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14.1.1 Relevance to Performance Management

1.1 Relevance to Performance Management

Definition

Human resource management – a strategic approach to managing employment relations which

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Definition

emphasises that leveraging people's capabilities is critical to achieving competitive advantage.

– Bratton and Gold

Human resource management (HRM) includes the following activities:

 Recruitment of the right number of staff with the right skills;

 Managing training and development to ensure the skills of employees remain relevant;

 Ensuring that employees are motivated; and

 Monitoring the performance of employees (via appraisals).

14.1.2 Staff Recruitment

1.2 Staff Recruitment

1.2.1 Importance of Recruiting the Right Staff

To enable most organisations to succeed, it is essential that they employ the right staff, and that
they manage them. This is because:

 Employees implement the strategy of the organisation. They may have their own objectives
that conflict with the strategy of the organisation.

 The strategy of an organisation is unlikely to be achieved if there are problems at the

operational level, where a large proportion of employees are likely to work. For instance, the
attitude of staff towards aspects such as quality of products and customer relationships can
have a significant impact.

 If staff behave dishonestly or unethically, this can have an adverse effect on the
performance of the organisation.

 Many firms have distinctive cultures. It is important to employ staff that fit into this culture
and will contribute to it.

1.2.2 Effect of Recruitment on Strategy and Processes

An organisation’s strategy may have a significant effect on recruitment. For example:

 If the strategy is differentiation, highly-skilled staff will be required who can provide the high
level of service that differentiation implies.

 If the strategy is cost leadership, recruitment of lower-skilled staff that are able to do
repetitive tasks is necessary.

At the operational level, staff must have the appropriate skills and experience to contribute to the
organisation's objectives.

1.3 Motivation of Staff

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Having recruited staff, the staff must be motivated, to ensure that they are working towards the
organisation's goals.

Motivation depends to a great extent on the system of performance measurement, and possibly on
the system of reward. These are covered later in this chapter.

1.4 Monitoring Staff

In many organisations staff appraisals take place on a regular basis (e.g. every six months).

The overriding purpose of any appraisal is to improve individual performance. This then leads to an
improvement in the efficiency and effectiveness of the organisation by ensuring that each individual
employee is working to the best of their abilities and is working towards the goals of the
organisation.

An appraisal typically includes:

 Review of past performance;

 Discussion of goals and targets for the future;

 Assessment of the level of the reward (e.g. pay rises, bonuses).

1.4.1 Types of Appraisal

Appraisals can be carried out in a number of different ways:

 Top down – staff members are appraised by their immediate superiors.

 Bottom up – staff members appraise their manager.

 180 degree – the superior and subordinate appraise one another.

 Peer – staff appraise those with whom they work.

 360 degree – everyone appraises everyone else.

1.4.2 Objectives of an Appraisal

The objectives of an appraisal from an individual's point of view include the following:

 Comparing the individual's performance against an established target.

 Identifying work of merit done during the period under review.

 Providing a basis of remuneration.

 Establishing what the individual has to do regarding the objectives of the organisation.

 Determining the future employment of the individual (e.g. to remain in the same job, be
transferred, promoted or retired early).

 Establishing the key results that the individual needs to achieve in their work within a
defined period of time.
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 Identifying training and development needs.

1.4.3 Appraisal and Business Performance

Appraisal may improve performance because:

 Employees will be more motivated and hence more efficient if they feel they are rewarded
for achieving their objectives.

 Likewise, motivation and efficiency will increase if employees feel their developmental needs
are satisfied.

 Organisational performance will improve if employees achieve their goals (providing that
employee goals align to organisational goals).

However, appraisal can demotivate and effect efficiency if:

 Employees feel they are being criticised.

 They believe the appraisal of their performance is unfair.

 There is a perception that the process has no value.

