Behavioral Aspect

Of Performance
Evaluation

Oleh:
Puji Lestari
FEB Unsoed
Performance Evaluation

Performance Evaluation System is design to measure

three basic elements:

 Personal performance
 Attainment of operating goal
 Return on investment
What is the Performance
Evaluation?

PE is the periodic assessment of the

operational effectiveness of an organization,
its subunits, and its personal in light of
predetermined goals, standards, and criteria

Primary purpose of performance evaluation:

 To motivate employee to attain organization goal
 To comply with predetermined desire standards
 To produce desire actions and outcomes.
 Uses of PE
1. To manage the operations of the organization effectively
and effisiently by maximising employee motivation.
2. To assist the personal divisions such as promotion,
transfers and terminations.
3. To identify spesific training and development needs and to
provide criteria for selection and evaluation of training
programs
4. To provide feedback to employee about how superiors
percieve their performance
5. To provide a basis for reward allocation
Motivation As A Tool For Promoting Operational
Efficiency
Motivation is concerned with what induces people to
behave in particular ways.

One of the motivation theory is Exppectancy

Theory, which the best predictors of
motivation and performance. According to this
theory, behaviour is influenced by the probabilities
people assign to the following
relationship:
 The effort necessary to achieve the goal
 Performance and reward
 Rewards satisfying personal goals
Effect of Rewards on Behavior
There are 3 ways to shape the behavior of the people who
work in organizations:

 The response to desirable behavior can be made

something pleasant ( a prise or a reward). The
behavioral influence is called positifreinforcement
 Desirable behavior can be induced by the
elimination of something unpleasant. This is
called negatif reinforcement. For example: the
supervisor will stop watching employee if he/she
seems busy.
 Punishment is common remedy for undesirable
behavior. For example: punishment would be a
profit center manager who is transferred to a
less desirable division, or even fired, for not
reaching predetermined profit goals.
 Types Of Rewards And Their Benefits In Functional Behavior
Inducement And Reinforcement

Rewards grouped into categories : INTRINSIC DAN EXTRINSIC

 Intrinsic rewards; personally satisfying feelings that people
experience for jobs well done and for goal attained. Can be
enhanced by: job enrichment, increased responsibility,
partisipation in decision making, etc.
 Extrinsic rewards, include direct, indirect and non financial
compen-sation given to employee.
 Direct compensation; payments for basic wages/salaries, over-
time and holiday pay, profit sharing, stock options, and other
type of performance based-bonuses.
 Indirect compensation: provide employee fringe benefit, such
as insurance, vacation pay, sick leave, pension plans and etc.
 Nonfinancial rewards include desirable ‘extra’: preffered office
location, elaborate office furniture, assigned parking spaces,
impressive titles, private secretaries.
Behavioral Aspects By Performance Evaluation Steps
 Preliminary Steps
1. Define the segments and activities to be controlled and the
individuals associated with them.
2. Set performance criteria (policies, goals, and standards) for
each organization segment and activity.
3. Measure actual performance.
 Performance Evaluation Steps
4. Compare actual performance with predetermided goals.
Promptly report result to individuals responsible for
segments and activities.
5. Determine operational and behavioral causes of unfavour-
able variance
6. Reinforce desired behavior and act to prevent recurrence of
undesire behavior.
Define Segment and Activities to be Controlled

Responsibility criteria that motivating employee effectively:

 Responsibility must be consistent with the authority that

managers have over the revenue and/or expenses.
 The definition of responsibility must be accurate and fair.
Should be avoid overlapping responsibilities. The scope of
each manager’s responsibility and authority must be stated
clearly.
 To enhance operational control, the area of responsibility
assigned must be capable of measuring operational
efficiency and effectiveness in the fullfillment of the spesific
goals.
 The performance evaluation criteria chosen must conform to
the scope of assigned responsibilities.
 Set Performance Criteria
 To motivated employee, must be set goal congruence
between indivi-dual goals and organization goals. Nowa-
days, profit optimization is not more become as single
organization goal, instead have multiple organization
goals such; profitability, market share, product
leadership, utilization of human resources, corporate
citizenship.
 Measurability of Criteria; there is easily measured criterion
such profit-ability, but others harder measure criterion
(such as product leadership, corporate citizenship, etc)
 Time Span on Resources and Expences; there is expense
unfavourable in short run, but favourable in long run.
 Wieght Assigned to Criteria; assignment of relative
weights and trade-off rules to the performance criteria is
important.
 Performance Indices Vs Performance Criteria; performance
criteria are companywide objectives based on the
multiple goal structure of the firm. Indices of
performance must be established to evaluated the
Set Performance Criteria-Cont...........

