CHAPTER

FOUR

Managing Performance
and Compensation

Course manager :
Semu Bacha (Ph.D.)

06/22/2024 By: Semu B. (Ph.D.) 1

 A) Performance Management
Performance management refers to an ongoing process of identifying,
measuring, and developing the performance of the employees in the
organization.
PM is a tool that is widely used by managers to monitor and evaluate the
work performance of employees.
Its main objective is to focus on employee performance and direct their
efforts towards achieving the business goal of the organization.
It is a goal-oriented process directed toward ensuring that organizational
processes are in place to maximize the productivity of employees, teams,
and ultimately, the organization.

06/22/2024 By: Semu B. (Ph.D.) 2

 Why is performance management important?
• To increase employee engagement: via providing them with learning
and development opportunities, a clear career path in the organization, and an
understanding of their role’s impact on meeting organizational goals.
• To future-proof workforce’s skills: it helps to uncover potential skills
and performance gaps in the organization.
• To enhance employee retention: When an employee can see their
progression at work and clearly understands their career path and what they need to do
to earn a promotion, it leads to more engaged employees who are likely to stay with
your organization.
• To promote culture of feedback and trust: When managers are open
and give honest, constructive feedback to employees, this encourages employees also to
be open and honest, building mutual trust. It also fosters a healthy overall
• To improve organizational performance: Managing employee
performance ultimately leads to significant improvements in organizational
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performance, including revenue growth and customer satisfaction.
 Managing Employee’s Performance

HIGH
Solid Performers Misdirected Effort
• Reward good performance • Coaching
• Identify development • Performance feedback
opportunities • Training and assignment for
• Provide honest, direct skill development
MOTIVATION

feedback • Restructured job assignment

Under-utilizers Dead wood

• Give honest, direct feedback • Withholding pay increases
• Provide counselling • Demotion
LOW

• Use team building and conflict

resolution
• Reprimand (oral/written)
• Link rewards to performance • Firing
outcomes
HIGH LOW
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ABILITY
 Stages of performance management: 4 stages

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• Employee performance metrics can be grouped into four core
categories:
1.Work quality metrics: e.g. MBO, product defects, number of
errors, Net promoter score, 360-degree feedback, 180-degree feedback
2.Work quantity metrics: e.g. number of sales, number of clients
served, number of units produced etc.
3.Work efficiency metrics: wise utilization of prevailing
organizational resources
4.Organizational performance metrics: e.g. revenue per
employee, absenteeism rate etc.

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Research shows that organizations with employees who are more satisfied with their
company’s approach to performance management are:

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 ?
What are the characteristics of better
Performance Management system? (3’)
 Characteristics of better Performance Management system:
Aligned with organizational goals, culture and values
Fair and Accurate: free from personal bias e.g. using 360-degree appraisal
system
The system must be efficient
Continuous, flexible, and intuitive (intelligent insights)
Focus on employee development
Help with goal setting and tracking (SMART goals)
Customization, Security, and Integration with other HR
technologies and tools
Supports learning culture in organization

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 B) Performance Appraisal (PA)
Performance appraisal (PA) is a formal system of review and
evaluation of individual or team task performance
PA is especially critical to the success of performance
management
Performance appraisal is the key ingredient of performance
management.

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 The Performance Appraisal Process
1st Establish performance standards
2nd Communicating the standards set for employees
3rd Measuring of the actual performances
4th Comparing actual performance with standards set in the
beginning
5th Discussion with the concerned employee
6th Initiate corrective action