14.2.1 Performance Management of Human Resources

2.1 Performance Management of Human Resources

Effective performance management requires an organisation’s strategic objectives to

be broken down into successively more detailed sub-objectives, to the point that
employees’ performance can be assessed against personal goals and targets that
underpin and support the organisation’s strategy. These personal goals and
objectives are set during the HRM appraisal process and, in this way, the HRM
process integrates with the strategic direction of the organisation.
As part of the organisation’s performance management system, employees’ actual
performance is measured and compared against their goals and targets, and hence
there is a need to establish suitable performance indicators (or measures) against
which to measure performance.
2.2 Performance Measures

Performance measures are often discussed under four categories:

2.2.1 Input and Personal Qualities

Inputs and personal qualities are the skills, knowledge and attitude that employees have. These are
sometimes referred to as traits. Examples of traits include:

 professional qualifications, such as ACCA, which demonstrate that an individual has the
technical knowledge to perform a role;
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 attitudes (e.g. towards customers, such as friendliness, helpfulness and ability to solve their
problems);

 ability to lead staff;

 ability to work in a team;

 organisational skills.

Such traits are usually measured using psychometric tests, which require the use of qualified
professionals. Traits will be defined for each position in the company (e.g. staff in management
positions will require leadership traits).

A problem with basing staff assessment on inputs is that although it measures the traits that
employees possess, it does not measure how well they actually apply those traits in the workplace.

2.2.2 Results and Outcomes

Quantified targets, such as number of client visits made by a sales representative, are set for
individuals. The individual's performance is then compared against these. One potential problem is
setting the targets. This should be done in advance of the period during which performance is
measured; however it is often difficult to decide what is a fair target.

Results and outcomes assess an employee based on quantifiable measures of output. Examples of
measures might include the number of:

 units of output produced per day by a skilled manual worker;

 calls answered per day by a call centre operator;

 chargeable hours worked per month by a trainee auditor.

2.2.3 Behaviour in Performance

Behaviour in performance measures how well an employee displays the required behaviour at work
(e.g. how often a supervisor gives praise to his subordinates).

Behavioural Anchored Rating Scales (BARS) identify a range of behaviours that are considered to be
important in doing a job well. Evaluations are based on specific behaviours required for
each individual position in the organisation.

Example 1 Behaviours Required

Examples of behaviours required for a waiter in a restaurant might include the following:

 Greeting a customer within two minutes of arrival;

 Taking the customer's order promptly and accurately;

 Displaying a friendly and helpful attitude towards customers;

 Dealing successfully with any customer complaints;

 Providing the customer with the bill promptly after finishing the meal; and
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Example 1 Behaviours Required

 Communicating effectively with the kitchen staff.

Employees are given a score for each of the behaviours identified (e.g. a score from 1 =
unsatisfactory, to 5 = exceptional).

Advantages Disadvantages

 It is based on behaviour relevant to  Actions that are not incorporated as

performance of the individual behaviours may be overlooked and make it
employee. difficult to assign a rating.

 Clear indicators make it easy for  Gathering detailed information about

managers to use and employees to subordinates' actions is time-consuming and
accept. managers may dispense with it.

 Emphasis on actual behaviour makes  Implementation is time-consuming and

the evaluation process fair and expensive, as every position is different.
equitable.
 Changes in expectations of positions over
 It is tailored, uniquely to each time mean that the behaviours need to be
position. monitored and maintained.

 Emphasis on action makes it easier

and more likely that individuals
improve their performance.

A criticism of BARS is that they require judgement, that the measurement of performance is
subjective. Considering Example 1, one customer may think a waiter has displayed a friendly and
helpful attitude, whereas another may not.

Behavioural Observation Scales (BOS) attempt to overcome this criticism.

BOS aim to identify what are considered to be critical activities, and then attempt to measure how
often an employee performs those activities. Some activities would be considered to be desired
activities, such as "gives praise when praise is due", and some are undesired, such as "misses work
days".

The performance of the employee is then judged for each of these activities, using a scale of 1 to 5,
where 1 is never, 5 is always, etc.

3.1 Performance-Rewards Linkage

Employees will be encouraged to achieve organisational objectives if they are offered rewards linked
to their success or failure in achieving desired levels of performance. Therefore, it is important to
establish an appropriate performance-rewards linkage. Consideration should also be given to
establishing “negative rewards” or “punishments”, linked to the failure to achieve desired levels of
performance. These might include failure to obtain potential rewards, demotions and possibly – at
the extreme - the loss of employment.
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Definition

Reward scheme – all the monetary, non-monetary and psychological payments that an
organisation provides for its employees in exchange for the work they perform.

.2 Features of an Effective Reward Scheme

An effective reward scheme:

 Should support the company strategy by aligning the goals of employees to it.

 Should align risk preferences of managers and employees to the organisation.

