Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

1. Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

2. Results-based performance management • Three approaches to performance measurement and management • What are ‘results’? • Key result areas (KRAs), key performance indicators (KPIs) and goals • Measuring results validly and reliably • Goal-setting • The balanced scorecard

3. Inputs: Competencies (individual knowledge, skills and abilities) Activities: Work behaviours (individual) Outcomes: Results (individual, group and organisational) Competency assessment Behavioural appraisal/assessment Results-based assessment Three approaches to performance measurement and management

4. What are ‘results’? Product/service quantity: • Quantity produced/sold • Customer/client volume • New accounts created • Labour productivity Product/service quality: • Attainment of a standard (quality, level of service) • Defect rates • Safety • Environmental impact Financial outcomes: • Revenue • Costs (materials, capital, human resources) • Net profit • Rate on return on: assets (ROA); investment (ROI); equity (ROE) • Economic value added (EVA)

5. What are ‘results’? Timeliness: • Speed of response to customer demand/inquiry • Delivery times • New product/service development time • Time to market • Achievements compared with timetable • Amount of backlog Innovation: • New product/service development • Plant diversification Multi-stakeholder perceptions and reactions: • External customer satisfaction and level of product/service uptake • Employee satisfaction and commitment • Judgement of external shareholders and share markets • Community perception/brand image • Corporate social responsibility/environment/‘quadruple bottom line’

6. KRA 1: Plant productivity KRA 2: Unit costs KRA 3: Product quality KRA 4: Plant safety KRA 5: Employee turnover Measuring results: KRAs, KPIs and goals Key result areas (KRAs): • = What is measured • Important core tasks, duties and responsibilities, the achievement of which contributes materially to organisational effectiveness • Typically three to five KRAs per position/job Example: Production manager KRAs

7. KRA 1: Plant productivity KPI 1: Units produced per person-hour KRA 2: Unit costs KPI 2: Operating costs per unit produced KRA 3: Product quality KPI 3: Defective products per 1,000 KRA 4: Plant safety KPI 4: Lost time injuries per month KRA 5: Employee turnover KPI 5: Voluntary separations per month Measuring results: KRAs, KPIs and goals Key performance indicators (KPIs): • = Measures applied • Direct or indirect/proxy measures of achievement in each KRA Example: Production manager KPIs

8. Measuring results: KRAs, KPIs and goals Goals (= targets or objectives): • Quantify desired results/outcomes to be achieved in each key result area • Specific and time-related Example: Production manager goals

9. Measuring results validly and reliably Measures should be: • Related to appropriate strategic goals and objectives, with each measure weighted accordingly (i.e. construct validity) • Relevant to the objectives and accountabilities of the individuals and groups concerned (i.e. construct validity) • Comprehensive, covering all key result areas (i.e. content validity) • Accurate indicators of actual performance against the performance standards or criteria set (i.e. criterion-related validity) • Focused on measurable outputs that can be clearly defined and for which evidence can be made available (i.e. reliability) • Based on solid data or evidence that will be available as the basis of measurement (i.e. reliability) • Verifiable – provide accurate information that will confirm the extent to which objectives have been met (i.e. criterion-related validity and reliability) • Able to provide a sound basis for feedback and further performance development

10. Goal-setting Origins: • Practice pioneered by the US management theorist Peter Drucker in the 1950s in the form of ‘management by objectives’ (MBO) • Current approaches informed by goal-setting theory (Locke & Latham, 1980s/early 1990s) Goal-setting theory: • Specific goals increase performance (cf. ‘Do your best’) • Difficult but attainable goals, when accepted, result in higher performance than easy goals (cf. expectancy theory) • Motivation is stronger when there is a sense of goal ownership/commitment • People will perform better when they get feedback on how well they are progressing towards their goals (i.e. need for achievement and recognition) • People must believe they can perform (cf. expectancy, self-efficacy)

11. Self-efficacy Goal commitment Goal- directed effort Goal achievement M Agreed goals Feedback Goal-setting theory(Locke & Latham) M = Motivation

12. S Specific and Stretching: Clear, unambiguous, straightforward, understandable and challenging. M Measurable and able to be Monitored: Related to valid quantifiable key performance measures (KPIs) that will allow progress to be tracked during the performance cycle. A Agreed and Accepted: A target which the employee has co-determined and over which she/he feels a sense of ‘ownership’. R Realistic and Representative: Challenging but position-valid and within the capabilities of the individual. T Timely: Achievable within a defined time scale, with progress subject to continuous feedback. ‘SMART’ goals

13. Annual performance goals Review period: Name: Position: Business unit: Key result areas Weighting (%) Performance indicator Goal Annual review (1–7 rating X weighting) Comments 1 2 3 4 5 Overall rating: 100% Employee signature: Date: 1st manager’s name: Signature: Date: 2nd manager’s name: Signature: Date: Example of an individual goal-setting instrument

14. Example of an individual goal-setting instrument Rating scale: • 0–19% of goal achieved • 20–39% of goal achieved • 40–59% of goal achieved • 60–79% of goal achieved • 80–99% of goal achieved • 100% of goal achieved • Goal exceeded.