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 • Traditional Approach
A. Essay Method/Free Form method: involves a description of the
performance of an employee by his/her superior. Cons: the
inseparability of the bias of the evaluator.
B. Straight Ranking Method: the appraiser ranks the employees
from the best to the poorest on the basis of their overall performance.
C. Paired Comparison Method: it compares each employee with all
others in the group, one at a time. After all the comparisons on the
basis of the overall comparisons, the employees are given the final
rankings.
D. Forced distribution: The ratings of employees in a particular group
are disbursed along a bell curve, with the supervisor allocating a
certain percentage of the ratings within the group to each performance
level on the scale.
E. Critical Incidence Method: the evaluator rates the employee on
the basis of critical events and how the employee behaved during
those incidents.
F. Checklist Method: The rater is given a checklist of the descriptions
of the behavior of the employees on job.
G. Graphing Rating Scale: an employee’s quality and quantity of
work is assessed in a graphic scale indicating different degrees of a
particular trait (personal characteristics and characteristics related to
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the on the job performance of the employees).
e.g. for graphic rating scale:
Q1: How would you rate Mr. X’s ability to communicate?
1- Very poor (Mr. X fails to reveal critical information, is terrible with clients, or
confuses coworkers)
2- Below Average (Mr. X has trouble communicating with coworkers and customers)
3- Average (Neither excellent nor bad with words)
4- Good (Mr. X communicates with colleagues and customers well and on time)
5- Excellent (Mr. X’s communication skills boost the efficiency of their team)
Q2: This employee has a strong desire to succeed independently.
1. Strongly disagree (The employee needs micromanagement and doesn’t complete responsibilities
unless encouraged)
2. Disagree (The employee rarely takes the initiative)
3. Neutral (The employee’s self-motivation isn’t clear, or they haven’t had many chances to be
proactive)
4. Agree (The employee makes an effort to help out where they can and rarely needs reminders to finish
their work.
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 Modern methods of appraisal

Appraisal by results /MBO

Behaviorally Anchored Rating Scale (BARS)

Modern Methods
of performance Assessment Center
appraisal
360 degree Appraisal
BSC

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 1. Appraisal by results/MBO
Steps
1st Subordinate prepare a plan for specific period with mutual
consultation
2nd Evaluation criteria prepared with mutual consultation
3rd At the end of specific period (mostly in one year) the superior
makes performance evaluation
4th Superior discuss the results with subordinates
Limitations
Emphasis on achievement alone
Emphasis on present performance
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 2. Behaviorally Anchored Rating Scale/BARS/
It’s new technique which combines the graphic rating scale and critical
incidents method.
Steps
Identification of performance measure-dimension of the job identified
Identification of critical behaviors
Retranslation of critical behaviors-ensure the reliability of critical
behaviors
Scaling of critical behaviors
Development of the BARS instrument: Likert scale 1 to 7 is used
from extremely poor to extremely good performance.
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 Examples of BARS for Ability to Present Positive Company Image

Extremely good performance Makes excellent impression on college recruits.

7
• Good performance Makes good impression on college recruits

Slightly good performance Makes a reasonable impression on college recruits.

Neither…. nor …performance Makes a fair impression on college recruits.

Slightly poor performance Attempts to make a good impression on college recruits.

Poor performance At times makes poor impression on college recruits

1 Even with repeated instructions continues to make a

Extremely poor performance poor impression
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 BARS
Advantages
 It’s behaviorally based
 It’s easy to use
 It’s equitable
 It’s fully individualized
 It’s action-oriented
Disadvantage
 Time-consuming, difficult, and expensive
 It’s demanding of managers
 the scale is not relatively reliable

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 3. Assessment Centers
 It involves the use of methods like social/informal events, tests and exercises,
assignments being given to a group of employees to assess their competencies
to take higher responsibilities in the future.
Basic purpose:
 To assess objectively various relevant skills related to interpersonal
interaction, creativity, organizing and planning, resistance to stress,
motivation to work, dependence on others etc.
Advantages
1. Useful for forecasting future performance
2. High reliability, content validity and predictive ability compared to other
methods
3. Useful for defining the criteria for selection and promotion
Disadvantages
 Costly
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process By: Semu B. (Ph.D.) 20
 4. 360-degree feedback appraisal/Multi-rater method
360-degree feedback appraisal: Is the process of systematically gathering data
on person’s skills, abilities, and behaviors from a concerned variety of sources

Rating form Manager

Peers Rating form

Self
Rating form

Customers Rating form Subordinate

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 360-degree feedback appraisal…
Advantages
 Brings concerned people together
 Identifies development opportunities
 Core competencies adhered to
Disadvantages
 Inadequate feedback if Poor leadership
 Feedback may swiftly forgotten