 Should have a positive effect on recruitment and selection policy.

 Should be fair.

 Must conform to law.

 Must be affordable.

 Must be able to motivate staff.

 Must be administered correctly.

3.3 Reward Methods

Rewards may be extrinsic or intrinsic:

 Extrinsic – tangible items such as salaries, bonuses, promotion and benefits.

 Intrinsic – intangible aspects such as responsibility, recognition and self-esteem.

Extrinsic or material reward can be divided into three categories:

1. Base pay (basic salary).

2. Performance-related pay (e.g. a bonus), with a level of pay that is linked to the performance
level achieved (as measured against a pre-agreed goal or target).

3. Indirect pay (e.g. pension contributions, child care or health insurance) provided in addition
to base pay and performance-related pay.

The sections which follow consider various types of performance-related pay and their potential
benefits and adverse consequences in terms of the impact on performance.

3.4 Individual Bonuses Based on Achievement of Targets

Targets are set for individuals and agreed bonuses (usually in the form of cash) are paid if the targets
are achieved.

3.4.1 Advantages of Individual Bonus Schemes

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 The individuals will understand what is expected of them, since their objectives will have
been communicated to them through the bonus scheme.

 The existence of the bonus scheme will motivate the employees.

3.4.2 Potential Disadvantages of Individual Bonus Schemes

 The individuals may take a short-term view of performance; working to achieve the current
year's bonus, while ignoring the future.

 Setting an appropriate target can be difficult.

 The individuals will focus on what is being measured and may ignore non-measured aspects.
This is tunnel vision (see s.6.2).

 Unless the target is updated and made more challenging each year, there will be no
improvement once the target has been achieved.

 The risk attitudes of employees may not be aligned with those of the organisation. Typically,
employees are more risk averse and avoid actions that would risk them missing their targets,
even if such actions are consistent with the risk preferences of other stakeholders.

14.3.5 Performance Improvement Schemes

3.5 Performance Improvement Schemes

This more dynamic version of the individual bonuses scheme involves four stages:

1. Researching and identifying benchmarks for performance.

2. Communicating the targets to staff and agreeing on what the bonus will be if the target is
achieved. Non-cash bonuses are preferred to cash.

3. Rewarding participants for achieving their targets.

4. Resetting the standard for the following year. A higher standard should be set the following
year, to ensure continuous improvement.

The reason that bonuses are not paid in cash is that it makes the scheme more flexible; additional
bonuses can be paid if it is thought to be appropriate, without needing to consider parity of pay, or
possible problems with trade unions.

3.5.1 Advantages

The same advantages as for individual bonus schemes, plus:

 Targets are based on benchmarking exercises carried out in advance. This leads to fair but
challenging targets.

 The target is updated every year, and this leads to continuous improvement.

 Organisations that have used this method have reported big increases in profits as a result of
introducing the scheme.

3.5.2 Disadvantages
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 Such schemes are time consuming to set up and operate.

 They may not take account of factors outside of the control of the individual.

 Again, the risk attitude of employees may not be aligned with those of the organisation.

14.3.6 Profit-Related Pay Schemes

3.6 Profit-Related Pay Schemes

A bonus is paid to employees based on the level of profitability of the organisation.

3.6.1 Advantages

 Such schemes focus the attention of participants on reducing costs and increasing revenues.

 They should motivate staff.

3.6.2 Disadvantages

 They may encourage managers to take a short-term view - for example, cutting existing
expenditure on quality to reach the current year's profits (which may adversely affect future
years).

 Setting the appropriate profit target may lead to the introduction of budgetary slack by
management.

 Employees, particularly the administrative and those at junior levels, will not see the link
between their efforts and the profits.

 They may lead to creative accounting practices.

An example would be the selective application of depreciation rules (affects expenses), or

recognition of consignments as sales (affects revenue).

 The goal of profits and maximising shareholder wealth are not the same. (See value-based
management in Chapter 15.)

 Again, the risk attitudes of employees, managers and other stakeholders may not be aligned.

