PERFORMANCE MANAGEMENT
EXAM LITERATURE
Topic 1 – Performance management perspectives
DeNisi, A. & Smith, C. E. (2014). Performance Appraisal, Performance Management, and Firm-Level Performance: A
Review, a Proposed Model, and New Directions for Future Research. The Academy of Management Annals, 8, 127-
179.
Goal of this paper: To address the question of whether we have shown a relationship between individual-level PA /
PM techniques and improvements in firm-level performance in our research.
Goal of PM & appraisal: develop techniques that will help employees reach personal goals & help the organization to
function more effectively;
Does improved individual performance translate into improved organizational performance?
Very little evidence: no link established (yet) between individual appraisals & firm performance.
In simple cases, the performance of the larger entity is nothing more than the aggregate of the performance
of the individual members;
In more complex cases, the degree & type of aggregation from the individual to the team/firm level depends
on certain aspects of the work environment:
o Temporal pacing:
Timing of when employees perform their individual tasks – they can perform them
independently or they can require synchronization in order to be completed.
o Dynamism of the task environment:
The extent to which tasks are stable or changing.
o Strength of member linkages:
The extent to which members must interact with each other & know what other members
are doing.
o Workflow structure:
Whether the structure of tasks is pooled, sequential, reciprocal, or intensive, which, in turn,
require different levels of member linkages & temporal pacing.
Moving up to the firm level of the organization: Ployhart & Moliterno (2011).
Multi-level model of how HR at the individual level is transformed into unit-level capabilities:
If we can aggregate up the level of the team, we can aggregate to higher levels of analysis as well.
Performance appraisal PA:
The process by which we evaluate the individual performance of an employee over some period of time.
o Formal appraisals: infrequent events; some type of score is assigned; there may or may not be any
formal developmental feedback.
- Much of the research on PA has focused on ways to eliminate rating errors and/or to improve accuracy.
o 1960s: most organizations relied on some type of graphic rating scale, so much of the research was
devoted to finding better ways to construct/administer these scales.
o Shift: Landy & Farr (1980) demonstrated that research so far had failed to demonstrate that any
rating scale format was superior to another. Proposed that future research focus on rater cognitive
processes & how such processes might influence rating accuracy rather than rating errors.
o Recently: focus has shifted away from trying to improve rating accuracy. Scholars began to study
intentional distortion of ratings & issues involving rater motivation.
Performance management PM:
Goes beyond appraisal, encompassing all activities a firm undertakes to improve an employee’s
performance, beginning with the evaluation of performance & subsequent feedback to the employee,
continuing through training & administration of rewards. A continuing process of identifying, measuring, and
developing the performance of individuals & teams and aligning performance with strategic goals of the
organization.
- Focus of PM: the process through which an individual employee might be motivated to (try to) increase their
, performance. Importance of employee reactions in the appraisal process.
- In this context, rating accuracy is only important as it might affect employee motivation, mainly through
employees’ perceptions of fairness.
o If procedures for generating ratings are not clear, not understandable, or not seen as fair ratings
themselves are not perceived as fair employee performance does not improve.
o Even if raters intend to be fair & accurate in their ratings, ratings do not have the desired effect
unless they are perceived as fair by employees.
- Ratee biases, e.g., ratees perceiving more favorable ratings to be more accurate, can be problematic as
employees who need to improve the most may discount appraisals of their performance as inaccurate,
resulting in little, if any, performance improvement.
- Although accuracy of ratings is not as important as individual-level perceptions and biases, from a strategic
perspective, all organization-level decision-making & planning relies on accurate measurement of
performance at the individual, team, and organizational level.
- PM is complicated by expressly trying to create links between or trace the effects of performance across
different levels requires a broader view of what constitutes PM than what has traditionally been the case.
Team PA & PM
- Teams = groups of employees working together, defined by interdependency of action, shared
responsibility, & meaningful goals.
- Nature of task & type of interdependence may impact what types of PM will be beneficial for team.
