Performance Management

IBSAR/PRFORMANCE/0IBSAR/PRFORMANCE/0808808

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PRFORMANCE PRFORMANCE MANAGEMENTMANAGEMENT

Presentation at Presentation at Institute of Business Studies and Research Institute of Business Studies and Research

(IBSAR)(IBSAR)C.B.D. Belapur, Navi MumbaiC.B.D. Belapur, Navi Mumbai

OnOn

By By D.J.Thakur, Principal Consultant D.J.Thakur, Principal Consultant

E&Q CONSULTINGE&Q CONSULTINGC.B.D. Belapur, Navi MumbaiC.B.D. Belapur, Navi Mumbai


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PERFORMANCE DRIVEN ORGANIZATIONPERFORMANCE DRIVEN ORGANIZATION

WHY SHOULD YOU CARE ABOUT CREATING WHY SHOULD YOU CARE ABOUT CREATING A PERFOMANCE DRIVEN ORGANIZATION?A PERFOMANCE DRIVEN ORGANIZATION?

The simple answer is that businesses need The simple answer is that businesses need to get as much productivity as possible out to get as much productivity as possible out of the work force. People are expensive of the work force. People are expensive and they need to work efficiently.and they need to work efficiently.

The key to maximizing efficiency of the The key to maximizing efficiency of the entire Organization areentire Organization are : :

1) Make sure each individual has 1) Make sure each individual has goals aligned to the strategic goals aligned to the strategic objectives of the organization.objectives of the organization.2) Provide each person with frequent 2) Provide each person with frequent feedback about their progress feedback about their progress towards their goals.towards their goals.3) Rewards them for achieving their 3) Rewards them for achieving their goals. goals.


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DEFINITION DEFINITION ––It is a method of connecting your It is a method of connecting your organization's objectives to the people who organization's objectives to the people who are there to achieve them, and most are there to achieve them, and most approaches to performance management have approaches to performance management have the following elementsthe following elements: :

A sense of purpose or mission which is A sense of purpose or mission which is understood by everyoneunderstood by everyone

Goals which are understandable andGoals which are understandable andmeasurable measurable

Developing targets which are within theDeveloping targets which are within thecontrol of the people for whom they are setcontrol of the people for whom they are set

Regular one-to-one with staff for reviewingRegular one-to-one with staff for reviewing Regular team performance reviewRegular team performance review Management and staff development based on Management and staff development based on

the competencies needed for the present and the competencies needed for the present and likely future jobs. likely future jobs.


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Based on the organizations mission and future Based on the organizations mission and future goals, develop analysis of training and goals, develop analysis of training and coaching needs for all staffcoaching needs for all staff

Rewarding people fairly for their Rewarding people fairly for their achievements.achievements.


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Performance Management is in two Performance Management is in two parts: parts:

1.1. The First part is about the organization The First part is about the organization goals and targets) goals and targets)

2.2. The second part is about the job holder The second part is about the job holder (competencies and development) and this is (competencies and development) and this is the input.the input.

The process is a balance between, action needed The process is a balance between, action needed to achieve the company goals, and holder's to achieve the company goals, and holder's development relevant to the goals of the development relevant to the goals of the company. company.


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Terminology –Terminology –Vision – our ultimate aim Vision – our ultimate aim Mission – The purpose for which we Mission – The purpose for which we

existexistValues - The beliefs we hold which guide Values - The beliefs we hold which guide

our day to day action and decisionsour day to day action and decisionsObjectives – the key overall objectives of Objectives – the key overall objectives of

the business which accomplish our the business which accomplish our mission and business plans. These mission and business plans. These mainly refer to ‘Longmainly refer to ‘Long term’ and higher term’ and higher level objectives or goals.level objectives or goals.

TARGETS – These are ‘shorter term’ and TARGETS – These are ‘shorter term’ and lower level aimslower level aims


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PERFORMANCEPERFORMANCEEmployee performance depends on 3 factors: Employee performance depends on 3 factors:

Performance=f{ SxKxM}Performance=f{ SxKxM}

S=SkillS=Skill

K=Knowledge K=Knowledge

M= MotivationM= Motivation

For an organization to succeed, it needs employees who For an organization to succeed, it needs employees who

perform well.perform well.

This involves not only a good compensation strategy butThis involves not only a good compensation strategy but

also good HR practices.also good HR practices.

We need to hire people with skills and ability (S) We need to hire people with skills and ability (S)

We need to make sure that good employees stay with us. We need to make sure that good employees stay with us.

It we succeed in the above2, we can then concentrate onIt we succeed in the above2, we can then concentrate on

building further knowledge and skills (K&S) building further knowledge and skills (K&S)

The importance of fit between pay and other HR system is The importance of fit between pay and other HR system is

the ‘High Performance’ approach of leading companies,the ‘High Performance’ approach of leading companies,

which includes 3 features: which includes 3 features:

1.1. High Skill/Knowledge component (effective hiring) High Skill/Knowledge component (effective hiring)

2.2. Work designed so that employees have discretion and Work designed so that employees have discretion and opportunities to collaborate with others (team) and opportunities to collaborate with others (team) and continue to learn (training/development) continue to learn (training/development)

3.3. Performance based pay systemPerformance based pay system


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MOTIVATION THEORIESMOTIVATION THEORIES

Maslow`s theoryMaslow`s theory People are motivated by inner needs which People are motivated by inner needs which

form a hierarchy, from most basic (food, form a hierarchy, from most basic (food, shelter) to higher order (self esteem, love, self shelter) to higher order (self esteem, love, self actualization)actualization)

- Base pay must be set high enough to provide Base pay must be set high enough to provide individuals means to meet basic needsindividuals means to meet basic needs

- At-risk program may not motivate, since it At-risk program may not motivate, since it restricts ability to meet basic needs. restricts ability to meet basic needs.