14.4.1 Difficulties in Aligning Reward and Performance

4.1 Difficulties in Aligning Reward and Performance

As discussed, reward schemes are based on setting targets for employees that aim
to incentivise them to work in a way that is consistent with the objectives of the
organisation as a whole. In practice this is harder than it may appear:
 It can be difficult to specify what to measure, particularly for operational
managers, which will exactly match their interests with the interests of the
organisation. This can lead to goal incongruence.
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 Individuals tend to focus only on what is measured (see s.6.1). However, it

may not always be easy to define targets that relate to all of the
organisation's objectives.
 No performance measurement system is perfect for measuring the
contribution of individuals to the objectives of the organisation. Individuals
may, for example, take actions to achieve the measured target without
actually achieving the underlying objective that the target is designed to
measure.
Otley described the problems of designing reward schemes using the following
diagram:

Circle A shows behaviour necessary to achieve organisational goals.

Circle B shows behaviour actually engaged in by an individual manager.
Circle C shows behaviour measured by the performance measurement system.
A perfect reward and performance measurement system would be such that Circle B
and Circle A would exactly coincide. In practice, this is unlikely to occur.
14.4.2 Reward Scheme Design Principles

4.2 Reward Scheme Design Principles

The following principles should therefore be considered when designing a reward scheme to ensure
that it has a positive effect on the organisation’s performance:

 It should offer a real incentive to individuals. The potential rewards should be sufficient to
motivate employees.
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 The employee should have control over the areas that are being measured.

 The way the reward will be calculated should be clear.

 The scheme should be cost-effective (i.e. potential benefits from higher performance should
more than compensate the bonuses paid for the effort).

4.2.1 Building Block Model

Fitzgerald and Moon’s building block’s model provides a structure for designing effective reward
systems, which are aligned to organisational strategy. It gives three principles for the setting of
standards or targets:

1. Equity – in this context means fairness (i.e. targets should be equally challenging for the
various managers).

2. Ownership – managers should accept, agree and be motivated by the targets set for them.
This can usually be achieved by participation.

3. Achievability – targets must be achievable, otherwise employees will become demotivated.

For example, they must take account of external market conditions which are beyond the
control of the employee, which can be managed by benchmarking against an industry
average, say.

The building block’s model then goes on to specifically cover reward schemes. It sets out three
principles of a good reward scheme:

1. Clarity – it should be clear how the reward scheme works and understood by those to whom
it applies.

2. Motivation – employees need to be motivated to achieve their objectives (and hence the
organisation’s) and hence the scheme must be of value to the employee.

3. Controllability– employees should only be judged and rewarded based on factors within
their control. Hence profit-related pay might not be relevant to a junior administrative
assistant, for example.

4.2.2 Hope and Fraser

Hope and Frazer, however, warn against linking rewards to fixed performance targets, as this leads
to “gaming”. In particular, managers whose rewards depend on fixed targets may be tempted to:

 negotiate “lowest targets and highest rewards”, thereby understating the organisation’s
potential;

 act unethically (e.g. engage in fraudulent accounting) to ensure that targets are met.

Hope and Fraser therefore suggest divorcing the planning process and the target setting process and
basing rewards on relative targets and benchmarks. For example, setting a market share (%) target
rather than $ sales target for a sales manager. If the market rises, more is expected in absolute
terms. This adds to controllability, since the sales manager could not be held responsible for a rise
(or fall) in the overall market, which is outside of his control, but would be able to control whether
he achieves the expected share of the market.

14.4.3 Linking Reward Schemes to Performance Measurement

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4.3 Linking Reward Schemes to Performance Measurement

4.3.1 Advantages

 A well-designed reward scheme should shape the behaviour of managers in a way that is
consistent with the strategic objectives of an organisation.

 There is evidence to suggest the existence of a reward scheme provides an incentive to

achieve a good level of performance.

 A reward scheme may attract and retain talented individuals who make a positive
contribution to the organisation.

 Use of KPIs in the performance rewards mechanism helps employees understand both the
organisation's objectives and those aspects of performance that contribute to organisational
success

 An effective reward scheme will lead to an environment that engenders employees to focus
on continuous improvement.

 Schemes that include share-based payments may encourage managers to take a longer-term
view.

Example 3 Linking Reward Schemes to Performance Measurement

Australia’s Prudential Regulation Authority (APRA) recommended in July 2019 that banking
executives should wait up to seven years to receive bonus payments and have more of their pay
linked to non-financial criteria, as part of a proposed shake-up following an inquiry into
misconduct in the financial sector. The measures are intended to strengthen the remuneration
systems in banks and financial institutions in order to incentivise the right behaviours. There had
been reports of an overemphasis on short-term financial performance and a lack of accountability
when failure occurred, especially among senior management.