Behavioral Aspects of Usage

There 3 different types of indices:

 Single criterion indice; measurement only one quantity
 Multiple criteria indices; simultaneously measure several
quantities.
 Composite criteria indices; involve several separate
quantities that are measured, weigheted, and then
averages.
Behavioral Impact Of Any Quantitatif Performance
Measurement
1. ROI; quantitatif performance evaluation by deviding income by
investment in asset.
Advantage:
 ideal index
 Can be use to compare the performance with diffe-
rent size firm
 Induce manager to get maximum sales/to reduce
the investment
 Attention is directed to profit margin, cost contorl and
effisiency in asset use
Disavantage:
 Vary definition of asset income and investment
 Vary valuation method; historical cost, standard cost,
current cost
 Depreciation method will affect the ratio
 Tendency to place too much emphasis on ROI to use
it exclusivelly.
Cont....

2. Residual Income; the excess of actual net income

over desired net income; measured by the
imputed interest on capital employed. RI is
favor than ROI because maximization of dollar
return in excell of cost of invested capital has
more meaning for manager, rather than ratio
of ROI.
3. Other Indices; exp: machinary/economy ratio,
standard manufacturing cost/sales ratio, etc.
 Measurement of Actual Performance

Measurement of actual performance may triggered dysfunctional

behavior. Its happen to suit their different purpose with
organizational goal. Dysfunctional behavior, such:
 Smoothing; include all activities used by managers to affect the
flow of data. May done by accelerating/delaying message. Exp:
vary GAAP method.
 Biasing; managers select a set of possible message those likely to
produce the most favourable picture of their performance.
 Gaming; exploiting various aspects of the superior-subordinates
relationship.
 Focusing and Illegal Acts; highlightig favourable messages and
hiding unfavourable ones.
Comparison of Actual and Expected Performance
 Comparison of actual and expected performance is
done through periodic performance reports.
 Feedback to managers is intended to appropriate
inefisiencies and effectiveness in performance.
 Separate performance reports must be prepared for
every segment, starting from lowest hierarkhi level.
 Performance report should be clearly distinguish control-
lable and uncontrollable items
 Performance report should include variance, both favour-
able and unfavourable
 Performance reports should be match to the needs and
experience of the user; reports to top manager will
different with report to middle and lower manager.
 Analysis of Variance
 Causes of variance must be found so that corrective
and/or commendaroty action can be taken.
 Both satisfactory and unsatisfactory condition deserve
management’s attention, and should be analyzed and
interpreted. Unfavourable variances signal danger and
require further investigation to discover their precise
cause.
 Using conference among manager to joint problem
solving session because of unfavourable variance, and
get feedback from them, and avoiding blaming among
manager each other.
 Superiors should be at all time exhibit a supportive and
constructive attitude and refrain from publicizing and
punishing failure.
 Corrective Action

 Corrective action is a final step of performance evaluation.

 Corrective action is done to reinforce desirable behavior
and modify undesirable behavior
 Behaviors are actions of people who produce result.
 Result are indicators of effectiveness, such as profit,
quality of output, sales level
 Organization should evaluate both behaviors and result
simultaneously.
Behavioral Aspects of Performance Evaluation Using

Accounting Information

 Firms use accounting information alone or

conjunction with other information as the basis for
evaluating segment/subordinate performance.
 Accounting information is more objective rather
than others/subjective
 The Relationship Of The Organizational Structure To The
Financial Reporting Structure

 If organizaztional structure and reporting structure correspond,

there is harmony between manager’s responsibility and control
over revenues and/or expense.
 Performance evaluation will be percieve as fair and meaningful,
and will guide future behavior and aspiration
 If mgr are held responsible by the organizational structure for
factors over which they have no control, they will ignore the
performance report and may even sabotage their preparation
through manipulation/falcification.
 Performance should contain ‘need to know’ information. Those
report should only cover area that manager addresses is able
and expected to control.
 Unfavourable reaction are caused by overlapping; two or more
mgr are responsible for same factor, causing ‘buck passing’,
animocity, deterioration of corporation, inefficiency.
Degree of Participation in Standard Setting.

 Segment manager/subordinate should participate

in budgeting and standard setting, and how
using them in their performance evaluation.
 Participation will raise sense of belonging of
manager to budget goal and standard.
 Level of Understanding of Accounting System

 The people who evaluate and controll by accounting

information should have a good understanding of
the methods used in their accumulation; budgeting,
standard cost setting, and the process of setting
performance goals.
 The more manager understand the system, the
greater the likelihood of effective functioning.