7.

0 PERFORMANCE MANAGEMENT - MEANING, SYSTEM AND PROCESS

Definition of Performance Management

The role of HR in the present scenario has undergone a sea change and its focus is
on evolving such functional strategies which enable successful implementation of
the major corporate strategies. In a way, HR and corporate strategies function in
alignment. Today, HR works towards facilitating and improving the performance of
the employees by building a conducive work environment and providing maximum
opportunities to the employees for participating in organizational planning and
decision making process.

Today, all the major activities of HR are driven towards development of high
performance leaders and fostering employee motivation. So, it can be interpreted
that the role of HR has evolved from merely an appraiser to a facilitator and an
enabler.

Performance management is the current buzzword and is the need in the current
times of cut throat competition and the organizational battle for leadership.
Performance management is a much broader and a complicated function of HR,
as it encompasses activities such as joint goal setting, continuous progress
review and frequent communication, feedback and coaching for improved
performance, implementation of employee development programmes and
rewarding achievements.

The process of performance management starts with the joining of a new

incumbent in a system and ends when an employee quits the organization.

Performance management can be regarded as a systematic process by which the

overall performance of an organization can be improved by improving the
performance of individuals within a team framework. It is a means for promoting
superior performance by communicating expectations, defining roles within a
required competence framework and establishing achievable benchmarks.

According to Armstrong and Baron (1998), Performance Management is both a

strategic and an integrated approach to delivering successful results in
organizations by improving the performance and developing the capabilities of
teams and individuals.

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The term performance management gained its popularity in early 1980’s when total
quality management programs received utmost importance for achievement of
superior standards and quality performance. Tools such as job design, leadership
development, training and reward system received an equal impetus along with the
traditional performance appraisal process in the new comprehensive and a much
wider framework. Performance management is an ongoing communication process
which is carried between the supervisors and the employees through out the year.
The process is very much cyclical and continuous in nature. A performance
management system includes the following actions.

 Developing clear job descriptions and employee performance plans which

includes the key result areas (KRA') and performance indicators.
 Selection of right set of people by implementing an appropriate selection
process.
 Negotiating requirements and performance standards for measuring the
outcome and overall productivity against the predefined benchmarks.
 Providing continuous coaching and feedback during the period of delivery of
performance.
 Identifying the training and development needs by measuring the outcomes
achieved against the set standards and implementing effective development
programs for improvement.
 Holding quarterly performance development discussions and evaluating
employee performance on the basis of performance plans.
 Designing effective compensation and reward systems for recognizing those
employees who excel in their jobs by achieving the set standards in
accordance with the performance plans or rather exceed the performance
benchmarks.
 Providing promotional/career development support and guidance to the
employees.
 Performing exit interviews for understanding the cause of employee
discontentment and thereafter exit from an organization.

A performance management process sets the platform for rewarding excellence

by aligning individual employee accomplishments with the organization’s mission and
objectives and making the employee and the organization understand the
importance of a specific job in realizing outcomes. By establishing clear
performance expectations which includes results, actions and behaviors, it helps
the employees in understanding what exactly is expected out of their jobs and
setting of standards help in eliminating those jobs which are of no use any longer.
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Through regular feedback and coaching, it provides an advantage of diagnosing the
problems at an early stage and taking corrective actions.

To conclude, performance management can be regarded as a proactive system of

managing employee performance for driving the individuals and the organizations
towards desired performance and results. It’s about striking a harmonious
alignment between individual and organizational objectives for accomplishment of
excellence in performance.

Evolution of Performance Management

The term performance management gained its importance from the times when the
competitive pressures in the market place started rising and the organizations felt
the need of introducing a comprehensive performance management process into
their system for improving the overall productivity and performance effectiveness.

The performance management process evolved in several phases.

1. First Phase: The origin of performance management can be traced in the

early 1960’s when the performance appraisal systems were in practice.
During this period, Annual Confidential Reports (ACR’s) which was also
known as Employee service Records were maintained for controlling the
behaviors of the employees and these reports provided substantial
information on the performance of the employees.

Any negative comment or a remark in the ESR or ACR used to adversely

affect the prospects of career growth of an employee. The assessments
were usually done for ten traits on a five or a ten point rating scale basis.
These traits were job knowledge, sincerity, dynamism, punctuality,
leadership, loyalty, etc. The remarks of these reports were never
communicated to the employees and strict confidentiality was maintained in
the entire process. The employees used to remain in absolute darkness due
to the absence of a transparent mechanism of feedback and communication.
This system had suffered from many drawbacks.