The reforms proposed by APRA would have brought Australia into line with practices in many
other countries, where curbs on bankers’ bonuses and remuneration were introduced in the wake
of the 2008 financial crisis. APRA proposals include that no more than 50% of bonus payments
should be based on financial performance but rather on non-financial metrics such as customer
satisfaction, sustainability and culture. Another was a provision enabling the clawback of
remuneration for four years. And, as mentioned above, a third was delaying long-term bonuses
for up to seven years to ensure executives were committed to their organisations and thereby
allowing boards to reduce pay if problems emerged over time.

There was huge opposition to the proposals, and a consortium of lenders, investors and advisers
arguing that the changes were too complex and that boards should have the flexibility to set
bonus targets to attract talent. Such was the strength of opposition that APRA had bowed to the
pressure and watered down proposed new rules restricting bonuses that were recommended by
the Hayne royal commission.

The final standard CPS 511 Remuneration was released in August 2021.
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4.3.2 Issues to Consider

 Targets based on results or effort? It can be difficult to quantify the impact of administrative
staff’s efforts, for example.

 Monetary or non-monetary rewards? Money means different things to different people.

Some people prefer increased job security, which results from improvements in
organisational performance and taking a longer-term view. Share option schemes would
motivate in this instance.

 Implicit or explicit reward promises?

o Explicit incentives are performance-based rewards, awarded based on performance

measure outcomes during a specific period. They are easy to understand but do not
offer management any flexibility.

Examples of explicit reward are any form of remuneration directly linked to the achievement of a
performance objective, such as a bonus tied to a performance target.

o Implicit incentives result from actual and potential permanent increases from merit
pay, promotion opportunities, and at a very basic level not losing one’s job.

o They are not suitable for all organisations, as the promise of promotion, say, is only
feasible in those that provide structured career progression.

Examples of implicit incentives are promotion, basic pay level, and perceived job security.

 Individual or group-based reward?

 Equity participation or not? Such schemes should be open to all employees to avoid
perceptions of inequity.

4.3.3 Potential Disadvantages

 There is much empirical evidence to suggest that reward schemes may lead to dysfunctional
behaviour. For example:

o Including slack in budgets to make them easier to achieve, to ensure the bonus is
received.

o Taking action to achieve the required target, at the expense of the longer-term goals
of the company.

o Individual reward schemes may discourage team spirit.

 Employees’ stress levels may be high if a significant proportion of their income is

performance-related.

 Should targets be based on individual, team, division or organisational-wide performance?

 Reward schemes tend to measure results. They do not necessarily measure effort. This can
be unfair, particularly when the results are partly influenced by external factors.

 Employees will prioritise achieving their rewards which may affect their risk appetite. This
may have adverse consequences if the risk preferences of employees is not aligned with that
of the organisation's stakeholders, or if the risk that employees take on is not the same as
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that of the organisation. Employees may become too cautious and risk averse or may take
bigger risks.

Example 4 Reward Schemes and Risk Appetites

The financial crisis of 2008 still remains an extremely pertinent example of what can happen when
reward schemes encourage employees to take on too much risk. The financial crisis occurred
because banks in the US had made mortgage loans to individuals with low credit ratings. Many of
these individuals then defaulted on the loans.

The bank staff that made the loans were paid generous commissions when the loan agreements
were signed. The commissions were often payable in full on the date of signing, even though the
loans lasted 25 years. So the officers of the bank were passing on high risks to the banks, without
accepting any risks themselves.

14.5.1 Agency Theory

5.1 Agency Theory

Agency theory considers the relationship between an agent and a principal. An agent is somebody
who is authorised to act on behalf of another person – the principal. This authority may often
include a wide range of powers, such as the ability to enter into contracts on behalf of the principal.

In the case of companies, the agents are the directors and managers of the company, who act on
behalf of the owners of the company.

There are two main performance management issues regarding agents:

1. How to keep them motivated;

2. How to make the agent accountable to the principal.

o The agent must be made to account for performance to the principal, for example,
by preparing financial statements and other reports.

o The principal must hold the agent to account. This means taking action to ensure
that the agent is indeed behaving in the required manner. (See Example 4)

The principle of accountability therefore requires that an organisation’s employees and managers
are motivated to do what the shareholders, say, want them to do (so that there is goal congruence)
and that their performance is monitored.

