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Introducing Performance Management



This report is an attempt to analyse the existing Performance Management System for Large Financial Service Organisation (LFSO) and from this information, recommend, and implement an appropriate new performance management system.

LFSO is an organisation, which traditionally has a paternalistic culture with low levels of unionisation. LFSO current Performance Management system was implemented two years ago changing the nature of the previous incremental salary scales described as Prerogatives by Lupton and Bowey and led to the abolition of the annual cost of living increment. This change by LFSO was an attempt to achieve a strategic, integrative and flexible approach to pay, in order to address its organisational objectives. Therefore it reflected on a pluralist approach with the use of job evaluated grade structures regarding financial rewards and benefits. (Heery, 1996) despite the fact that with most paternalistic culture have a Unitarist approach to Performance Management systems.

Initial research conducted by the organisation indicated that objectives are not always established and reviews were spasmodic. There was a high degree of resentment between the different members of staff leading to unhealthy competitiveness and unwillingness to support others. (Kerr, 1995) describe this behaviour as esprit de corps. This resulted in an increase in general grievances. The BFU have been aware of this anxiety and have started a strong recruitment drive amongst employees but no figures on existing membership were available.

In general, both employees and management did not fully understand the scheme at its inception and saw it simply as a cost cutting exercise. The reward levels introduced were seen to be too small to act as a motivator. There was also debate about the role of the annual appraisal interview as there was no consensus view on the purpose of these, which were regarded as an inconvenience.

Now two years into the scheme, LSFO is facing the threat of a Bargaining Unit or possible Unionisation. Alongside high levels of dissatisfaction from employees and some line managers who have also expressed serious concerns about their role in the process. The system itself is under severe criticism with large numbers of appeals although only a very few of these have been upheld. Performance results currently could be described as Poor due to the new system and negative behaviour has resulted from the low monetary reward system.
Therefore the psychological contract defined as  the set of expectations held by the individual employee the specify what the individual and the organisation expect to give to and receive from each other in the course of the working relationship has deteriorated.

A summary of this research is shown using Winfield, Bishop and Porter SWOT analysis (Please see Appendix A), which evaluates LFSO organisational fit between the Performance Management system and its organisational objectives.
Within this SWOT analysis we have noted the following factors:

Strengths:          Mutual Understanding of Results/Expectations
Organisational Objectives and goals reflected in PMS
Appraisal system

Weaknesses:           Possible Unionisation amongst employee base
(Third party Pressure)
Competencies not clearly defined
Amount of Reward

Opportunities:          Transparency of Scheme
Employee contribution to PRP Structure
Importance of Fairness
To learn and grow
Employee Involvement in System
Quality Time for Managers with employees

Threats:          Esprit de Corps
Financial Restraints may increase salary bill without improvements in organisational performance.
Resistance to Change factors

Therefore additional research will need to be conducted. This will include the following:
,h Defining Performance Management and its key elements
,h Compare and evaluate LFSOs Performance Management system against Company X


So what is Performance Management and its key elements?

Performance Management can be defined as, a strategic and integrated approach to increase the effectiveness of organisations by improving the performance of the people who work in the team and by developing the capabilities of teams and individual contributors, and also can be seen as a continuous process involving reviews that focus on the future rather that the pastK (Baron and Armstrong, 1998; 38-39)

It is also described as not simply the appraisal of individual performance: it is an integrated and continuous process that helps develops, communicates and enables the future direction, core competencies and values of the organisation, and helps create an horizon of understandingKit identifies who or what delivers the critical performance with respect to business strategy and objectives. (Hendry et al, 1997)

Performance Management regarding LFSO is simply defined by (Swabe, 1989:17)  as system in which an individuals increase in salary is solely or mainly dependent on his/her appraisal or merit rating.
Therefore, Performance management is the process of creating a work environment or setting in which people are enabled to perform to the best of their abilities.
Key elements in a Performance management system are listed below
,h Setting of corporate, department, team and individual objectives.
,h Performance Appraisal Systems
,h Reward Strategies and schemes
,h Communication, coaching and feedback.
,h Training & Development Strategies and plans
,h Provide promotional/career development opportunities for employees.
,h Mechanisms for monitoring the effectiveness of performance management system and interventions
So why have a performance management system? Possible reasons for introducing a PRP system may be to increase the motivation of employees, encourage certain behaviours, to help in recruitment and retention, facilitate change in the organisational culture, internalise the performance norms and weaken trade union power.
However, possible problems may occur when introducing a PRP system that may include the notion of there being a clear and direct relationship between effort and reward. This is considered a rather simplistic view, as the expectancy theory of motivation proposes that there are two other factors that influence employees. They include effort and performance and the perceived value of the outcome. Other issues or problems that may occur include the employee focussing on certain objectives and or the employee does not value the financial reward offered. This is further supported by (Porter and Lawler1968) Expectancy Theory of motivation which argues, that there is little direct incentive for employees to increase their effort when there is no direct link between effort and valued outcome
LSFO implementation of the PMS reflected that of (Kessler and Pursell 1992) study in which it intended to reward highly those the organisation it wanted to keep and lowly those it was happy to lose this was represented by the 5% of the staff who could be put into the A scale, within their department. This 5% represented outstanding performance. Herzbergs motivation theory showed that the Hygiene factors which included pay, working conditions, supervision were noted in the initial system however it lacked what Herzberg believed motivated employees in the work place. These Motivators included recognition, responsibility, and personal growth. Herzberg Motivators can be reflected in intrinsic rewards. Therefore, LSFO PMS should have included:
,h The belief that the person is a valuable member of the team
,h Participation in setting targets, and opportunities to achieve them
,h Feedback of information
,h Recognition
,h Opportunities to learn and grow

A similar organisation (Company X) introduced a Contribution-related pay system (CRPS) two years ago which has proven to be quite successful. It has increased it profits by 6% over a two year period. A CRPS is defined as, a process for making pay decisions that are based on assessments of both the outcomes of work carried out by the individual and the levels of the capability that has influenced these outcomes (Michael Armstrong 1994,2000).