- Success sharing plans may motivate to the Success sharing plans may motivate to the extent they help pursue higher needs. extent they help pursue higher needs.


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Hertzberg`s two factor theoryHertzberg`s two factor theory Employees are motivated by two types of Employees are motivated by two types of

motivators-hygiene factors and satisfiersmotivators-hygiene factors and satisfiers Hygiene factors in their absence prevent Hygiene factors in their absence prevent

behavior, but in their presence cannot behavior, but in their presence cannot motivate.motivate.

- base pay must be set high enough to provide - base pay must be set high enough to provide economic means to meet hygiene needs, but it economic means to meet hygiene needs, but it cannot motivate performance. cannot motivate performance.

- Performance is achieved through rewards-- Performance is achieved through rewards-payments in excess of that required to met payments in excess of that required to met basic needs. basic needs.


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Expectancy theoryExpectancy theory Motivation is products of following factors- Motivation is products of following factors-

Perception, expectancy instrumentality and Perception, expectancy instrumentality and valance.valance.

Expectancy is employees assessment of their Expectancy is employees assessment of their ability to perform required tasks ability to perform required tasks

Instrumentality is employees beliefs that Instrumentality is employees beliefs that requisite job performance will be rewarded by requisite job performance will be rewarded by the organization.the organization.

Valance Is the value employees attach to the Valance Is the value employees attach to the organization rewards offered for job organization rewards offered for job performance. performance.

- job, task and responsibilities should be clearly - job, task and responsibilities should be clearly defined.defined.

- Performance based pay must be large enough Performance based pay must be large enough to be seen as rewards to be seen as rewards

- People choose the behavior that leads to People choose the behavior that leads to greatest rewards. greatest rewards.


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Equity Theory Equity Theory Employees are motivated when perceived Employees are motivated when perceived

outputs (e.g. pay) are equal to inputs (e.g. outputs (e.g. pay) are equal to inputs (e.g. effort, work, behavior) effort, work, behavior)

A disequilibrium in output to input balance A disequilibrium in output to input balance causes discomfort.causes discomfort.

If employees perceive that other are paid If employees perceive that other are paid more for the same effort, they react more for the same effort, they react negatively to correct the imbalance.negatively to correct the imbalance.

- Pay- performance link is critical.Pay- performance link is critical.- Performance inputs and expected output must Performance inputs and expected output must

be clearly defined and identified.be clearly defined and identified.- Employees evaluate the adequacy of their pay Employees evaluate the adequacy of their pay

via comparison with other employees. via comparison with other employees. - fairness and consistency of performance fairness and consistency of performance

based pay across employees in the based pay across employees in the organization is important.organization is important.


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MOTIVATION THEORIESMOTIVATION THEORIES Reinforcement Theory Reinforcement Theory Rewards reinforces performance Rewards reinforces performance

(motivate and sustain) (motivate and sustain) High performance followed by a High performance followed by a

monetary reward will make future high monetary reward will make future high performance more likely.performance more likely.

Rewards must follow directly after Rewards must follow directly after behaviors to be reinforcing.behaviors to be reinforcing.

Behaviors that are not rewarded will be Behaviors that are not rewarded will be discontinued.discontinued.

- Timing of payouts is very important. Timing of payouts is very important. Performance based payment must Performance based payment must follow closely behind performance. follow closely behind performance.

- withholding payouts can be a way to withholding payouts can be a way to discourage unwanted behavior. discourage unwanted behavior.


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GOAL SETTINGGOAL SETTING Challenging performance goals influence greater Challenging performance goals influence greater

intensity and duration in employee intensity and duration in employee performanceperformance

Goal setting results in feedback to employees on Goal setting results in feedback to employees on company's and their performance company's and their performance

Individuals are motivated to the extent that goal Individuals are motivated to the extent that goal achievement is combined with receiving achievement is combined with receiving valued rewards. valued rewards.

- Performance based pay must be contingent Performance based pay must be contingent upon achievement of important goals.upon achievement of important goals.

- Goals must be challenging and specific Goals must be challenging and specific - Performance targets must be communicated Performance targets must be communicated

in terms of specific, difficult goals.in terms of specific, difficult goals.- Feedback on performance is important. Feedback on performance is important.


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AGENCY THEORYAGENCY THEORYPay directs and motivates employee Pay directs and motivates employee

performanceperformanceEmployees prefer static wages ( a salary) Employees prefer static wages ( a salary)

totoperformance based pay.performance based pay.- If performance can be accurately If performance can be accurately

measured, payments should be made measured, payments should be made on basis of satisfactorily completion of on basis of satisfactorily completion of work.work.

- Performance based pay must be tightly Performance based pay must be tightly liked to organizational objectives.liked to organizational objectives.

- If performance cannot be monitored, If performance cannot be monitored, pay should be aligned to achieving pay should be aligned to achieving organizational goals.organizational goals.

- Use of performance based pay will Use of performance based pay will require higher total pay opportunity. require higher total pay opportunity.