14.5.2 Motivation and Vroom’s Expectancy Theory

5.2 Motivation and Vroom’s Expectancy Theory

Vroom’s Expectancy theory is the view that an individual's motivation to do something depends on
two factors:

1. The expectation that something may happen as a result of doing something;

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2. The strength of preference for the thing that will happen.

For example, the motivation of an ACCA student to spend 100 hours studying for an exam will be
based on:

 The expectation that he/she will pass the exam as a result of studying for 100 hours.

 The motivation to pass the exam.

Expectancy theory is sometimes expressed as an equation:

Force (of motivation to do X) = Strength (of preference for outcome Y) x Expectation (that doing X
will lead to Y)

5.3 Accountability and Reward Systems

Reward systems should provide a means of monitoring the performance of the agent and motivating
the agent to do what is required of them. The following should help ensure accountability:

 Ensure agents and principals are aware of the range of performance measures that are to be
used.

 Ensure that the benefits of the performance measures have been identified.

 Determine and understand potential problems of using performance measures.

 Determine how to overcome the potential problems.

Accounting systems have a key role to play in holding the agent accountable to the principal. For
example, the comparison of budgeted performance against actual is a way of holding a manager of a
department accountable for the part of the organisation for which he is responsible.

5.3.1 Hard Accountability

Hard accountability uses quantitative and financial information. It requires the following features:

 Counting (e.g. adding the number of customer complaints).

 Accounting for the numbers (i.e. saying how and why they have occurred).

 Holding somebody accountable for the numbers (i.e. identifying who is responsible, not only
for preparing the accounting information, but also being responsible for what has occurred).

5.3.2 Soft Accountability

Soft accountability focuses on the human inputs to the system. It includes subjective assessment of
individuals, and consideration of how human behaviour affects the implementation of the
organisation's goals.

14.6.1 What Gets Measured Gets Done

6.1 What Gets Measured Gets Done

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The quotation "What gets measured gets done" has been attributed to Peter Drucker, the American
professor, management consultant and author. In his 1954 book, "The Practice of Management",
Drucker discussed the importance of defining objectives within an organisation so that management
and employees understand what they need to do. "What gets measured gets done" means that
managers and employees will try to do something well if their performance in that area is being
measured. If something is not measured, it may get ignored. The choice of targets is therefore
important to ensure employees are focussing on the right areas.

If it is the case that ‘what gets measured gets done’, there may be positive implications. If an
employee’s objectives are aligned to the organisation’s objectives and critical success factors,
meaning there is goal congruence, ‘what gets measured gets done’ should help improve
performance in key areas.

14.6.2 Potential Problems of Performance Measurement Systems

6.2 Potential Problems of Performance Measurement Systems

 Tunnel vision – "what gets measured gets done” can lead to an obsession with maximising
measured performance at the expense of non-measured performance (e.g. staff welfare).

 Sub-optimisation – focusing too much on some objectives and therefore not achieving other
important objectives.

 Myopia (short-sightedness) – maximising short-run performance at the expense of long-run

success.

 Misrepresentation – "creative" reporting or deliberate manipulation of data to make a

result appear better than it actually is (e.g. trying to classify all adverse variances as planning
variances).

 Gaming – deliberate distortion of a measure in order to secure some advantage (e.g. failing
to achieve required production quantities so that management agrees to invest in newer
machinery).

 Measure fixation – behaviour to ensure performance measures are met even if they are met
in a way that is not effective for the organisation.

 Goal incongruence – where the goals of the manager are not the same as the goals of the
organisation. For example, if a manager is judged based on the Return on Capital Employed
of his division, he will reject projects that would reduce this, even if they might increase the
overall return on capital employed of the company.

 Misinterpretation – a failure to understand the message that the performance measures are
showing. Usually this is not intentional (unlike misrepresentation), but due to a lack of
understanding the complexity of the situation.

 Ossification – resistance to change. When new performance management systems are

introduced, there will usually be some staff that are sceptical about the usefulness of such
systems

6.3 Solutions
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 Participation – involve staff at all levels in the design and implementation of the system. This
should help to overcome the problems of tunnel vision and gaming.

