Performance Management Research Paper

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PerformanceManagement:Impacts and Trends

Written and prepared by:

Roger Sumlin, Senior Consultant

Performance Management Practice

Recent studies have identified trends in effectiveperformance management systems and determinedthe impact of these systems on organizationalsuccess. The messages from these studies aredramatic: Performance management is an importantbusiness system; it makes a difference inorganizational performance; approaches toperformance management are changing; and seniormanagers must be attentive to the performancemanagement systems in their organizations.

This body of research is useful to anyone designingand implementing a new performance managementsystem and equally beneficial to those trying toprove the value of effective performancemanagement.

This paper reviews six recent performancemanagement studies and organizes their keyfindings into two groups: Performance Manage-ment Impact on Organizational Success and

Performance Management Trends/Best Practices.

The first group substantiates the importance ofperformance management; the latter group aids thepractitioner seeking the characteristics of successfulsystems. Two studies, one by DDI in 1997 and oneby Hewitt in 1994, address and appear in bothareas—organizational impact and trends.

Performance Management Impact onOrganizational Success

1997 Study by DDI

Performance Management Practices is the mostrecent performance management study. It provesthat successful organizations realize thatperformance management is a critical business toolin translating strategy into results. The CEOs in themajority of the 88 organizations surveyed say theirperformance management system drives the keyfactors associated with both business and culturalstrategies. Some key findings of the study follow.

Organizational Impact

Performance management systems directlyinfluence five critical organizational outcomes:financial performance, productivity, product orservice quality, customer satisfaction, and employeejob satisfaction.

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Performance Management

When performance management systems areflexible and linked to strategic goals, organizationsare more likely to see improvement in the fivecritical areas.

Team objectives, nonmanager training, appraiseraccountability, and links to quality management arethe specific practices most strongly associated withpositive outcomes.

Supplemental Survey—CEO Ratings

A supplemental survey in this study sought CEOs'perceptions of their organizations' performancemanagement systems.

Sixty-three percent of CEOs believe theirperformance management system drives the keyfactors associated with business strategy. Seventy-nine percent say their system drives the culturalstrategies that maximize human assets.

When CEOs realize the value of performancemanagement in driving business strategy, overallsystem effectiveness is significantly higher.

The success of performance management and itseffect on business and cultural strategies dependheavily on senior-level support.

1996 Study by Wm. Schiemann & Associates

This national survey of a cross-section of executivesconcluded that measurement-managed companies—especially those that measure employeeperformance—outperform those that downplaymeasurement. The research studied 122organizations making between $27 million and$50 billion in sales.

A higher percentage of measurement-managedcompanies were identified as industry leaders, asfinancially in the top third of their industry, and assuccessfully managing their change efforts. Thislast area implies that measurement-managedcompanies tend to anticipate the future and arelikely to remain in a leadership position in a rapidlychanging environment.

The research examined performance in six strategicperformance areas deemed crucial to long-termsuccess:

• Financial performance• Operating efficiency• Customer satisfaction• Employee performance• Innovation/Change• Community/Environment

The findings revealed that the biggest measurementarea separating successful from less successful firmsis employee measurement. Successful industryleaders simply do a better job than nonleaders atmeasuring their workforce, which, the study says, iswhere real change is won or lost.

Study data point strongly to four mechanisms thatcontribute to the success of measurement-managedcompanies:

• Agreement on strategy. Ninety-three percent ofthe measurement-managed firms reportedagreement among top management on strategy,versus only 37 percent of the nonmeasurement-managed organizations.

• Clarity of communication. Good communi-cation demands a clear message, andmeasurement provides a common languagefor communication.


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• Focus and alignment of efforts. Measurement-managed companies reported more frequentlythat unit performance measures were linked tostrategic company measures and that individualperformance measures were linked to unitmeasures.

• Organizational culture. Compared tononmeasurement-managed organizations,measurement-managed companies morefrequently reported strong cultural elements,such as cooperation and teamwork amongthe management team, a greater extent ofemployees self-monitoring their ownperformance, and a greater willingness totake risks.

1995 Study by Yankelovich Partners forWilliam M. Mercer

The 1,200 workers surveyed said that on averagethey could improve their daily output by at least26 percent if only they weren't hindered by lackof —in order of importance—direction, support,training, and equipment. One in four said theycould raise productivity by 50 percent. An effectiveperformance management system delivers thedirection and support workers need.

