps, to benchmark your brand’s
marketing efforts…

1 Determine the marketing processes you want to measure

To choose what you want to benchmark - social media channels, website, emails, blog posts,
paid ads, etc. - you’ll need to have your marketing goals already established. Goals that could
include...

 Increasing email open-rate

 Boosting engagement on your social posts

 Increasing the number of visitors to your site

Your marketing benchmarking could focus on…

 Measuring the open-rate of your promotional emails

 Tracking the engagement rate your tweets are earning

 How long visitors are spending on your website

2 Choose your metrics

Don’t go crazy. Too much data collected, and you’ll be overwhelmed.

Benchmarking has to be precise, so you can implement the best actions. For

instance, benchmarking your blog…

38 | P a g e
  What’s the frequency of your blog posts?

 Where are your blog visitors coming from?

 How long do visitors spend reading your content?

 What do visitors do after they’ve read your content - click CTA, click to another page,
bounce, etc.?

For your social media channels, benchmarking performance metrics could be…

 How often do you tweet/share?

 What’s the engagement rate of your social posts?

 How many people click your CTA?

 How many retweet/share your messages?

3 Competitor analysis

Competitor analysis is vital, regardless of your industry. What are they doing that’s working?
Are you doing it too? What countries are they successful in? Are you? You have to learn from
their strengths, and exploit their weaknesses.

 How often do they publish blog posts?

 What’s their social media posting schedule?

 Which countries are they targeting?

 What are consumers saying about their products?

Have a look at the Competitor Analysis Guide. It is not a sneaky peek at your competitors’
social channels. That’s just being nosey. The best competitor analysis will identify opportunities
that’ll help you improve your marketing campaigns - targeting, SEO, content, leads, conversions,
revenue, and more.

39 | P a g e
Determine which channels are working best for your competitors.
(simulated Talkwalker report).

Remember, you have to be brutally honest about your brand, and compare with the data you
collect about your competitors.

4 Build your digital marketing strategy

Got another marketing guide that’s going to help. My Digital Marketing Strategy eBook.
You’ll learn...

 How to deliver a sustainable competitive advantage

 The data to track from previous marketing campaigns

 How to report your results

 How to plan, monitor, and measure your social media activity with social listening

 How to create social media reports to present your results

You’ve established your digital marketing benchmark. Now you need to define your strategic
objectives. Choose SMART goals. For example,

 Blog - increase subscribers to your blog by 55% by Q3

 Social - increase LinkedIn followers to 750K by Q4

40 | P a g e
  Email - achieve an average email click-through rate of 20% by December

 Paid - increase website traffic 4,000 visitors per month by November

5 Regular analysis

Benchmarking your marketing activities is not a one-time process. It should be performed

regularly, so you can understand how your processes are improving and the impact your
strategies are having.

You're going to an analytics plan. Have a look at my Social Media Analytics Guide. It explains
all that you need to measure, how to do it, competitive intelligence, and the tools you'll need.

Marketing Benchmarks

Marketing benchmarks allow you to compare your results with your competitors and industry.
You’ll find your competitive advantage. You’ll identify where you’re underachieving.

To benchmark your marketing activities, you’ll need data about your competitors. Much of this
data is freely available in the public domain. Financial reports, market research surveys, for
instance. There are also research companies that provide - for a price - benchmarking data. Then
there’s analytics tools...

Marketing metrics benchmarks include:

Top of mind awareness - TOMA

The first brand, product, service that springs to mind, when a specific product category is named.
If consumers are asked to name a premium car - Rolls Royce, Ferrari, Bentley, Porsche, etc. -
the brand with the highest percentage of mentions is top of mind. Some brands have achieved
so much TOMA, that their product has become a generic word for a product.

An example being, Kleenex for tissues, regardless of brand.

Unprompted brand recall

When consumers remember a brand - when a product category is mentioned - without it having
been mentioned.

How many burger brands can you name?

41 | P a g e
Brand recognition

Consumers identifying your logo, tagline, jingle, packaging, ads over your competitors.

Which trainer comes with a tick?

Reach

The percentage of your target audience that you reach with your content marketing, compared to
your competitors.

Engagement

The interaction between consumers and your brand with regard to your marketing messages -
likes, follows, shares, retweets, comments, click-throughs, time spent on your website.

Conversion rate

The number of visitors to your website that complete an action - subscribe to newsletter, request
free demo, download report.

Customer satisfaction

Metric that shows the percentage of how happy customers are with your brand, product, service,
compared to your competitors.

Customer loyalty

This metric reveals how likely a customer is to buy a particular brand on a regular basis.

If you can’t have a McDonald’s, you won’t have a burger. You only buy Samsung. A positive
experience, brings customers back again and again.

Customer perceptions

A customer’s impression and awareness of your brand, products, services. Their opinion is
formed through every direct and indirect interaction with your company. Measure to find pain
points and to improve CX.

42 | P a g e
Product performance

The value consumers put on your products - new, updated. Collected user-generated content can
be used to improve product development, and inspire marketing campaigns.

Market share

The percentage of total industry sales in a product category that are down to your company. For
instance, if consumers buy 100 mobile phones, 55 from Samsung, the brand has 55% market
share.

Share of wallet - SOW

Metric that calculates the percentage of a customer’s spending on your brand, as opposed to your
competitors.

Customer reviews

Customer reviews/ratings shared on review sites, ecommerce sites, etc. For example, Amazon’s
star rating, TripAdvisor, and more.

Customer acquisition cost - CAC

How much it costs for you to persuade consumers to buy your product or service. Costs include
market research, surveys, marketing, paid ads, printing, TV commercials, events, etc.

Customer lifetime value - CLV

The amount of money a customer is estimated to spend on your products and services in the
future. Based on their average spend per year.

Customer retention rate

A metric which enables companies to calculate the percentage of customers they’re retaining;
versus the percentage they’re losing.

Pricing strategy

An ongoing process to identify what consumers are willing to pay for your products, and to
monitor what your competitors are charging. Optimize your price strategy accordingly

43 | P a g e
Benchmarking tools

Analysis decided. Metrics to measure sorted. Choose the time period that you’d like to monitor -
for instance, previous two to three months/Q1, etc. Now it’s time to get your toolkit out.

You can do basic analysis to start…

 How many blog posts you published?

 How many tweets per day?

 How many emails sent

 How many social media ads shared?

To understand better. To collect more detailed data, you’ll need benchmarking tools…

Performance Culture

What do the most productive, creative, and engaged workplaces have that others lack? The
answer often comes down to company culture specifically, a high-performance work culture.

But while culture is often viewed as intangible, that doesn’t mean it’s not possible to change or
create it. If you want to build a high-performance culture at your organization— and reap the
many benefits of doing so here’s what you need to know.

What Is High-Performance Culture?

Simply put, a high-performance workplace is one that works well. Employees are highly
productive and motivated. They have the resources they need to meet and exceed their goals, feel
supported by their manager, are aligned with company values, and feel favorably about corporate
leadership.

Research and advisory firm Gartner defines a high-performance workplace as “a physical or

virtual environment designed to make workers as effective as possible in supporting business
goals and providing value…it results from continually balancing investment in people,
processes, physical environment, and technology to measurably enhance the ability of workers to
learn, discover, innovate, team, and lead, and to achieve efficiency and financial benefit.”

In other words, companies with high-performance cultures tend to be great places to work.

44 | P a g e
“[A high-performance culture] is more than just having inspired leadership or a roster of self-
motivated workers,” said Phillip Lew, founder and CEO of C9 Staff, a boutique remote staffing
agency. “It’s more a combination of a number of elements that include upper management;
management style and strategy; task distribution and assignment; and systems of accountability,
cooperation and help, and support among others.”

Characteristics of High-Performance Cultures

High-performing cultures share a lot in common with high-performing teams. For instance, trust
is a key pillar of both.

“Trust is a huge component of developing a high-performance culture,” said Irial O’Farrell,

partner at Pebble, a consulting agency that focuses on business transformation, and author
of SMART Objective Setting for Managers: A Roadmap.

Some other similarities: High-performance teams, like high-performance cultures, tend to focus
on the team over the individual, are composed of diverse members, set shared goals and have
clear direction, and allow for healthy conflict. And, recognizing the importance of rewards and
recognition, the members, and managers, of high-performance teams celebrate individual and
group wins.

Benefits of High-Performance Cultures

In a high-performance culture, individuals work hard to meet goals, employees feel engaged and
aligned with the company’s values, and teams trust each other — and leadership.

Here are three more benefits of high-performance cultures.

1. They’re more profitable.

O’Farrell explained that it’s common in underperforming organizations for work to “float up”
meaning that when employees are not equipped to handle the tasks of their job, whether because
they lack the skills, knowledge, support, resources, or motivation, their work “floats up to the
next level, sometimes even to the next level again,” she said.

45 | P a g e
For example, O’Farrell said, “a task that should cost the company $50 and two hours to complete
floats up to a higher-paid employee. This person does the task in one and a half hours but the
cost to the company is $70.”

Yet, she continued, because the product or service has been priced around the cost of the work at
$50, businesses begin losing money. “The company is now in a position whereby it is eroding its
profit. When you multiply this by several hundred tasks, profitability comes under serious
pressure,” cautioned O’Farrell.

However, high-performance cultures don’t typically experience this type of loss, because
employees are prepared for their roles and the tasks that accompany them.

2. They encourage idea generation.

In a high-performing culture, employees are motivated, productive, and engaged. Due to the trust
and respect inherent in high-performance cultures, employees feel empowered to take part in
decision-making processes and freely contribute ideas and share feedback.

“Better ideas result in better use of resources, and in turn, the team, function, or organization
becomes more effective, thus higher-performing, as compared to the competition,” O’Farrell
pointed out.

3. They experience less employee turnover.

High-performance cultures are characterized by highly engaged employees who are trusted to
complete the tasks of their roles. “When people are trusted that they won’t be second-guessed, or
their decision won’t be questioned or overturned, people feel ownership for their work and are
highly engaged in continuing to do it,” O’Farrell said.

What a high-performance culture is not is cutthroat or toxic. The attributes that contribute to a
high-performance culture employee well-being, communication, trust, support, alignment
of values, and emphasis on development are antithetical to a toxic workplace.

Employees working in an encouraging and open workplace culture where they’re empowered to
make decisions and trusted to do their roles are more likely to be engaged at work, and therefore
less likely to leave the company. A culture that’s high-performing without being toxic drives
both employee engagement and retention.

46 | P a g e
How to Cultivate a High-Performance Culture

While creating a high-performance culture may sound like a lofty ideal that’s impossible to
attain, it’s not. It is doable, but requires strategy, investment, leadership buy-in, and patience.
Here’s how to start.

1. Make communication a must.

Clear communication between managers and employees is a must for any high-performance
culture. When expectations are clearly articulated, employees can more readily meet goals at the
individual, team, and organizational level. Similarly, when managers understand an
employee’s career and development goals, they can better coach employees and help them
explore learning opportunities that align with their career aspirations.

‍One-on-ones are an especially helpful tool for facilitating ongoing communication between
managers and their direct reports. In these regular check-ins, managers and employees alike have
the opportunity to exchange feedback, share progress, communicate wins, and find solutions to
roadblocks and challenges.

Lattice 1:1s make it easy for managers and employees to work together each week to build an
agenda ahead of time, and within one user-friendly platform they can also take and share notes
and follow-up on action items as well.

47 | P a g e
2. Set company values that matter and embody them.

Company values set the stage for company culture. When employees feel aligned with their
company’s values, they are more engaged and more likely to serve as brand ambassadors for the
company. Yet according to research by Gallup, only 27% of employees strongly believe in their
organization’s values.

Since values are a pillar of company culture, without strong company values plus organizational
alignment and embodiment of those values businesses will experience the consequences of a
poor workplace culture, like a disengaged workforce and increased turnover. But by determining
the values that most accurately represent what you’d like your company to stand for, and
bringing them to life through corporate messaging and everyday interactions, you can contribute
to the creation of a high-performance culture.

3. Prioritize performance management.

One reason performance management can be incredibly valuable is that it enables managers to
increase employee engagement. First of all, by initiating employee development conversations,
managers can highlight a company’s dedication to employee growth. And by sharing actionable
feedback and clarifying expectations, managers can further coach, energize, and motivate their
teams.

‍Performance reviews are a key component of performance management. However, when not
executed well, they can be rote exercises that both managers and employees dread. But, when
approached thoughtfully and intentionally, performance reviews can provide both parties with an
opportunity to give and receive feedback and touch base on project progress, while strengthening
the manager-employee relationship in the process. Lattice adapts to fit your company’s
performance management model, so regardless of whether you run annual reviews or quarterly
development cycles, Lattice can help make the process more productive and effective.

But in order to be truly effective, performance management must exist as part of a culture of
ongoing feedback. This means in-the-moment, everyday praise in addition to more
structured mid-year reviews and annual performance reviews. With Lattice, sharing real-time
feedback is easy be it between peers, from managers to direct reports, or even from senior
leadership to teams.

48 | P a g e
4. Use goals to keep career development top of mind.

Part of why employees working for high-performance organizations excel is because they feel
the relationship is reciprocal; they trust that their manager, leadership team, and organization
want the best for their career and are invested in helping them succeed.

Reiterate your commitment to your employees’ success by helping them set and reach goals that
build the skills and experience they need to further their careers. Goals are an impactful place to
channel energy and resources because they contribute to a company’s success and its employees’
growth and development. With Lattice Goals, which helps teams set more meaningful goals,
incorporate goals into the regular flow of work, and capture the most important metrics, you can
enable employees to create and achieve goals that benefit their own careers and the organization
as a whole.

High-performance cultures benefit both the company and the individual. When employees are
engaged, supported, and empowered, businesses are rewarded with motivated and highly
productive employees. Like any new or ongoing initiative, building a high-performance culture
can feel overwhelming. But by focusing on communication, company values, performance
management, and employee growth and development, HR teams can bolster company culture
and set teams up for success.

Job Competency Assessment

Competence and Competency Analysis

Definition of Competence:

Competence is a description of something that people carrying out particular types of work
should be capable of doing. (National Vocational Qualification). In simple words it can be
understood as a standardized requirement for an individual to perform a job properly.

It is a combination of:

1. Knowledge.

2. Skills.

3. Behavior utilized to improve performance.

49 | P a g e
Competence is mainly concerned with output rather than input.

Competences can be defined at three levels:

1. Core Competences:

They refer to what the organization has to be good at doing if it is to succeed. It could include the
factors like customer orientation, production of superior quality goods or delivering quality
services, creativity and innovation, effective utilization of resources, managing cost, reducing
wastage etc. Core competences can be linked to the balanced scorecard of measuring
organizational success as developed by Kaplan and Norton (1992).