 Be flexible in the use of performance measures – recognising that performance measures

should not be relied on exclusively for control and that improved performance may (to some
extent) be achieved through the informal interaction of individuals and groups. This should
then go some way to reducing gaming and tunnel vision.

For example, the achievement of a performance objective (such as sales growth), would be
dependent on the collaborative action of both the main measure holder (which is the sales team),
and indirectly by production (for product quality) and other support functions (for efficiency).

A well-designed performance management system could incorporate elements which reflect the
collaboration and cooperation required to achieve that objective and share responsibility between
all parties which affect the measure.

An example of a mechanisms that could be added are collective specialist working groups which
review key factors which affect the measure; automated review process, which is triggered when
there is a change in internal or external environment; and monitoring of standards that would affect
the measure (such as product quality).

 Encourage a long-term view among staff (e.g. through company share option scheme).
However, evidence is mixed about the success of options in creating a long-term view.

 Ensure the system of performance evaluation is "audited" by experts to identify problems.

 Review the system regularly, to overcome the problems of ossification and gaming.

 Audit data used in performance measurement to prevent/detect manipulation, thereby

helping to reduce the incidence and effects of measure fixation, misinterpretation and
gaming.

Activity 1 Behavioural Challenges

The following situations illustrate some of the potential problems associated with behavioural
aspects of performance measures. For each situation, state which of the problems (tunnel vision,
myopia, etc) each situation represents:

1. An audit manager asks staff to allocate some time to "general admin" in order to reduce the
time allocated to working on a client, so that the internal reports show that the work was
performed within budget.

2. The performance of schools in the UK is measured based on exam results. Many schools
require potential students to take an entrance exam, and only admit students who pass this
exam. These schools enjoy higher pass rates.

3. Guests at a hotel are given a questionnaire to complete when they leave the hotel. The
rooms' division manager told the hotel manager, "Guests appear to be very happy; 80%
rated the service as very good". The manager forgot to mention that the questionnaire was
only given to guests who appeared to be happy when they checked out.
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4. A hospital is given a range of performance measures, including utilisation of the operating

theatre. To increase utilisation, one hospital has cut down on cleaning and many patients
have become even more ill due to the poor hygiene.

5. A pharmaceutical company has decided to reduce expenditure on research and

development. The managing director has justified this, saying, "Cutting back on research and
development will reduce our intangible assets and therefore our capital employed. This will
surely increase our return on capital employed, which should make our shares more
attractive to investors".

6. The owners of a high-class restaurant are concerned that the number of clients has fallen
dramatically over the last six months. The restaurant is located in an old industrial city.
Recently, many of the factories in the city have been closed down and relocated to China. At
a meeting of the management, the head chef stated, "We need a more adventurous menu.
If we increase our international dishes, we are bound to win back our customers".

*Please use the notes feature in the toolbar to help formulate your answer.

7.1 Hopwood's Management Styles

Hopwood's work in the 1970s looked at how different organisations applied budgeting techniques.
The conclusion of his work was that there are three types of management style which should be
considered when designing performance management systems.

1. Budget constrained – Performance is evaluated based on ability to meet the budget on a

short-term basis. Although the approach should ensure short-term targets are met, potential
side effects include short termism, deliberate distortion of results, stress, lack of flexibility,
little ingenuity and poor staff relations.

2. Profit conscious – Performance is evaluated based on the ability to improve the general
effectiveness of the specific area of the organisation in relation to the longterm objectives of
the organisation – to reduce costs and increase profit in the long term. The approach
provides the opportunity for flexibility and improves staff relations, it decreases stress and
manipulation of results but there is a reduction in short-term control.

3. Non-accounting – Budget information has little bearing on the evaluation of performance.

Indeed, budgets are not important. As the emphasis is on nonfinancial aspects of
performance, targets such as customer satisfaction and quality are more meaningful. Like
the profit-conscious style, it reduces stress and tension and distortion of results, but the
disadvantage of the approach is that financial performance might be neglected.

Hopwood suggested that the profit-conscious style was often the most optimal approach but
highlighted the importance of the need to adopt a style dependent on the organisation and its
environment.

7.1.1 Short-term and Long-term Performance Measures

The budget-constrained and profit-conscious styles provide an example of the distinction between a
focus on short-term performance targets and longer-term objectives.
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The budget-constrained style of management will lead to performance measurement focused on

short-term financial performance and cost control. Managers will be assessed on their ability to hit
short-term targets such as budgets.

