Transcript PMC

MEASURING AND
EVALUATING PERFORMANCE
1
Annoucements

Midterm exam
◦ February 25th: 100 MC questions, Chapters 1 through 7
◦ All chapters will be equally represented in the exam
◦ Questions will be from BOTH text as well as the
material covered in class
◦ From the text you can exclude the topic “forecasting
human resource needs” (pp. 109-112). Just read lecture
notes for this topic
◦ You can also exclude the topic HRIS from the text
(pp.137-144).
◦ Everything else is fair game.
◦ If you have any questions feel free to contact me
GOOD LUCK!
2
Agenda

What is performance
◦ What to measure
◦ Limitations of various measures

Performance Appraisal

Ratings and rater errors

General recommendations
3
What is performance?

Performance
◦ Observable behavior that contributes to the
accomplishment of an organization’s goals
 Task
 Citizenship
 Counterproductive

Performance Criteria
◦ Measures of job performance that capture
individual differences in the proficiency of jobrelated behaviours
4
Performance Management

HR system that includes processes used to
identify, encourage, measure, evaluate,
improve, and reward employee performance

Related to terms such as performance
appraisal, performance evaluation, etc.
◦ Performance appraisal: “the process by which
organizations evaluate employee performance”
◦ Although Performance Management is often
considered to be a broader term
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Common Uses of Performance Appraisal
1.
Administrative – to make employment
decisions
◦ Promotion, termination
◦ Training—who to train; what to train
◦ Compensation—merit increases
2.
Developmental
◦ Provide feedback / coaching
◦ Seek to improve performance; address
weaknesses
◦ Motivation
6
What is performance? The Criterion Problem
Difficulties involved in determining what
performance is and how to measure it

Criterion Deficiency
◦ When performance standards fail to capture the full
range of employees’ responsibilities
◦ Behaviours that are important for job performance are
not assessed
 E.g., Salesperson - focused on sale revenue but ignore
customer service

Criterion Contamination
◦ When criterion measure is influenced by other factors
that are not part of job performance
 E.g., factors outside of employee’s control influence
his/her performance - machine breakdowns; differences in
sales regions
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What is performance?

“Objective” Measures
◦ Output
 Units produced, items sold, $ sales, commission
earnings, etc.
◦ Quality measures
 # of errors, # of errors detected, #
complaints/grievances, # commendations, rates of
scrap/breakage
◦ Employment data
 Absences (unexcused), Lateness/tardiness, Accidents
◦ These suffer from unreliability, deficiency, and
contamination
 Also, many jobs don’t have “objective” outcomes
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Potential Performance Criteria

Ratings
◦ Performance appraisals by trainers,
supervisors, peers, self
◦ Performance in work samples, simulations,
etc.

Others
◦ Counterproductive behaviours
◦ Safety records, accidents
◦ Citizenship (voluntary) behaviours
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The Appraisal Process
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What is performance?

Behaviours??
◦ Behaviours that contribute to fulfilling job
requirements
◦ Focuses on what employees do – and what
they have control over
◦ PA - what ee’s should start, stop, and continue
doing
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What is performance?
 Measuring
behaviours requires use of
ratings
◦ Relative Judgments
 Rankings / comparisons with other employees
◦ Absolute Judgments
 Comparisons with job-related standards –
checklists, rating scales, etc.
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Potential Performance Criteria

Ratings - referred to as “Subjective
Measures”
◦ by supervisors, peers, trainers, self

Limitation
◦ Ratings depend on human judgment
◦ Prone to biases and rating errors
◦ Structured rating scales have been used to
reduce biases
 2 common instrument types: BARS, BOS
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BARS: Behaviourally Anchored Rating Scales

Format was developed by Smith and Kendall due
lack of standardization (and reliability) across
raters
◦ Goal was to help the rater rate

Performance standards are concrete
◦ Each standard consists of a number of specific,
behavioural anchors on the rating form itself
◦ behavioral anchors cover the range of performance –
from excellent to poor behaviour
◦ Anchors are worded in the form of
expectations
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BOS: Behavioural Observation Scales
Focus on behaviour

◦
Based on job analysis – often critical
incident technique
Performance ratings are based on the
“frequency” criterion