2. Generic Competences:

These competences are shared by a group of people performing same kind of job say system
analysts, team leaders etc. They cover the aspects of the work that they have in common and
define the shared capabilities, which are required to deliver desired results.

3. Role -Specific Competences:

Such competences are unique to a particular role. They define the special tasks that they have to
do. In addition to generic competences they may share with others who are performing with
similar role.

Competence Analysis:

From practical aspect the concept of competence is more meaningful than competency because it
is about what people do to achieve results. It does not consider how to do. So, it may or may not
result in the required performance and trends to produce some generalized personality
characteristics. Some companies have adopted the term capability instead of competence.

How to Analyze Competencies?

In order to analyze competencies, we need to search answers for the following questions:

1. What are the elements of this job?

2. What is the job holder supposed to do?

3. For each element, what is an acceptable standard of performance?

50 | P a g e
4. What type of knowledge is required?

5. What are the skills required for a job holder?

6. How will the role -holders and their managers know that the required levels of competence
have been achieved?

The answers for the above questions are pen-down i.e., recorded on flipcharts. Brainstorming
rules should apply any contribution should be welcomed.

The list of answers is then discussed by the group and put into statements. This can be well
understood with the Glaxo Well-come definition of competence, which states that competence is
what you do, what you know and how you do it. The most important feature of this approach is
that the definition of competence is written by the people in their own language which increases
their acceptability.

Approaches to Competence Analysis:

Competency analysis is concerned with the behavioral dimensions of roles while competence
analysis considers what people have to do to perform well. In an organization a tailor-made
competency schedule is carried out by specialists or management consultants or both.

Line managers may be consulted but the frameworks are issued to them in accordance with
procedures laid down for such processes as performance management. Although the first draft
may be developed in-house but when practiced the suggested changes can improve it further.

There are 7 approaches to competence analysis:

1. Expert Opinion.

2. Structured Interviews.

3. Workshops.

4. Functional Analysis.

5. Critical Incident Techniques.

6. Repertory Grid Analysis.

51 | P a g e
7. Job Competency Assessment.

1. Expert Opinion:

This method involves an expert member of the HR dept., possibly discussing with the other
experts and referring to the published list to draw up “What counts”. The major drawback of this
method is that it lacks detailed analysis and the line managers have not been involved at any step
so it may be unacceptable.

2. Structured Interviews:

Here we require the list of competences prepared by experts and the job-holders. The key result
areas (KRA’s) of a particular are identified to analyze the behavioral characteristics, which
distinguish performers at different levels of competence.

The positive and negative indicators required for achieving high levels of performance can
be analyzed as:

1. Personal drive (achievement motivation).

2. Analytical power.

3. Creative thinking.

4. Team management.

5. Interpersonal skills.

6. Communication skills.

This approach relies too much on the experts.

3. Workshops:

A team of experts (knowledge and experience holders), managers, job-holders along with a
facilitator (not from personnel department) or a consultant work together in a workshop.

The activities of workshop initiate with defining job-related competence area. Then the members
of the group develop examples of effective and less effective behavior recorded on flipcharts.

52 | P a g e
The facilitators job is to help the group to analyze its findings and assist generally to set
competency dimensions which can be identified by behavior.

4. Functional Analysis:

Functional analysis is based on the method used to define competence-based standards for
National Vocational Standards. It produces definitions of units and elements of competence,
performance criteria and range statements the functional analysis starts by describing the key
purpose of the occupation and then identifies the key functions undertaken.

The tasks and functions are then distinguished as the activities undertaken at work are tasks and
purpose of the occupation are the key functions. This is done because analysis should focus on
outcomes of activities to define standards of performance.

5. Critical Incident Technique:

This is a means of eliciting data about effective or less effective behavior related to actual
events- critical incidents.

The technique is used with groups of job holders, their managers and expert in following
way:

1. Explain what the technique is and what are its uses. This helps to gather the real information
regarding the behaviors constituting good or poor performance.

2. Listing the key areas of responsibility for a particular job.

3. Each area of the job can be discussed and linked to critical incidents.

4. Collect information about the critical incidents under the following headings

a. What were the circumstances?

b. What did an individual do?

c. What was the outcome of the efforts of the individual?

5. Same process is repeated for each area of responsibility and various critical incidents are
recorded.

53 | P a g e
6. On referring to the flipchart, analyzing the critical incidents, the recorded behavior is marked
on a scale from one to five.

7. These ratings are discussed and re-discussed for reducing errors.

8. Final analysis- It lists the desired competence, performance indicators for each principal
accountability or main task.

6. Repertory Grid:

Repertory grid can be used to identify the dimensions that distinguish good from poor standards
of performance. This technique is based on Kelly’s personal construct theory (Kelly 1955).

Personal constructs are the ways in which we view the world. They are personal because they are
highly individual and they influence the way we behave or view other people’s behavior. The
aspects of the job to which these ‘constructs’ or judgements apply are called ‘elements.

A group of people concentrate on certain elements (work or task of job holder) and develop
constructs for them. This helps to define the qualities which indicate the essential requirements
for successful performance.

The procedure being followed by an’ analyst’ is called’ triadic’ method of elicitation and
involves following steps:

1. Identify the elements of the job to be analyzed.

2. List the tasks on cards.

3. Draw three cards randomly from the pack of cards and ask the group members to select the
odd one out from the point of view of the qualities and characteristics needed to perform it.

4. Try to obtain more specific definitions of these qualities in the form of expected behavior.

5. Again draw three cards from the pack and repeat step 3 & 4. Repeat the process unless all the
cards have been analyzed.

6. List all the constructs and ask the group members to rate each task on every quality using a
six- or seven-point scale.

7. Collect and analyze the scores in order to assess their relative importance.

54 | P a g e
The repertory-grid analysis helps people to articulate their views with reference to specific
examples. It is easier to identify behavioral competences required in a job by limiting the area
through the triadic technique. This method of analysis is quite detailed and time-consuming.

7. Job Competency Assessment:

The job competency assessment method as described by Spencer & Spencer (1993) and offered
by Hay/ Mc Ber, is based on David Mc Clelland’s research on what competency variables
predict job performance.

He listed 20 competencies under six clusters:

1. Achievement Cluster.

2. Helping/ Service.

3. Influence.

4. Managerial.

5. Cognitive.

6. Personal Effectiveness.

The competency assessment method is used to model the competencies for a generic role i.e., for
a position which is similar to many job holders and basic accountabilities are same.

The method begins with assembling a panel of expert managers to express their vision, of the
job, its duties, responsibilities, difficult job components, likely future changes to the role and the
criteria against which the job-holders performance is measured. The members do nominate some
members to be outstanding or satisfactory.

The next step is to conduct ‘behavioral event interview’ with nominated job-holders to focus
upon the distinction between a person’s concept and what a person actually does. This employs a
structured probe strategy rather than a standard set of questions. This investigative interview
helps to gather most accurate performance data.

Following this analysis, differentiations can be made between superior and average
performers in the form of the:

55 | P a g e
a) Competencies possessed by superior performers.

b) Activities undertaken by average performers.

c) Competency and average criteria for both superior and average performers.

Competency Mapping:

The concept of competency was first popularized by Boyatzis (1982). He stated that there was a
range of factors which differentiated successful from less successful manager. The factors
included personal qualities, motives, experience & behavioral characteristics.

He defined ‘competency’ as a capacity that exists in a person that leads to behavior that meets
the job demands within the parameters of the organizational environment & that in turn bring the
desired results. It is a process through which one assesses and determines one’s strengths as an
individual worker.

It generally examines two areas:

1. Emotional intelligence or EQ.

2. Strengths of an individual in areas like team structure, leadership & decision-making.

Usually, a person may find himself with strengths in about 5 to 6 areas. Sometimes an area
where strengths are not present is worth developing. Thus, competency mapping can indicate
finding work that is suited to one’s strengths or finding a dept., at one’s current work place
where the strengths of the worker can be utilized.

The common problem with competency mapping is that when it is conducted by an organization
there may be no room for an individual to work in a field that would best make use of his/her
competencies. If it is not done properly it may give short term benefit & result into greater
unhappiness on the part of individual employees.

Competency Map

A competency map is a list of an individual’s competencies that represent the factors most
critical to success in given jobs, departments, organizations or industries that are part of the
individual’s current career plan.

56 | P a g e
Competency Mapping

It is a process an individual use to identify and describe competencies that are most critical to
success in a work situation.

Although the above definition of ‘competency mapping’ refers to individual employees,

organizations also “map” competencies but from a different perspective.

They map competencies using one or more of the following four strategies:

(i) Organization wide.

(ii) Job family or business unit competency sets.

(iii) Position-specific competency sets.

(iv) Competency sets defined relative to the level of employee contribution.

Why should an Individual Map their Competencies?

(i) It helps an individual to gain clear sense of true marketability in today’s job market.

(ii) Projects an appearance as a “cutting-edge” and well-prepared candidate who has taken the
line to learn about competencies & map them prior to interviewing.

(iii) Helps to develop self-confidence that comes from knowing one’s competitive advantage.

(iv) It secures essential input to resume development-a set of important terms to use in describing
expertise derived from prior career experience.

(v) It develops the capability to compare one’s actual competencies to an organization or

position’s preferred competencies in order to create an Individual Development Plan.

How an individual can carry-out competency Mapping?

Individual can complete their own competency mapping by completing a series of logical
steps like:

1. Find and locate relevant competency resources.

2. Identify the individual’s current competencies and then determine the top competencies.

57 | P a g e
3. Define the top competencies with a list of behaviors the individual has demonstrated in the
past.

4. For every key behavior, identify past performance example.

5. Prepare verbal explanations of the examples.

6. Use the top competencies & key behavioral examples to write or revise the individual’s
resume.

Some Common Challenges being Faced by Individuals while Mapping their Competencies:

1. Effective competency mapping calls for insight into the requisite competencies for success in
the individual’s career field. It is difficult to find competency-based position descriptions.

2. It is difficult for many individuals to create their own competency maps, given limited
experience with competencies, their behavioral definitions as well as some blind spots about
their own prior accomplishments.

3. Another common challenge being faced by many career consultants is encountering people
who are less comfortable in this area.

4. Some research studies say that some competencies are trainable & some cannot be developed
by an individual, no matter their level of personal effort.

58 | P a g e
Team Work and Performance

59 | P a g e
What is Teamwork?

Teamwork implies that individuals work in an environment of mutual support and trust,
functioning cohesively with strong inter-group interactions. Teamwork entails appreciating the
strengths of each other. It also creates increasing interpersonal maturity, where individuals can
disagree constructively and respectively and where both challenge and support are important in
making teams function.

10 Benefits of Teamwork

1. Better problem solving

Albert Einstein gets all the credit for discovering the theory of relativity, but the truth is that he
relied on conversations with friends and colleagues to refine his concept. And that’s almost
always the case.

“Behind every genius is a team,” says Murphy. “When people play off each other’s skills and
knowledge, they can create solutions that are practical and useful.”

Science reinforces the idea that many brains are better than one. “We found that groups of size
three, four, and five outperformed the best individuals,” says Dr. Patrick Laughlin a researcher at
the University of Illinois at Urbana-Champaign. “ We attribute this performance to the ability of
people to work together to generate and adopt correct responses, reject erroneous responses, and
effectively process information.”

2. Increased potential for innovation

According to Frans Johansson, author of The Medici Effect, some of the most innovative ideas
happen at “the intersection” – the place where ideas from different industries and cultures
collide.

“Most people think success comes from surrounding yourself with others that are like you,” says
Johansson. “But true success and breakthrough innovation involves discomfort. Discomfort
pushes you to grow. This is where difference of experience, opinion, and perspective come in.
Diversity is a well-documented pathway to unlocking new opportunities, overcoming new
challenges, and gaining new insights.”

60 | P a g e
A recent report from the consulting firm McKinsey & Company backs this up. It found teams
made up of members from diverse backgrounds (gender, age, ethnicity, etc.) are more creative
and perform better by up to 35 percent, compared to more homogeneous teams. Instead of
looking at an issue from your individual vantage point, you get a 360-degree picture, which can
lead to an exponential increase in ideas.

Research from Tufts University suggests that just being exposed to diversity can shift the way
you think. A study on a diverse mock jury found that interacting with individuals who are
different forces people to be more open minded, and to expect that reaching consensus will take
effort.

3. Happier team members

As part of our ongoing research on teamwork, we surveyed more than 1,000 team
members across a range of industries and found that when honest feedback, mutual respect, and
personal openness were encouraged, team members were 80 percent more likely to report higher
emotional well-being.

Having happy employees is a worthwhile goal in itself, but the company benefits, too. Research
from the University of Warwick in England suggests happy employees are up to 20 percent more
productive than unhappy employees. And who couldn’t benefit from a happiness boost?

4. Enhanced personal growth

There may be no “I” in team, but being part of a team can help you grow. “By sharing
information and essentially cross training each other, each individual member of the team can
flourish,” says Murphy. You might discover new concepts from colleagues with different
experiences. You can also learn from someone else’s mistakes, which helps you sidestep future
errors.

You might even learn something new about yourself, says Dr. Susan McDaniel, a psychologist at
the University of Rochester Medical Center and one of the guest editors of America
Psychologist’s special edition on “The Science of Teamwork.”

“We all have blind spots about our behaviors and strengths that we may be unaware of, and
feedback from a team member can expose them,” she says. Recognizing these strengths and

61 | P a g e
addressing the weaknesses can make you a better team member, and even a better person.
“Maybe working in a team you’ll discover you could be a better listener. That’s a skill you can
grow in, and then take home and use to improve your family interactions,” McDaniel points out.

5. Less burnout

A Gallup study of nearly 7,500 full-time employees found that 23 percent of employees feel
burned out at work very often or always. Another 44 percent say they sometimes feel this way.
What helps? Sharing the load.

Team members can provide emotional support to each other because they often understand the
demands and stress of completing work even better than managers, says Ben Wigert, lead
researcher for Gallup’s workplace management practice.

Managers reading this: you’re not off the hook. The study also found that knowing your boss has
your back also protects against burnout.

6. More opportunities for growth

Collaboration in the workplace isn’t unlike teamwork on the baseball diamond. When the pitcher
and outfielders each excel at their individual roles, the team has a better chance of winning.

Off the playing field, that idea is more important than ever. Changes in technology and increased
globalization mean that organizations are facing problems so complex that a single individual
simply can’t possess all the necessary knowledge to solve them, says Wigert. When team
members use their unique skills to shine in their own roles, it creates an environment based on
mutual respect and cooperation that benefits the whole group, notes Murphy.

7. Boosted productivity

Getting a pat on the back from the boss can boost an employee’s motivation, but receiving kudos
from a team member may be even more effective.

