Performance Management MBA II-I Semester

Unit-1: Definition – concerns – scope - Historical developments in performance management -

Over view of performance management - Process for managing performance - Importance –
Linkage of PM to other HR processes - Performance Audit.

Performance Management: Definition:

According to Michael Armstrong and Angela Baron – ‘Performance management is a
process which contributes to the effective management of individual and teams in order to
achieve high levels of organisational performance.’
According to Dr. T. V. Rao – ‘Performance management involves thinking through
various facets of performance, identifying critical dimensions of performance, planning,
reviewing and developing and enhancing performance and related competencies.’
Performance Management is a process that consolidates goal setting, performance
appraisal, and development into a single, common system, the aim of which is to ensure that
the employee’s performance is supporting the company’s strategic aims.
Performance Management is both a strategic and integrated approach to delivering
successful results in the organisation by improving the performance and developing the
capabilities of teams and individuals.
Objectives of Performance Management:The major objectives of performance
management are discussed below:
1. To emphasise on career planning and future growth opportunities for employee
2. It ensures to raise the efficiency and productivity of employees
3. To encourage belongingness, team spirit and devotions among employees with the job
4. To provide feedback about HR planning and potentialities to implement the planning
facts
5. To identify systematically the need and requirements of some learning and training
aspects
6. To promote better and high work culture in the organisation
7. To focus more on systems approach to perform appraisals rather than to make any
formalities
8. To foster a positive relationship between managers and employees through a two way
communication process
9. To appreciate, recognise and to give reward and compensate employees for
achievement of performance objectives successfully in a more objective, transparent
and justified way.

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Concerns of Performance Management:The following are the concerns of

performance management:
1. Concern with outputs, process and inputs:Performance management is
concerned with outputs (the achievement of results) and outcomes (the impact made
on performance). But it is also concerned with the processes required to achieve these
results (competencies) and the inputs in terms of capabilities (knowledge, skill and
competence) expected from the teams and individuals involved.
2. Concern with planning:Performance management is concerned with planning
ahead to achieve success in future. This means defining expectations expressed as
objectives and in business plans.
3. Concern with measurement and review:If you can’t measure it, you can’t
manage it. Performance management is concerned with the measurement of results
and with reviewing progress towards achieving objectives as a basis for action.
4. Concern with continuous improvement: Concern with continuous
improvement is based on the belief that continuously striving to reach higher
standards in every part of the organization will provide a series of incremental gains
that will build superior performance. This means clarifying what organizational, team
and individual effectiveness look like and taking steps to ensure that those defined
levels of effectiveness are achieved.
5. Concern with continuous development:Performance management is
concerned with creating a culture in which organizational and individual learning and
development is a continuous process. It provides means for the integration of learning
and work so that everyone learns from the successes and challenges inherent in their
day-to-day activities.
6. Concern for communication:Performance management is concerned with
communication. This is done by creating a climate in which a continuing dialogue
between managers and the members of their teams takes place to define expectations
and share information on the organization’s mission, values and objectives. It
establishes mutual understanding of what is to be achieved and a framework for
managing and developing people to ensure that it will be achieved.
7. Concern for stakeholders:Performance management is concerned with
satisfying the needs and expectations of all the organization’s stakeholders,

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management, employees, customers, suppliers and the general public. In particular,

employees are treated as partners in the enterprise whose interests are respected,
whose opinions are sought and listened to, and who are encouraged to contribute to
the formulation of objectives and plans for their team and for themselves.
8. Concern for transparency:Four ethical principles that should govern the
operation of the performance management process. These are −
✓ Respect for the individual
✓ Mutual respect
✓ Procedural fairness
✓ Transparency of decision making
Scope of Performance Management:The following are the various areas in which
performance management is applicable:
1. Identifying Performance Parameters:When any organisation decides to go for
performance management activity, it is very important to decide the parameters of
performance, because when the parameters are clear and set, both, the employer and the
employees can better understand their role in the activity and can reach to the goal effectively
and efficiently.
2. Setting Performance Standards:Once the parameters are set, the next step is to
identify the performance standards. Performance standards are nothing but analysing and
finalising the expected level of performance. This is decided in advance so that gaps, if any,
can be corrected at the earliest.
3. Planning Performance of all Constituents: Performance management activities
involve continuous improvement of all the processes and people in the organisation. So after
setting the performance standards, to get the desired results, it is imperative to mould the
behaviour and performance of the employees in a particular way so that it generates the
preferred output.
4. Identifying Competencies / Competency Gaps:When we are in the process of
moulding the behaviour of the employees, it is important that we understand the competency
gaps if any. Gaps are nothing but a space between standard competencies and expected
competencies. Once it is identified that there are gaps, these can be healed with the help of
training and development programmes.