- Team members must work together very closely managing & measuring team performance often involves
not just focusing on team task & outcomes, but also on:
o Team processes, including detrimental (relational) conflict, other dysfunctional behavior that may
affect task outcomes;
o Assessing teamwork, taskwork, and team-level action as both outcomes and processes; at both the
team- and individual-level.
- Goal of team PM: make all team members accountable & motivate them to have stake in team performance.
- PA & PM in team settings can be challenging because:
o It may be difficult to assess individual contributions to the team outcome can lead to social
loafing: when some members do not put forth as much effort in the group as they would if working
alone, resulting in lower team performance.
o It can be subject to rating errors, like team halo, where certain individuals are assumed to be the
source of failure rather than the team as a whole.
o It is difficult to establish effective goals & to compensate members:
Group goals help team performance, but individual goals are only beneficial for group
performance when they are specifically directed at maximizing the individual contribution to
the team’s performance, not just at increasing individual performance.
Compensation: mixed individual & group incentives may produce faster, but less accurate,
performance and undermine backing-up behavior, when compared to group-based
incentives only.
o Different justice norms may exist in teams as compared to individual performance situations,
causing different reactions to PA & PM practices when they are applied to a team setting.
o Teams tend to go through stages of development that affect performance PM may need to adapt
to different stages over the course of a task or over the life of a team.
o Training may be more complicated for employees embedded in teams, as they may require more
interpersonal skills training and may benefit from self-correction training, which encourages team
members to correct each other & provide performance feedback to each other on an ongoing basis.
For such training to be successful, there needs to be a high level of psychological safety in
the team & low relational conflict, as relational conflict can interact with task conflict to
create negative team outcomes.
Whether intact teams should take part in training or whether training should be at the
individual level depends on whether team performance results from composition
(isomorphic across levels, generally represented by the mean or sum of individual
performance); or compilation (discontinuous; results from the combination of related but
different lower-level processes).
,HR practices & firm performance
- Evidence directly linking PA & even PM to firm performance is limited.
- Theories linking HR and performance:
o HPWSs:
Posthuma et al (2013) – 9 categories of HPWSs:
• Compensation & benefits; job & work design; training & development; recruiting &
selection; employee relations; communication; performance appraisal &
management; promotions; turnover, retention, & exit management.
• Within PA & PM category, best practices include appraisals based on objective
results or behaviors, appraisals for development, and frequent PA meetings.
Implementation of a HPWS is linked to organizational ambidexterity = the ability of the
organization to align its resources with present demands in order to create value, and yet be
flexible enough to adapt to changing conditions. Ambidexterity partially mediates the
relationship between HPWS and firm growth.
Flexibility-oriented HRM system: flexible system using practices similar to those usually
associated with HPWS, but also emphasizing coordination & resource flexibility. Use of such
systems increases potential & realized absorptive capacity, and is related to a firm’s ability to
respond to the market & to be more innovative.
o Contingent approach – concerned with fit between HR practices & strategy:
Firm must align its HR practices with each other AND with its strategic goals in order for
there to be an effect on firm performance.
o Resource-based view RBV of the firm:
Firm’s human resources represent a unique source of competitive advantage; when HR
practices ensure that employee have the right skills, attitudes, and direct discretionary effort
in the right direction to produce the right behavior, the firm will prosper.
o Organizational Citizenship Behavior OCB:
Defined as individual behavior that is discretionary, not directly or explicitly recognized by
the formal reward system, and that in the aggregate promotes effective functioning of the
organization. Going beyond job requirements.
Related concept: contextual performance = behavior that enhances or sustains social,
psychological, organizational context of the system.
If a firm could encourage OCBs through a PMS, this might increase firm performance:
• OCB, satisfaction, and turnover are related to long-term financial performance;
• OCBs are related to individual-level outcomes (ratings, rewards, turnover) & firm-
level outcomes (productivity, efficiency).
• Challenge-oriented OCBs are related to workgroup task performance; workgroup
performance mediates the relationship between OCBs & firm performance.
o Bundling of HR practices:
Real effects on firm performance can only be obtained if HR practices are bundled.