◦
◦
How often employee engages in behaviour
Using a 5-point frequency scale
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Developing Behavioural Observation Scales
(BOS)
Collect critical incidents
2. Group similar incidents into a behavioural item
◦ E.g., 2 critical incidents
1.
(1) Describes details of organizational change to
subordinates
(2) Explains why the change is necessary
 Could be grouped into a behavioural item Provides
employees with information about organizational
change
◦ 2 more critical incidents
(1) Listens to employee concerns
(2) Asks employee for help in making the change work
 Could be grouped into a behavioural item Addresses
employee concerns and input regarding change
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Developing Behavioural Observation Scales
(BOS)
3. Similar behavioural items are grouped into
a meaningful behavioural criterion
◦ 2 behavioural items
1. Provides employees with information about
organizational change
2. Addresses/responds to employee concerns and
input regarding change
 Combine to form the behavioural (BOS)
criterion OVERCOMING RESISTANCE TO
CHANGE
 The PA instrument is created by attaching a
5-point rating scale to each behavioural item
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Example of a BOS Criterion
I. Criterion: Overcoming Resistance to Change
1.
Provides employees with information about organizational
change
Almost never
2.
1
2
3
4
5
Almost always
Addresses/responds to employee concerns and input
regarding change
Almost never
1
2
3
4
5
Almost always
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Who’s perspective matters?

Multisource (or 360) PA

Possible rating combinations
include…
◦
◦
◦
◦
◦
Supervisors rating employees
Employees rating supervisors
Team members rating each other
Employees rating themselves
3rd parties (customers) rating employees
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Who’s perspective matters?

Should ratings from multiple sources be
consistent?

Does it matter if the appraisal is for
administrative or developmental
purposes?

What if different sources are not
consistent?
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Factors Distorting PA Ratings aka: Rating
Errors
 Halo
effect / error
 Leniency / Strictness error
 Central tendency
 Recency effect
 Contrast effect
 Matthew effect
 Similarity error
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Factors Distorting PA Ratings

Halo effect
◦ Tendency to provide similar ratings across different
PA dimensions

Leniency / Strictness error
◦ Leniency –when ratings are restricted to high part of
scale
◦ Strictness – when ratings are restricted to low part of
scale

Central tendency
◦ When raters avoid extreme ratings and restrict
ratings to middle of scale
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Factors Distorting PA Ratings

Recency effect
◦ Ratings are based largely on employee’s most recent
behaviour

Contrast effect
◦ When an employee’s evaluation is biased upward or
downward because of a comparison with another
employee who was recently evaluated
24
Rating Errors

Matthew effect
◦ Tendency of raters to use previous
evaluations as an anchor for subsequent
evaluations
◦ "the rich get richer and the poor get
poorer“
 i.e., Employees receive the same appraisal
results, year in and year out
 Like a self-fulfilling prophecy -- if they have
done well, they will continue to do well; if they
have done poorly, they will continue to do
poorly
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Rating Errors

Similarity (“similar-to-me”) error
◦ Tendency of rater to inflate ratings when they have
something in common with the target
◦ Study: middle class managers divided into 2 groups
◦ Both groups given a detailed job description and
then viewed videotape of someone performing the
job well
 Group 1: heard applicant say he had 2 brothers, a
father with a Ph.D. in physics and mother with
MSW
 Group 2: heard applicant say he had 12 brothers
and sisters, father was a bus driver, mother was a
maid
 2nd group gave significantly lower ratings
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Pop Quiz – What type of error is this
If I don’t know how to evaluate someone,
I assume they are average.
 What type of rating error results in highly
correlated performance dimensions?
 Using a forced distribution is primarily a
response to what rating error?
 What is a type of rater error training that
focuses on teaching raters the meaning of
different levels of performance?