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PERFORMANCE PERFORMANCE

We need to find ways to motivate (M) We need to find ways to motivate (M) employees to perform well on the job employees to perform well on the job

The oil to lubricate this HR engine is The oil to lubricate this HR engine is performance measurement and performance measurement and management.management.

We can't tell if we selected good We can't tell if we selected good employees, If we don't know how to employees, If we don't know how to measure what constitutes good.measure what constitutes good.

We need to accurately measure We need to accurately measure performance to tell whether our HR performance to tell whether our HR efforts are workingefforts are working. .


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COMPENSATIONCOMPENSATION

DefinitionsDefinitions Compensation:Compensation: refers to all forms of financial refers to all forms of financial

returns and benefits employees receive as returns and benefits employees receive as part of an employees relationship (contract)part of an employees relationship (contract)

Base pay:Base pay: is cash compensation an employer is cash compensation an employer pays for work performed. It reflects value of pays for work performed. It reflects value of work or skill and generally ignores work or skill and generally ignores differences attributable to individual differences attributable to individual employees. employees.

Incentive :Incentive : pay increases, directly pay increases, directly attributable to individual employee, team or a attributable to individual employee, team or a business unit's performancebusiness unit's performance..


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TOTAL RETURN FROM WORKTOTAL RETURN FROM WORK

Total Returns

Challenging work

Cash Compensation

Benefits

Total compensation

Total Returns

Base pay Cost

of living

Short term incentive

Long term incentive

Income protection

Allowances

Learning Opportunity

Recognition & status


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PERFORMANCEPERFORMANCEManaging performance is most important for Managing performance is most important for

the success of any organization the success of any organization

Performance Management as practiced today, Performance Management as practiced today, includes several approaches like Balanced includes several approaches like Balanced Scorecard, Six sigma, Financial Reporting, Scorecard, Six sigma, Financial Reporting, Performance Appraisals, Competency Performance Appraisals, Competency Management, Training, Incentive Management, Training, Incentive Compensation etc.Compensation etc.

The current approach to Performance The current approach to Performance Management lacks a single consistent vision Management lacks a single consistent vision that ties together every component of the that ties together every component of the organization.organization.

Most of the Performance Management systems Most of the Performance Management systems have inefficiencies built into it. have inefficiencies built into it.

A consistent enterprise wide approach to A consistent enterprise wide approach to performance management is the key to avoid performance management is the key to avoid inefficiencies. inefficiencies.


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PERFORMANCEPERFORMANCEOrganization must first “ Put the right Organization must first “ Put the right

peoplepeoplein the right jobs, reward top performers, in the right jobs, reward top performers,

retain talent for long term and increase retain talent for long term and increase efficiency and performance throughout efficiency and performance throughout the organization.the organization.

Individual Performance Management is Individual Performance Management is the world of Human Resource and the world of Human Resource and Sales Management. It is about Sales Management. It is about cascading the strategic objectives of cascading the strategic objectives of the organization to every individual, the organization to every individual, making sure that each person making sure that each person understands what he/she has to achieve understands what he/she has to achieve as their goals, using pay for as their goals, using pay for performance, providing frequent performance, providing frequent feedback to individuals about their feedback to individuals about their performance. performance.


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VIEWS ON FERFORMANCE MANAGEMENTVIEWS ON FERFORMANCE MANAGEMENT

FINANCE: To the CFO and other finance FINANCE: To the CFO and other finance managers, performance is related to financial managers, performance is related to financial performance of the organization, business performance of the organization, business unit or departments. unit or departments.

SALES: To the sales executive, performance SALES: To the sales executive, performance management is about sales force management is about sales force effectiveness, the ability of each sales person effectiveness, the ability of each sales person to sell more so that the overall revenue goes to sell more so that the overall revenue goes up, he tries to make the sales incentives as up, he tries to make the sales incentives as lucrative as possible so that the morale of lucrative as possible so that the morale of sales force is high. sales force is high.

HUMAN RESOURCE: To the HR executive, HUMAN RESOURCE: To the HR executive, performance management is about measuring performance management is about measuring performance of individuals to improve performance of individuals to improve productivity, its about hiring the right people, productivity, its about hiring the right people, evaluating individual competencies and evaluating individual competencies and making sure that compensation is line with making sure that compensation is line with market rates, providing opportunity for market rates, providing opportunity for advancement through training. advancement through training.


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What should we do? What should we do?

To effectively implement performance To effectively implement performance Management, the organization must: Management, the organization must:

ALIGN: the strategic objectives, plans ALIGN: the strategic objectives, plans and budgets of various groups.and budgets of various groups.

MEASURE past performance with an MEASURE past performance with an orientation towards financial orientation towards financial measures of organization performance.measures of organization performance.

ANALYSE what must change to ANALYSE what must change to optimize strategy and maintain optimize strategy and maintain organizational alignment. organizational alignment.


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What should we do?What should we do?

To beTo be PERFOMANCE DRIVEN, the PERFOMANCE DRIVEN, the organization must link:organization must link:

The The ObjectivesObjectives of the organization to of the organization to those of the individuals,those of the individuals,

Budgets and Resources Budgets and Resources of the of the organization with the objectives of the organization with the objectives of the organization. organization.

Measurement of past performance with Measurement of past performance with alignment to the future direction.alignment to the future direction.

The information in Finance with The information in Finance with information on human resources.information on human resources.

The pay of each person in the The pay of each person in the organization with that of individual organization with that of individual performance. performance.