The TINY pulse Employee Engagement and Organizational Culture Report surveyed more than
200,000 employees. Participants reported that having the respect of their peers was the #1 reason
they go the extra mile at work.

62 | P a g e
8. Smarter risk taking

When you work alone, you might be hesitant to put your neck on the line. When you work on a
team, you know you have the support of the entire group to fall back on in case of failure. That
security typically allows teams to take the kind of risks that create “Eureka!” ideas.

But here’s one place where size does matter. The most disruptive ideas often come from small
teams, suggests recent research in the journal Nature, possibly because larger teams argue more,
which can get in the way of coming up with those big ideas.

Wharton Business School researchers also discovered that small is the secret to success: they
found that two-person teams took 36 minutes to build a Lego figure while four-person teams
took 52 minutes to finish more than 44 percent longer.

There’s no definitive ideal small team size, but consider following Amazon CEO Jeff Bezos’ 2
Pizza Rule: no matter how large your company gets, teams shouldn’t be larger than what two
pizzas can feed.

9. Fewer mistakes

If your team has good energy – you encourage and inspire each other, and you have fun together
you’ll feel less stressed, says Murphy. “Studies show that stress makes us stupid, and leads us to
make more mistakes,” says Murphy.

Of course, the converse is also true: when your team feels less frazzled, you’ll make fewer
errors. That’s worth keeping in mind, especially if you’re one of the 61 percent of workers who
cite work as a significant source of stress.

10. Expanded creativity

Stale solutions often come out of working in a vacuum. When people with different perspectives
come together in group brainstorms, on the other hand, innovative ideas can rise to the surface –
with one caveat. Research shows this can only happen when communication within the team is
open and collaborative, notes Wigert. The most creative solutions can only come up when there’s
a level of trust that lets team members ask ‘stupid’ questions, propose out-there ideas, and
receive constructive criticism.

63 | P a g e
64 | P a g e
 UNIT III

Appraisals, Introduction, need, skill required, the role of appraiser, job description and job
specification, appraisal methods, ratters’ errors, data collection, conducting an appraisal
interview, follow up and validation, present thoughts and future directions.

Performance Appraisal

65 | P a g e
What Is a Performance Appraisal?

The term “performance appraisal” refers to the regular review of an employee’s job performance
and overall contribution to a company. Also known as an annual review, performance review or
evaluation, or employee appraisal, a performance appraisal evaluates an employee’s skills,
achievements, and growth, or lack thereof.

Companies use performance appraisals to give employees big-picture feedback on their work and
to justify pay increases and bonuses, as well as termination decisions. They can be conducted at
any given time but tend to be annual, semiannual, or quarterly.

How Performance Appraisals Work

Performance appraisals are usually designed by human resources (HR) departments as a way for
employees to develop in their careers. They provide individuals with feedback on their job
performance, ensuring that employees are managing and meeting the goals expected of them and
giving them guidance on how to reach those goals if they fall short.

Because companies have a limited pool of funds from which to award incentives, such as raises
and bonuses, performance appraisals help determine how to allocate those funds. They provide a
way for companies to determine which employees have contributed the most to the company’s
growth so that companies can reward their top-performing employees accordingly.

Performance appraisals also help employees and their managers create a plan for employee
development through additional training and increased responsibilities, as well as to identify
ways that the employee can improve and move forward in their career.

Ideally, the performance appraisal is not the only time during the year that managers and
employees communicate about the employee’s contributions. More frequent conversations help
keep everyone on the same page, develop stronger relationships between employees and
managers, and make annual reviews less stressful.

Types of Performance Appraisals

Most performance appraisals are top-down, meaning that supervisors evaluate their staff with no
input from the subject. But there are other types:

66 | P a g e
  Self-assessment: Individuals rate their job performance and behavior.

 Peer assessment: An individual’s work group or co-workers rate their performance.

 360-degree feedback assessment: Includes input from an individual, supervisor, and

peers.

 Negotiated appraisal: This newer trend utilizes a mediator and attempts to moderate the
adversarial nature of performance evaluations by allowing the subject to present first. It
also focuses on what the individual is doing right before any criticism is given. This
structure tends to be useful during conflicts between subordinates and supervisors.

Types of performance appraisals

Here are some types of performance appraisals:

1. Negotiated appraisal

Negotiated appraisals involve the use of a mediator during the employee evaluation. Here, the
reviewer shares what the employee is doing well before sharing any criticisms. This type of
evaluation is helpful for situations where the employee and manager might experience tension or
disagreement.

2. Management by objective (MBO)

The management by objective (MBO) is an appraisal that involves both the manager and
employee working together to identify goals for the employee to work on. Once they establish a
goal, both individuals discuss the progress the employee will need to make to fulfill the
objectives. When the review time concludes, the manager evaluates whether the individual met
their goal and sometimes offers incentives for meeting it.

Related: Management by Objectives: Definition, Benefits and Examples

3. Assessment center method

The assessment center method allows employees to understand how others perceive them. This
helps them understand the impact of their performance. The assessment center method divides

67 | P a g e
the review into three stages: pre-assessment, during assessment and post-assessment. During the
assessment, the manager places the individual in role-playing scenarios and exercises to show
how successful they are in their role.

4. Self-appraisal

A self-appraisal is when an employee reflects on their personal performance. Here, they identify
their strengths and weaknesses. They may also recount their milestones with the organization,
such as completing a high number of sales within a month. This type of appraisal usually
involves filling out a form, and manager may choose to follow up on this written self-assessment
with a one-on-one meeting.

Related: How To Write a Self-Appraisal

5. Peer reviews

Peer reviews use coworkers as the evaluator for a particular employee. This type of performance
appraisal can help assess whether an individual works well with teams and contributes to their
share of work. Usually, the employee reviewing the individual is someone who works closely
with them and has an understanding of their skills and attitude.

6. Customer or client reviews

Customer or client reviews occur when those who use a company's product or service provide an
evaluation. This provides the company with feedback on how others perceive the employee and
their organization. Using this type of appraisal can help you improve both employee
performances and customer interactions.

7. Behaviorally anchored rating scale (BARS)

Behaviorally anchored rating scale (BARS) appraisals measure an employee's performance by

comparing it to specific behavioral examples. Businesses give each example a rating to help
collect qualitative and quantitative data. These examples help managers measure an employee's
behavior on predetermined standards for their role.

68 | P a g e
What are performance appraisals used for?

Performance appraisals are used to review the job performance of an employee over some period
of time. These reviews are used to highlight both strengths and weaknesses to improve future
performance.

Criticism of Performance Appraisals

Performance appraisals are designed to motivate employees to reach and/or exceed their goals.
But they do come with a lot of criticism.

An issue with performance appraisals is that differentiating individual and organizational

performance can be difficult. If the evaluation’s construction doesn’t reflect the culture of a
company or organization, it can be detrimental. Employees report general dissatisfaction with
their performance appraisal processes. Other potential issues include:

 Distrust of the appraisal can lead to issues between subordinates and supervisors or a
situation in which employees merely tailor their input to please their employer.
 Performance appraisals can lead to the adoption of unreasonable goals that demoralize
workers or incentivize them to engage in unethical practices.
 Some labor experts believe that the use of performance appraisals has led to lower use of
merit- and performance-based compensation.
 Performance appraisals may lead to unfair evaluations in which employees are judged
not by their accomplishments but by their likability. They can also lead to managers
giving underperforming staff a good evaluation to avoid souring their relationship.
 Unreliable raters can introduce a number of biases that skew appraisal results toward
preferred characteristics or ones that reflect the rater’s preferences.
 Performance appraisals that work well in one culture or job function may not be useful
in another.

69 | P a g e
What are the benefits of a performance appraisal?

When executed correctly, performance appraisals can pay off big. Among other things, they are
capable of boosting employee morale and engagement, clarifying expectations, helping to get
the best out of staff, and incentivizing hard work and dedication.

It’s not just companies that benefit, either. Open lines of communication make it easier for
employees to raise concerns, express themselves, find their right path, feel appreciated, and be
rewarded when they do a good job.

Performance appraisals serve a variety of objectives, such as recognizing the strengths of an

employee. Conducting regular evaluations of team members can increase communication
between managers and their team of employees. It also can help create a plan to resolve any
areas an employee is lacking and provide additional training. Some other advantages of
performance appraisals include:

 Helping make human resource decisions, such as who to promote and whether to raise a
salary

 Developing employee skills and performance

 Determining the organization's future goals and objectives

 Increasing employee morale

 Rewarding top performers

70 | P a g e
Drawbacks of performance appraisals

While performance appraisals can be instrumental tools in helping managers, they may present
some challenges. There's the potential for biases in the reviews since they depend on human
assessment.

Because performance appraisals occur every few months, or even once a year, the feedback may
not reflect an employee's current work and behavior. Employers may also give generic
comments that can result in confusion. Other possible drawbacks of performance appraisals
include:

 Taking a lot of time to conduct

 Developing unhealthy competition in the workplace

 Creating stressful work environments

 Using the wrong type of performance appraisal

71 | P a g e
  Adopting unreasonable goals

To avoid these drawbacks, it's helpful to carefully consider which type of appraisal is the best fit
for your organization and to conduct these appraisals at regular intervals. It's also helpful to
allow those conducting the appraisals enough time and resources to do so, as this can improve
the quality of results and your employees' experiences with the appraisal process.

You might also consider using the feedback you receive from employees during their appraisals
to determine if the metrics you use to measure employee performance are fair and up-to-date.

When should a performance appraisal take place?

Performance management is an ongoing process. Throughout the year, managers are

encouraged to engage with employees to establish goals, note progress, and provide feedback.
Formal reviews or appraisals often take place on a yearly or quarterly basis.

What is a 360-degree appraisal?

Standard performance reviews include an employee and their manager or supervisor. The 360-
degree version also solicits input from the employee’s colleagues or co-workers.

72 | P a g e
The Bottom Line

Communication between employees and their manager or supervisor can be very rewarding.
Performance appraisals are capable of boosting morale and output, benefiting all parties.

That’s assuming they go well, though. Sadly, many performance appraisals aren’t executed in
the most effective way. In many cases, they may be rushed or simply follow a set framework
that perhaps doesn’t always benefit every type of industry or person. Poorly handled appraisals
can be counterproductive. Without a bespoke approach and careful consideration of how to
structure meetings and set reasonable targets, the performance appraisal process can
potentially cause all types of problems.

Job Description and Job Specification

73 | P a g e
When discussing a job description vs. job specification, we can review the differences between
the two. A job description is a factual statement of all job-related content, usually summarizing
all relevant information for the job seeker. It may include the name of the company, job title,
purpose of the job, duties and responsibilities, salary, incentives, allowance, working policies,
compensation and benefits. A job specification is a section in a job listing that mostly lists the
qualifications and qualities required for the job.

It usually follows the job description and lists the qualities that every candidate is required to
possess for the job and may include educational qualifications, work experience, soft skills,
aptitude, reasoning ability, leadership skills, adaptability, value, ethics, creativity and flexibility.
Although both are a part of the job listing and are intended to give the job seeker a clear idea of
the job, they discuss different aspects of the role. While a job description lists details like duties,
tasks, goals and policies of a role, a job specification discusses the requirements that potential
candidates are required to meet.

Job description example

Here is an example of a job description:

Company name: Wavewood

Job title: Business development associate

Work location: Remote

74 | P a g e
Overview: Looking for a business associate who can explain company products to students or
their parents effectively, set up online meetings and sell courses.

Responsibilities:

 Showcasing the unique ways of learning

 Teaching and mentoring

 Selling education courses

 Guiding students for better educational growth and result

 Working in a team to spread awareness about our ways of learning

Job specification example

Here is an example of a job specification:

Company name: Wavewood

Job title: Sales head

Educational Qualification: A graduation degree is essential; MBA is preferred

Skills Required:

 Excellent communication skills

 Leadership skills

 Negotiation skills

 Positive work attitude

 Keen interest in and deep understanding of the sales process

Experience: Minimum three years of work experience in leading a sales team

Key Differences Between Job Description Vs. Job Specification

Here are some key differences between job description and job specification, and understanding
them can help you highlight the right elements, skills and achievements when applying for a job:

75 | P a g e
Purpose

A job description explains all the tasks, duties, and responsibilities of the vacant role. It talks
about the day-to-day actions that a candidate may be required to perform after being hired. The
goal is to help potential applicants understand the demands and requirements of the job profile to
determine whether they have the qualifications and experience to fit the role.

The purpose of a job specification is to list the required capability and eligibility and help
candidates understand whether they are qualified for the role. Since it clearly mentions the
required educational qualification, certifications, technical knowledge, and non-technical skills
needed for a particular role, it makes it easier for the candidates to determine whether they are a
good fit. It also helps the recruiters shortlist candidates faster.

Utility

A job description can help the company management and HR define the scope of a role and
evaluate job performance. It is used to clarify any questions the candidate may have regarding
the role and set the right expectations during the interview process. A well-written job
description defines a clear set of expectations for both candidates and employers. It may explain
the duties and responsibilities of the advertised role in great detail.

A job specification helps match the right candidate with the right job. It is relevant during the job
search process as it helps candidates determine whether they qualify for a job. It can also be a
useful benchmark for hiring managers to compare and shortlist candidates objectively.
Employers can also design training and development programs based on qualifications
mentioned in the job specification. For candidates, the job specification is also a helpful
reference for writing a customized cover letter or highlighting relevant experience in their
resume.

Content

A job description includes details about the job, the company, the work profile and everything
else that may help a candidate understand their professional duties. Occasionally, it may also
include details about the reporting officer for the potential employee. A job specification lists all

76 | P a g e
additional information regarding specific skills required from a candidate, such as education
details, work experience, technical skills, soft skills and certifications.

Related: Technical Skills: Definitions And Examples

Creation Process

A recruiter may create a job description based on an analysis of the requirements of the
company. To write the job description, the hiring manager usually identifies the tasks to be
performed, defines the particular role, decides the associated responsibilities for a person in that
position and the appropriate job title.

A job specification originates from the job description and helps with preliminary shortlisting in
the selection process. But the job specification may require to meet certain industry or regulatory
standards as well. For example, certain skills or certifications might be necessary for niche roles
in the manufacturing, medical or construction industries. Thus, the required skills, capabilities
and aptitude of candidates may depend on external yardsticks and parameters like education
qualification or training.

5. Role in Performance Measurement

The job description helps organizations set the right expectations and enables an objective
performance assessment. It reduces ambiguity in roles and helps candidates understand exactly
what they might be doing. With a clear job description, it becomes easier to evaluate employee
performance.

A job specification may be important for the management while deciding on an internal transfer,
salary increase, promotion or bonus. It may provide a standard threshold for measuring
performance to evaluate progress and selecting employees for leadership roles based on past
experience.