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Reducing Rating Errors

Frame of Reference (FOR) Training

Encourage supervisors to keep notes about
worker performance – performance “diary”
◦ Improves accuracy of recall

Build accountability into ratings
◦ Require raters to justify / provide evidence for
ratings
◦ E.g., describe specific behaviour; include
someone who can verify; etc.
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Performance Management / Appraisal
System should…
1.
2.
3.
4.
5.
6.
Be based on job analysis
Be focused on behaviour (use BOS)
Be prioritized by senior management
Use multiple raters
Provide raters with extensive training
Ensure performance management is ongoing
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Important Elements of PA

In general, Performance Appraisal systems
– like selection systems – should be:
◦
◦
◦
◦
Valid
Reliable
Practical
Free from bias / Fair
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3 Dimensions of Fairness / Justice
1.
Distributive justice
• Perceived fairness of the distribution of the
rewards
2.
Procedural justice
• Perceived fairness of the procedure/system
used
• “Voice”
3.
Interactional justice
• Perceived fairness of the relationship with
the rater(s); sincerity, etc.
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Final Recommendations
1.
No surprises
2.
It’s about process
3.
Providing feedback
◦
◦
Improves performance if it focuses on taskrelevant behaviour
Makes performance worse if it’s personal –
implies traits
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COMPENSATION
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Agenda

Strategic issues in Compensation

Establishing Base Pay

Performance-based Pay
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Compensation

Goals of Compensation:
◦ Attract
◦ Retain
◦ Motivate

Compensation costs are single largest
cost category in most firms
◦ 60% in some manufacturing organizations
◦ Up to 80% in colleges/universities
 http://www.fin.gov.on.ca/english/publications/salarydi
sclosure/2009/univer09.html
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Strategic Considerations
1.
What criteria should determine pay?
◦
2.
What “pay mix” should be used?
◦
3.
Base, benefits, stock, performance rewards
Should performance rewards be used?
◦

The job, individual KSAOs, performance,
organizational profitability, what other orgs are
paying…?
If so, based on individual, team, org performance?
Optimal strategy is one that adds the most
value to the firm
◦ May not be the lowest cost
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Total Compensation
Direct
Base Pay
Wages / Salaries
Commissions
Incentives /
Performance
Pay
Indirect
Time Not Worked
• Vacations
• Holidays
• Leaves
Insurance Plans
Bonuses
Pay for Performance
• Medical
• Dental
• Life
Security Plans
• Pensions
Employee Services
• Educational assistance
• Recreational programs
• can account for up to 50% of pay costs
Changing Compensation Systems
Traditional
Modern
Pay = 100% base
salary
Variable component
added
Seniority-based
increases
Performance-driven
gains
Few incentive/bonus
plans, restricted to
executives
Many kinds of plans,
extended throughout
the organization
Designing a Compensation System
Considerations in Developing a Compensation Plan
1. Internal vs External Equity
2. Below-Market vs Above-Market Pay
3. Fixed vs Variable Pay
4. Job vs Individual Pay
5. Egalitarianism vs Elitism
6. Performance vs Membership
7. Monetary vs Non-monetary Rewards
8. Open vs Secret Pay
9. Centralization vs Decentralization of Pay Decisions
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Pay Preferences?

Which of the following pay systems
would you prefer?
1. Straight salary
2. Variable pay system with incentives based
on individual performance
3. Variable pay system with incentives based
on organizational performance
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Pay Preferences?

U.S. survey showed following
preferences?
1. Straight salary (63%)
2. Variable pay system with incentives based
on individual performance (22%)
3. Variable pay system with incentives based
on organizational performance (12%)
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Pay Paradox

Psychologists (e.g., Kasser & Ryan, 2001) and
economists (e.g., Stutzer, 2004) have noted:
◦ People who earn a higher income report being more
happy and satisfied with their lives

However,
◦ People who strongly value and seek money and
financial success are less happy and satisfied
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Monetary vs Non-Monetary Rewards

Non-monetary rewards are intangible
◦ Interesting work, challenging assignments, public recognition

Rank the following in order of importance?
◦
◦
◦
◦
◦

A) a nice boss
B) pay level
C) interesting work
D) opportunity to learn new skills
E) flexibility of work hours
How would other people rank these?
43
Monetary vs Non-Monetary Rewards

