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 5 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 7 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 8 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 9 The Appraisal Process 10 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 11 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. 12 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 13 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 14 15 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 16 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 17 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 18 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 19 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 20 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? 21 Factors Distorting PA Ratings aka: Rating Errors Halo effect / error Leniency / Strictness error Central tendency Recency effect Contrast effect Matthew effect Similarity error 22 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 23 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 25 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 26 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? 27 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. 28 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 29 Important Elements of PA In general, Performance Appraisal systems – like selection systems – should be: ◦ ◦ ◦ ◦ Valid Reliable Practical Free from bias / Fair 30 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. 31 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 32 COMPENSATION 33 Agenda Strategic issues in Compensation Establishing Base Pay Performance-based Pay 34 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 35 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 36 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 39 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 40 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%) 41 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 42 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 44 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 46 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? 47 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 48 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 51 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.