77 | P a g e
Tips for conducting exceptional performance appraisals

Here are some tips for how to conduct exceptional performance appraisals:

 Use an outline: Consider using a universal outline for your performance appraisals to
help employees prepare for the meeting and create structure during the review.

 Check in more frequently: To help your team of employees understand how they are
doing, conduct performance evaluations more than once a year. For example, some
organizations conduct performance reviews once per quarter.

 Document your sessions: When providing a performance appraisal, make sure to

document your meeting and store the notes in a database system where you can locate
them in the future when trying to make decisions about an employee.

Raters Errors in Performance Appraisal

Rater errors are errors in judgment that occur in a systematic manner when an individual
observes and evaluates another.

What are the types of rater errors and why do they occur?

 The opposite of this is the horn effect, which occurs when the employee is seen as weak
in one or more areas and is rated low in other areas based on that weakness. An example

78 | P a g e
 would be where an employee’s poor customer service skills negatively influences the
evaluation of other relevant skills or causes the rater to overlook the employee’s superior
skills when preparing the appraisal.

 One type of rater error is the halo effect. This error occurs when an employee is seen by
the supervisor as highly competent in one or more areas and, as a result, is rated highly in
other areas. For example, if an employee is a good record keeper but is occasionally late,
the supervisor might overlook the tardiness because the positive work habit overshadows
the problem behavior.

 Another rater error is the recency effect, which occurs when a supervisor considers only
the most recent performance rather than the performance over a year (or the length of
time the appraisal covers). This can be a serious issue if the employee has performed well
all year, only to have a performance problem right before the evaluation takes place. Of
course, the opposite can also be true, where an employee’s performance improves a few
months before the appraisal and the manager only recalls the recent performance progress
at the time of assessment.

 Contrast takes place when the appraiser rates one employee based on the work of other
employees, rather than based on the performance standards for a particular position. One
employee may be a “shining star,” which would make all other employees seem average
in comparison, or an employee could be a constant performance problem, which then
makes all of the other employees seem like superior performers in comparison.

 Bias occurs when a supervisor has prejudices against certain employees based on gender,
age, religion, ethnicity, race, weight, disability, or some other non-job-related aspect. An
additional rater error is strictness, which occurs when an appraiser believes that no
employee can ever be worthy of the highest rating since “no one is perfect.” The opposite
effect is called the leniency error. This happens when the supervisor believes that all
employees put forward their best efforts, so they should all be worthy of a higher rating.
A related error is called central tendency, which occurs when the rater believes that all
employees are average and should fall somewhere in the middle of the rating scale.

79 | P a g e
  Sampling error occurs when the supervisor has observed only a small portion of the
employee’s work and bases the rating only on what was witnessed. This situation might
occur when an employee telecom-mutes or works in another location. It might also occur
if the supervisor is new to the position and has worked with the employee only a short
time. Ideally, a performance appraisal should take into consideration all of an employee’s
work during the period of evaluation, even if more than one supervisor’s ratings needs to
be considered.

 The final type of rater error is known as similar to or different from me. This type of
error occurs when supervisors give higher ratings to employees who are similar to them
in personality, interests, or other non-job-related issues. Of course, the opposite can also
be true where supervisors give lower ratings to those employees who are not like them.

Rater errors are most common when one person is evaluating the performance of another. It is
for this reason that ongoing training in performance appraisal is important. Companies and
individual raters can find themselves in legal trouble if an employee is terminated for a poor
performance appraisal based on rater errors. In addition, performance should be based on only
job-related items and not on personal feelings. Each employee should be provided with his or her
job description and job expectations prior to their performance review. There should be no
surprises for the employees during the review about performance expectations. This is why
consistent, ongoing feedback on performance is important. It should not be something that is
discussed only once or twice per year—it should be a regular occurrence. Furthermore,
corrective performance counseling should be provided on an ongoing basis so that the employee
can improve performance all year. And finally, every appraisal process should include a method
to appeal or disagree with the outcome.

Data Collection

80 | P a g e
Data collection is a systematic process of gathering observations or measurements. Whether you
are performing research for business, governmental or academic purposes, data collection allows
you to gain first-hand knowledge and original insights into your research problem.

While methods and aims may differ between fields, the overall process of data collection
remains largely the same. Before you begin collecting data, you need to consider:

 The aim of the research

 The type of data that you will collect

 The methods and procedures you will use to collect, store, and process the data

To collect high-quality data that is relevant to your purposes, follow these four steps.

Step 1: Define the aim of your research

Before you start the process of data collection, you need to identify exactly what you want to
achieve. You can start by writing a problem statement: what is the practical or scientific issue
that you want to address and why does it matter?

Next, formulate one or more research questions that precisely define what you want to find out.
Depending on your research questions, you might need to collect quantitative or qualitative data:

 Quantitative data is expressed in numbers and graphs and is analyzed through statistical
methods.

81 | P a g e
  Qualitative data is expressed in words and analyzed through interpretations and
categorizations.

If your aim is to test a hypothesis, measure something precisely, or gain large-scale statistical
insights, collect quantitative data. If your aim is to explore ideas, understand experiences, or gain
detailed insights into a specific context, collect qualitative data. If you have several aims, you
can use a mixed methods approach that collects both types of data.

Examples of quantitative and qualitative research aims you are researching employee perceptions
of their direct managers in a large organization.

 Your first aim is to assess whether there are significant differences in perceptions of
managers across different departments and office locations.

 Your second aim is to gather meaningful feedback from employees to explore new ideas
for how managers can improve.

You decide to use a mixed-methods approach to collect both quantitative and qualitative data.

Step 2: Choose your data collection method

Based on the data you want to collect, decide which method is best suited for your research.

 Experimental research is primarily a quantitative method.

 Interviews, focus groups, and ethnographies are qualitative methods.

 Surveys, observations, archival research and secondary data collection can be quantitative
or qualitative methods.

Carefully consider what method you will use to gather data that helps you directly answer your
research questions.

Data collection methods

Method When to use How to collect data

Experiment To test a causal relationship. Manipulate variables and measure their effects on

82 | P a g e
Method When to use How to collect data

others.

Survey To understand the general Distribute a list of questions to a sample online, in

characteristics or opinions of a person or over-the-phone.
group of people.

Interview/focus To gain an in-depth understanding Verbally ask participants open-ended questions in

group of perceptions or opinions on a individual interviews or focus group discussions.
topic.

Observation To understand something in its Measure or survey a sample without trying to affec
natural setting. them.

Ethnography To study the culture of a Join and participate in a community and record
community or organization first- your observations and reflections.
hand.

Archival research To understand current or Access manuscripts, documents or records from

historical events, conditions or libraries, depositories or the internet.
practices.

Secondary data To analyze data from populations Find existing datasets that have already been
collection that you can’t access first-hand. collected, from sources such as government
agencies or research organizations.

Step 3: Plan your data collection procedures

When you know which method(s) you are using, you need to plan exactly how you will
implement them. What procedures will you follow to make accurate observations or
measurements of the variables you are interested in?

For instance, if you’re conducting surveys or interviews, decide what form the questions will
take; if you’re conducting an experiment, make decisions about your experimental design (e.g.,
determine inclusion and exclusion criteria).

83 | P a g e
Operationalization

Sometimes your variables can be measured directly: for example, you can collect data on the
average age of employees simply by asking for dates of birth. However, often you’ll be
interested in collecting data on more abstract concepts or variables that can’t be directly
observed.

Operationalization means turning abstract conceptual ideas into measurable observations. When
planning how you will collect data, you need to translate the conceptual definition of what you
want to study into the operational definition of what you will actually measure.

Sampling

You may need to develop a sampling plan to obtain data systematically. This involves defining
a population, the group you want to draw conclusions about, and a sample, the group you will
actually collect data from.

Your sampling method will determine how you recruit participants or obtain measurements for
your study. To decide on a sampling method, you will need to consider factors like the required
sample size, accessibility of the sample, and timeframe of the data collection.

Standardizing Procedures

If multiple researchers are involved, write a detailed manual to standardize data collection
procedures in your study.

This means laying out specific step-by-step instructions so that everyone in your research team
collects data in a consistent way – for example, by conducting experiments under the same
conditions and using objective criteria to record and categorize observations. This helps you
avoid common research biases like omitted variable bias or information bias.

This helps ensure the reliability of your data, and you can also use it to replicate the study in the
future.

Creating a Data Management Plan

Before beginning data collection, you should also decide how you will organize and store your
data.

84 | P a g e
  If you are collecting data from people, you will likely need to anonymize and safeguard
the data to prevent leaks of sensitive information (e.g. names or identity numbers).

 If you are collecting data via interviews or pencil-and-paper formats, you will need to
perform transcriptions or data entry in systematic ways to minimize distortion.

 You can prevent loss of data by having an organization system that is routinely backed
up.

Step 4: Collect the Data

Finally, you can implement your chosen methods to measure or observe the variables you are
interested in.

Examples of collecting qualitative and quantitative data to collect data about perceptions of
managers, you administer a survey with closed- and open-ended questions to a sample of 300
company employees across different departments and locations.

The closed-ended questions ask participants to rate their manager’s leadership skills on scales
from 1–5. The data produced is numerical and can be statistically analyzed for averages and
patterns.

The open-ended questions ask participants for examples of what the manager is doing well now
and what they can do better in the future. The data produced is qualitative and can be categorized
through content analysis for further insights.

To ensure that high quality data is recorded in a systematic way, here are some best practices:

 Record all relevant information as and when you obtain data. For example, note down
whether or how lab equipment is recalibrated during an experimental study.

 Double-check manual data entry for errors.

 If you collect quantitative data, you can assess the reliability and validity to get an
indication of your data quality.

Conducting an Appraisal Interview

85 | P a g e
A performance appraisal is an opportunity for you to speak with each employee about how
they're doing in the workplace. It’s important to focus on goals, results and overall performance
while talking about specific strengths and areas of improvement. Performance appraisals can be
nerve-wracking for some employees, so it’s vital to establish a comfortable and honest setting for
the discussion.

Prepare for the Appraisal Interview

Performance appraisals should be held at regular intervals, giving both you and the employee
ample notice to prepare for the meeting. In many businesses, performance appraisals are held on
an annual basis, with quarterly check-ins to ensure the employee is on track to meet their annual
goals. Each appraisal interview should provide enough time for you and the employee to discuss
their performance at length. Set aside 45 to 90 minutes so that no one feels rushed during the
meeting.

Ask the employee to complete a self-appraisal a few weeks before the meeting. Give them
enough time to carefully and thoughtfully provide answers to your questions. Prepare for the
performance interview by reviewing the employee’s job description and their self-appraisal. Pay
close attention to the employee’s goals and whether or not they've met them during the course of
the year.

Encourage your employee to prepare for the appraisal interview by filling out the self-appraisal
and writing down issues, concerns or questions they'd like to discuss with you in the meeting.
Ask them to think about their goals for the coming year, in addition to their larger career
goals and career trajectory within the company.

Offer Constructive Feedback

It’s important to put the employee at ease during the performance interview. Select a quiet and
private place to have the discussion so that no other employees can hear the conversation. Begin
on a positive note to help the employee feel comfortable. Tell them what to expect during the
meeting so there are no surprises.

For example, let them know you’ll begin by giving your thoughts on the self-appraisal and then
you’d like to hear from the employee on how they feel their performance is going. Then, you’d

86 | P a g e
like to discuss the goals for the following year and listen to where the employee would like to go
next with their career.

Provide fair and honest feedback during the performance interview. Be sure not to dwell on
weaknesses alone. It’s easy to get caught up in discussing how the employee can improve in
certain areas. However, it’s also critical to specify where the employee is succeeding and what
you want them to continue doing in the workplace. Mention their areas of strength and outline
how they add value to the business.

Refrain from comparing the employee’s performance to other employees in the company.
Instead, look at how far the employee has come in their own right. Have they learned a new skill
they didn't know last year? Have they taken on new tasks that are outside their job description?
Have they self-identified a weakness and started working on ways to improve it?

Listen to the Employee

During the performance appraisal process, give the employee plenty of opportunities to provide
their perspective. Take care to listen closely to what they say. Get rid of any preconceived
notions about what you think they may say. Instead, empower the employee to talk candidly
about their performance.

This will help you to better understand the employee’s career goals. It will also help you to learn
more about them as a person, not just an employee. As a result, you’ll be able to better coach and
teach them new skills and processes to add more value to the company.

Establish Next Steps

Figure out the next steps during your performance appraisal. Set the next set of goals and
objectives for the coming year. Define what skills are important for the employee to build on.
Outline what courses or seminars they can take or what workshops they can attend. Create a plan
to help the employee reach their long-term career goals.

Finally, end on a positive note. Thank the employee for their service to the company and the
work they have done thus far. Express excitement for the coming year and the growth and new
opportunities it will bring.

Follow up and Validation in Performance Appraisal

87 | P a g e
So, you have conducted an appraisal to review an employee’s performance for the whole year.
You have provided critical feedback on the report and the meeting did go smoothly. Now is the
time for you, to move on from the past and look forward to the future while determining the next
step: Follow-up on your employee’s progress.

Conducting employee performance appraisal is mandatory for HR. The main purpose of this
program is to measure employees’ success in getting their job done, as well as achieving the
expected results. However, an appraisal is not enough to support improvement unless it is backed
by real efforts to follow-up on the report.

In order to prevent all time and efforts invested in the performance review in vain, it is important
for HR leaders to follow-up on the employee’s progress. Be it a formal follow-up to meet face-
to-face and leave notes on the employee’s files, or an informal method of asking for quick
updates and providing feedback directly, you should make sure that the follow-up is counted and
not taken for granted by the employees.

The tips below will help you prepare for a follow-up session after the performance appraisal
process:

 Schedule well ahead of time

At the end of the performance appraisal meeting, you can discuss and schedule the follow-up.
However, this session should not be done right after the review. Wait for at least a month, such
that you can better measure any significant changes in the employee’s performance after the
review.

If you do not have time to schedule the follow-up earlier, you can steal some minutes of your day
to talk with your employees and negotiate on the agenda.

 Set clear goals

The main purpose of both performance appraisal and a follow-up is to ensure consistent
employee performance and achieve company goals. You cannot ask your employees to improve
themselves better without providing detailed and clear instructions on areas that need fixes and
improvements.

88 | P a g e
Therefore, you need to set clear goals for specific elements, such as productivity, competencies,
attitudes, skillsets, or expertise. Besides aligning the goals with company’s overall business
plans, you should make sure to keep these goals achievable and measurable, such that employees
are weighed down by too high expectations.

 Bring the last notes

Progress will not be visible unless you have a variable for comparison. For this reason, it is
important for leaders to bring upon the previous notes of employee’s performance and compare it
with the current report.