What’s the truth??
◦ People often underreport importance of pay
to themselves
◦ Organizations should not underestimate
importance of pay
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Pay Secrecy
Advantages
Disadvantages
• Most employees prefer • May generate distrust
to have their pay kept
in the pay system
secret
• May erode perceived
• Gives managers
link between pay and
greater freedom
performance
• Covers up inequities in • Tendency to
the internal pay
overestimate others’
structure
pay – causes
dissatisfaction
Study re: the Cost of Pay Cuts

Greenberg, J. (1990). Employee theft as a
reaction to underpayment inequity: The hidden
cost of pay cuts. Journal of Applied Psychology, 75,
561-568.
 Study
background
◦ Company had lost 2 large contracts
◦ In lieu of layoffs, company made
temporary pay cuts of 15% in 2
manufacturing plants
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Research Questions

Based on equity theory
◦ Would employees perceive the pay cut as
unfair and seek to redress this via theft?
◦ Would the nature of the reason provided for
the pay cut influence the degree of theft that
would occur?
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Rationales for Pay Cut

In the 2 plants getting pay cut, the
explanation for pay cut was varied
◦ Plant A: Adequate explanation
 rationale for cut, management showed remorse
◦ Plant B: Inadequate explanation
 rationale was minimal, no remorse
◦ Plant C: Control plant
 A plant owned by same company where cuts were
not necessary
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Method

Data collected every 2 weeks for 30
week period
◦ 10 weeks before, during, and after pay cut
◦ Plant A - n = 55; Plant B - n = 30; Plant C - n =
58
◦ Measured theft using shrinkage measure (% of
inventory not accounted for by known usage,
sales, etc)
◦ Any guesses?
49
Mean % theft
Mean percentage of employee theft as function
of time relative to pay cut
9
8
7
6
5
4
3
2
1
0
Inadequate
explanation
Adequate
explanation
Control
Before
During
After
Time period relative to pay cut
50
Summary

Increase in theft during underpayment period
◦ Moderated by adequacy of explanation
◦ Less theft when decision was not biased, authorities
were sensitive to employee point of view, decision
based on adequate information

Preexisting differences between plants may have
influenced results

Conclusion
◦ Fairness re: pay cuts has significant influence on
employee negative reactions to pay cuts
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Methods for Establishing Base Pay
Base Pay
Job
Evaluation
Market
Pricing
Skill-based
Pay
Market Pricing

Establishing base pay by
determining the minimum
amount of pay necessary
to attract qualified
individuals from the
labour market

Salary surveys

Relates to external equity
Job Evaluation

Job Evaluation
◦ The systematic process of determining the
relative worth of jobs in order to establish which
jobs should be paid more than others within an
organization.
◦ Point system is most popular method
Point Method of Job Evaluation

Establishes job values by assigning points to
each job based on “compensable factors”
◦ key job characteristics that differentiate the value of
various jobs,
◦ Factors are weighted
◦ Jobs are rated - points assigned

The point totals are used to create the job
worth hierarchy.
Point Values for Job Factors of The American Association of
Industrial Management
FACTORS
1ST
2ND
3RD
4TH
5TH
DEGREE DEGREE DEGREE DEGREE DEGREE
Skill
1. Education
2. Experience
3. Initiative and ingenuity
14
22
14
28
44
28
42
66
42
56
88
56
70
110
70
10
5
20
10
30
15
40
20
50
25
5
5
5
5
10
10
10
10
15
15
15
15
20
20
20
20
25
25
25
25
10
5
20
10
30
15
40
20
50
25
Effort
4. Physical demand
5. Mental or visual demand
Responsibility
6. Equipment or process
7. Material or product
8. Safety of others
9. Work of others
Job Conditions
10. Working conditions
11. Hazards
Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.
Pay Grade

A grouping of jobs of similar value to
the organization.

How many pay grades to use?
◦ Could range from 4 to 15.
◦ It depends on the variance of wages and jobs
across the organization, and the width of the pay
ranges.
PAY GRADE STRUCTURE
575
550
525
Weekly
Salary 500
V
475
IV
Max
450
425
400
III
Mid
II
Pay Policy Line
Min
I
100
150
200
250
300
Job Evaluation Points
350
Pay Range


The minimum and
maximum pay rates for
jobs in a particular pay
grade.
Typically we see ranges
around 80% of mid-point
for minimum to 125% for
maximum.
MAX
MID
MIN
Pay-for-Performance
Performance Pay
Individual
Performance
Team
Performance
Organizational
Performance
60
Individual Incentive Plans

Straight Piecework
◦ Employees receive a certain rate for each unit
produced.