2. Second Phase: This phase continued from late 1960’s till early 1970’s, and
the key hallmark of this phase was that whatever adverse remarks were
incorporated in the performance reports were communicated to the
employees so that they could take corrective actions for overcoming such

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 deficiencies. In this process of appraising the performance, the reviewing
officer used to enjoy a discretionary power of overruling the ratings given
by the reporting officer. The employees usually used to get a formal written
communication on their identified areas of improvements if the rating for
any specific trait used to be below 33%.
3. Third Phase: In this phase the term ACR was replaced by performance
appraisal. One of the key changes that were introduced in this stage was
that the employees were permitted to describe their accomplishments in the
confidential performance reports. The employees were allowed to describe
their accomplishments in the self appraisal forms in the end of a year.
Besides inclusion of the traits in the rating scale, several new components
were considered by many organizations which could measure the productivity
and performance of an employee in quantifiable terms such as targets
achieved, etc. Certain organizations also introduced a new section on training
needs in the appraisal form. However, the confidentiality element was still
being maintained and the entire process continued to be control oriented
instead of being development oriented.
4. Fourth Phase: This phase started in mid 1970’s and its origin was in India as
great business tycoons like Larsen & Toubro, followed by State Bank of
India and many others introduced appreciable reforms in this field.

In this phase, the appraisal process was more development driven, target
based (performance based), participative and open instead of being treated
as a confidential process. The system focused on performance planning,
review and development of an employee by following a methodical approach.

In the entire process, the appraisee (employee) and the reporting officer
mutually decided upon the key result areas in the beginning of a year and
reviewed it after every six months. In the review period various issues such
as factors affecting the performance, training needs of an employee, newer
targets and also the ratings were discussed with the appraisee in a
collaborative environment.

This phase was a welcoming change in the area of performance management

and many organizations introduced a new HR department for taking care of
the developmental issues of the organization.

5. Fifth Phase: This phase was characterized by maturity in approach of

handling people’s issues. It was more performance driven and emphasis was

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 on development, planning and improvement. Utmost importance was given to
culture building, team appraisals and quality circles were established for
assessing the improvement in the overall employee productivity.

The performance management system is still evolving and in the near future one
may expect a far more objective and a transparent system.

Objectives of Performance Management

According to Lockett (1992), performance management aims at developing

individuals with the required commitment and competencies for working towards
the shared meaningful objectives within an organizational framework.

Performance management frameworks are designed with the objective of improving

both individual and organizational performance by identifying performance
requirements, providing regular feedback and assisting the employees in their
career development.

Performance management aims at building a high performance culture for both

the individuals and the teams so that they jointly take the responsibility of
improving the business processes on a continuous basis and at the same time
raise the competence bar by upgrading their own skills within a leadership
framework. Its focus is on enabling goal clarity for making people do the right
things in the right time. It may be said that the main objective of a performance
management system is to achieve the capacity of the employees to the full
potential in favor of both the employee and the organization, by defining the
expectations in terms of roles, responsibilities and accountabilities, required
competencies and the expected behaviors.

The main goal of performance management is to ensure that the organization as a

system and its subsystems work together in an integrated fashion for
accomplishing optimum results or outcomes.

The major objectives of performance management are discussed below:

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  To enable the employees towards achievement of superior standards of work
performance.
 To help the employees in identifying the knowledge and skills required for
performing the job efficiently as this would drive their focus towards
performing the right task in the right way.
 Boosting the performance of the employees by encouraging employee
empowerment, motivation and implementation of an effective reward
mechanism.
 Promoting a two way system of communication between the supervisors and
the employees for clarifying expectations about the roles and
accountabilities, communicating the functional and organizational goals,
providing a regular and a transparent feedback for improving employee
performance and continuous coaching.
 Identifying the barriers to effective performance and resolving those
barriers through constant monitoring, coaching and development
interventions.
 Creating a basis for several administrative decisions strategic planning,
succession planning, promotions and performance based payment.
 Promoting personal growth and advancement in the career of the employees
by helping them in acquiring the desired knowledge and skills.

Some of the key concerns of a performance management system in an

organization are:

 Concerned with the output (the results achieved), outcomes, processes

required for reaching the results and also the inputs (knowledge, skills and
attitudes).
 Concerned with measurement of results and review of progress in the
achievement of set targets.
 Concerned with defining business plans in advance for shaping a successful
future.
 Striving for continuous improvement and continuous development by creating
a learning culture and an open system.
 Concerned with establishing a culture of trust and mutual understanding
that fosters free flow of communication at all levels in matters such as

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 clarification of expectations and sharing of information on the core values
of an organization which binds the team together.
 Concerned with the provision of procedural fairness and transparency in the
process of decision making.