This system rewarded employees for both the quality of their inputs (their capabilities) and the level of their achievements (their outputs). The system was marketed and implemented as a, payment for potential programme. Managers were given a one-month intensive training course to understand the policies and procedures involved and to implement a formal assessment, Absolute, method (Individuals are assessed with some reference of standard(s) of performance and not to other individuals). Employees were encouraged to meet with managers to discuss any concerns and give feedback on a quarterly basis. By linking performance to reward, management control was increased, and flexibility encouraged regarding working practices and skills deployment.

Additionally, the system communicated the message that change is happening, and you are expected to change with it, but we will help you and reward you in this process.

Therefore Company Xs strategic perspective on reward was that of (Open/Contingent approach Mabey & Soloman 1995) This approach argues that the content of the HR strategy in contingent on the internal and external context and the type of business strategy.

In comparison to Company X, LSFO strategic perspective was that of a Closed approach as the reward system was based on new pay (e.g. Guest 1987). The new system neglected the importance to fairness with its employee base. In which individuals need to be treated fairly and to make comparisons between two variables (inputs/outcomes) this is best described by (Adams 1963) as the Equity Theory of Motivation. This theory argues that, employees will subconsciously formulate a ratio between their inputs and outcomes and compare it with the perceived ratios of inputs and outputs of other people in the same or a similar situation.
It also failed to include the employee in the development and implementation process. This resulted in negative behaviour from the employees, and poor performance results based on the low monetary reward.

LFSOs new system closely resembles that of a Broadband Scheme. Broadbanding, is the collapsing of a range of narrow and complex pay grades into fewer but wider pay bands. Pay flexibility within the bands can be based on individual performanceKcompany performance and competencies. This replaced the previous system where increments were automatic and there was no possibility of moving down. Secondly, the assessment was translated into a rating scale (A-E) and each scale was linked to an amount of performance related pay, expressed as a percentage of current salary. LFSO included a Performance assessment methods of forced distribution V in which individual performances are given single ratingsKranking performance levels according to some predetermined distribution and absolute methods V using ratings scales.

LSFO PMS failed to negotiate requirements and accomplishment-based performance standards, outcomes, and measures with both the Management and employees. Its financial reward was minimal and failed to motivate.


The key determinant for effectiveness of the new reward scheme must match the expectations of the employees involved. We therefore recommend that LSFO replace the entire PMS with a Contribution-based pay system which has proved successful in Company X. This system would be viewed as less judgmental and more flexible than the traditional PRP. The effectiveness of this new payment system depends more on the method of selecting and implementing the system V that is, the extent of employee participation in the process V than in the actual choice of payment system. (Bowey and Thorpe, 1989:Geary, 1992:40)

This system would reward employees for both the quality of their inputs (their capabilities) and the level of their achievements (their outputs). The introduction of this system would suggest a, payment for potential. As the previous system was implemented with no employee involvement, the new system would re-establish and improve the channels of communication between the management and employee base.

Performance planning is therefore the starting point of the performance management system. The performance agreement is based on the joint discussions and agreement of roles, objectives, performance standards and capability requirements. Employees are therefore expected to behave to meet these requirements. These consultation meeting will be on going over a 60 day period.

This system would increase the role of the line manager, in regards to providing more feedback to and evaluating employees. They would have more Quality Time with their employees to discuss their performance, progress, and development.

By linking performance to reward management control is increased, and flexibility encouraged in regarding to working practices and skills deployment. These new attributes can than be linked to the new system, as there is strong evidence that the role of the front line managers in bringing HR policies to life is most critical factor in the link between people management and enhanced business performance (Angela Baron CIPD 2003)

It would be noted to the organisation that the new PMS programme would take place over a two-year period with review meetings attended by both management and the employee representatives. These meetings would provide the transparency needed for the PMS to succeed.

The two- year programme would start with an intensive one-month training and development course for managers and employee representatives. This course would focus on the policies and procedures relating to the reward system and demonstrate possible outcomes of the rating system.

As the current appraisal system lacked purpose. It should be suspended at this time and reviewed to establish if it is compatible with the Contribution based system. This new appraisal system should align itself with the new PMS. An appraisal procedure will then be created to account for both team and individual based standards. The manager will be responsible for setting of individual and team objectives and targets, assessing and evaluating these and feeding findings back to staff and advising the HR manager. The HR manager will be kept regularly updated on progression or development needs of individuals and teams. An appeal procedure will also be set in place to deal with staff disagreements around these decisions. The manager will have in place a formal quality monitoring procedure and adherence to this will form part of the team and individual reward and appraisal procedure.

As the BFU has started to implement a strong recruitment drive amongst LFSO employees, the management/ and HR Manager should consider meeting with the union to obtain its views on a partnership agreement with the organisation. This approach would recognise the possible impact BFU may have on the new system and would demonstrate a gesture of goodwill by the management team. It would also address the collective representation can help achieve important business objectives, including good communication.

In conclusion it must be emphasised that an effective Performance Management system ensures that both Managers and employees understand each others expectations, and how these are incorporated into the Corporate Strategy and how these impact upon their own context V their roles, behaviours, relationships and interactions, rewards and futures.

Beardwell, I. And Holden, L. (2001) Human Resource Management: A Contemporary Approach 3rd Ed. Prentice Hall

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