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PERFORMANCE MANAGEMENT DIAGRAMPERFORMANCE MANAGEMENT DIAGRAM

ORGANIZATIONORGANIZATION INDIVIDUALINDIVIDUAL

Define Define

Organization Organization objectives objectives

CascadeCascade

individual goalsindividual goals

Set and Align Set and Align Resources & Resources & BudgetsBudgets

Align Align individuals individuals with with opportunitiesopportunities

Set Set individuals individuals goalsgoals

ALIGNALIGN

Measure Measure

OrganizationOrganization PerformancePerformance

Measure individual Measure individual

performanceperformance MEASUREMEASURE

Rewards individualsRewards individuals REWARDREWARD

Report Report Organizational Organizational PerformancePerformance

Report individual Report individual performanceperformance

REPORTREPORT

Analyze Analyze organizational organizational performance to performance to optimize strategyoptimize strategy

Analyze individual Analyze individual performance to optimizeperformance to optimize

Execution of strategy Execution of strategy

ANALYSE ANALYSE


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ALIGHMENT ALIGHMENT

An organization consists of divisions, An organization consists of divisions, Business units, departments each with Business units, departments each with its own set of objectives. its own set of objectives.

Alignment must exist between the Alignment must exist between the objectives of the organizational entities objectives of the organizational entities and the strategic objectives of the and the strategic objectives of the organization.organization.

The alignment must be frequently The alignment must be frequently adjusted, in response to new objectives, adjusted, in response to new objectives, changes in business environment or changes in business environment or problems with achieving existing problems with achieving existing objectives. objectives.

Alignment is also needed to be Alignment is also needed to be adjusted between the objectives and the adjusted between the objectives and the budgets and resources e.g. budgets and resources e.g. infrastructure, human resource, I.T. etc.infrastructure, human resource, I.T. etc.


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MEASUREMEASURE Most organization measure performance, this Most organization measure performance, this

is largely the domain of finance dept, since is largely the domain of finance dept, since many of the measures are financial in nature. many of the measures are financial in nature. Revenue growth Revenue growth COST as percentage of revenueCOST as percentage of revenue Budget varianceBudget variance Returns on assetsReturns on assets Inventory turnoverInventory turnover ResourceResource utilization utilization

Other measure can beOther measure can be Customer satisfactionCustomer satisfaction Customer complaintsCustomer complaints Compliance to statutory/regulatory Compliance to statutory/regulatory

requirementrequirement Measuring individual performance is largely the Measuring individual performance is largely the

domain of HR although other departments domain of HR although other departments may be involved. may be involved.


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REWARDREWARD The better an employee performs, the The better an employee performs, the

higher the reward, which could be in higher the reward, which could be in the form of promotion, merit pay, the form of promotion, merit pay, salary increases, bonus, incentivessalary increases, bonus, incentives

There must be no cap on their There must be no cap on their opportunities to make money.opportunities to make money.

Employees and entire departments will Employees and entire departments will do whatever they view to be in their do whatever they view to be in their best interest.best interest.

By rewarding individuals for their By rewarding individuals for their objectives, demonstration of objectives, demonstration of competency, we are able to derive competency, we are able to derive behavioral change that helps the behavioral change that helps the organization achieve its strategic organization achieve its strategic objectives. objectives.

It is often the case that diverse set of data It is often the case that diverse set of data must be gathered and integrated for must be gathered and integrated for calculation of individual rewards. calculation of individual rewards.


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REPORTREPORT REPORTING is a about providing timely REPORTING is a about providing timely

information to management and individuals about information to management and individuals about performance of the organization and its people.performance of the organization and its people.

As with Measure component, reporting tends to As with Measure component, reporting tends to have a strong financial and organizational have a strong financial and organizational orientation. It is heavily data oriented and focuses orientation. It is heavily data oriented and focuses on one data at a time such ason one data at a time such as Profit and loss report showing changes in Profit and loss report showing changes in

revenue and cost compared to previous revenue and cost compared to previous periods.periods.

Client satisfaction reportClient satisfaction report Incentive compensation report showing Incentive compensation report showing

incentives paid in each region /location. incentives paid in each region /location.

With good organizational reporting, management is With good organizational reporting, management is able to see how the different entities that make up able to see how the different entities that make up the organization are performing.the organization are performing.

The key factor in organizational reporting is not so The key factor in organizational reporting is not so much as collecting data, but sharing information much as collecting data, but sharing information with individuals, who are working towards with individuals, who are working towards achieving organizational strategic objectives. achieving organizational strategic objectives.


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ANALYZE ANALYZE

Reporting and Analysis are a Reporting and Analysis are a continuum.continuum.

The purpose of analysis is to The purpose of analysis is to initiate changes in strategy, initiate changes in strategy, tactics, in personnel, in budgets tactics, in personnel, in budgets and many aspects of managing an and many aspects of managing an enterprise. enterprise.

One aspect of organizational One aspect of organizational performance Analysis is performance Analysis is determining the extent to which determining the extent to which performance outcomes can be performance outcomes can be attributed to strategic objectives attributed to strategic objectives or to execution.or to execution.


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ANALYZEANALYZE In the case in which the organization has In the case in which the organization has

failed to achieve a particular objective, we failed to achieve a particular objective, we need to determine whether it was due to bad need to determine whether it was due to bad objectives, poor execution or both.objectives, poor execution or both.