The performance management approach has become an indispensable tool in the

hands of the corporates as it ensures that the people uphold the corporate values
and tread in the path of accomplishment of the ultimate corporate vision and
mission. It is a forward looking process as it involves both the supervisor and also
the employee in a process of joint planning and goal setting in the beginning of the
year.

Components of Performance Management System

Any effective performance management system includes the following

components:

1. Performance Planning: Performance planning is the first crucial component

of any performance management process which forms the basis of
performance appraisals. Performance planning is jointly done by the
appraisee and also the reviewee in the beginning of a performance session.
During this period, the employees decide upon the targets and the key
performance areas which can be performed over a year within the
performance budget, which is finalized after a mutual agreement between
the reporting officer and the employee.
2. Performance Appraisal and Reviewing: The appraisals are normally
performed twice in a year in an organization in the form of mid reviews and
annual reviews which is held in the end of the financial year. In this process,
the appraisee first offers the self filled up ratings in the self-appraisal
form and also describes his/her achievements over a period of time in
quantifiable terms. After the self-appraisal, the final ratings are provided
by the appraiser for the quantifiable and measurable achievements of the
employee being appraised. The entire process of review seeks an active
participation of both the employee and the appraiser for analyzing the
causes of loopholes in the performance and how it can be overcome. This has
been discussed in the performance feedback section.
3. Feedback on the Performance followed by personal counseling and
performance facilitation: Feedback and counseling is given a lot of
importance in the performance management process. This is the stage in

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 which the employee acquires awareness from the appraiser about the areas
of improvements and also information on whether the employee is
contributing the expected levels of performance or not. The employee
receives an open and a very transparent feedback and along with this the
training and development needs of the employee is also identified. The
appraiser adopts all the possible steps to ensure that the employee meets
the expected outcomes for an organization through effective personal
counseling and guidance, mentoring and representing the employee in training
programmes which develop the competencies and improve the overall
productivity.
4. Rewarding good performance: This is a very vital component as it will
determine the work motivation of an employee. During this stage, an
employee is publicly recognized for good performance and is rewarded. This
stage is very sensitive for an employee as this may have a direct influence on
the self esteem and achievement orientation. Any contributions duly
recognized by an organization helps an employee in coping up with the
failures successfully and satisfies the need for affection.
5. Performance Improvement Plans: In this stage, fresh set of goals are
established for an employee and new deadline is provided for accomplishing
those objectives. The employee is clearly communicated about the areas in
which the employee is expected to improve and a stipulated deadline is also
assigned within which the employee must show this improvement. This plan is
jointly developed by the appraisee and the appraiser and is mutually
approved.
6. Potential Appraisal: Potential appraisal forms a basis for both lateral and
vertical movement of employees. By implementing competency mapping and
various assessment techniques, potential appraisal is performed. Potential
appraisal provides crucial inputs for succession planning and job rotation.

Problems in Performance Appraisal

As indicated at the beginning of this chapter, performance appraisal is constantly

under a bar-rage of criticism. The rating scales method seems to be the most
vulnerable target. Yet, in all fairness, many of the problems commonly mentioned
are not inherent in this method but, rather, reflect improper implementation. For

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example, firms may fail to provide adequate rater training or they may use
appraisal criteria that are too subjective and lack job-relatedness. The following
section highlights some of the more common problem areas.

Appraiser Discomfort

Conducting performance appraisals is often a frustrating human resource

management task. One management guru, Edward Lawler, noted the
considerable documentation showing that performance appraisal systems
neither motivate individuals nor effectively guide their development. Instead,
he maintains, they create conflict between supervisors and sub-ordinates and
lead to dysfunctional behaviors. This caveat is important. If a performance
appraisal system has a faulty design, or improper administration, employees will
dread receiving appraisals and the managers will despise giving them. In fact, some
managers have always loathed the time, paperwork, difficult choices, and
discomfort that often accompanies the appraisal process. Going through the
procedure cuts into a manager’s high-priority work-load and the experience can be
especially unpleasant when the employee in question has not performed well.

Lack of Objectivity

A potential weakness of traditional performance appraisal methods is that they

lack objectivity. In the rating scales method, for example, commonly used
factors such as attitude, appearance, and personality are difficult to
measure. In addition, these factors may have little to do with an employee’s job
performance. Although subjectivity will always exist in appraisal methods,
employee appraisal based primarily on personal characteristics may place the
evaluator and the company in untenable positions with the employee and equal
employment opportunity guidelines. The firm may be hard-pressed to show that
these factors are job-related.