A follow-up session is the right time to evaluate employee’s progress and advancements
achieved. Set a clear agenda on what will be discussed during the meeting, so that employees
know exactly what they will have to deal with.

 Be proactive

Do not wait for problems to appear or for employees to show up at your office when they meet
obstacles at work. Be proactive and demonstrate that you care about your employees’
development. Take some time to work with them, observe their daily performance, and provide
real-time feedback on their jobs.

You need to see and understand their work pattern, analyze the areas in which employees show
great performance and those that need improvements. Maintain smooth communication flow all
through to align the same vision and growth objectives.

 Don’t go overboard

You should bear in mind that follow-up is not another term synonymous with performance
reviews. Do not dominate the session by solely talking about employee’s evaluation and
progression goals. Rather, it will be advisable to talk about areas that need to be focused for
significant improvements.

Not everyone is in favor of performance appraisal, and this very fact makes the regular program
a cumbersome exercise to guarantee organization growth. Therefore, follow-up with employees
becomes very crucial for HR managers and team leaders to demonstrate that they care about their

89 | P a g e
workforce and support employees’ career progression goals – both professionally and
individually as well.

UNIT IV

90 | P a g e
Performance management and employee development, personal development plans, 360-degree
feedback as a developmental tool, performance management and reward system, performance
linked remuneration system, performance linked career planning and promotion policy.

Performance Management and Employee Development

Employee development is a component of an effective performance management system. For

employee development to be successful, it has to be a joint activity entered into by both the
employee and the manager.

To do so, the first step is to create a personal development plan.

Create employee development plans

To be most useful, personal development needs to answer the following questions:

 How can I continually learn and grow in the next year?

 How can I do better in the future?

 How can I avoid performance problems I faced in the past?

 Where am I now and where would I like to be in terms of my career path?

Information to be used in designing development plans comes from the performance evaluation
form. You can design a development plan based on each of the performance dimensions

91 | P a g e
evaluated. For example, if the performance dimension “communication” is rated as substandard,
this area would be included in the development plan.

Implement employee development plans

The direct supervisor has an important role in the creation and completion of the employee’s
development plan.

Because of the critical role of the direct supervisor in the employee development process, it is a
good idea for the supervisor to have their own development plan as well. This will help the
supervisor understand the process from the employee’s perspective, anticipate potential
roadblocks and pain points, and create a plan in a collaborative fashion.

If you are a manager, make sure you do the following if you want your employees’ development
plans to be implemented effectively:

 Explain what is required of the employee to reach a required performance level

 Refer to appropriate development activities

 Review and make suggestions about development objectives

 Check on the employee’s progress toward development objective achievement

 Offer the opportunity for regular check-ins and reinforcing positive behaviors

To be successful in implementing each of the five success factors listed, supervisors themselves
need to be motivated to support the employees’ completion of their development objectives. For
this to happen, supervisors must be held accountable and rewarded for doing a good job of
helping their employees develop.

Define and measure performance

Performance is a combination of two things:

 Behaviors and actions: what an employee do

 Results and products: the outcomes of an employee’s behavior

92 | P a g e
Do you see the arrows creating a circular motion in the figure? This means that behaviors and
actions affect results and products, and vice versa. For example, if an employee puts a lot of time
in preparing for an important client presentation (behavior), the client will be pleased (result). In
turn, if the client is satisfied (result), this will motivate the employee to allocate sufficient time to
client presentations in the future (behavior).

Performance is a combination of behaviors and actions as well as results and products.

Measure performance as behaviors

To measure behaviors, you first cluster them into competencies. These are clusters of knowledge,
skills, and abilities (KSAs) that are critical in determining how results will be achieved.
Examples of competencies are customer service, written or oral communication, creative
thinking, and dependability.

Competencies are not directly observable, so you must rely on key performance indicators
(KPIs), which are measurable behaviors telling us the extent to which the competency is present.

An indicator is a behavior that, if displayed, shows that the competency is present.

Take the case of a professor teaching an online course. An important competency is

“communication.” This competency is defined as “the set of behaviors that enables a professor to
convey information so that students are able to receive it and understand it.” For example, one of
the KPIs is whether the professor is conveying information during preassigned times and dates.
That is, if the professor is not present at the chat room during the prespecified dates and times, no
communication is possible.

93 | P a g e
Another behavioral indicator of the competency communication is whether the responses
provided by the professor address the questions asked by the students or whether the answers are
only tangential to the questions asked.

Measure performance as results

To measure results, you first need to answer the following two questions:

 What are the key accountabilities — different areas in which this individual is expected
to focus efforts?

 Within each accountability, what are the expected performance objectives — goals that
should be achieved?

Key accountabilities are broad areas of a job for which the employee is responsible for producing
results. Objectives are statements of important and measurable outcomes for each accountability.

If you manage people, you need to become a performance management leader, meaning that you
guide employees so their performance is aligned with the mission, vision, objectives, and
strategies of your unit and your organization.

To transition from being a manager to becoming a performance management leader, you must
learn a few important skills.

Become an effective coach

Coaching is key to staff training and development. It is a collaborative, ongoing process in which
the manager interacts with direct reports and takes an active role and interest in their
performance.

Good coaches do three things: they direct, motivate, and reward employee behavior. Coaching
happens every day. It is about helping to correct and improve any performance that doesn’t meet
expectations. But it is also about long-term performance and involves ensuring that each
employee’s development plan is being achieved.

Being a coach is similar to serving as a consultant, and for coaching to be successful, you must
establish a helping relationship.

Do you want to be an effective coach? Then follow these success factors:

94 | P a g e
  Establish a good coaching relationship. For coaching to work, the relationship between
the coach and the employee must be trusting and collaborative. You need to listen to
understand. You need to try to walk in the employee’s shoes and view the job and
organization from his or her perspective. You need to coach with empathy and
compassion. Such compassionate coaching will help develop a good relationship with the
employee.

 Make sure the employee is the source and director of change. You must understand
that the employee is the source of change and self-growth. Accordingly, you need to
facilitate the employee’s setting the agenda, goals, and direction.

The purpose of coaching is to change employee behavior and set a direction for what the
employee will do better in the future. This type of change will not happen if the employee isn’t
in the driver’s seat.

 Make sure you understand that the employee is whole and unique. You must
understand that each employee is a unique individual with several job-related and job-
unrelated identities (for example, computer network specialist, father, skier) and a unique
personal history. You must try to create a picture of your employees that is complete and
rich so that they bring their whole selves to work. It will be beneficial if you have
knowledge of the employee’s life and can help the employee connect his life and work
experiences in meaningful ways.

 Facilitate employee growth. Your main role is one of facilitation. You must direct the
process and help with the content of a developmental plan but not take control of these
issues. You need to maintain an attitude of exploration: Help expand the employee’s
awareness of strengths, resources, and challenges. And you need to facilitate goal setting.

Give effective feedback

Giving feedback to an employee regarding their progress toward achieving their goals is a key
component of the coaching process. Effective feedback is not limited to an annual employee
performance review.

95 | P a g e
Feedback includes information about both positive and negative aspects of job performance and
lets employees know how well they are doing.

Positive feedback

Although most people are a lot more comfortable giving feedback on good performance than
they are on poor performance, you need to follow best practices when you give praise.

Here are some best practices you should implement:

 Positive feedback should be sincere and given only when it is deserved. If you give
praise repeatedly and when it isn’t deserved, employees are not able to see when a change
in direction is needed.

 Positive feedback should be about specific behaviors or results. You should give
feedback within context so that employees know what they need to repeat in the future.

 In giving positive feedback, you should take your time and act pleased. Don't rush
through the information.

 Don’t give positive feedback by referring to the absence of the negative. For example,
avoid saying “not bad” or “better than last time.” Instead, praise should emphasize the
positives and be phrased, for example, as “I like the way you did that” or “I admire how
you did that.”

Constructive feedback

Constructive feedback includes information that performance has fallen short of expectations.
This type of feedback is sometimes referred to as “negative feedback,” but I prefer to use
"constructive feedback" because this label has a more positive and future-oriented connotation.

The goal of providing constructive feedback is to help employees improve their performance in
the future; it isn’t to punish, embarrass, or chastise them. It is not easy to give constructive
feedback. Why? Managers fear negative reactions such as employees becoming defensive and
even angry. Friendships at work can be damaged.

Constructive feedback is most useful when early coaching has been instrumental in identifying
warning signs and the performance problem is still manageable. Constructive feedback is most

96 | P a g e
likely to be accepted when it is given by a source who uses straight talk and not subtle pressure
and when it is supported by hard data.

Conduct effective review meetings

Discussions to review various aspects of an employee's performance evaluation serve three

important purposes:

 These discussions allow employees to improve their performance by identifying

performance problems and solutions for overcoming them.

 They help build a good relationship between the supervisor and the employee because
the supervisor shows that they care about the employee’s ongoing growth and
development and that they are willing to invest resources, including time, in helping the
employee improve.

 Performance management leaders use review discussions as stay interviews. Stay

interviews focus on finding out what makes employees stay in the organization and help
managers create strategies to enhance employee engagement and retain star performers.

Set up and separate review meetings

Because performance management leaders play these paradoxical roles, it’s usually helpful to
separate the various meetings related to performance. Separating the meetings also minimizes the
possibility of negative surprises. Also, when meetings are separated, it’s easier to separate the
discussion of rewards from the discussion about future career development, which allows
employees to give their full attention to each issue, one at a time.

Effective employee development is not reliant upon one annual performance appraisal;
performance management systems can involve as many as six formal meetings. Each of these
sessions should be seen as a work meeting with specific goals, including the following:

 System inauguration: A discussion of how the system works and the identification of
the requirements and responsibilities resting on the employee and supervisor. This
discussion includes the role of self-appraisal and the dates when the employee and
supervisor will meet formally to discuss performance issues.

97 | P a g e
This meeting is particularly important for new employees, who should be introduced to the
performance management system as soon as they become members of the organization.

 Self-appraisal: This meeting involves the employee’s assessment of themselves. This

meeting is informational in nature, and at this point, the supervisor doesn’t pass judgment
on how the employee regards their own performance. This meeting provides an
opportunity for the employee to describe how they see their own performance during the
review period. It is helpful if they are given the same employee evaluation form to be
filled out later by the supervisor so that they can provide self-ratings using the same
dimensions that will be used by the supervisor.

 Classical performance review: During this meeting, you discuss employee

performance, including both the perspective of the supervisor and the employee. Most
performance management systems include only this type of meeting. No other formal
meetings to discuss performance are usually scheduled. This meeting is mainly past-
oriented and typically doesn’t focus on what performance should look like in the future.

 Merit/salary review: During this meeting, you discuss what, if any, compensation
changes will result as a consequence of the period’s performance. It is useful to separate
the discussion of rewards from the discussion of performance so that the employee can
focus on performance first, and then, on rewards. Although these meetings are separate,
supervisors should explain clearly the link between the employee’s performance,
discussed in detail in a previous meeting, and the rewards given.

 Developmental plan: In this meeting, you discuss the employee’s developmental needs
and what steps will be taken so that performance will be improved during the following
period. This meeting also includes information about what types of resources will be
provided to the employee to facilitate the development of any required new skills.

 Objective setting: This meeting includes setting developmental goals for employees,
both behavioral and results-oriented, regarding the following review period. At this point,
the employee has received very clear feedback about their performance during the past
review period, knows what rewards will be allocated (if any), understands developmental

98 | P a g e
 needs and goals, and knows about resources available to help in the process of acquiring
any required skills.

Although six types of meetings are possible, not all six-take place as separate meetings. For
example, the self-appraisal, classical performance review, merit/salary review, development
plan, and objective setting meetings may all take place during one umbrella meeting, labeled a
“performance review meeting.”

Optimal sequence for review meetings

Regardless of the specific type of meeting, performance management leaders should take several
steps before the meeting takes place:

1. Give at least a two-week advance notice to the employee to inform them of the purpose
of the meeting and enable her to prepare for it.

2. Block out sufficient time for the meeting and arrange to meet in a private location
without interruptions.

Taking these two steps sends a clear message that the meeting is important and that,
consequently, performance management is important.

If several meetings are merged into one labeled “performance review meeting,” the optimal
sequence of events for such a meeting is the following:

1. Explain the purpose of the meeting.

2. Conduct self-appraisal.

3. Share performance data and explain rationale.

1. Discuss development.

2. Ask employee to summarize.

3. Discuss rewards.

4. Hold follow-up meeting.

5. Discuss approval and appeals process.

99 | P a g e
 6. Conduct final recap.

If you are dealing with a top performer, use the final recap meeting as a stay interview by asking
these types of questions:

 Have you ever thought about leaving our team?

 How can I best support you?

 What do you want to learn here?

 What can you learn here that will make you feel good when you go home every day?

Although stay interviews will not ensure that a star employee will never move, they can be very
useful in identifying the factors that matter most to a team’s most impactful contributors.

Personal Development Plans

What is a Personal Development Plan?

The aim of creating a personal development plan is to document a process of self-analysis,

personal reflection and honest appraisal of your strengths and weaknesses. This should

enable you to evaluate the value of the leadership and management training you have

received, and to consider your future leadership development.

What do I need to do?

An example of a PDP included later in this GUIDE, and should be read in conjunction with

the requirements outlined below. This task is relatively short, succinct and designed to be

helpful in evaluating your leadership development. It enables you to reflect upon your recent

experience and to focus on the next stage of your training and development. Creating your

PDP has three stages as follows:

a. Stage 1 – Personal Analysis. The first stage is designed to analyze your strengths and
weaknesses. You will be able to draw heavily upon your career and the outcomes of courses that

100 | P a g e
you may have attended. These should be supplemented by the perceived opportunities that will
have been derived from your experience and any threats to your continued success.

b. Stage 2 – Setting Goals. This involves setting new and clearly definable goals for yourself
which are measurable. The example PDP provides clear guidance on identifying these. You will
need to consult your immediate superior (your first reporting officer/line manager)

c. Stage 3 – Personal Objectives. This stage involves setting out your personal objectives.
These can also be set in context within your civilian employment as shown in the example,
which will be helpful in reinforcing its value.

Example of a Personal Development Plan

Mr. A is a 25-year-old graduate working for a well-known mobile telecommunication company.

He is 2 years into their graduate recruitment program. He joined the organization while at
university and transferred to his current department following graduation. After a year he was
encouraged to enter a managerial leadership and management development program. He re-
joined his department as a junior manager.

His employer is supportive and has been reasonably flexible and supportive in making
allowances for the additional time off work to complete all the training modules. Once properly
qualified and with more experience, he is keen to take on more responsibility and be seconded to
another part of the company.