- An objective may have been unrealistic due An objective may have been unrealistic due to adverse market conditions, inadequate skill to adverse market conditions, inadequate skill set or poor planning.set or poor planning.

- If the objective is a problem, we need to go If the objective is a problem, we need to go back to the ALIGN component and eliminate back to the ALIGN component and eliminate or modify it.or modify it.

- Probably the previous alignment did not work Probably the previous alignment did not work since the objectives were not cascaded into since the objectives were not cascaded into individual goals correctly or the budget was individual goals correctly or the budget was not sufficient. not sufficient.

Without Analysis we are left to guesswork Without Analysis we are left to guesswork and assumptions.and assumptions.


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ANALYZEANALYZE Without analysis, raw data are left to Without analysis, raw data are left to

uniformed interpretations.uniformed interpretations. In assessing organizational In assessing organizational

performance without benefit of performance without benefit of analysis even if you manage to obtain analysis even if you manage to obtain valid readings of which departments valid readings of which departments are outperforming others, there is no are outperforming others, there is no way to tell whether it was good or bad way to tell whether it was good or bad performance. performance.

- If sales were up 10% is that good? If sales were up 10% is that good? (10% in an emerging market is bad) (10% in an emerging market is bad) 5% in a stagnant / declining market 5% in a stagnant / declining market may be good.may be good.

Analysis must provide actionable, Analysis must provide actionable, meaningful, timely information to meaningful, timely information to people who are in position to use it. people who are in position to use it.


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ANALYZEANALYZE

Most Performance Management Most Performance Management approaches look backward only. They approaches look backward only. They measure what was done. If objectives measure what was done. If objectives are met, there is the usual patting the are met, there is the usual patting the back. If objectives are not met, there is back. If objectives are not met, there is rounding up of suspects and rounding up of suspects and consequences for them.consequences for them.

The above approach will have little The above approach will have little direct impact on the organizations direct impact on the organizations ability to meet future goals.ability to meet future goals.

Analysis can serve as the bridge Analysis can serve as the bridge between past outcomes and future between past outcomes and future performance performance


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DESIGNING A PAY FOR DESIGNING A PAY FOR PERFORMANCE PLANPERFORMANCE PLAN

The effectiveness of the plan depends on The effectiveness of the plan depends on the following factorsthe following factors

1.1. Efficiency which involves 3 areas of Efficiency which involves 3 areas of concernconcern

Strategy : The pay for performance plan Strategy : The pay for performance plan must support the corporate must support the corporate objectives. Payouts must have objectives. Payouts must have relation to improved performance on relation to improved performance on the bottom line. Next question is the bottom line. Next question is how much does it take to motivate how much does it take to motivate employees? Research indicates that employees? Research indicates that employees do not notice incentives employees do not notice incentives less than 10% with 15-20% more less than 10% with 15-20% more likely to evoke response. likely to evoke response.


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Structure:Structure: Is Is the organization the organization sufficiently decentralized to allow sufficiently decentralized to allow different operating units to create a different operating units to create a flexible variation on the general pay for flexible variation on the general pay for performance plan? Differentiate pay performance plan? Differentiate pay for stars from average/below average for stars from average/below average performers.performers.

Standards: WeStandards: We need to be concerned need to be concerned about the following about the following

OBJECTIVES OBJECTIVES - are they specific yet - are they specific yet flexible?flexible?

MEASURES – do employees MEASURES – do employees know what measures will be used know what measures will be used to asses whether performance is to asses whether performance is really good to merit payout?really good to merit payout?


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ELIIBILITY : How far down will ELIIBILITY : How far down will the plan run? Will all employees the plan run? Will all employees be included? be included?

FUNDING : How long will the FUNDING : How long will the plan continue? What happens in a plan continue? What happens in a bad year?bad year?


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DESIGNING A PAY FOR PERFORMANCE DESIGNING A PAY FOR PERFORMANCE PLANPLAN

FAIRNESS / EQUITY : we have to FAIRNESS / EQUITY : we have to ensure that system is fair to ensure that system is fair to employees. Does the amount of employees. Does the amount of money distributed to employees money distributed to employees have a relation to the input have a relation to the input (equity theory). Employees must (equity theory). Employees must know in advance what is expected know in advance what is expected of them and what is the return. of them and what is the return. (effective communication) (effective communication)


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COMPLIANCE: pay for COMPLIANCE: pay for performance system should performance system should comply with existing laws. The comply with existing laws. The reward system must enhance the reward system must enhance the reputation of the firm.reputation of the firm.


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PAY FOR PERORMANCE PLAN PAY FOR PERORMANCE PLAN WHAT IS IT?WHAT IS IT?

- INCENTIVE PLANSINCENTIVE PLANS- VARIABLE PAY PLANSVARIABLE PAY PLANS- COMPENSATION AT RISKCOMPENSATION AT RISK- EARNINGS AT RISK EARNINGS AT RISK - SUCCESS SHARINGSUCCESS SHARING- ETCETC

The above plan are effective if they are designed The above plan are effective if they are designed well.well.

WE SHALL NOW DISCUSS THE DESIGN OF WE SHALL NOW DISCUSS THE DESIGN OF SOME OF THE WIDELY USED PLANS.SOME OF THE WIDELY USED PLANS.