Halo/Horn

A halo error occurs when a manager generalizes one positive performance feature
or incident to all aspects of employee performance, resulting in a higher rating.
bias

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For example, Rodney Pirkle, accounting supervisor, placed a high value on
neatness, a factor used in the company’s performance appraisal system. As
Rodney was evaluating the performance of his senior accounting clerk, Jack
Hicks, he noted that Jack was a very neat individual and gave him a high
ranking on this factor. Also, consciously or unconsciously, Rodney permitted
the high ranking on neatness to carry over to other factors, giving Jack
undeserved high ratings on all factors. Of course, if Jack had not been neat,
the opposite could have occurred. This phenomenon is known as the horn error,
an evaluation error that occurs when a manager generalizes one negative
performance feature or incident to all aspects of employee performance, resulting
in a lower rating.

Leniency/Strictness

Some managers are too generous with praise or too hard on a person. Giving
undeserved high ratings to an employee is referred to as leniency. This behavior is
often motivated by a desire to avoid controversy over the appraisal. It is most
prevalent when highly subjective (and difficult to defend) performance criteria are
used, and the rater is required to discuss evaluation results with employees. When
managers know they are evaluating employees for administrative purposes, such as
pay increases, they are likely to be more lenient than when evaluating performance
to achieve employee development. Leniency, how-ever, may result in failure to
recognize correctable deficiencies. The practice may also deplete the merit budget
and reduce the rewards available for superior employees. In addition, an
organization will find it difficult to terminate poor-performing employees who
continuously receive positive evaluations.

Being unduly critical of an employee’s work performance is referred to as

strictness. Although leniency is usually more prevalent than strictness, some
managers, on their own initiative, apply an evaluation more rigorously than the
company standard. This behavior may be due to a lack of understanding of various
evaluation factors. The worst situation is when a firm has both lenient and strict
managers and does nothing to level the inequities. Here, the weak performers get
relatively high pay increases and promotions from a lenient boss, whereas the

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strict manager shortchanges the stronger employees. This can have a demoralizing
effect on the morale and motivation of the top-performing people.

Central Tendency

Central tendency error is an evaluation appraisal error that occurs when employees
are incorrectly rated near the average or middle of a scale. This practice may be
encouraged by some rating scale systems that require the evaluator to justify in
writing extremely high or extremely low ratings. With such a system, the rater
may avoid possible controversy or criticism by giving only average ratings. However,
since these ratings tend to cluster in the fully satisfactory range, employees do
not often complain. Nevertheless, this error does exist and it influences the
accuracy of evaluations. Typically, when pay raises are given, they will be based on
an employee’s performance. When a manager gives an underachiever or
overachiever, an average rating, it undermines the compensation system.

Recent Behavior Bias

It is only natural for a rater to remember recent behavior more clearly than
actions from the more distant past. However, formal performance appraisals
generally cover a specified time, and an individual’s performance over the entire
period should be considered. Maintaining records of performance throughout the
appraisal period helps avoid this problem.

Personal Bias (Stereotyping)

This pitfall occurs when managers allow individual differences to affect the ratings
they give. If these are factors to avoid such as gender, race, or age, not only is
this problem detrimental to employee morale, but it is blatantly illegal and can
result in costly litigation. The effects of cultural bias, or stereotyping, can
definitely influence appraisals. Managers establish mental pictures of what are
considered ideal typical workers, and employees who do not match this picture may
be unfairly judged.

Discrimination in appraisal can be based on other factors as well . For example,

mild-mannered employees may be appraised more harshly because they do not
seriously object to the results. This type of behavior is in sharp contrast to the

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more outspoken employee, who often confirms the adage: the squeaky wheel gets
the grease.

Manipulating the Evaluation

In some instances, managers control virtually every aspect of the appraisal process
and are therefore in a position to manipulate the system. For example, a
supervisor may want to give a pay raise to a certain employee or the
supervisor may just “favor” one worker more than another . In order to justify
this action, the supervisor may give the employee an undeserved high performance
evaluation and perhaps a less favored, but productive, employee a lower rating. Or,
the supervisor may want to get rid of an employee and so may give the individual an
undeserved low rating. In either instance, the system is distorted and the goals of
performance appraisal cannot be achieved. In addition, in the latter example, if the
employee is a member of a protected group, the firm may wind up in court. If the
organization cannot adequately support the evaluation, it may suffer significant
financial loss.

Employee Anxiety

The evaluation process may also create anxiety for the appraised employee. This
may take the form of discontent, apathy, and turnover. In a worst-case scenario, a
lawsuit is filed based on real or perceived unfairness. Opportunities for promotion,
better work assignments, and increased compensation may hinge on the results.
This could cause not only apprehension, but also outright resistance. One opinion is
that if you surveyed typical employees, they would tell you performance appraisal is
management’s way of highlighting all the bad things they did all year.

