How Organizations Can Manage Their Performance Effectively

In the search for Human Resource Management strategies and techniques to improve business performance, many management scholars have been working on the topic of High Performance Work System.

High Performance Work System is a set of human resource practices which can help organizations “improve their employees’ skills, commitment, and productivity” [1].

Although there are different thoughts on which Human Resource Management (HRM) practices can be considered parts of High Performance Work System (HPWS) [2], it usually includes performance management [32], [33], [34]. One comprehensive literature review conducted by Posthuma [3] on 181 articles also placed performance management (along with performance appraisal) as one of the nine main practice categories of HPWS. Aiming to help business leaders understand performance management more thoroughly, this essay describes its definition, the way it improves business results, and its best practices for implementation. 

A. Performance Management Definition 

According to DeNisi, performance management is a set of activities to increase the performance of an individual or a team to enhance the business effectiveness of the whole organization [4]. Aguinis defined performance management as the repeated process of “identifying, measuring and developing the performance of individuals and teams” in alignment with the strategic objectives of the firms [8]. This iterative cycle usually includes the activities of setting goals, providing feedback, coaching and conducting performance appraisal [9] and is carried out by line managers to get the best out of their employees [8].  

Interestingly, although performance appraisal – the evaluation of employees’ performance – has been in existence much longer than performance management, it is now considered one of the components of performance management [5]. The main reason is that management scholars and practitioners had shifted their focus from the accuracy of employees’ performance rating to the methods of actually improving their performance [5]. Another related concept is Performance Management System (PMS), which is defined as a combination of practices, processes, and functions to help the organizations to achieve the desired organizational performance through improving employees’ work performance [8]. 

B. How Performance Management affects business results 

Campbell and Garfinkel found that companies with effective PMSs do better than the ones without such systems, in terms of both profit and cash flow [35]. Bernthal et al. [10] also concluded that firms with robust PMSs have more than fifty percent chance to outperform their competitors financially. The association between performance management and organizations’ performance can be explained with the AMO framework. This framework explains that HR practices can improve employees’ abilities (A) to do their jobs, enhance the motivation (M) to put in their efforts, and bring the necessary opportunities (O) for them to perform and hence improve the performance of the firms [2]. Hence, DeNisi and Smith defined PMSs as the bundles of HRM practices which are used by employers to enhance their employees’ AMO. They demonstrated that an effective PMS possesses all the practices which can enhance the abilities, motivation, and opportunities of employees, and thus can contribute to the overall performance of the firm [6]. 

caption: The Effects of PMSs on Organizations’ Performance

Moreover, motivation-enhancing is a noticeable effect of the PMS. In one survey, 71 percent of the respondents from more than 200 organizations in the United Kingdom chose “motivation” as the main driver of their PMSs [11]. CIPD’s survey [14] also found that 75 percent of their participants agreed that their performance management practices motivate their employees. Furthermore, in their meta-analysis, Jiang [12] showed that many motivation-enhancing practices (e.g. performance appraisal, compensation, and incentives) could be regarded as components of PMS. And those practices directly affect employees’ motivation, human capital and financial performance [12]. 

C. Performance Management Best Practices  

Below is a list of 6 recommendations which are synthesized from the recent research and case studies to help organizations implement effective PMSs. 

1. Make sure that employees have the right perceptions 

Hartog et al. developed a model to explain the relationship between performance management and organizations’ performance [13]: 

Caption: The relationship between performance management practices and firms’ performance

As depicted, the views of the employees on PMSs affect the effectiveness of such systems [15]; [16]). Their perceptions affect the ways they think, feel, and behave, which in turn influence their performance [18]. In case the staff consider the rating towards them unfair, they would be less motivated to change their behaviors [19]. And as previously stated, since motivation is the main driver of performance management [11], the PMSs would not gain the desired results, even if the evaluation is correct [6]. In other words, if the assessment of the organizations is not accepted by the employees, the PMSs are ineffective [20]. Hence, it is vital for organizations to show their staff that fair procedures were carried out to reach their performance valuation and feedback [21]. Moreover, the employees also need to understand very clearly what the organizations expect from them and how they can meet those objectives [16] to adjust their behaviors correctly. Thus, firms should work on both the “what” and “how” to make sure that their evaluations are considered fair and clear to motivate the employees to work on their performance in the correct directions [22]. 

2. Give more frequent feedback

As an aspect of performance management, performance appraisal is the method for managers to provide evaluations on employees’ performance, usually after 12 months [23]. However, there is a growing concern that one year is a long period. As Donna Morris, Adobe’s Chief Human Resources Officer and Executive Vice President of Human Resources shared, this “rearview-mirror approach” is no longer suitable for the ever-changing world [23]. In a recent survey, 68% of 1,800 global leaders had a consensus that ongoing coaching and frequent feedback lead to positive employees’ performance [23]. However, organization leaders should beware that too much feedback would not be beneficial [22]. A study at Midwestern university showed that after a certain point, higher feedback frequency could decrease the participants’ effort and performance [22]. So, in addition to what to say and how to say it, managers also need to find the right balance in terms of frequency so that their feedback can be useful and help their staff to improve. 