15. Example of a goal-setting instrument for a business unit and teams (1) Business unit goals • Reduce controllable expenses from 70% to 60% of unit revenue over the next year • Increase net revenue from $9 million to $12 million over the next year • Improve on-time delivery rate to external customers from 60% to 85% over the next year • Improve the customer satisfaction survey score from 70% to 90% over the next year • Improve the product quality/non-defect rate from 85% to 95% over the next year

16. Business unit KPIs Weight 50 60 70 80 90 Goal 100 110 120 130 140 Weighted points score • Controllable expenses as % of unit revenue 30% 70% 68% 66% 64% 62% 60% 58% 56% 54% 52% 2. Net revenue – $ million 20% $9 $9.5 $10.0 $10.5 $11.0 $12.0 $13.0 $14.0 $15.0 $16.0 3. On-time delivery – % meeting due date 30% 60% 65% 70% 75% 80% 85% 88% 90% 92% 96% 4. Customer satisfaction score – average survey score 10% 70 75 80 85 87 90 93 96 98 100 5. Product quality/non-defect rate 10% 85% 87% 89% 91% 93% 95% 96% 97% 98% 99% Example of a goal-setting instrument for a business unit and teams

17. Team KPAs and KPIs Weight Agreed team goals Annual outcome Team leader comments • Team expenses 30% 2.Team revenue 20% 3.Order delivery time 30% 4.Customer satisfaction 10% 5.Non-defect rate 10% Example of a goal-setting instrument for a business unit and teams (2) Team goals

18. Goal-setting: for and against Advantages: • Uses ‘objective’ measures • Avoids the subjectivity inherent in behavioural assessment • Encourages involvement • High specificity • Facilitates strategic focus • Continuous feedback • Facilitates continuous improvement • Facilitates forward planning • Facilitates greater supervisor–subordinate communication • People encouraged to find their own creative pathways to goal achievement • Applicable to individuals, groups and whole organisations

19. Goal-setting: for and against Disadvantages: • Downplays behavioural ‘means’ • Work dimensions not subject to goal-setting may be ignored • Short-termism • Temptation to set easy goals, especially where linked to pay • Selecting measures and setting targets still subjective • Can overlook situational constraints on employee performance • Not suited to situations of contextual turbulence • Routine jobs require only performance to a standard rather than ‘continuous improvement’ • Performance burnout; work–life balance problems

20. The balanced scorecard: features • Developed by Robert Kaplan and David Norton (1992, 1996) • A multi-measure/multi-stakeholder approach to organisation-wide performance management • Setting and communicating strategically aligned goals and measuring/rewarding goal achievement: ‘What you measure is what you get’ • Three key stakeholder interests: shareholders, customers, employees • Focus on value creation processes rather than just cost-control activities • Balances lag indicators (e.g. annual financial results, market share) with lead indicators (e.g. learning, creativity, innovation)

21. The balanced scorecard: features • Balances hard, short-term goals (e.g. financial goals) with long-term goals (e.g. organisational learning and business process improvement) • Aligns performance goals of individual employees, workgroups, operating units and whole organisation, i.e. ‘cascading’ • Each employee has a ‘personal scorecard’ as part of the wider objective-setting process • Enables systematic tracking of impact of changes in HR practice (e.g. increased outlays on staff development) on performance outcomes (e.g. new product innovation, customer satisfaction) • ‘Strategy mapping’ used to draw up scorecard

22. Key phases: Key stakeholders (and functional responsibility areas) Strategic indicators (examples) Shareholders (Accounting professionals) • Lag: • Return on equity • Revenue growth • Lead: • New/existing product revenue mix 4. Financial How do we look to shareholders? External customers (Sales and marketing professionals) • Lag: • Market share • Customer satisfaction • Lead: • On-time delivery • Customer-specific product development 3. Customers How do our customers see us? Internal ‘customers’ and others in supply chain (Engineering, IT and other systems management professionals) • Lag: • Product defect rate • Unit product cost • Lead: • Supply chain efficiency 2. Internal business processes What must we excel at? 1. Internal learning and growth How can we continue to improve and create value? Employees (HR professionals) • Lag: • Rate of new product development • Employee job satisfaction • Lead: • Develop strategic competencies • New product development time Source: Adapted from Kaplan & Norton (1992, 1996) The balanced scorecard: four ‘perspectives’/KRAs

23. Example of a balanced scorecard-based individual goal-setting instrument for a retail sales role

24. Balanced scorecard goals and results for year ended _____ (Note: Weightings – Financial + Customer + Process + People = 100%)

25. The balanced scorecard: pros and cons Advantages: • Facilitates internal strategic alignment/‘cascading’ • Balances financial and non-financial criteria • Balances short-term and long-term goals • Balances lag and lead indicators • Cross-functional: integrates HRM, engineering, marketing and financial accounting • Facilitates internal and external alignment/fit • Highlights importance of HR learning and development • Can be customised • Can be linked to rewards

26. The balanced scorecard: pros and cons Disadvantages: • Difficulty of translating long-term corporate objectives into accepted individual targets/goals • Overlooks other stakeholders (e.g. suppliers, community) • Insensitive to organisational specifics, including strategy, structure and culture • Assumption of linear cause-and-effect is questionable; relationships may be interdependent rather than linear (e.g. learning and development is driven by financial results) • Four main result areas may be in conflict and require trade-offs • Lacks adequate consideration of time differentials between four result areas: financial performance is short-term; staff learning and development is long-term • Measurement does not equal effective strategic thinking or good performance management