Need for an Effective Performance Management System

In the era of cut throat competition and globalization, organizations have realized
the importance of strategic HR practices for gaining a competitive edge over the
competitors. A well designed performance management system can play a crucial
role in streamlining the activities of the employees in an organization for realizing
the ultimate corporate mission and vision. Performance management is a useful tool
for aligning all the major organizational functions and sub functions so that the
focus is directed towards attainment of the organizational goal.

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Performance management is a much broader system as it is linked with the
processes of planning, implementing, reviewing and evaluating, for augmenting
growth and productivity at both the individual and organizational level.

By clearly defining both individual and team based responsibilities in the form
of KRA’s as well as by creating an understanding of shared mutual
accountabilities, a good performance management system enables, empowers
and facilitates the development of staff members.

Managing the performance of the employees is one of the toughest challenges

which the organizations are facing today as this completely depends upon the
employee’s commitment, competence and clarity of performance. If managed
efficiently through a well planned reward practice and feedback mechanism, a
performance management system can serve as an important tool for employee
motivation and development. The need for the introduction of a robust system of
performance management was felt during the period when the traditional
performance appraisal mechanism started failing and its limitations were surfacing
up. The performance appraisal system of the earlier period was missing objectivity
as the diameters or the parameters for measuring performance were not clearly
specified and the focus was on traits instead on behaviors or measurable targets.
As a result, the employee’s morale and motivation to work was adversely affected
due to an absence of a transparent feedback mechanism and lack of employee
involvement in the entire process of appraisal. A performance management system
overcomes the drawbacks of the traditional performance appraisal system by
maintaining a futuristic approach instead of assessing the past contributions of the
employees for evaluating the performance of the employees.

Performance management is a strategic tool and is holistic in nature as it

pervades in every activity of the organization which is concerned with the
management of individual, team and the overall organizational performance. The
process is indispensable and very important for an organization as it is concerned
with establishing a culture in which the individuals and teams can excel by
continuously improving in terms of skill sets and the business processes.

Performance management facilitates improvement of quality of relationship

amongst the members of the organization by encouraging sharing of expectations
and building a climate of openness and mutuality. The significance of performance
management has grown in recent times because most of the organizations are
giving a lot of importance to employee development and talent management. The

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contemporary organizations are working towards grooming the competencies of the
employees for maintaining a leadership in the competitive market and performing
outstandingly. Arvind Mills of Lalbhai Group, realized the importance of strategic
HRM practices and the implementation of a pro active performance management
system in their organization after facing serious threats from the business
competitors. The company created a Manpower Planning and Resource Group
which took the charge of preparing job descriptions and structuring the jobs for
the employees and was responsible for implementing the recruitment and selection
procedures. An innovative online recruitment system was introduced which was
known as Selection Information System, for fixing interviews, generating call
letters, etc. This system was linked with the Compensation Information System
and Training Information System. The training requirements of the employees
were taken care by the Management and Organizational Development Group. The
company also introduced MBO system, for setting smart goals for the employees
which may motivate them for a superior performance.

Performance management has attracted the attention of many organizations

and in the near future its importance will still grow as it will become more
integrated with the processes like talent management, career management,
pay based on performance, development and talent management

Performance Appraisal and Performance Management

The contemporary organizations are undergoing a transformation for coping

against the changing needs of the environment and excelling in the business by
building up their adaptive capabilities for managing change proactively. The
traditional performance appraisal system did not suffice the needs of the changing
scenario as it was mainly used as a tool for employee evaluation in which the
managers were impelled to make subjective judgments about the performance and
behavior of the employees against the predetermined job standards.

The main objective of the performance appraisal system was to exercise control
over the activities of the employees through disciplinary actions and management
of rewards and promotions. The supervisors were expected to rate their employees
on certain traits ranging between a scale of unsatisfactory to outstanding
performance and these ratings were susceptible to various errors like central
tendency, bias, halo effect, etc.

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Performance appraisals were mostly carried out annually for measuring the
degree of accomplishment of an individual and were implemented on a top down
basis in which the supervisors had a major role to play in judging the performance
of an employee without soliciting active involvement of the employee. Performance
appraisals were mostly discredited because it was backward looking concentrating
largely on the employee’s inabilities and flaws over a period of a year instead of
looking forward by identifying the development needs of the employees and
improving them. Traditionally, the performance appraisals were organized in a
bureaucratic manner and suffered from unnecessary delays in decisions and
corruption. Performance appraisals were mostly narrowly focused and functioned in
isolation without bearing any linkage with the overall organizational vision or goals.
The side effects of the performance appraisal system was it generated skepticism
amongst the managers and the employees on any new initiative of the HR.