3. Enhance Middle Managers’ AMO

Also shown in Hartog et al. [13]’s model above, direct supervisors or line managers play a vital role in the PMS because they influence the perception and attitudes of their staff. Research of Vermeeren [24] and Bos-Nehles et al. [25] also demonstrated the positive association between the managers’ capability to carry out HRM practices and employees’ experience and attitudes towards the PMSs. Hence, it is vital for organizations to develop middle managers’ AMO to conduct performance management practices to gain better firm performance [17]. Specifically, middle managers should have the ability to conduct the performance management practices such as setting goals and providing feedback, have the motivation to carry out those activities (as opposed to delivering only the bare minimum), and possess the opportunities to do so [17].

4. Implement many performance management practices concurrently 

Although there are studies which showed the positive associations between PMSs and firm performance [12], the HRM practices in those studies were implemented as bundles, not individually. A meta-analysis of Combs et al. [26] also argued that the performance improvement effects could only occur with the presence of many HRM practices because employees need to have all the knowledge, skills, abilities (KSAs), and also motivation to improve their performance. Hence, DeNisi and Smith suggested that instead of doing only one HRM practice at a time, we need to conduct multiple practices at once, depending on the needs of the organizations to increase their staffs’ abilities, motivation, or opportunities. Firms can use Fu et al. [27]’s HRM practices classification to know which practices can enhance skills, motivation, or opportunities of their employees. 

Caption: The three main categories of HRM Practices

5. Make use of technology to manage and improve performance better

In their global executive research, Breschi argued that technology has been and will keep on making performance management more effective. Instead of relying on managers’ opinion, digital PMSs can collect data from multiple communication and collaboration platforms such as Slack or Asana to generate evidence-based feedback which can help employees to improve their behaviors. Moreover, as data enters the systems continuously, organizations can conduct more frequent and near-constant feedback to promote ongoing improvement [23]. In 2015, IBM transformed their traditional PMS into technology-enabled, feedback-based, and data-driven system which can give managers recommendations to develop skills and enhance the engagement of their staff. One of the gained results was higher employee retention rate, which led to nearly $300 million in saving for IBM. With the support of technology, organizations’ digital PMSs can even provide performance prediction and provide automated feedback, saving managers’ time so they can focus more on giving coaching to their team members with the insights generated via technology [23]. As Google’s former Chief People Officer, Mr. Laszlo Bock said that technology-enabled PMSs can help everyone to make the changes which matter when they matter most [23].

6. Make sure the practices fit the organizations 

Performance management practices are not one-size-fits-all solutions which business leaders can just copy and paste into their organizations and expect to see their performance improve [28]. What works for this company might not be effective for another [7]. Each firm has to choose and design the HRM practices which fit its situations and strategies [29]. For example, Ates et al. [30] found that because of their characteristics, Small and Medium Enterprises (SMEs) tend to focus more on the near future and implement practices which can help them satisfy short-term priorities. Moreover, they don’t usually conduct performance management practices which larger firms normally do such as setting, reviewing and matching Key Performance Indicators (KPIs) with their strategy, vision, and mission [30]. Hence, it is essential for companies to align their HRM practices with their strategic objectives [31]. DeNisi and Smith also recommended firms to design PMSs which are suitable for their unique characteristics and culture to equip their staffs with the appropriate combination of skills, attitudes, and behaviors to improve their companies’ performance. 

Conclusion

Performance management is the iterative process of implementing different HRM practices to improve organizations’ business effectiveness by increasing work performance of their employees [8]. PMSs can help staff to improve their performance by enhancing their abilities, motivation, and opportunities [2]. Organizations’ leaders can develop effective PMSs by making sure that their employees have the right perception and attitudes to change their behaviors by communicating the fairness of the systems and give them clear expectations and directions. Additionally, organizations should give employees feedback more frequently, instead of conducting annual performance appraisals. Since middle managers are the ones to interact directly with the staff, it is also vital for firms to enhance their abilities, motivation, and opportunities to manage the performance of their team members [17]. In addition, performance management practices should be implemented in bundles, together with other HRM practices to ensure that employees have all the necessary knowledge, skills, abilities, and also motivation to improve their performance [26]. Moreover, companies need to apply technology to performance management, so feedback becomes more evidence-based, happens more frequently, and can further promote on-going improvement [23]. And last but not least, firms need to choose and design performance management practices which fit their situations and strategies to achieve their business objectives. 

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