In contrast, the profit-conscious style of management will lead to performance measurement

focused on long-term performance and profitability, with managers being assessed on their ability to
support the achievement of the organisation’s long-term objectives, such as increasing market
share.

Just as long-term performance can suffer if there is a focus on the short-term, a focus on the longer-
term could mean that shorter-term performance is negatively affected.

14.7.2 Organisational Culture

7.2 Organisational Culture

An alternative approach to classifying organisational culture (e.g. into Handy's stereotypes of

"power, role, task and people cultures") is to recognise a continuum with Financial Control Culture at
one extreme and Excellence/Service Culture at the other. These correspond to the extremes of
Porter's generic strategies "Least cost producer" and "Differentiation" (see Chapter 1).

7.2.1 Financial Control Culture

This culture is based on the belief that success depends on achieving efficiency. Such organisations
are likely to adopt a rigid, top-down approach to management. The budget is the key tool of
management control and managers are focused only on achieving their budgets.

The emphasis of the accounting system will be on the short-term interests of shareholders. These
would include the use of the following performance measures:

 Return on capital employed;

 Product profitability;

 Monthly performance evaluation through comparison of actual results against budget.

Managers in such organisations will be keen to improve their own department's performance,
without considering the impact on other departments.

7.2.2 Excellence/Service Culture

This culture is based on the belief that success depends on delivering high levels of customer
satisfaction. Such organisations emphasise teamwork and management control is much looser.

Management is concerned with creating teams who are dedicated to customer satisfaction and gives
those teams much more autonomy in how they do this.

Within such organisations, the management accounting system is more likely to emphasise the
following indicators of performance:

 Customer profitability analysis;

 The value of brands, knowledge and other intangible assets;

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 Comparison of performance against benchmarks, peers, and prior years, rather than on fixed
targets set at the start of the year;

 The use of a Balanced Scorecard, or similar approach, where financial performance is not the
dominant measure of success.

14 Syllabus Coverage

Syllabus Coverage

Congratulations, you have covered the following Learning Outcomes:

C. Strategic Performance Measurement

6. Performance measurement and strategic Human Resource Management issues

1. Advise on the relationship of HR management to performance measurement (performance

rating) and suitable remuneration methods.

2. Advise on the link between achievement of the corporate strategy and the management of
human resources (e.g. through the Building Block model).

3. Discuss and evaluate different methods of reward practices including the potential beneficial
and adverse consequences of linking reward to performance measurement.

7. Other behavioural aspects of performance measurement

1. Discuss the accountability issues that may arise from performance measurement systems.

2. Assess the statement, "What gets measured, gets done” in the context of performance
management.

3. Demonstrate how management style needs to be considered when designing an effective

performance measurement system (such as Hopwood’s management styles).

ummary and Quiz

 Recruiting, motivating and monitoring staff is an essential part of improving
the performance of an organisation.
 Staff appraisals aim to improve the performance of individuals. Typically,
an appraisal will include a review of the individual's performance during the
period prior to the appraisal, and the agreement of objectives for the
following period.
 Performance management of individuals aims to align the human
resources activity of an organisation with its strategy. Performance
management of employees relies on performance measures or
performance ratings systems. Performance ratings include personality
traits, quantified targets, behavioural anchored rating scales and
behavioural observation scales.
 Reward schemes are used to encourage managers to work towards the
strategic objectives of the organisation. Various types of reward schemes
exist, and there are advantages and disadvantages of each.
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 It can be difficult to align reward and performance. Fitzgerald and Moon’s

building block model provides a structure for designing effective reward
systems, which are aligned to organisational strategy.
 Agency theory is based on the premise that an agent acts on behalf of a
principal. The agent is accountable to the principal. Within an organisation,
the management are the agents, and the owners of the organisation (or
the members) are the principals.
 Hard accountability is based on quantitative and financial data. Soft
accountability is based on human input to the system.
 "What gets measured gets done" means that managers and employees
will try to do something well if their performance in that area is being
measured. If something is not measured, it may get ignored.
 There will always be potential problems with any performance evaluation
system including tunnel vision, myopia and gaming.
 The style of management and organisational culture will have an impact
on how performance is evaluated.