In the present scenario, the organizations have shifted their focus from
performance appraisals to performance management as a result of
internationalization of human resources and globalization of business. The
functions of HRM have become far more complicated as today the major focus of
strategic HRM practices is on the management of talent by implementing such
development programmes which enhance the competencies of the employees. The
performance management approach focuses more on observed behaviors and
concrete results based on the previously established smart objectives. By adopting
techniques like Management by Objectives (MBO), smart objectives are
established in terms of either facts and figures and in the entire process the
superior plays the role of a coach or a facilitator. The objectives are mutually
decided at the beginning of the performance season and serve as a standard of
performance for evaluation. In this method, the employees can offer a feedback on
their contributions by filling up a self appraisal form. Performance management is a
much broader term in comparison with performance appraisal as it deals with a
gamut of activities which performance appraisals never deal with. This system is a
strategic and an integrated approach which aims at building successful
organizations by developing high performance teams and individuals and improving
the performance of people. This process starts when a job is defined. Performance
management emphasizes on front end planning instead of looking backward unlike
performance appraisals and the focus is on ongoing dialogue instead of appraisal
documents and ratings. Thus, performance management may be regarded as a
continuous process.

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A table depicted below shows a comparison between performance appraisal and
performance management:

Performance Appraisal Performance Management

Focus is on top down assessment Stresses on mutual objective setting

through a process of joint dialogue

Performed annually Continuous reviews are performed

Usage of ratings is very common Usage of ratings is less common

Focus is on traits Focus is on quantifiable objectives,

values and behaviors

Monolithic system Flexible system

Are very much linked with pay Is not directly linked with pay

Performance management is concerned with assumptions, mutual obligations,

expectations and promises (Guest, D E et al, 1996). The views of some of the
leading organizations of performance management approach are given below:

 According to Eli Lilly and Co., performance management focuses on aligning

the individual goals with the goals of the organization and ensures that the
employees work on the right tasks and do the right things.
 According to Standard Chartered Bank, performance management is
concerned with those processes and behaviors by way of which the managers
manage the performance of the employees for developing high achieving
organizations.

Benefits of a Performance Management System

A good performance management system works towards the improvement of the

overall organizational performance by managing the performances of teams and
individuals for ensuring the achievement of the overall organizational ambitions and
goals. An effective performance management system can play a very crucial
role in managing the performance in an organization by:

 Ensuring that the employees understand the importance of their

contributions to the organizational goals and objectives.

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  Ensuring each employee understands what is expected from them and equally
ascertaining whether the employees possess the required skills and support
for fulfilling such expectations.
 Ensuring proper aligning or linking of objectives and facilitating effective
communication throughout the organization.
 Facilitating a cordial and a harmonious relationship between an individual
employee and the line manager based on trust and empowerment.

Performance management practices can have a positive influence on the job

satisfaction and employee loyalty by:

 Regularly providing open and transparent job feedbacks to the employees.

 Establishing a clear linkage between performance and compensation
 Providing ample learning and development opportunities by representing the
employees in leadership development programmes, etc.
 Evaluating performance and distributing incentives and rewards on a fair and
equated basis.
 Establishing clear performance objectives by facilitating an open
communication and a joint dialogue.
 Recognizing and rewarding good performance in an organization.
 Providing maximum opportunities for career growth.

An effectively implemented performance management system can benefit the

organization, managers and employees in several ways as depicted in the table given
below:

Organization’s Improved organizational performance, employee

Benefits retention and loyalty, improved productivity, overcoming
the barriers to communication, clear accountabilities,
and cost advantages.

Manager’s Benefits Saves time and reduces conflicts, ensures efficiency and
consistency in performance.

Employee’s Benefits Clarifies expectations of the employees, self-

assessment opportunities clarifies the job
accountabilities and contributes to improved
performance, clearly defines career paths and promotes
job satisfaction.

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Clearly defined goals, regular assessments of individual performance and the
company wide requirements can be helpful in defining the corporate competencies
and the major skill gaps which may in turn serve as a useful input for designing the
training and development plans for the employees. A sound performance
management system can serve two crucial objectives .

Evaluation Objectives

 By evaluating the readiness of the employees for taking up higher

responsibilities.
 By providing a feedback to the employees on their current competencies and
the need for improvement.
 By linking the performance with scope of promotions, incentives, rewards
and career development.

Developmental Objectives

The developmental objective is fulfilled by defining the training requirements of

the employees based on the results of the reviews and diagnosis of the individual
and organizational competencies. Coaching and counseling helps in winning the
confidence of the employees and in improving their performance, besides
strengthening the relationship between the superior and the subordinate.