1994 Study by Hewitt Associates

The Impact of Performance Management on

Organizational Success substantiates thatperformance management systems can have asignificant impact on financial performance andproductivity. The study used the Boston ConsultingGroup/HOLT financial database to track thefinancial performance of 437 publicly held U.S.companies from 1990 through 1992. Researchersfirst compared organizations that had performance

management systems with those in the sameindustry that did not. The researchers thencompared the financial performance of theorganizations having performance managementsystems (47 percent) to see how those organizationsfared before and after implementation.

The study results showed that:

• Companies with performance managementprograms have higher profits, better cash flows,stronger stock market performance, and agreater stock value than companies withoutperformance management.

• Productivity in firms without performancemanagement is significantly below the industryaverage, while productivity in firms withperformance management is on par with theindustry average.

• Companies with performance managementsignificantly improved their financialperformance and productivity after

implementing performance management.

In 1995 the researchers conducted additionalanalysis of the study data. This longitudinalresearch focused on the following three financialratios that the researchers say are excellentindicators of a company's overall financial strength:

• Stock return to market index• Price to book total capital• Real value to cost

Companies with performance management achievedhigher ratios than those without in all three areas.


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Performance Management Trends/Best Practices

1997 Study by DDI

In addition to looking at impact on organizationalsuccess as reported in the first section, this studyalso investigated organizations' current performancemanagement practices and compared the resultswith those from DDI's 1993 study (described later inthis paper).

Most Frequently Used Practices

• Fifty-one percent of organizations frequentlytrain managers in applying performancemanagement systems, and 22 percent frequentlytrain nonmanagers.

• Thirty-eight percent of the organizationsfrequently use competencies in theirperformance management systems.

• Approximately 20–25 percent of organizationsfrequently use peer input, customer feedback,and input from direct reports.

• Twenty percent of organizations frequentlyinclude team-based objectives in individualperformance plans. Team appraisal, in whichteam members or peers actually appraise oneanother, is less common.

• For rating techniques organizations relyprimarily on overall ratings, summarystatements, and numerical ratings.

Changes in Usage

In 1993 DDI's survey of performance managementpractices measured current and predicted usage for12 of the practices measured in this study. The

following highlights the key changes in usagebetween the two studies:

• Training for both managers and nonmanagers inperformance management doubled in four years.

• Forced rankings (i.e., the use of a predeterminedpercentage of ratings distribution) decreased by

more than 300 percent since 1993.• Team-based objectives have become more

common.• The most common rating tools—overall ratings

and summary statements—are used even morefrequently than they were four years previous.

• Different forms of performance managementinputparticularly peer inputhave becomemore common.

• Respondents to the 1993 survey predicted alarge increase in the use of team appraisal.That prediction proved to be off target.

Effectiveness

Although some system qualities such as employeeinvolvement and flexibility were more prevalent,they were not necessarily the qualities mostpredictive of system success. The following systemqualities and practices had the strongest relationshipto overall effectiveness.• Alignment. Aligning performance management

to support organizational goals and integratewith other systems proved to be the most criticaldifferentiator in system effectiveness. However,it was the least common quality of theperformance management systems in thesample.

• Accountability and training. The mostsuccessful performance management systemsrequired training in using the system,established clear accountability for the peopleusing it, and focused on competencies.


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1994 Study by Wyatt

This study focused on identifying best practices inperformance management by examining the systemsof a select group of 37 companies recognized forfinancial success and innovative resource programs.

What emerged from the study is not a single bestsystem, but a set of best practices that can helpfocus the process of designing, implementing, andmonitoring performance management. Distilled,the best practices share a handful of traits:

• Full alignment with other parts ofthe organization

• Simplicity• Flexibility• Decentralized control• A measurement process• Employee development

Other findings include:

• Alignment with business objectives, strategy,

customer needs. Alignment is central toperformance management. Companiesreinforce the following most importantbehaviors and results when they linkperformance measurement to key areas:customer needs, the company's mission andvalues, business improvement initiatives, andhuman resources.

• Decentralized control. Performancemanagement works best when the process isnot highly centralized. Allowing individualbusiness units the flexibility to customize thesystem fosters a greater sense of employeeownership.