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DISIGNING A PAY FOR DISIGNING A PAY FOR PERFORMANCE PLAN PERFORMANCE PLAN

MERIT PAYMERIT PAY A merit pay system links increase in base pay to how A merit pay system links increase in base pay to how highly employees are rated on a subjective evaluation as highly employees are rated on a subjective evaluation as illustrated below. illustrated below.

Performance rating 1Performance rating 1 22 33 44 55Merit PAY Merit PAY 6% 5% 4% 3% 0% 6% 5% 4% 3% 0%

1-well above average1-well above average2-above average2-above average3-average3-average4-below average4-below average5-well below average5-well below average

At the end of a performance year, employees are At the end of a performance year, employees are evaluated, generally by the direct supervisor, the evaluated, generally by the direct supervisor, the performance rating as above determines size of increase performance rating as above determines size of increase in base pay. Here what you do in the year of in base pay. Here what you do in the year of performance, is rewarded every year you remain with performance, is rewarded every year you remain with the company, so on a compounding basis this amounts the company, so on a compounding basis this amounts to a large sum for the employees (large cost to the to a large sum for the employees (large cost to the company) company)


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DISIGNING A PAY FOR DISIGNING A PAY FOR PERFORMANCE PLANPERFORMANCE PLAN

LUMPSUM BONUSLUMPSUM BONUS

Based on the company's and employees Based on the company's and employees performance, employees receive an end of the performance, employees receive an end of the year bonus that does not build into the basic year bonus that does not build into the basic pay. Lump sum bonus can be considerably pay. Lump sum bonus can be considerably less expensive for the company over the long less expensive for the company over the long run.run.

INDIVIDUAL SPOT AWARDINDIVIDUAL SPOT AWARDUsually, these rewards/awards are given for Usually, these rewards/awards are given for exceptional performance, e.g. on a special exceptional performance, e.g. on a special project, outcome of a suggesting (suggestion project, outcome of a suggesting (suggestion scheme), leading to savings for the company. scheme), leading to savings for the company. The mechanism is simple-Management is The mechanism is simple-Management is informed of the exceptional contribution by informed of the exceptional contribution by an individual or group and a spot reward in an individual or group and a spot reward in monitory terms or gift is awarded for the monitory terms or gift is awarded for the effort. effort.


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INDIVIDUAL INCENTIVE PLANINDIVIDUAL INCENTIVE PLANHere performance is compared against a Here performance is compared against a

standard (may be set by Time study) and a standard (may be set by Time study) and a rate is determined which could be rate is determined which could be

-units of production per time period-units of production per time period

-time period per unit of production.-time period per unit of production.


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Individual Incentive PlanIndividual Incentive PlanMost frequently implemented system is a Most frequently implemented system is a piecework system. Advantage is that it is piecework system. Advantage is that it is easily understood by workers and readily easily understood by workers and readily accepted. Wages vary as a function of accepted. Wages vary as a function of production level.production level.

Piece rate is determined from time study 10U/hr Piece rate is determined from time study 10U/hr

Guaranteed minimum wage: Rs.5/hrGuaranteed minimum wage: Rs.5/hr

Incentive rate for each additional unit over 10=Rs.2.5/hrIncentive rate for each additional unit over 10=Rs.2.5/hr

Worker output Worker output WageWage

10 UNITS OR LESS10 UNITS OR LESS Rs.5/hrRs.5/hr

20 Units 20 Units Rs.30/hrRs.30/hr

30 Units30 Units Rs.55/hrRs.55/hr


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TEAM INCENTIVE PLANSTEAM INCENTIVE PLANSHere we move away from individuals Here we move away from individuals and focus on people working together. and focus on people working together. The group might be a team, a The group might be a team, a department, or a division. Basic department, or a division. Basic concept is as in Individual Incentive concept is as in Individual Incentive Plan. A standard is established against Plan. A standard is established against which the team performance is which the team performance is compared to determine the amount of compared to determine the amount of incentive.incentive.The standard may be an expected level The standard may be an expected level of revenue, profit, or other measure of revenue, profit, or other measure such as customer satisfaction index, such as customer satisfaction index, lower turnover rate, development of lower turnover rate, development of new customers etc.new customers etc.


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-Examples of performance measure -Examples of performance measure On time deliveryOn time delivery Cycle timeCycle time New product introduction New product introduction Revenue growth Revenue growth Market share Market share Profit marginProfit margin Customer growth and retentionCustomer growth and retention Recruitment costRecruitment cost ProductivityProductivity Employee turnover Employee turnover ETC.ETC.


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INDIVIDUAL vs.GROUP INCENTIVE INDIVIDUAL vs.GROUP INCENTIVE PLANSPLANS

It is observed that individual Incentive plans It is observed that individual Incentive plans have better track record in delivering higher have better track record in delivering higher productivity.productivity.

Group incentive plans suffer from what is Group incentive plans suffer from what is called “free-rider problem”.called “free-rider problem”.


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RESEARCH FINDINGSRESEARCH FINDINGS

Incentive systems are notorious for getting Incentive systems are notorious for getting people to do exactly what is incentivized. people to do exactly what is incentivized. Expecting employees to do a wide array of Expecting employees to do a wide array of duties results in employees demanding duties results in employees demanding additional payment for these.additional payment for these.

Evidence suggests that companies are able to Evidence suggests that companies are able to get employees to be flexible and committed get employees to be flexible and committed when a broad array of rewards rather than just when a broad array of rewards rather than just money is part of the compensation package.money is part of the compensation package.