In a nutshell, performance management serves as an important tool for realizing

organizational goals by implementing competitive HRM strategies. It helps in
aligning and integrating the objectives with the KPI’s in an organization both
vertically and horizontally across all job categories and the levels and thus helps in
driving all the activities right from the bottom level towards one single goal.

Prerequisites for a Performance Management System

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Performance management can be regarded as a continuous process managing the
performances of people for getting desired results. Performance management is
beneficial to all the major stakeholders of an organization by clearly describing
what is supposed to be done for attaining certain desired goals. Performance
management is the heart of any HR processes in an organization as it influences
the rest other HR functions or processes. Focus on performance management may
be fruitless without the existence of proper organizational design and management
systems.

Some of the essential pre requisites without which performance management

system will not function effectively in an organization are:

 Should attract very high levels of participation from all the members
concerned in an organization. It should be a participative process.
 Top management support and commitment is very essential for building a
sound performance culture in an organization.
 Organizational vision, mission and goals should be clearly defined and
understood by all levels so that the efforts are directed towards the
realization of the organizational ambitions.
 Clear definition of the roles for performing a given job within the
organizational framework which emanates from the departmental and the
organizational objectives. The system should also be able to explain the
linkages of a role with other roles.
 Open and transparent communication should prevail which will motivate the
employees for participating freely and delivering high performance.
Communication is an essential pre requisite for a performance management
process as it clarifies the expectations and enables the parties in
understanding the desired behaviors or expected results.
 Identification of major performance parameters and definition of key
performance indicators.
 Consistency and fairness in application.
 A commitment towards recognition of high performance. Rewards and
recognitions should be built within the framework of performance
management framework.
 Proper organizational training should be provided to the staff members
based on the identification of training needs from periodic evaluation and
review of performance. This will motivate the employees for a superior
performance.

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Tata Iron and Steel Company (TISCO), a flagship company of India involved in
manufacturing of cost effective steel can be appreciated for their initiatives in
the implementation of an effective performance management framework and
innovative HR practices. TISCO initiated a management restructuring programme
for transforming into a high performing and a growing organization. In the HR
front, the management focused on providing exciting career opportunities and
building a team of high performing professionals for which they hired Mckinsey
and Co. The consultants firstly started with building a lean and a flat strategic
business unit with enriched jobs, increased accountabilities and autonomy. A
Performance Ethic Programme (PEP) was also introduced for promoting young and
dynamic professionals and this was a replacement of seniority based promotions. A
new Performance Management System (PMS) was introduced for aligning the KRA’s
with the business strategies and identifying superior performers in the
organization by defining clear career paths and accountabilities. The rewards and
recognitions were linked with the PMS. The new measures in the direction of
performance management boosted the employee’s motivation and performance. The
job satisfaction also improved due to the introduction of a fair and transparent
reward system.

Stages in the Development and Implementation of a Performance Management

System

Performance management is a strategic process and an integrated approach.

The process involves an ongoing dialogue between the supervisor and the
employee for setting goals which are achievable and contribute in the direction
of fulfillment of the organizational goal. The main objective of performance
management approach is to proactively manage employee’s performance for
accomplishing organizational goals by attaining a desired level of performance. It
believes in linking the performance plans of an organization with the strategic
vision and identifying the major performance indicators and KRA’s for enabling the
employees to achieve the expected outcomes for their organization.

Any performance management process broadly involves three stages and these are:

1. Goal Setting and Motivation which is normally done in the beginning of the
session.
2. Encouraging Stage which is normally undertaken when the employees get
involved in the process of pursuit of the assigned task.

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 3. The final stage is the Stage of Rewards and Consequences which is applied
after the completion of a task.

Performance management is always a forward planning process which is

developmental and facilitative in nature as it involves the team leaders and the
employees in a joint process of decision making for fixing smart targets. It aims at
breeding performance orientation in the employees for developing high
performance organizations. The entire process involves identification, evaluation
and development of the work performance of the employees through effective
management practices like continuous coaching, feedback and regular
communication. The process includes the following stages:

 Work Planning and defining expectations

 Monitoring performance
 Developing the weak performance areas
 Performance rating
 Rewarding good performance

Performance Management Process in Action Aid

The performance management system of Action Aid aims at continuous

development of the staff members and recognizing their contributions, assessing
the future potential and also the development needs which may be professional as
well as personal and facilitating a shared understanding of mutual accountability
through giving and receiving feedback. In Action Aid 360 degree feedback is
performed which means feedback is elicited from multiple sources on key
performance areas of the employees which are competency, behavior and attitude,
values, work life balance, major achievements and areas of improvements. The
performance management process in Action Aid passes through the following
stages:

1. Identification of the Key Result areas both at the organizational level and
the regional/unit level.
2. The staff members settle their work plans which are derived from the
KRA’s in the departmental level and also from the framework of their job
descriptions. These work plans are laid down each year for the following
year.
3. After defining the work plans, the staff members describe the key
performance indicators which may also include some qualitative dimensions

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 which can be measured in quantifiable terms and ultimately form the basis
of assessment for the appraiser.
4. Identification of those set of behaviors and attitudes which are critical for
effective performance.
5. Annual review of performance of the staff members against the plans and
the behavioral dimensions which is done in a structured format and also the
mid reviews are performed at the regional or the departmental level.
6. Identification of training needs of the staff members followed by
finalization of a new action plan for the ensuing year.