360 Degree Feed Back as a Developmental Tool

Starting the development process with 360 Feedback

We have discussed in a number of posts why 360-degree feedback is effective in evaluating

leadership at all levels of an organization. The assessment itself is a great way to identify
strengths, weaknesses and areas in need of improvement for the focal leader being
evaluated. The assessment is anonymous, and gives the focal participant an opportunity to
review themselves against how their direct reports, managers, peers, etc. see them, making it a
more accepted assessment in the eyes of the person being assessed. With multiple perspectives
there is greater acceptance of the results which in turn leads to more likelihood of development
occurring. And remember, 360-degree feedback shouldn’t stop with the evaluation and

101 | P a g e
generation of the feedback report. In fact, the feedback report is the beginning of the
development process for the focal leader.

Top 6 reasons why 360-degree feedback is a highly effective tool:

1. Provides assessment data to measure progress

“Is the development we are having our leaders go through working?” This is a common question
that companies should be attempting to answer all the time. The 360 survey and report help
answer this question explicitly. An initial 360 report provides a baseline of a leader’s current
performance. The initial report also outlines and helps the leader prioritize development. After
the leader has engaged in development work a 360 survey can be read ministered to show exactly
where performance gains occurred or didn’t occur. These gains can subsequently be quantified
to help show a significant return on investment.

2. Provides a clear roadmap for development priorities

The 360-feedback report is a rich source of information that will assist the focal leader in
understanding true development needs. The feedback report allows for a focal leader to identify
the underlying reasons behind each of the ratings provided in the report. The report provides
feedback at a competency and behavioral level that pinpoint where the focal leader will get their
biggest return on investment for their development work and activities. In other words, each
leader going through the 360 process gets an individualized development plan which is specific
to their unique needs.

3. Growing leadership skills leads to increased organizational success

An organization’s greatest asset is their people. By having the best possible performers in
leadership positions, companies will beat their competition every time. Unfortunately, not all
hires are perfect to begin with. Therefore, development of talent needs to happen post hire, and
the more development that occurs the better off a company will be. When companies invest in
their people’s growth, it leads to better performance which in turn leads to better organizational
performance. In other words when organizations are able to increase their individual and team
effectiveness there is a direct impact on the organization’s bottom line.

4. Company culture improvement

102 | P a g e
One of the top three reasons why employees leave an organization is always the lack of
developmental opportunities. When 360 feedback surveys are used to assess a team of leaders it
shows the company cares about development and it promotes the idea of learning on the job.
The 360-feedback tool stands out as a consistent method for building trust within an
organization. It does this by showing the company cares about everyone’s opinion and is willing
to take steps to improve. It all starts at the top, and in order to get the full effectiveness of 360
feedback on development, it must be messaged correctly from leadership as to why the
organization is going through these 360 processes and how it will benefit the team as a whole.
When messaged correctly, the benefits start before the process has even begun because it shows
how much the organization cares for its people.

5. Improves the effectiveness of more than just the leader.

The impact of the leader on the entire team is tremendous. No one person has more of an impact
on an organization than their leader. The 360-feedback process identifies behaviors that will
improve the individual leader’s performance. This in turn has a significant impact on those that
report to that leader, as well as his or her peers. In other words, a major benefit of the 360
process is that it makes it easier for the focal participant to communicate effectively with his or
her team and therefore leads to improved teamwork. Better teamwork leads to greater
productivity and again, leads to a more successful organization.

6. Helps ensure that development occurs on the job.

The old saying of, “If you can’t measure it then don’t do it” and “what gets measured gets paid
attention” couldn’t be truer than when speaking about development programs for
employees. Too often if people are left up to their own development it never happens. If an
organization is not rewarding development activities, then most people don’t have the intrinsic
motivation or desire to do the “extra work” it takes to improve. The beauty of the 360-
feedback tool and why it is so effective is that it provides an easy means for companies to hold
their leaders accountable for development activities. The resulting individual development plan
can be evaluated for quality. The activities on that development plan can be monitored
for completion, and as we discussed in point 1 above, the 360 can be used to measure progress of
development and quantify that development did occur.

103 | P a g e
As you can see, there are many reasons why 360 feedback is an effective developmental tool.
360 feedback has many more benefits beyond just developing an individual. Be sure to plan
accordingly when you implement 360 surveys in your organization allowing plenty of time and
resources to make the development process as good as possible.

Performance Management and Reward System

Lockett (1992) had very rightly said that “the essence of performance management is the
development of the individuals with competence and commitment working towards the
achievement of shared and meaningful objectives within the organization. All this supports and
encourages the achievement.”

Performance Management is a process which is designed to improve organization team and

individual performance. It is a shared/participative process, an integrating process which is based
on agreements on accountability, measurement and review, feedbacks, development and
improvements on a continuous basis.

In the present scenario, the biggest challenges before the compensational reward system are to
attract the right kind of human capital and to motivate them to develop and perform in a way that
increases shareholders value.

The moment unless their reward and compensation system accomplish these two objectives,
most organizations cannot be affected in a highly competitive business environment. Just in case,
simply spending a large amount of money is not enough; the money must be spent in ways that
attract, retain and motivate the right people.

104 | P a g e
The organizations have to safeguards some points before introducing Performance Pay and these
are given below:

 The criteria for measuring performance of work and contribution to company needs to be
developed, communicated, understood and accepted.

 There should be clarity in setting target/results for measuring performance.

 Regular/Periodic Feedback on Performance should be conducted.

 Reward System/Performance Pay on line with desired target/result to be achieved.

 Appropriate ratio in pay which is subject to performance should be linked.

 Need for a periodic evaluation of the scheme.

 Need to recognize that performance when influenced by factors outside control how will
they be evaluated (Exchange rates, recession, sudden spurt/fall in demand).

To create reward systems that focus on excellence and treat employees as human capital; the
investors require a major change in the way most systems operate. The reward system generally
treats employees as jobholders and rewards them individually on how well they perform their
jobs.

The investors suggest a different approach to rewards by viewing them as human capital in two
respects:

It suggests basic reward on the value of human capital that people bring to organization because
their job is at a particular moment is much less important than the value of their knowledge and
skills.

105 | P a g e
  It also suggests that rewarding people according to how effectively they use their human
capital – their knowledge, skills and competencies to help the organization improve its
business performance.

In organizations, creating a reward system that recognizes the value of human capital and reward
performance excellence is not easy because it requires a total departure from the traditional
compensation system and careful articulation of the existing reward system, business strategy,
organizational design, information systems, etc.

When designing a performance-linked reward system, it is conditioned by a variety of factors;

such as, nature of business, type of technology, the attitude of unions, and human resource
strategy of the organization. Therefore, there is no standard model can be recommended and it
has to be customized.

When performance is linked with reward systems, it reduces labor cost, results in an increase in
real wages and motivates performance. They provide a method of observing cost escalation on
account of pay increase from time to time. Thus, help in sustaining the competitiveness of the
organization.

If performance-related pay is used in isolation, it has been increasingly realized that it may have
little impact on motivation for performance. The appropriate conditions have to be created in the
organization for performance-linked reward system to be motivationally effective.

Proper information, proper consultation, proper communication, proper training and

development of the employees, developing a proactive attitude and performance-oriented culture,
providing non-monetary incentives and evolving an efficient management performance involved
as an outcome of this.

The performance of employees depends on mainly three factors: skill, knowledge &
motivation:

Employees performance= f (SKM) + External Environment

Where,

S = Skill & ability to perform task

106 | P a g e
K = Knowledge of facts, rules, principles & procedures

M = Motivation to perform

Components of Reward System

The key components or elements of an organization’s reward system can be categorized as

follows:

 Financial Reward

 Non-financial Rewards

Financial Reward

The financial rewards include direct monetary rewards in terms of cash for their work and
achievements. For example, Salary, wages, incentives etc. given to the employees.

Non-financial Rewards

Behavioral scientists have been describing for the past 50 years that non-financial rewards is
critical which contains many of the reward components for improving workplace performance.
The non-financial rewards can be given in different forms which are as follows:

 Enhanced Dignity and Satisfaction from Work Performed

 Enhance Physiological Health, Intellectual Growth and Emotional Maturity

 Promote Constructive Social Relationships with Coworkers

 Design Jobs that Require Adequate Attention and Effort

 Allocate Sufficient Resources to Perform Work Assignments

 Grant Sufficient Control over the Jobs to Meet Personal Demands

 Offer Supportive Leadership and Management

Enhanced Dignity and Satisfaction from Work Performed

It is the least costly and one of the most powerful rewards an organization can offer to an
employee to recognize the person as a useful and valuable contributor at the workplace. When

107 | P a g e
this kind of recognition is given, it leads to employee feelings of self-worth and pride in making
a contribution. At the same time, there are few people want simply to be given something.

They have the personality who would much prefer to know that through their own efforts, they
have earned and deserved rewards. Every compensation and non-compensation reward
component used in organization should carry with it the message. “We need you and appreciate
your efforts.”

Enhance Physiological Health, Intellectual Growth and Emotional Maturity

If the organization is considering the number of hours a person spends on the job i.e. on travel to
and from the work site, and off the job in attempting to resolve job-related problems frequently
receive minimal attention until a serious problem occurs.

Once this situation occurs, it overrides all other employee concerns and activities. In present
scenario, the modern health practices recognize the direct relationship between the physiological
health and intellectual and emotional well-being of each individual.

Promote Constructive Social Relationships with Coworkers

There is an old saying that “One man is no man.” Although there are constant reminders of what
one dedicated person can achieve, there are even more reminders that one human alone is weak
and however, with concerted action, people can accomplish almost anything.

This is the world of extreme specialization where people need and rely on other people more
than ever. There is the opportunity to interact in a socially constructive manner with other people
is one of the most valued rewards gained from working to enjoy the comradeship of workplace
associates.

Design Jobs that Require Adequate Attention and Effort

Organizational scientists have discussed at length the problems arising boredom related to work
assignments over the past 40 years that were developed in the last quarter of the nineteenth
century.

The jobs were designed so that workers could be taught quickly how to perform a few highly
repetitive tasks and workers then were required to perform these few tasks for as long as they

108 | P a g e
remained on the job. It is proved to have serious drawbacks what first appeared to be an efficient
way of melding human resources with machine technology.

Allocate Sufficient Resources to Perform Work Assignments

When the organization requires employees to perform assignments for which they have neither
the knowledge nor the skills opens the door for problems. In this situation, not only is the
organization likely to suffer because of outcome failures but employee job-related interest and
satisfaction are apt to break down because of the likelihood or inevitability of failure.

In these times, most employees seek a sense of accomplishment from their work and they want
some degree of challenge, but they also want to feel reasonable, sure that they can succeed.

Grant Sufficient Control over the Jobs to Meet Personal Demands

Behavioral scientists have discussed the need to grant employees greater opportunity to
participate in organizational decision-making processes from the 1950s to the present time. The
organizations are composed of all kinds of people with all kinds of decision-making desires is
one problem with this participation concept.

There are some people who simply want to be told what to do, to be shown what is an acceptable
level of performance, and then to be left alone to do their jobs. At the same time, there are few
people in every organization want to tell top management how to run the organization.

Between these two extremes present in every organization is a wide variety of demands for a
greater voice in determining how to perform assignments.

Offer Supportive Leadership and Management

This dimension is very crucial and difficult to separate from all other non-compensation rewards,
but it is so important that it must be recognized as a unique dimension of the non-compensation
rewards and not just a component of the other factors.

Performance Linked Remuneration System

How to Link Performance with Compensation?

A performance appraisal system is often the link between rewards which the employees hope to
receive & their productivity. The linkage can be thought of as follows:
109 | P a g e
Productivity — Performance appraisal — Rewards

Performance-based compensation affirms the idea that there will be rise in pay for performance
accomplishments rather than for seniority.

What is variable pay?

Pay for performance linked with normal compensation is also known as variable performance-
linked to pay or contingent pay where a performance-oriented philosophy is followed.

The organizations do not guarantee additional or increased compensation simply for completing
another year of organizational service instead, pay and incentives reflect performance differences
among employees. The employees who perform will receive a larger compensation increase but
those who do not perform satisfactorily see little or no increase in compensation.

Thus, there are employees who perform satisfactorily, advance in relation to market
compensation levels, whereas poor or marginal performers may fall behind. Along with this, the
bonuses are determined on the basis of individual, group, and/or organizational performance.
There are few organizations follow totally performance-oriented compensation practices.

However, in the midst of organizational restructuring occurring throughout many industries,

organizations look for compensation systems that break the entitlement mode and even in the
public sector, some organizations have recognized the need to shift toward more performance-
oriented reorganized compensation practices.

Implications of Performance Linked Reward System

The set of four main questions in relation to reward system are coming to existence which are as
follows:

 Who should be rewarded?

 What rewards should be given?

 How should assessment be done for deciding the rewards?

 How rewards should be given?

We shall discuss each issue with examples of practices in the Indian organizations:

110 | P a g e
Whom to Reward?

The rewards are symbols of appreciation and recognition and it reinforce what the organization
values and wants to be strengthened. Therefore, almost every one related to the organization can
be covered by the reward system.

Individual Employees: The individuals who were showing exceptional behavior and high
performance should be rewarded and they are being rewarded by all organizations that follow a
reward system. The variable pay is one type of reward and probably about 20% of managers are
likely to get rewards.

Teams: It has been already stated that individuals work in teams, and the organizations need
strong, cohesive, competent and self-managed teams and therefore it is required that in future
more and more rewards should be given to teams. The teams need to be empowered by giving
more autonomy and resources to high performing teams.

Organization: Exceptional performance by the organization needs to be celebrated and

everyone belonging to the organization then has a sense of pride.

Outsiders: The customers, suppliers, vendors etc. can also be covered in the reward system.

What to Reward?

It is obvious and proved that rewards are meant to reinforce desirable behavior, high
performance, values etc. It is about whatever the organization wants to be strengthened and
promoted further and some of the following aspects can be rewarded; some of them are:

Performance: Employees performance needs to be rewarded; both of individuals and teams and
the criteria of performance excellence and their weightage may be already determined.

Organizational level: At the end of every year the organization have to declare profit, market
share, customer satisfaction, employee satisfaction, achievement index of one thrust area. They
should also celebrate exceptional events like new product launches, export awards, crossing a
significant milestone etc.

Unit/Department level: They should declare in advance the internal customer satisfaction,
innovations leading to efficiency, achievement-index-of one thrust area, quality, culture building,

111 | P a g e
team work, creativity, internal customer service, cost reduction, strategic initiatives, etc. Any of
these could also become annual thrust areas or some other thrust areas could be declared by the
organization or the unit/department.