In the long run success of a company depends In the long run success of a company depends on getting good people to accept employment on getting good people to accept employment and the compensation challenge is to figure and the compensation challenge is to figure out what components of compensation is out what components of compensation is likely to influence their decision to join, likely to influence their decision to join, perform well and remain with the company. perform well and remain with the company.


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RESEARCH FINDINGSRESEARCH FINDINGS

Let employees construct both a more satisfying and less Let employees construct both a more satisfying and less expensive reward package from the 13 elements expensive reward package from the 13 elements below:below:

1.1. Compensation - Wages, Commissions, bonus,Compensation - Wages, Commissions, bonus,2.2. Benefits - Vacation, health insurance Benefits - Vacation, health insurance 3.3. Social interaction- friendly workplaceSocial interaction- friendly workplace4.4. Security – stable consistent position and rewards Security – stable consistent position and rewards 5.5. Status /recognition- respect, Prominence due to Status /recognition- respect, Prominence due to

work.work.6.6. Work variety opportunity to experience different Work variety opportunity to experience different

work.work.7.7. Workload – Right amount of work-not too much Workload – Right amount of work-not too much

/too little/too little8.8. Work importance – is work valued by societyWork importance – is work valued by society9.9. Authority /control/autonomy – ability to influence Authority /control/autonomy – ability to influence

othersothers10.10. Advancement – Chance to get aheadAdvancement – Chance to get ahead11.11. Feedback – receive information helping to Feedback – receive information helping to

improve performanceimprove performance12.12. Work conditions- Hazard freeWork conditions- Hazard free13.13. Development opportunity –Formal and informal Development opportunity –Formal and informal

training opportunitytraining opportunity. .


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PERFORMANCE MANAGEMENT PERFORMANCE MANAGEMENT STEP BY STEPSTEP BY STEP

1.SET SMART TARGETS1.SET SMART TARGETS SSpecificpecific MMeasurableeasurable AAchievablechievable RRealisticealistic TTime relatedime related

How many targets?How many targets?

Not more than 6 else chances of achieving Not more than 6 else chances of achieving all are unlikelyall are unlikely

How much detail?How much detail?

Make them precise to avoid conflictsMake them precise to avoid conflicts


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How long should each target last?How long should each target last?Stagger the deadlines for the targets, Stagger the deadlines for the targets, since no one works on all targets at the since no one works on all targets at the same time.same time.

How difficult should the targets How difficult should the targets be?be?Targets must stretch and challenge a Targets must stretch and challenge a person and give him a sense of person and give him a sense of achievement achievement


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2.REVIEWING PROGRESS2.REVIEWING PROGRESS

Individual measures and targets must Individual measures and targets must be discussed regularly to review be discussed regularly to review performance of each team member and performance of each team member and if there are deviations from expected if there are deviations from expected figures, corrective measures can be figures, corrective measures can be taken.taken.

3. PAPERWORK3. PAPERWORK

Keep the paperwork simple and which Keep the paperwork simple and which can be used for appraisals at a later can be used for appraisals at a later date. Targets and competencies are date. Targets and competencies are closely liked. closely liked.


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PERFORMANCE APPRAISALPERFORMANCE APPRAISAL

Performance Appraisal is the most Performance Appraisal is the most important part of Performance important part of Performance Management in which after Management in which after Performance Review, deficiencies in Performance Review, deficiencies in competencies can be identified and competencies can be identified and necessary training and development necessary training and development plans can be made to enhance existing plans can be made to enhance existing competencies or new competencies can competencies or new competencies can be developed. be developed.


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PERFORMANCE APPRAISALPERFORMANCE APPRAISAL DefinitionDefinition: A face-to-face discussion in : A face-to-face discussion in

which an employee's work (incl. behavior, which an employee's work (incl. behavior, attitude) is discussed, reviewed by another attitude) is discussed, reviewed by another using an agreed an understood framework.using an agreed an understood framework.

PM consists of 3 partsPM consists of 3 parts

1.1. Defining performance measures specific Defining performance measures specific to the organization to the organization

2.2. Measure performance through Measure performance through performance appraisal performance appraisal

3.3. Provide feedback so that employees can Provide feedback so that employees can adjust their performance to meet the adjust their performance to meet the organizations goalsorganizations goals

Usually line managers conduct the appraisal Usually line managers conduct the appraisal of their staff although peers can appraise of their staff although peers can appraise each other and line managers can be each other and line managers can be appraised by their staff though a 360 degree appraised by their staff though a 360 degree appraisal.appraisal.


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USE OF PERFORMANCE APPRAISALUSE OF PERFORMANCE APPRAISAL

Performance AppraisalPerformance Appraisal

Administering Wages and Salaries

Administering Wages and Salaries

Give Performance feedbackGive Performance feedback

Identify Strengths and weakness

Identify Strengths and weakness


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PM MethodsPM Methods

Category Rating Graphics rating

ScaleChecklist

Category Rating Graphics rating

ScaleChecklist

Comparative MethodRanking

Forced Distribution

Comparative MethodRanking

Forced Distribution

Behavioral/Objective Method

Behavior ApproachMBO

Behavioral/Objective Method

Behavior ApproachMBO

Narrative MethodNarrative Method

PA METHODS


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Types of performance information Types of performance information

Trait based Information

Job Performance Behavior-basedInformation

Result-basedInformation


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ROLES FOR PERFORMANCE ROLES FOR PERFORMANCE APPRIASALAPPRIASAL

Performance Appraisal

Administrative usesCompensation

PromotionDismissal

DownsizingLayoffs

Development usesIdentifying strengths

Identifying areas of growthDevelopment planning

Caching, Career planning


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PERFORMANCE APPRAISAL PERFORMANCE APPRAISAL

The biggest attack, against performance The biggest attack, against performance appraisals and in general subjective appraisals and in general subjective appraisal, comes from the Quality appraisal, comes from the Quality Management guru Deming who said Management guru Deming who said that that

THE WORK SITUATION, not the THE WORK SITUATION, not the individual is the major determinant of individual is the major determinant of performance. Variation in performance performance. Variation in performance arises many times becausearises many times because

- Employees do not have necessary - Employees do not have necessary information, technologyinformation, technology

- Control to adequately perform. - Control to adequately perform.