In Action Aid, performance development is treated as a continuous process and a

lot of importance is given to the feedback mechanism.

Competency Management Approach for Setting Superior Performance

Benchmarks

In the present business environment of cut throat competition and globalization,

competency based practices have gained much of an attention from the
contemporary organizations. They aim at achieving an optimum performance in the
long term by developing the skills and competencies of the employees on a
continuous basis. Competency based management systems are primarily employee
centric performance management systems and focuses upon how an organization
achieves a desired performance. By aligning competencies within the performance
management framework, the supervisors provide a feedback to the employees on
the performance goals achieved and how the work was performed.

Competency focused performance management systems can serve as a useful tool

for helping the employees in understanding the performance expectations and
improving the competencies. Competency based management are strategic in nature
and influences almost every area of human capital management which starts with
the hiring of an employee and ends with the retirement. It aims at standardizing
and integrating all HR activities by relying upon competencies which support
fulfillment of organizational goals.

For example, Maruti Udyog Limited which was a joint venture with Suzuki of Japan
realized the need of aligning HR strategies with the corporate strategies by linking
competency mapping with the major systems of HR. Deregulation in India in 1998
drastically declined the market share of Maruti which was earlier the undisputed
leader in the automobiles industry. Reforms like competency mapping, job

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rotations, improvements in the appraisal system, initiatives in implementation of a
transparent system of feedback and communication, clear definition of job profiles
and their accountabilities and many others, improved the competitiveness of
Maruti.

Performance management systems are based on personal competencies which

distinguish high performers from the average performers and the personal
competencies are derived from the values and core competencies of an
organization (Reagan, 1994). According to Collins and Porras (1996), organizations
which use core competencies based systems are regarded as high performers or
visionaries. Competencies are primarily job specifications concerned with the
knowledge, skills and abilities of an individual which defines the personal as well as
the organizational success (Englemann & Roesch, 1996). The same researchers
listed personal competencies as achievement orientation, team work, analytical
thinking, relationship building, customer service orientation, etc. Individual
competencies drive excellence in an organization as they are utilized as a yardstick
for evaluating and monitoring both individual and organizational performance and
their effectiveness (Antonacopoulou & FitzGerald, 1996).

Competencies can be integrated with the performance management process by any

of the two ways:

1. By identifying and defining the key competencies required for realizing

the performance goals/objectives: The key competencies are jointly
defined by the manager and the employee during the stage of setting
performance plans, goals and objectives. These competencies are ultimately
assessed during the performance review period in connection with the
performance goals/objectives realized by the employees.
2. By identifying the competencies which are required for performing an
employee’s job/role into the performance management process: In the
case, the competencies are identified from the competency profile from the
employee’s role or job point of view and also include the performance
goals/objectives for being reviewed. The performance goals/objectives deal
with the aspect of what must be achieved over the entire period of review
and the competencies address the question of how an employee achieved the
pre determined performance goal by demonstrating an expected pattern of
behavior.

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Competencies are aligned in each phase of the performance management cycle. CPS
Human Resource Services has designed a model on Strategic Performance
Management which is given below:

CPS Human Resource Services treats the process of performance management as

a gap closing strategy, which focuses upon the vision, mission and values of the
organization, the goals and objectives of the agency, individual goals and objectives
and also the core competencies.

Organizations like Wipro and Infosys, the major IT giants of India give a lot of
importance to competency based performance management system. In Wipro, the
performance management process begins with the identification and assessment of
critical competencies for top management, senior management and middle

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management on the basis of critical incidents, focus groups and rigorous interviews.
360 degree feedback is used for providing a feedback on the existing
competencies of the employees and based on the results of the feedback a training
programme is organized for improving the deficit areas of performance. Finally,
personal development plans are formulated for each employee for monitoring and
tracking the improvement in competencies or skill sets. For building competencies,
Wipro focuses on strategic thinking, vision, building star performers and global
focus. Infosys equally gives a lot of importance to 360 degree feedback for
evaluating the critical leadership competencies of their employees.

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