Bundling is necessary because this way firms can ensure that employee have the KSAs
needed to perform their jobs; that employees are empowered to leverage KSAs for
organizational benefit; and that employees are motivated to do this.
Presence of a “motivation-enhancing bundle” (including aspects of a PMS, i.e. PA, pay linked
to performance, promotion, incentive plans, benefits) is positively linked to retention,
operating performance, financial performance, and overall performance.
- Conclusion on this section:
o Considerable evidence that HR practices & performance are linked, but only when bundled.
o What may be required is an expanded view of PMSs which include HR practices beyond those
typically associated with such systems.
o No matter how good a system is developed, PA or traditional PMSs alone cannot produce
improvements in firm-level performance.
Moving from “what” to “how”
- How do (bundles of) HR practices affect firm performance?
o HPWSs (including PA) are related to empowerment climate and employee psychological
empowerment, related to performance.
o HR practices can be divided into skill-enhancing, motivation-enhancing, and opportunity-enhancing.
, Outcomes of motivation-enhancing practices (PA, compensation, incentives, benefits,
promotion & career development, job security): employee motivation, financial outcomes,
operational outcomes (including quality, innovation, productivity, service).
HR practices may affect firm performance primarily by improving various aspects of
employee motivation.
o Specific HR practices employed should be related to the organizational context & strategy (should be
based on environmental context). These practices, when bundled & implemented, should then
affect organizational climate & psychological climate, creating a climate for performance.
Organizational climate = employees’ shared perceptions of and the meaning attached to
practices, policies, and procedures in the workplace & the behaviors they observe being
supported, expected, and rewarded.
Performance climate = employees share the perception that firm-level performance is
important, and that the organization’s policies & procedures are devoted to achieving that
goal; policies enable employees to influence firm-level performance, and employees are
rewarded for doing so employees are more likely to work together towards improving
performance at the firm level.
Corporate culture = actual shared values, traditions, philosophy, and policies of a
corporation that influence the level of loyalty & general behavior of its employees. Closely
related to corporate climate. Unless there is strong convergence among employees in terms
of how they view the values, policies, etc. of the organization, there really is no culture.
Changes in climate & culture should cause changes in individual attitudes, behaviors, skills,
and abilities, as well as collective attitudes & human capital, and it would be these changes
that would affect both individual-level & organization-level performance.
Effective PM cannot be concerned with improving the performance of individual employees
alone. It must include the entire HR system, so that it can influence organizational climate,
and can help diffuse organizational strategy throughout all levels of the organization.
- Requirements for effective PMSs – PMSs are more likely to influence firm performance when they are:
o Integrated with other HR practices so that, together, they form a broader view of what constitutes a
PMS and produce behaviors that support strategic goals;
o Consistently aligned with the achievement of the firm’s strategic goals;
o Focused on behaviors that are under the control of employees;
o Focused on behaviors that employees can see are related to achieve strategic goals;
o Work together to form a strong PMS.
- Such systems are strongest when they are:
Visible to all employees & Practices & policies are posted & reinforced frequently
salient to everyone
Associated with legitimate Practices & policies come down from the highest levels in the
authority organization, and people at those levels are seen as legitimate
Relevant Employees see how they can achieve personal goals that are aligned with
strategic goals
Stated & administered Policy statements & related decisions made do not vary by the person
consistently involved
Instrumental for goal Employees see how these policies can help them achieve personal &
attainment strategic goals
Valid Policies & practices reflect best practices
Fair Policies & practices are applied equally to all employees & do not have
any type of adverse impact against any group of employees
Agreed upon by HR decision- All HR decision-makers endorse & support all policies & decisions.
makers
Defining firm performance
- Elements of performance to be measured:
o Financial performance
Accessible & easy to measure.
Simple outcome-based financial measures assumed to reflect the firm’s economic goals. Rely
on a narrow definition of what it means for a firm to be successful.
