Effectiveness of Performance Management System.

AuthorJha, Sumi


Organizations plan, measure and control their performance with the help of a defined performance management system (PMS). The system aids them to align decisions, resources and activities with strategies to achieve required organizational goals (Bento & Bento, 2006). Employees performance can be measured, to recognize and reward excellent performance and to suggest means of improvement for poor performance (Edwards, 2002). A PMS facilitates a higher attention on targets and dismisses uncertainty and restricts goal conflict by establishing defined performance standards (Brunetto & Farr-Wharton, 2005; Hood, 1991).

Lawler (2003) defined performance management as a concept which can integrate both behavior and the results in a work system. In other words, performance management is a collective approach of managing operational activities based on agreed objectives, knowledge and skill for strategic goal achievement. The traditional performance management system was focused on "what gets measured gets done". The performance measurement system forms the core of a performance management system which assists in managing the company strategy (Lebas, 1995; Neely, 2005; Otley, 1999).

According to Walters (1995) performance management is about directing and supporting employees to work as effectively and efficiently as possible in line with the needs of the organization. Performance management is a continuous process of setting goals, paying attention to employees' attitudes, mentor them to improve their association, measure their performance and understand the causes of deviation in performance if any. It benefits both employers and employees. The performance management therefore, includes understanding of employees' job satisfaction, commitment and perceived psychological contract level. However, there may be contradictions as the agency theory (Jensen & Meckling, 1976) suggests that if both parties in the relationship are utility maximizers there is good reason to believe that the agent (employee) will not always act in the best interests of the principal (employer). Hence, this paper focuses on revisiting performance management system from agency theory perspective and to study the process to enhance the effectiveness.

Literature Review

Performance management is achieved when each employee of an organization is responsible and accountable for his/her own actions regardless of the outcomes since the definition of objectives, tasks, standards, and performance measures, monitoring progress and developing performance, are mutual understanding between employee and organization (Armstrong & Baron, 2000). A PMS is a system that is concerned with different aspects of performance important for development and growth of an organization as a whole. The management must receive report on performance standards of the organization and the extent to which set objectives are met (Flapper et al., 1996: 27). PMS initiates all the five functions of management i.e., planning, organizing, directing, controlling and rewarding employees to achieve anticipated results (Lawler, 2003). The PMS of an organization is expected to set performance objectives, enhance performance of individuals and departments, with the aim towards enhancing organizational effectiveness (Biron et al., 2011: 1294). It contributes to bridging the gap between the employees and management interests by specifying a clear strategic direction for the organization (Huselid, & Becker, 2011).

A PMS is broader than a performance measurement in that "performanc management precedes and follows performance measurement in a virtuous spiral and performance management creates the context for measurement" (Lebas, 1995:34).PMS is a means of implementing organizational strategy by communicating to employees about priorities of the organization, assigning responsibility and accountability for behavior and outcomes and guiding to enhance performance (Biron et al., 2011; Bae, 2006). PMS has been discussed as a vital tool for improving public services (through efficiently and effectively delivering services as per performance parameters) and reinforcing accountability for good or bad performance (Audit Commission, 1999). Furthermore, the objectivity and fairness in measuring performance can improve employee involvement, commitment and motivation (Bevan & Thompson, 1991), and act as a communication tool to provide feedback on employees' contributions to achieving organizational goals (Cheng et al., 2007).

Franco and Bourne (2005) in their research study which factors are critical in enabling organizations to effectively implement PMS.Researchers focused their attention on "knowing-doing gap" (i.e. organizations struggle to transform employee knowledge and skill into desired action). Further, researchers also tried to understand the differences between organizations which implement PMS effectively (measures performance) and with those that do not. Researchers (de Waal, 2004; 2007) advocated that the effectiveness of the PMS lies in involvement and training of employees in the development, implementation and use of PMS. The initial preparation play an important role in defining the success of performance management system in an organization. Ackoff (1999) argued from resource-based view of the firm (Barney, 1991), that the more volatile, uncertain, chaotic and ambiguous the market environment, the more organizations shall depend on their employees as a vital resource with the requisite intellectual capital to realize the desired future. Similarly, according to the dynamic capability theory, a firm's dynamic capabilities (Bowman & Ambrosini, 2003) are crucial determinants of its ability to achieve firm performance (Shore et al., 2004) particularly in a confused, turbulent and unpredictable environment. Shapiro et al. (2004) argued that these capabilities are derived from employees' knowledge base that is developed based on experiences and the capability composition of the work force. Grant (2002) proposed that capabilities of organization build the stepping stone of competitive advantage. The organizational capabilities are integration of tangible and intangible resources in an organization. Jugdev and Mathur (2006) discussed a similar concept that capturing and understanding intangible resources are important because it is not easily copied or transferred, therefore, can lead to a competitive advantage.

Roberts et al. (2005) argued that over-emphasis on control may be counterproductive. Munene et al. (2000) also discussed that in extreme control oriented environment, employees develop ways to only meet minimum required standard. This method may not engage employees well and they will either quit or compromise on quality over quantity. PMS of an organization must have checks in place but the required flexibility to work shall be inbuilt. Ferreira and Otley (2009), argued that feedback and feedforward information flows promotes learning. Hence, the PMS process which includes feedback system could be considered as a process where interaction and communication among superior, subordinates and peers support learning and knowledge development in the organization, having characteristics of both a tacit and an explicit forms (Mercurio et al., 2014; Vaivio, 2006). Franco-Santos et al. (2007) pointed out that while developing PMS, organizational members' are bound to learn with each other. If a PMS without such learning has been developed it may not be effective enough to yield outcomes. One primary focus of any new system design is the creation and exchange of knowledge. Development of PMS as a 'systems thinking' than as a 'command and control mechanism' would generate learning and facilitate feedback (Canonico & Brudan, 2010). The command and control mechanism emphasizes on volume production through specialization, standardization, hierarchical approach and through setting goals. Further, decision making is driven by budgets, standards and...

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