• Greater links between pay and performance.

All companies in the survey link pay and

performance management through meritsystems and sometimes through incentives.

• Feedback from multiple sources. Leadingbusinesses are building 360-degree ormultiperspective feedback into their systems.These include self-assessment and assessmentsfrom peers and subordinates, and customers areincreasingly brought into the assessmentprocess.

• Simplicity. Simple performance managementsystems are easier to use, offer greaterflexibility, and are easier for employees tounderstand, which fosters faster acceptance bythe employees.

• Measurement of results. Many managers lookto their organization's value statements for keybehaviors or competencies. Clearlycommunicated business strategies drive theresults measures.

• Senior management involvement. Byparticipating themselves and making sure thatdirect reports participate, senior managers canhelp ensure that the system works.

1994 Study by Hewitt

This study analyzed data from 18 companies inwhich senior managers and human resourceexecutives were particularly satisfied with theresults of their performance management systems.The study found that those programs shared severalcharacteristics:• Implementation at the top. Senior managers

helped design and implement the program andused it with those reporting directly to them.

• Simple process. The performance managementprocess was relatively simple and wasintegrated into the daily work process.

• Reasonable number of goals. The number ofgoals was limited to four or five, with bonuses


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and incentives to reward those who achievedtheir goals.

• Additional feedback. Annual reviews weresupplemented by regular informal feedback.

1993 Study by DDI and Society for HumanResource Management

The national study Performance Management:

What's Hot—What's Not examined trends inperformance management practices, people'ssatisfaction with their organization's currentsystems, and the bridges and barriers to effectivemanagement.

The study involved 1,149 people, includingmanagers (56.8 percent) and nonmanagers(42.2 percent), representing 79 companies.

Major study findings regarding people's satisfaction

with their current system revealed:

• Feedback and Coaching, considered the heart ofan effective performance management system,fared the worst. Respondents reported theyreceive feedback and coaching too infrequently,and when they do, it is unbalanced andnonspecific.

• Performance Planning got the highest marks.Results from this section show thatorganizations are getting better at clarifyinggoals and linking them to organizationalstrategies, although there is room forimprovement. Managers reported a muchstronger sense of ownership and involvement inestablishing their performance plans than didnonmanagers.

• Performance Review offered a good news/badnews scenario. Most participants consistently

receive an annual review, and most viewedtheirs as participative and covering bothstrengths and areas for improvement. However,most respondents indicated they prepared little,suggesting that the assessment process mightnot be participative. And reviews stillemphasize results instead of results and theskills and behaviors used to achieve them.

• Outcomes, defined as results or overall feelingsafter participating in the performancemanagement system, received mixed responseswith no areas of great satisfaction. Respondentsindicated significant frustration about pay andpromotion decisions not being clearly linked tothe performance management system.

Regarding the top trends, respondents thinkorganizations will:• Continue to adopt the already-popular practice

of using essays to describe an employee'soverall performance.

• Give managers more training in performancemanagement.

• Tie performance management more closely toquality improvement efforts.

• Hold managers accountable for usingperformance appraisal effectively.

• Educate employees about their companies'performance management system to help themmanage their own performance.

• Ask internal and external customers tocontribute to appraisals.


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© Development DimensionsInternational, Inc. MCMXCVIII.

All rights reserved.

Conclusion

This growing body of research finds for uscharacteristics and practices that have provensuccessful for others. In doing so, it helps guide usin improving our own performance managementsystem. Some of the research also provides thehard data we need to know that performancemanagement is an important business system—onethat affects our organization's bottom line and isworth our efforts to make it right.

References

Bernthal, P., Sumlin, R., Davis, P., & Rogers, R.(1997). Performance Management Practices

Survey Report. Development DimensionsInternational.

Hewitt Associates. (1994). The Impact of

Performance Management on Organizational

Success. Hewitt Associates LLC.

Lingle, J. & Schiemann, W. (1996, March). IsMeasurement Worth It? American Management

Association Management Review, 56–61.

Rogers, R., Miller, L., & Worklan, J. (1993).Performance Management: What's Hot—What's

Not. Development Dimensions International andthe Society for Human Resources Management.

The Wyatt Company. (1994). The 1994 Wyatt

Performance Management Survey. The WyattCompany.

Performance Management Research Paper

Education

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