Differential Piece Rate
◦ Employees whose production exceeds the standard
amount of output receive a higher rate for all of their
work.

Standard hour plan
◦ Pay rates set based on predetermined “standard
time” for completing a job
 Employees get paid for that amount of time, even if
they finish earlier
Bonuses

Bonus
◦ Incentive payment that is supplemental to the
base pay
 For cost reduction, quality improvement, or other
performance criteria.

Spot bonus
◦ Unplanned bonus given for employee effort
unrelated to an established performance
measure.
Merit Pay

Merit Pay (merit raise)
◦ Links an increase in base pay to how successfully
an employee achieved some objective
performance standard.

Problems
◦ Inadequate funding for merit increases.
◦ Small raises not very meaningful / noticeable
 May undermine motivational value of merit increase
◦ Problems with defining and measuring performance.
◦ Merit pay decisions influenced by organizational politics
◦ Mistrust between management and employees.
◦ Strategic utility is questionable
 Merit raises are added to base
 Creates fixed cost, even if perf is not maintained
Lump-Sum Merit Pay

Like a bonus
◦ Year-end merit payment which is not added to their
base pay.

Advantages
◦ Provides financial control – does not escalate
base salary levels
◦ Contains employee benefit costs – often
calculated as percentage of salary
◦ Provides a clear link between pay and
performance
Individual Incentive Systems
Advantages
• Performance is
reinforced regularly
• Reinforcement is quick
and frequent
• Effective behaviours
are likely to continue
• Wages paid in
proportion with
performance
Disadvantages
• Administration can be
complex
• May result in inequities
• Employees may not
achieve standards due
to uncontrollable forces
• Union resistance
• Focus efforts on only
one aspect e.g. sales
Pay-for-Performance
Advantages
1. Signal key behaviours
and motivate employees
2. Set performance
standards
3. Support specific
managerial strategies
4. Make pay more variable
Disadvantages
1. Employees prefer
predictable and certain
rewards
2. “line of sight”
shortcomings
66
Criticisms of Executive Incentive
Plans

Incentive payments are excessive compared
with return to stockholders.

Time periods for judging and rewarding
performance are too short.

Quarterly earnings growth is emphasized at the
expense of research and development.

Emphasis is placed upon equaling or exceeding
executive salary survey averages.

Benefits do not relate closely to individual
performance.
Compensation

Pay is a statement of an employee’s worth
by an employer.

Pay is a perception of worth by an
employee.

Pay carries a great deal of information
about what the organization values:
◦ E.g., Southwest Airlines
68
Advantages of Base Pay
Flexibility to direct employees to a
number of different activities or needs.
 Allows employers to recognize and
encourage non-output based behaviours
such as skill development.
 Signals a commitment to the employee.
 Simplicity.

Disadvantages of Base Pay
Represents more of a fixed employer
commitment than performancecontingent pay
 Does not directly motivate task behaviour
 Does not directly contribute to
citizenship behaviour
 Not self-correcting (for performance)


Group/Team Performance Pay
◦ Examples include profit sharing, gainsharing,
team merit increases.

Organization Performance pay
◦ Examples include profit sharing, employee
stock ownership plans (ESOP), stock options,
or pay based on organization level outcomes
such as profit or return on equity (ROE).
The Pros of Team Incentive Plans

Team incentives are effective when:
◦ They support group planning and problem
solving,
◦ The contributions of individual employees
depend on group cooperation.
◦ They broaden the scope of the contribution
that employees are motivated to make.
◦ They encourage cross-training and the
acquiring of new interpersonal competencies.
The Cons of Team Incentive Plans

Team incentives are ineffective when:
◦ Individual team members perceive that “their”
efforts contribute little to team success or to
the attainment of the incentive bonus.
 Or that others’ shortcomings undermine their
performance
◦ Intergroup social problems—”free-riders”
◦ Complex payout formulas are difficult for
team members to understand.