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5. Planning Performance Development Activities:To bridge the gaps between

standard and actual performance, performance development activities are planned in the
organisation. These activities are in the form of on-the-job training, management games, case
studies, outbound training etc.
6. Creating Ownership:This is one of the most important aspects in the entire
performance management initiative. Until and unless the employees feel that they are the
owners of their organisation and their smallest leap of step is going to affect the organisation
in either a positive or negative way, they will not behave in an expected manner.
7. Recognising and Promoting Performance Culture:It is very important that the
employees become used to performing better. If the organisation follows performance
culture, every employee would be performance oriented and there are minimal chances of
dissatisfaction, errors, and wastages among the employees.
Historical Development /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

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performance reports were communicated to the employees so that they could take
corrective actions for overcoming such 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.

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

people’s issues. It was more performance driven and emphasis was 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.
Overview of Performance Management: In the overview of performance
management, the important concept to be looked in is the factors influencing performance
management.
1. Business Culture: At the national level, culture affects performance management
through socio-political traditions and attitudes which determine whether performance
assessment is acceptable, and to what degree. Cultural norms dictate ‘acceptable’
standards of performance and the management methods by which they are assured.
2. Legislation: In today’s globalized economy, the employment relationship between
workers and employing organizations is seen as a contractual matter. This relationship
is expressed in formal or legalistic statements of obligation between the two, such as
written employment contracts, job descriptions and performance objectives.
3. General Economic Conditions: Prevailing attitudes towards employees and, in
turn, their response to performance assessment are considerably affected by issues
such as unemployment and economic conditions of the nation. Growth and shrinkage
in the job market which are influenced by changes in the economic scenario of a
nation is conventionally believed to be followed by changes in the behaviour of
workers and employers.
4. Industry Sector: Methods of performance management vary considerably
between different industrial sectors, partly as a matter of the nature of the work
involved, tradition and fashion. Sales and service dominated industries, such as retail
business and financial services, tend to have clear individual or team objectives which
can be translated readily into performance targets.

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5. Technological Change: Technological change, particularly changes in

information technology has a dramatic effect on the nature of supervision, and hence
performance assessment. Work can be done at a distance by travelling executives,
overseas affiliates or telecommuters working from home. This raises intriguing issues
for performance management.
6. Flexibility and Diversification: In the new business environment, the
traditional nature of the employment relationship has considerably changed, moving
the balance of power firmly in favour of employers. Organizations in today’s highly
competitive era have seen job descriptions have disappeared or, at least, have been
diluted, so that employees can be asked to do virtually anything required by the
organization.
7. Employee Relations: Performance management is a means of enhancing
managerial control, particularly through individual performance-related pay schemes.
Individualization of pay (performance based pay systems) diminishes or neutralizes
the role of collective bargaining. The purpose and influence of trade unions is thereby
getting day by day diluted, reducing both their effectiveness and attractiveness as an
alternative focus for employee involvement..

Process for managing performance/performance management process/

performance management cycle: Employee management effectiveness is one of the
most important factors in achieving company success and its competitive advantage.
Therefore, performance management is the continuous process of the planning, monitoring
and reviewing employees’ work objectives and their overall contribution to the company.

(Fig: Process of Performance Management)

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1. Planning:The planning stage of the performance management cycle involves both

the employees and managers. On this stage, the manager and employee agree what the
employee must accomplish, to what standard (for example, the sales goals), and
identify how results will be measured. They also negotiate about the competencies
(such as product knowledge and customer focus) that are necessary for effectively
accomplishing the company's performance and define the development and studying
the employee needs to eliminate gaps in his/her competence.
2. Monitoring: Employee performance and progress should be continuously
monitored. "Continuous monitoring" doesn't mean watching every aspect of how the
employee fulfils assigned tasks and activities. Managers should focus their attention
on the achieved results, individual and team dynamics affecting the work
environment. So, in the second stage of the performance management cycle, the
employee and manager track the employee’s development and performance. If it is
necessary, the employee’s performance plan is corrected to meet the changed
circumstances.
3. Reviewing: On the third stage of the performance management cycle, the
employee’s accomplishments and standards that have been agreed at the first stage are
analysed by the manager and employee. They also consider what new the employee
has studied and how his/her knowledge can be effectively used within the employee’s
current position and in the future company's jobs. They come to terms about how well
the employee performed during the last period and what he/she needs to consider for
achieving the future work standards and goals. The manager conducts the evaluation
of the employee’s performance, especially if decisions about the employee’s
employment, compensation, or rewards must be made.
4. Improving: The next step of performance management is improving employee
performance, and to do that effectively is possible only through understanding reasons
why employees are not performing at the optimal level. It could be valid reasons,
removal of which is a key for fixing the issue without employee replacements.
Managers should keep an open mind to discuss concerns without jumping to
conclusions. Clear direction about the responsibilities, job priorities, and expectations
of employee achievement as well as keeping clear accountabilities in every activity
are necessary.