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APPRAISAL METHODSAPPRAISAL METHODS

Straight RankingStraight RankingEmployees are ranked relative to each Employees are ranked relative to each other.other.

Alternation RankingAlternation RankingEmployees are ranked at extreme endsEmployees are ranked at extreme ends

Paired ComparisonPaired ComparisonEach individual is compared separately Each individual is compared separately with every other individualwith every other individual

The person who wins the most paired The person who wins the most paired comparison is ranked as top of the comparison is ranked as top of the group. Disadvantages is that when size group. Disadvantages is that when size of group is large, comparisons become of group is large, comparisons become unmanageable unmanageable


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APPRAISAL METHODSAPPRAISAL METHODS

Straight rankingStraight ranking RankRank Employee's nameEmployee's name

Best Best 1.1.

Next bestNext best 2.2.

Next bestNext best 3.3.

Etc. Etc. 4.4.

5.5.

Alternation rankingAlternation ranking

Best performer Best performer 1. 1.

Next bestNext best 2. 2.

Next bestNext best 3. 3.

Next worstNext worst 4.4.

Next worstNext worst 5. 5.

EtcEtc 6. 6.

Worst performer Worst performer 7.7.


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Paired comparison methodPaired comparison methodNameName Rahul Lalit Rahul Lalit Seema Reena total Seema Reena total

RahulRahul X X X X X 3 X 3

LalitLalit X X X X X X X 4 X 4

SeemaSeema X X 2 X X 2

Reena X 1 Reena X 1

X= indicated person in row ranked higher than person in X= indicated person in row ranked higher than person in column.column.

Person with most score is ranked as best. Person with most score is ranked as best.


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APPRIASAL METHODSAPPRIASAL METHODS

Behaviorally anchored Rating Behaviorally anchored Rating Scales (BARS) Scales (BARS) Is a widely used format with uses Is a widely used format with uses behavior as descriptors.behavior as descriptors.Standard Rating Scale with adjective Standard Rating Scale with adjective anchors is shown belowanchors is shown belowCircle the number which best describes Circle the number which best describes the level of employeethe level of employeeWell above average 1Well above average 1Above averageAbove average 2 2AverageAverage 3 3below average 4below average 4well below average 5well below average 5Besides behavior, most often, Besides behavior, most often, achievement of objectives is also used achievement of objectives is also used for evaluation.for evaluation.


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APPRIASAL METHODSAPPRIASAL METHODS

Management by Objectives (MBO) As Management by Objectives (MBO) As discussed in PM, Objectives are discussed in PM, Objectives are identified from the strategic plan of the identified from the strategic plan of the company, and cascaded down to lower company, and cascaded down to lower levels preferably up to the individual levels preferably up to the individual level. At the beginning of a review level. At the beginning of a review period, the employee and the period, the employee and the supervisor agree to the objectives at supervisor agree to the objectives at the end of the review period, the the end of the review period, the achievement of the agreed objectives is achievement of the agreed objectives is evaluated evaluated

The overall evaluation of the employee is The overall evaluation of the employee is evaluated with reference to BARS and evaluated with reference to BARS and MBO.MBO.


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ERRORS IN APPRAISING ERRORS IN APPRAISING PRFORMANCEPRFORMANCE

Supervisors can make errors in rating Supervisors can make errors in rating performance, Recognizing and performance, Recognizing and understanding these errors can build an understanding these errors can build an efficient and reliable appraisal system.efficient and reliable appraisal system.

The common errors in appraisal process The common errors in appraisal process are shown on the next slide.are shown on the next slide.


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HALO – an appraiser giving favorable HALO – an appraiser giving favorable rating to all duties, based on rating to all duties, based on impressive performance in one job impressive performance in one job functionfunction

HORNHORN – Downgrading an employee – Downgrading an employee across all performance parameters across all performance parameters because of poor performance in one because of poor performance in one dimension.dimension.

FIRST IMPRESSION ERRORFIRST IMPRESSION ERRORDeveloping a negative or positive opinion Developing a negative or positive opinion

of employee early in the review of employee early in the review allowing it to influence all later allowing it to influence all later perception of performance perception of performance


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LENIENCY/SEVERITY ERROR LENIENCY/SEVERITY ERROR Consistently rating higher or Consistently rating higher or lower than deserved.lower than deserved.

CENTRAL TENENCY ERRORCENTRAL TENENCY ERRORAvoiding extremes in rating Avoiding extremes in rating across employees.across employees.

CLONE ERRORCLONE ERRORGiving better rating to employees Giving better rating to employees who are like raters in personality who are like raters in personality or behavior. or behavior.

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Performance Management

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