Speed and efficiency: Ericsson Falcon Award is given for Speed and efficiency. The purpose of
this award is to promote a fast, urgent work pace with speed and efficiency. The Qualifiers are:
increase in efficiency; cost savings for the company; earnings/rewards for the company. The
demonstrated behaviors for the award are:

 Exceeds timelines consistently

 Completes projects in record time

 Always withstands pressures

 Does not wait for assignments, decides what is needed to be done

 Respond promptly to sudden/unexpected problems in own unit/department

Loyalty: When employees of Hughes Software complete their first year, they are presented a
watch; when they complete five year, they (and their families) are given a company paid holiday.
Ernst & young also reward people who stay in the company in considerable time.

Performance Linked Career Planning and Promotion Policy

Performance appraisal is the foundation of career planning. Through this process, employees
work towards goals that support the needs of the business and their professional development.

The purpose is to build relationships and facilitate conversations between employees and
managers throughout the year with regard to performance goals, career goals, and career
planning.

Feedback communicated in a positive manner goes a long way to motivate the employees and
helps to identify individual career developmental plans.

Based on the evaluation, employees can develop their career goals, achieve new levels of
competencies, and chart their career progression.

112 | P a g e
Performance appraisal encourages employees to reinforce their strengths and overcome their
weaknesses.

The latest mantra being followed by organizations across the world is – “get paid according to
what you contribute” – the focus of the organizations is turning to performance appraisal and
specifically to individual performance.

Performance appraisal helps to rate the performance of the employees and evaluate their
contribution towards the organizational goals.

Performance appraisal as a career planning and development tool lead to the recognition of the
work done by the employees, many times by the means of rewards and appreciation, etc.

It plays the role of the link between the organization and the employee’s personal career goals.

Performance appraisal is also closely linked to other HR processes as it helps to identify the
training and development needs, promotions, demotions, changes in compensation, etc.

The linking of appraisal to pay and/or promotion should not be seen as payment by results.
Rather this linking is an attempt to ensure that informed decisions are taken about the career
progression of employees.

In short, ‘decisions directly affecting career development within the current salary structure –
internal promotion and references for external promotions, e.g. – should be as well informed as
possible.

This knowledge can best be acquired through staff appraisals that focus on performance. In
matters of performance, ‘it remains the department’s view that a pay system which
rewards exceptional performance in the organization would be very much in the interests of the
employees’.

Thus, performance appraisals play a key role in several administrative areas such as promotions,
job transfers, and legal protection.

With the data generated from employee appraisals, one is better able to make good decisions
about a wide range of matters that directly affect the employees, department, and the company at
large.

113 | P a g e
Objectives of Linking Performance with Promotion Policy

The objectives of linking performance with promotion policy are as follows:

1. To integrate the growth opportunities of the executives with the fulfilment of the
company’s objectives.

2. To identify, train, and develop competent personnel with growth potential and to provide
a policy environment for high levels of performance.

3. To provide a system of equality in opportunity, equity in assessment, and uniformity in

implementation among all the Units, Business Groups, Directorates, and Officers of the
company in the matter of promotion.

4. To seek and provide a continuous team of work sustained high levels of competence in
the company.

Setting Groundwork for Promotion

One of the strongest motivators that many employees bring to the job is focused on being
promoted.

As a manager, one can look back on an employee’s performance over a given period and have a
general impression regarding his promotability.

However, if employer bases a promotion decision on feelings rather than findings, he actually
generates difficulties in three distinct areas:

Problems for the Promoted Employee

Without accurate performance data, the employer is likely to promote the wrong person.

In such a case, the outcome is obvious; Namely, he is likely to fail. This creates an entirely new
menu of problems that await him, such as extra time monitoring, coaching, counselling,
disciplining, and perhaps terminating this individual plus, the organization has lost an employee
who probably was performing satisfactorily in his original position and became just a marginal
person in the newly filled position.

Problems for the Employee who is not Promoted

114 | P a g e
By promoting the wrong person, the employer has most likely also upset at least one other
person in the department namely, the person who deserved to move up the ladder.

This person is likely to be upset and believes that promotions in the department are unfair and
arbitrary. These types of feelings eat away an employee’s motivation, commitment, and
performance which means one of the best employees, is now dissatisfied.

Problems for the Rest of the Team

Employees get a strong sense of which co-workers are actually deserving of promotions.

When they see a promotion decision that ignores a truly outstanding coworker, they too develop
doubts about the role of equity and merit in the department.

Such doubts can chip away at their attitudes and job behaviors as well. Thus, when the wrong
person is promoted, dissatisfaction is promoted throughout the department. So, promotion policy
must be linked with the employees’ performance.

Promotion Policy in Large-Scale Company

The promotion policy for officers/executives and supervisory levels (called PS Grades) of a
large-scale company having manufacturing units all over India is given hereunder:

1. Promotion policy shall cover all promotions made in PS Grade posts and shall apply to all
Units, Business Groups/Functional Directorates, Corporate, and other Offices of the company.

2. The PS Grades shall be divided into two broad cadres:

i. The unit cadre comprises executives in the Scales PS I to PS VI.

ii. The corporate cadre comprises executives in the Scales PS VII and above.

Promotion in the Unit Cadre shall be organized in respective Units. Promotion in the Corporate
Cadre shall be organized in the Corporate Office.

3. For purpose of promotion and career planning of executives, the scales of pay can be codified
in the following groups:

4. There can be two systems of promotion within the executive positions in the company i.e.,
promotions within the groups and between the groups.

115 | P a g e
All the promotions made in accordance with this promotion policy will be from one scale of pay
to the next without skipping any scale of pay.

5. The promotion norms shall consist of two parts:

i. Eligibility Factors: Which include a qualifying period, qualification norms, attendance,

conduct, and prescribed standards in Performance Appraisal.

ii. Suitability Factors: Which includes an interview and an assessment of the potential of
the executive in his own channel of promotion or for a post other than in his own channel
of promotion.

6. Promotions within the group can be:

i. Unit Cadre: Promotions within the groups will be made by the Competent Authority on
the recommendations of DPC. Ordinarily, there should be no vacancy constraint for
promotions within the groups, for executives fulfilling the prescribed norms.

ii. Corporate Cadre: All Promotions in the Corporate Cadre, i.e. Group V shall be subject
to the availability of vacancies and the organizational need to fill them.

7. These promotions shall be made in accordance with the above eligibility and suitability factors
and will be based on the availability of vacancies and the organizational need to fill up such
vacancies.

In considering the promotion of an executive from one group to another, merit will be the
primary consideration, which will include an assessment of the executive’s potential and aptitude
for a higher managerial position.

8. Executives who have outstanding reports for three consecutive years shall be considered for
promotion in accordance with the qualifying periods prescribed for the outstanding category.

However, the outstanding ratings of these executives shall be reviewed in detail before such
consideration by the respective Performance Review Committees constituted for that purpose
under the Performance Appraisal System.

As a Company norm, the top-ranking 10% to 20% will constitute outstanding performers. This
will be Unit-wise, Grade-wise.

116 | P a g e
The low performers who fail to fulfil the prescribed eligibility norms for 3 successive years shall
be counselled by the Committee(s).

This is in addition to the counselling done by their respective Reporting Officers as laid down in
the Appraisal System.

The Committee(s) may also recommend developmental training and/or a change of job to enable
such low performers to improve their performance.

9. Promotions shall be processed once a year in the month of May/June. The qualifying period
shall be reckoned as the First of July in the current year.

Subject to fulfillment of other promotion norms, promotion orders shall be released effectively
from 1st July only. Promotions with retrospective effects are totally discouraged.

Exceptions should have prior approval from the Director, of Personnel. An interview shall be
conducted in all cases of promotion by the Departmental Promotion Committee or the Selection
Committee, as the case may be.

For considering promotions in the same or similar disciplines in the Unit Cadre, a Division may
be taken as a unitary channel of promotion wherever this is practicable. Otherwise, the unit could
be taken as a channel of promotion.

10. Mechanics of Promotion: The Committee shall arrive at the recommendations on the basis
of the following factors:

5 Marks shall be allotted for each completed year of service in the present grade for promotions
from PS I through PS IV 3 Marks shall be allotted for each completed year of service in the
grade for promotion from PS V to PS VI and above.

Marks for the Performance Appraisal may be calculated as under:

The weighted Total Appraisal Score is to be divided by 5 for each of the three preceding years
and averaged out.

In the Interview, the Committee will assess the candidate’s merit including his potential and
aptitude for higher responsibilities.

117 | P a g e
The DPC or Selection Committee as the case may be, shall make its recommendations in the
order of merit arrived at on the basis of the total marks obtained by the candidates.

For this purpose, the DPC or Selection Committee, as the case may be, shall also draw up an
integrated assessment, in which the candidate shall be ranked in order of merit.

This order of merit will be reckoned as the order of seniority in the promoted grade for future
promotion.

11. Rotation: It includes:

i. Candidates Promoted from the Supervisory to the Executive Group as also from
Executive to Senior Executive Group should be invariably given a new assignment
different from what they have been doing.

ii. Ordinarily, an executive is expected to acquire experience in at least two disciplines/areas

of work units for consideration for promotion to PS VI,

iii. Mobility of executives from one unit to another as per the need of the organization will
be a consideration for promotions.

12. Probation: All promoted candidates shall be on probation for a period of one year.

13. Zone of Consideration for Intergroup Promotion: For each vacancy, normally 4 eligible
candidates in order of seniority as above will be called for an interview.

14. Promotions to PS III: Not more than 50% of the positions available in PS III shall be filled
from PS II. This shall not be more than 25% in high-tech areas, CNC, R&D, and Designs.

15. Reservations: Reservations for SC/ST shall be made in accordance with the presidential
Directives.

16. Interpretation: The interpretation of the Personnel Directorate shall be final in respect of
this Policy and Rules. Promotion audit, wherever necessary, will be made by the Personnel
Directorate.

17. Savings: The management reserves the right to change, alter, modify, add to or delete any or
all the clauses of this Promotion Policy including the declaration of a Promotion Holiday.

118 | P a g e
 UNIT V

Performance consulting, concept, the need for performance consulting, role of the performance
consulting, designing and using performance relationship maps, contracting for performance
consulting services, organizing performance improvement department.

Performance Consulting

Learning leaders often act as performance consultants to stakeholders in their organizations, and
consulting is one of the key competencies in the Training Manager Competency Model™. By
acting as a consultant, learning leaders can be strategic partners to other business leaders and
ensure that training programs are aligned to business needs.

What Is Performance Consulting?

Simply put, performance consulting consists of identifying a business need, its cause(s) and the
training strategy (if applicable) that can meet that need. Importantly, not all business problems
can or should be solved with training; therefore, identifying whether training is a possible or
good solution is an important step in the performance consulting process.

For example: The IT department head meets with the L&D leader because there has been an
increase of unsafe email practices among employees in multiple departments. She requests
organization-wide cybersecurity training from the L&D leader.

As a performance consultant, the L&D leader’s first step is to determine what is causing
employees to use unsafe email practices, so he can decide if training will change the behavior.
He can find out by conducting a needs analysis, perhaps talking to some of the employees
affected by the problem, asking them questions and actively listening to their answers.

He may find that employees are aware of the importance of cybersecurity, but they simply need a
reminder of what steps to take to protect their data. In that case, a job aid containing red flags to
look out for and password tips might be all that is needed. On the other hand, if employees are
completely unaware of the danger of cybercrime and email phishing, they may need some
training to improve their awareness and teach them how to protect themselves and the company.

If the business problem doesn’t require training, performance consulting can keep the
organization from spending valuable time and money developing and implementing training that

119 | P a g e
isn’t needed. On the other hand, if the problem’s solution does require training, taking a different
step can keep the business from being as successful as it can be.

The Five Phases of Performance Consulting

Training Industry has identified five phases of performance consulting, which create a
continuous cycle of activity: contracting, analysis, recommendations and agreements,
implementation, and assessing results.

Tips for Effective Performance Consulting

Learning leaders can follow these recommendations to be good performance consultants in their
organizations.

 Avoid being an order-taker. Never assume training is the solution to a problem. Instead,
collect data to identify the true need.

 Develop your consulting skills, including the ability to identify issues, define roles,
communicate solutions and obstacles, negotiate solutions, define and measure success,
and provide and receive feedback. Being a good performance consultant also requires
strong business acumen.

120 | P a g e
  Manage relationships. Depending on the circumstances, you may be working with a
stakeholder or with a person who reports to a stakeholder. The ability to work well with
both roles is essential to good performance consulting.

 Be an active listener. Listen to learners and business partners. Listen for information and
to develop a better understanding of needs. Listen both to what they’re saying and how
they’re saying it. Show that you’re listening with your body language, ask follow-up
questions and don’t make quick judgments.

 Measure and report results. Data informs more productive conversations with
stakeholders and helps you make decisions on learning strategy now and in the future.

Role of the Performance Consulting

Why You Need a Performance Consultant to Improve Employee Performance

During the learning design strategy phase of a project, performance consultants work closely
with clients and instructional design teams to create the architecture of a corporate training
solution. Once the architecture is in place, performance consultants and instructional designers
distill the conceptual framework into a production blueprint that can be used by teams of writers,
graphic designers, and programmers to create a training solution.

Our performance consultants come from all walks of life and represent several educational
disciplines from educational psychology to astrophysics. Their ability to consider an
organization’s big picture goals and deconstruct them into learning objectives that will generate
actual behavioral change in their audience makes them a crucial part of our design process. In
addition to conceptualizing our design strategies, the performance consultant team is proficient
in guiding clients through the learning and development process to forge lasting collaborative
relationships.

Needs Analysis

Even when organizations realize the need for training, it can be difficult to zero in on the root of
a particular issue. When this happens, our performance consultants are available to conduct a
needs analysis. Whether it’s a rapid needs analysis designed to gain stakeholder and workforce
insights and process that information into usable data or an extensive needs analysis composed of

121 | P a g e
site visits and focus groups designed to unearth critical nuances, our performance consultants
excel at getting to the bottom of the issue.

Once a needs analysis has been completed, our performance consultants create and present
recommendations for potential training solutions. After working on a need’s analysis, clients
come away with a more conceptual understanding of their training needs and are better prepared
to solve whatever workforce issue they might be facing.

Performance Mapping

Performance mapping is focused on what peak learner performance looks like, and what existing
factors are inhibiting that performance. When performance consultants design training solutions,
their focus is more dedicated to changing a learner’s perspective in a way that creates a positive
business outcome.

The performance mapping process begins by defining the business impact, a small-scale
measurable goal that creates the boundaries of a corporate training solution. A typical business
impact involves increasing or decreasing something on an organizational level boosting sales,
improving morale, and reducing policy infractions by a certain percentage are common
examples. So how do we achieve a desirable business impact?

We target behaviors. Part of the performance mapping process is outlining the types of behaviors
that the chosen demographic will need to develop in order to help an organization reach its
business impact. When we define these behaviors, our process is to be as specific as possible and
make sure to identify the result when performed the ideal way.