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5. Measurement: Performance measurement is a process of collecting data necessary

for the performance measures. All companies (from small business to huge
corporations) measure performance to some extent. Even though many organizations
are primarily focussing on financial measures, there is a large difference among
companies in terms of which performance measures they use. The revolution in
performance measurement has changed the priority in features of performance
measurements systems.
Significance/Importance of Performance Management:The significance or
importance of performance management in any organisation is given here:
1.Defining Objectives and Targets: It helps to define the objective, aims, targets,
missions, vision, strategy and values of the organisation in order to enable them to achieve in
proper way.
2. Opportunities for Learning: Performance management system provides some
worthwhile opportunities to create and develop learning aspects and employment
advancements. It may be identify the competencies as required for high performance.
3. Fulfil the Managerial Commitment: It is helpful to fulfil the required commitment
and assurances as given by the management. These are in the form of work facility, job
security, rewards and compensation promotion and career orientation programmes.
4. Fair and Justified Treatment with Workers:Within the purview of performance
management, the employees can get fair, justified and optimum behaviour from the
management. There is a pre-required condition is that there is an utmost need to make fair
and justified treatment with employees.
5. Human Resource Planning:Performance appraisal information provides a valuable
input for skills inventories and human resource planning (HRP). By providing information
about the human resource strengths and weaknesses of the organisation, the performance
appraisal system helps determine the promotability and potential of all employees. It,
therefore, constitutes an important information base for developing succession plans, HR
programmes and creating new positions in the organisation.
6. Recruitment and Selection: It is used to validate or evaluate the approaches and
decisions relating to employees recruitment and selection. It aims to determine the effectives
of them on a particular job as well as on organisation as a whole.

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7. Training and Development: With a comprehensive role of performance

management, it can be assess the need and requirement of training and development. It can
also identify performance deficiencies at the individual as well as organisation level.
8. Motivation:A good plan of performance management aims to motivate work
appearances with better work culture. It motivates the employees to better work culture, as
well as to develop their efficiency for more and better work performance.
9. Increase in Efficiency and Productivity:An optimum performance plan ensures to
raise the efficiency and productivity of employees. A fair, optimistic and rational
performance evaluation system motivates the employees to raise their better work
performance.
10. Decrease in Turnover of Employees: The performance plan also aims to stabilise
the existence of employees as well as to reduce the employees’ turnover. It has the signifying
role to reduce a wide range of turnover in the enterprise.
11. Career Planning and Development:The performance management helps in
identifying employee potential and in planning future growth opportunities for the employee.
Information about the strengths, weaknesses and potential of employees can be used to assist
them in developing and implementing realistic career plans.
12. Compensation and Reward: A fair and objective performance appraisal system
helps in making differential reward decisions, such that the most productive workers or teams
are rewarded accordingly. When rewards and compensation are linked to performance, it
reinforces the belief that pay raises should be linked to.
13. Better Employee Relations: Performance management aims to maintain better
organisational cultural. Any dissatisfaction or grievances can be overcome or manage by
using performance data. As such, by using optimum system of appraisal the better and most
amicable relations with employees can be developed.

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Linkage of PM to other HR processes: The following are the processes in which

performance management plays a very important role:

(Fig:Linkage of PM to other HR processes)

1. Recruitment:It can be defined as the “process of searching for prospective
employees and stimulating and encouraging them to apply for jobs in an
organization”.
2. Training & Development:Processes of enabling employees acquire skills (soft
and technical) to improve on their performance and mastery of their areas of
specialization. The skills are acquired through training and job experience.
3. Salary/Pay:The decided monetary amount that an employer offers an employee in
lieu of the services offered by the employee. ... It is divided by 12 to ascertain the
amount to be paid every month to the employee on the basis of employee
productivity.
4. Career Development:It refers to a set of programmes designed to match an
individual's needs, abilities, and career goals with current and future opportunities in
the organization. Since career development focuses on future opportunities, it has
essentially a long-term orientation.
5. Knowledge Management:It is the systematic management of an
organization's knowledge assets for the purpose of creating value and meeting tactical
& strategic requirements; it consists of the initiatives, processes, strategies, and
systems that sustain and enhance the storage, assessment, sharing, refinement, and
creation.

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6. Discipline: Discipline is the regulation and modulation of human activities to

produce a controlled performance. It is to encourage employees to confirm to
established standards of job performance and to behave sensibly and safely at work.
7. Rewards/Recognition Systems:This includes compensation and benefits
structures and policies adopted by an organization. The compensation package
includes salary and other types of work related benefits that an employee is entitled to
by virtue of being in employment.
Performance Audit: A performance audit measures the effectiveness or efficiency of
individual employees or the production output of business equipments. Companies usually
develop a set of guidelines and the job description of each employee to ensure each
individual hired by the company understands the goals and objectives of his or her job.
Objectives of Performance Audit: The following are the objectives of the
performance audit:
1. To provide clear picture of how people think the system should be improved.
2. To provide a clear picture of how people view performance management system right
now.
3. To provide a clear picture of how experts in performance management think the
system should be.
4. Gap analysis that shows graphically what is working, what is not, and which direction
to go.
5. Results based on the consensus of stakeholders
Steps in Performance Audit: The following are the steps in performance audit.
1. General surveys and updating of the potential areas in order to gain insight and
understanding of the organization concerned.
2. Planning and preparation of a performance management audit strategy and decisions
on the areas to be examined, taking account of improvement areas.
3. Preliminary studies and planning departmental and individual performance
management audit.
4. Conducting the full performance management audit involving detailed fact finding
and analysis of the areas under review.
5. Preparation of report
6. Discussing report with top management
7. Review and follow-up

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Dimensions of Performance Management: It involves thinking through various

facts of performance, identifying critical dimensions of performance, planning, reviewing,
developing, and enhancing performance and related competencies.

Dimension # 1-Result and Output:

The most acceptable and measurable dimension of performance is result and output. It

describes the conditions of inputs which included raw material, working conditions, process

capabilities and talent of employees in the final form of product or service. It is necessary to

plan all the performance activities in a scientific and systematic manner so that the desired

result or output may be obtained.

Dimension # 2-Input:
This dimension deals with the activities to be accomplished by the employee. Performance

can be achieved if the nature of inputs can be managed without mistake, because performance

is a function of three sets of factors – ability, motivation and organizational support. If

anyone among these three factor is less the performance is to be poor.

Employee Performance = Employee Competence + Employee Motivation + Organisational

Support
Dimension # 3-Time:
Time is precious and very important dimension of performance. In the current scenario of

world, the performance management is time bound otherwise the survival of organisation is

not possible in the future. Performance of an employee in relation to a given role during

particular period of time under the set of circumstances operating at that point of time.

Therefore, time may become the target.

Dimension # 4-Focus:
Performance also has a focus dimension. For example in case of sales, profits and new areas.

Focus means attention, not only on own activities but should also keep close watch on related

activities.
Dimension # 5-Quality:
‘Quality is not destination but a journey’. Quality refers to doing the things right from the
first time rather than making and correcting mistakes in order to achieve total customer
satisfaction. It means quality is conformance to customer requirements, not goodness. Higher

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is the quality greater is the satisfaction of customers. It is the responsibility of each and every

employee as well as management to build a quality standard which provides reasonable

customer satisfaction at economical cost. Quality is the core dimension of performance

management.
Dimension # 6-Cost:
The ultimate principle of purchasing is the low cost with best quality. Therefore cost

effectiveness is another dimension of performance management. It implies the capacity of a

business unit to produce a given commodity at a lower cost through more effective utilization

of existing resources. It is the process of cost reduction by improving efficiency of

operations.
Dimension # 7-Output:
Output relationships and analysis- It is relevant and essential to understand the input-output

relationships and analysis. The purpose of input-output analysis is to find out the

interdependencies and complexities of the economy in order to determine the conditions for

maintaining balance between demand and supply. It describes the inputs required to produce

the outputs of different sectors of the economy. It also involves the study of the exchange of

goods and services among industries.

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