After defining ideal behaviors, we proceed to map our learning objectives to fit the behavioral
needs of the learner. These learning objectives are tied to one or more learning activities that are
designed to put the learner on track for developing the desired behaviors necessary to achieve a
greater business impact. After analyzing the performance gaps and expected results, our
Performance Consultants design a learning strategy with a blend of learning modalities, activities
and learner paths. Our Instructional Designers then align the most relevant content in the right
amount to the design strategy. Quality training content, aligned with a robust design, makes the
learning experience meaningful and relevant.

122 | P a g e
Content Curation

During our design phase, performance consultants work closely with clients to gather training-
specific content that will inform our corporate training solution. Our main sources of content
usually come from previous trainings that the client has conducted. This could include a
complete web-based training or simply training manuals from facilitator-led classes. In addition
to existing client content, we often create additional contextual content in collaboration with
stakeholders and subject matter experts.

Based on our performance map, we can cross-reference relevant content with existing
performance gaps to further inform our design. When we arrive at a performance gap that has yet
to be crossed, we consult with stakeholders to help us create the content that becomes the focus
of what we include in the final course, such as instructional language, learning activities, and
assessments.

123 | P a g e
Contracting for Performance Consulting Services

The State of Contracting

Over the past year, McKinsey’s Rapid Procurement Contract Insights (RPCI) service line has
reviewed more than 100 contracts against a comprehensive assessment grid of more than 60
criteria. This analysis revealed that the majority of procurement contracts fall well short on a
range of basic contract elements related to performance. In general, contracts for indirect
spending in our sample tended to be written more effectively than those for direct spending, but
no particular industry or spending category outperformed others consistently. As most reviewed
contracts represented some of the top-spending categories, it was more likely that the indirect
spending contracts were centrally managed and therefore might have received greater scrutiny at
the time of completion than their direct spending counterparts. For direct spending, we have
observed that a lot of emphasis on getting the right product to the right place at the right time, so
contracts tend to be more robust on product specifications and delivery terms as opposed to total
cost of ownership. More specifically, our analysis assessed contracts across three dimensions:

1. General terms and conditions

More than 75 percent of contracts in our sample did not include an exhaustive set of key
performance indicators (KPIs) and reporting processes linked to total cost of ownership.
Procurement professionals cite various reasons for contract gaps with regard to KPIs and
reporting. At the performance-measurement level, many professionals do not have the category

124 | P a g e
expertise to measure overall vendor performance in a given category or effectively quantify how
vendor performance affects costs. Others are unable to define easily measured KPIs or lack the
capabilities and resources to track supplier performance. Still others believe their organization
can’t effectively negotiate performance KPIs with their suppliers, instead accepting vendor
terms. Of the remaining 25 percent, contracts for indirect spending categories were more likely
to have exhaustive sets of KPIs and reporting mechanisms included compared with contracts in
direct spending categories. For direct spending, procurement professionals often assume that
quality and performance are static requirements that should be evaluated on a pass-fail basis.

In addition, clauses that define rules for subcontracting were absent in one-quarter of the sample.
Contracts related to direct categories had subcontracted rules that were more poorly defined, on
average, compared with those in contracts for indirect categories. This effect can be explained in
part by the fact that more direct spending contracts are supply contracts, whereas indirect
spending contracts more often require vendors to perform services at a client’s site. When third-
party personnel gain access to client sites, the risks that come with subcontracting increase. But
for direct contracts, the supplier is mistakenly often not seen as a potential risk.

2. Commercial terms and conditions

In our sample, eight out of every ten contracts did not contain any form of a benchmarking
clause, which mandates a periodic review of pricing against industry standards or relevant
indices to ensure that vendors and suppliers are charging prices in line with fair and reasonable
market rates. Since a benchmarking clause would allow for much stronger cost controls, we
regularly find opportunities for procurement to improve contracts in this regard. But all too often,
benchmarking clauses feature generic language that allows the buyer to benchmark prices at
similar companies only. A bottom-up cost benchmarking potentially linked to a “should cost”
based understanding of supplier economics would be much more effective to determine
additional opportunities to capture value.

Similarly, clauses that cap pricing adjustments for inflation were not included in nearly 40
percent of contracts. Indirect spending categories were twice as likely to have contracts with
some form of inflation adjustment clause compared with contracts for direct categories. This
omission is relevant for several reasons. Inflation rates are calculated based on Consumer Price
Index (CPI) measurements. According to the US Bureau of Labor Statistics, the CPI typically

125 | P a g e
measures “the average change over time in the prices paid by urban consumers for a market
basket of consumer goods and services.” Depending on the specific product or service that a
supplier may provide to a customer, the direct relationship of this good (or of some share of its
cost) to a general basket of consumer goods and services is certainly questionable.

3. Partnership and governance conditions

A critical lever in generating more value from contracts is partnership and governance
conditions, which enable closer collaboration and contract governance between buyers and
suppliers. Despite its importance, our analysis uncovered some key gaps: in almost 20 percent of
cases, contracts did not contain any process definitions for continuous improvements. What’s
more, half of all contracts we reviewed did not include clauses related to the establishment of
governance bodies and escalation paths to manage contract life cycles. Many contracts include
only very vague contract language stating that, for example, “the parties will work together on
continuous improvement efforts.” Such language does not specify responsibility for achieving
goals nor any details on how any of the tasks would be tracked, reviewed, or implemented.

An examination of the impact of these contracting gaps reinforces the value at stake: poor
supplier performance can result in higher total costs of 10 to 20 percent in the contracted
category (Exhibit 1). When suppliers fall short, it can result in shadow or downstream costs that
lie beyond the view of procurement when negotiating the initial purchase price and contract
terms that do not incorporate a life cycle total cost of ownership (TCO) perspective. For
example, one industrial manufacturing company experienced significant rework in some
commodity segments, resulting in additional costs equal to 30 to 50 percent of revenues. Late
deliveries can have a knock-on effect, requiring manufacturers to pay additional overtime or
credit customers for delays.

Contracting for performance

The myriad variables involved in negotiating, writing, and enforcing contracts means that
incremental efforts to improve vendor performance will likely fail to capture significant value.
Instead, a comprehensive approach to the contracting process and project delivery is required.
Contracting for performance can help reduce costs and achieve value beyond the contract’s
original scope by shifting responsibility from buyer to supplier and specifying deliverables,

126 | P a g e
performance monitoring, and management processes. These contracts define metrics and
acceptable quality levels as part of the scope of work and establish a clear governance structure
for reporting and monitoring continuous improvement. The distinctive advantage of
performance-based contracts is that operational efficiencies are guaranteed by the supplier. Such
assurance comes from not only the inclusion of performance metrics, penalties, and monitoring
but also performance incentives and gain-share mechanisms that are typically common in
partnerships.

When seeking to improve contract writing and vendor management, it can be instructive to
segment the contract process into three phases precontracting, contract writing, and
implementation and management. In our experience, procurement organizations face a range of
challenges in these areas, and contracting for performance can directly address them.

Precontracting

During the initial development of contracts, negotiations often fail to address all relevant aspects
for contracting, implementation, and ongoing vendor management for a variety of reasons.
Legal, contracting teams, and other stakeholders may not be involved early enough in contract
negotiations or are not sufficiently engaged throughout the process. In some instances, a lack of
time and resources can impede sufficient preparation among procurement, legal, and the
business. In others, an overemphasis during negotiations on how responsibility and value will be
divided can lead to lengthy, antagonistic negotiations that alienate the contracting parties and
lead to a similarly lengthy and antagonistic vendor management process.

Companies that adopt contracting for performance can empower functions and stakeholders to
clearly define priorities and performance targets. By getting all relevant parties involved at the
outset of the process, procurement can start with a comprehensive perspective on TCO and value
creation. Contract negotiations can then start by creating a shared vision or statement of intent
that can be used as a basis to regularly revisit and emphasize integrative issues. Integrative issues
are opportunities to expand the value for both sides (“win-win”) or where the interests of both
sides are aligned. An example of an integrative issue is the length of contract: it costs the buyer
nothing (if properly written) and adds tremendous value to the supplier. Achieving consensus
also facilitates other important tasks that can keep the contract on track throughout the process:

127 | P a g e
  Articulate scope of services with commercial and legal terms while removing ambiguity

 Ensure value capture is addressed and translated to the contracting priorities across all
TCO levers over the expected life cycle of the product or service

 Develop a perspective on the main cost drivers of the product or service, and verify any
adjustments or escalation clauses are linked to the right baseline cost elements

 Define performance based on mutually agreed upon targets

 Develop an appropriate reward and penalty structure for vendors (and potentially also the
buyer) to encourage the expected performance

 Commit resources from the organization and suppliers to engage in a formal review
process

Contract Writing

The task of writing contracts is obviously affected, and sometimes complicated, by the results of
the precontracting phase. When negotiation results are handed to legal with the direction to “just
formalize the contract,” the final document can consist of legal contract language that may be
difficult for other stakeholders to understand and use to manage the vendor. Further,
procurement may emphasize certain performance levels during the formulation of the contract
that are not in alignment with business goals. Last, tight timelines can also produce contracts that
are prepared in a rush without adequate consideration from relevant parties. To save time, for
example, companies might opt to use a vendor template. All of these factors can undermine
efforts to define vendor performance levels.

128 | P a g e
Contracting for performance includes specific, measurable performance improvement targets as
well as incentives (for shared rewards) or liabilities (for damages based on performance against
targets). For the four main areas of contract terms—TCO, reliability, quality, and innovation—
companies should be sure to define corresponding KPIs. If a contract includes pricing terms
based on annual price reductions and supplier pricing competitiveness, for example, KPIs could
include the percentage of a price decrease or proximity to the lowest price in the market.
Documentation of the process and cadence to measure these KPIs and determine performance-
based pay should be clearly spelled out. (For more detail on KPIs, see sidebar, “Aligning KPIs to
strategic objectives.”)

Contract implementation and ongoing vendor management

Process and workflow gaps between the contracting and the implementation teams (for example,
a lack of transparency between procurement and legal) can lead to missed opportunities on
contract implementation and execution. After an arduous process to draft and execute the
contract, companies often fail to review and enforce terms on a regular basis. In addition,
inflexible contracts make forward-looking vendor performance management difficult instead of
addressing root causes of performance issues, contracting partners blame each other. Further,
without a basic level of collaboration, procurement will not have access to data and analytics that
could manage vendor performance more effectively.

Vendor management is not a solitary, arbitrary, or one-off process. Instead, companies must
commit to regular monitoring of contract performance against clearly defined targets. The focus
should be on measuring total costs as well as supplier performance. If a supplier is
underperforming, the customer must enforce a penalty, with repeated underperformance drawing
increasing fines. Regular monitoring, communication, and corrective action are vital to ensuring
contract performance, so companies must also commit the resources from the procurement
organization and vendor to regularly complete that formal review process. This setup also
enables the client to continually optimize the relationship within as well as potentially beyond
the contract scope.

One hospital system, for example, laid out incentives and penalties for vendor performance on
specific services. In housekeeping, the hospital uses several metrics including the employee
turnover and room turnaround times. To get a more complete picture of the quality of

129 | P a g e
housekeeping, the hospital also used a patient satisfaction survey, with specific incentives tied to
positive patient scores. The combination of metrics enabled the hospital to focus on the KPIs that
had a tangible impact on operations.

Shifting the organization to contracting for performance

Adopting the best practices discussed above will likely require procurement leaders to reevaluate
their function’s approach to contracting. The goal should be to put the processes in place so that
procurement can handle every contract in a consistent manner. Although setting up a contracting-
for-performance culture may seem like a daunting and lengthy task, organizations can take
actions to incrementally enhance their suppliers’ performance. Several initial steps can help to
build momentum for a sustained effort.

Implement standard contract reviews and benchmarking practices.

Greater visibility into existing contracts can enable the organization to write better contracts
going forward. A semiautomated, basic screening process involves scanning contracts for
keywords and phrases related to performance, value, and selected cost drivers. The aggregated
findings are reviewed and validated by sourcing managers and local teams. Legal then verifies
the analysis and conclusions of the review teams. The output of this process is a fact base that
procurement can use to support focused negotiations with selected suppliers.

One company, for example, had retained a technology provider to customize its off-the-shelf
product with specific features and functionality. The contract clearly linked all payments and
incentives to the delivery of very specific outcomes, so when the technology provider proved
incapable of tailoring its product in the defined ways, the company was able to claw back all
payments, including all internal costs associated with the provider’s nonperformance.

Differentiate contracting needs by category, spending levels, vendor relationships, and

risk.

Prior to writing the contract for a specific vendor agreement, procurement should collaborate
with legal to create a standard checklist and language that reflect the requirements of both
procurement and legal. This standard list should then be reviewed with the business partner in
each contracting situation and adjusted to the specific business goals. When contracting with

130 | P a g e
specific vendors, it is beneficial to write the contract and then request redline markups from
vendors, since starting with their language could make it more difficult to negotiate. In parallel
with writing the contract or editing legal’s initial or standard template, procurement should
formulate an approach to manage supplier performance.

To determine performance incentives, for example, procurement could use a three-tiered,

contracting-for-performance approach based on spending levels. All contracts would start with
basic terms and conditions for performance that serve as a minimum requirement for all suppliers
and include penalties for substandard performance. The next tier, for major suppliers, would be a
performance-based contract that includes a handful of KPIs to more specifically gauge
performance. For large spending categories that are critical to the organization’s success, a more
extensive list of KPIs would be used to support continuous improvement efforts. While this type
of contract requires substantial resources to develop and monitor, the size of the spend categories
and potential savings more than justifies this level of involvement.

Collaborate to increase coordination and transparency.

Since coordinating the efforts of procurement and legal, among other stakeholders, is often a
struggle, the contracting process can be used as a catalyst to define the collaborative relationship
across all stakeholders. Setting up an integrated contracting, implementation, and vendor
management organization that creates a strong feedback loop for the next contract negotiation
can enable procurement and legal to work hand in hand. Further, procurement should establish a
contract governance process that focuses on improving buyer-supplier relationships by using
performance data and analytics to take corrective action at the first offense.

Applying contracting for performance across the entire process can position procurement
organizations to extract more value from their vendors and suppliers. The close alignment of
procurement with other functions can support increased performance and continuous
improvement efforts. Such closely coordinated monitoring and vendor management can also
significantly reduce downstream costs such as cost overruns, scheduling delays, and poor
quality.

A good place to start is to focus on performance requirements linked to clear objectives and
quantitative metrics. A more ambitious program will likely require procurement to build

131 | P a g e
additional capabilities, such as adding contract specialists; establishing standing, cross-functional
teams; and implementing contract management and analytics software. Given the size of the
potential cost savings, procurement leaders cannot ignore the opportunity.

132 | P a g e