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5) Balanced scorecard – an approach given by Kaplan and Norton provides a
framework of various measures to ensure the complete and balanced view of the
performance of the employees.
– Balanced scorecard focuses on the measures that drive performance
 The four Perspectives are:
– The financial measures –include the results like profits, increase in the market
share, return on investments and other economic measures as a result of the
actions taken.
– The customers’ measures- These measures help to get on customer
satisfaction, the customer’s perspective about the organization, customer loyalty,
acquiring new customers.
– The internal business process–are the measures related to the organization’s
internal processes which help to achieve the customer satisfaction. It includes
the infrastructure, the long term and short term goals and objectives,
organizational processes and procedures, systems and the human resources.
– The learning & growth perspective – it covers the organization's ability to learn,
innovate and improve. They can be judged by employee skills matrix, key
competencies, value added and the revenue per employee.
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 ?
What do you think are the barriers to
effective performance appraisal? (3’)
 Barriers to effective performance appraisal
Barriers to effective appraisal can be grouped into three categories:
Faulty assumption, Psychological Block & Technical pitfalls
1. Faulty assumption:
Managers take a particular appraisal system as perfect
Managers assume that personal opinion is better than formal appraisal
2. Psychological blocks
Managers feeling of insecurity
Appraisal as an extra burden
Feeling of disliking by subordinates
Detest/dislike to communicate poor performance subordinates
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3. Technical pitfalls
3.1. Criterion problem: Ambiguity, vagueness, and generality of criteria are
difficult hurdles for any process to overcome.
3.2 Distortion: biases and errors in making the evaluation introduced by evaluator consciously
or unconsciously.
Central tendency: Considering all employees as an average;
Hallo/Horns effect: rater is influenced by ratee’s one or two outstandingly good (or
bad) performances and he evaluates the entire performance accordingly.
Stereotype: failing to discriminate between superior and inferior persons.
Leniency: being highly merciful/negligent
Contrast errors: difference between easy raters and tough raters
Raters liking and disliking: Personal factors and emotions; Raters may give
high for a person whom they like favoritism/nepotism)

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The Halo Effect: the tendency of the manager to overrate a favored
employee.
Reasons:
i. Effect of past record (spill-over effect) – Because the person has done
good work in the distant past
ii. Compatibility – with the rater, e.g. personality match, who agrees with
us, who nods their heads when we talk, or who—even better—makes notes of
our words
iii. Effect of recency – An outstanding job done recently
iv. The one-asset person – The persuasive talker, the person with an
impressive appearance or an advanced degree,
v. The blind-spot effect –here the supervisor doesn’t see certain types of
defects because they are just like his or her own.
vi. The high-potential effect –judging the person’s paper record, rather than
what she has accomplished for the organization.
The no-complaints bias
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The Horn Effect: the tendency to rate a person lower than the circumstances
justify.
Reasons:
i. The manager is a perfectionist
ii. The oddball effect (nonconformity) -The employee is contrary –employee’s
tendency to disagree too often on too many issues.
iii. Membership in a weak team
iv. The guilt-by-association effect –judging an employee based upon the
company he keeps.
v. The dramatic-incident effect – A recent mistake can wipe out the effect of
months of good work
vi. The personality-trait effect- The employee who is too cocky, too impatient,
too humble, or too passive or who lacks some trait the manager associates with
good employees
vii. The self-comparison effect – The person who does the job differently from
the way the manager did it when she still had that job suffers more than a person
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whose job the manager has never done.
 Overcoming Barriers to Appraisal
 Adoption of contemporary appraisal system
Conducting more frequent appraisal
Changing from a directive to supportive approach.
Obtaining appraisal data from multiple source – e.g. 360 degree
Appraising on the basis of input competency rather than process outcomes
 Objectivity in appraisal and feedback system
Articulating Bias: Study the types of bias and errors most common in performance
appraisals.
Turn the confrontation into discussion
Fairness in appraisal ---includes procedural fairness, interpersonal
fairness, and outcome fairness. e.g. The appraisal should be made by the person
who have intensive knowledge of the working of the appraise; Reliability of
appraisal system; open appraisal result; Effective feedback system
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 C) Compensation Management (CM)
 Compensation refers to a wide range of financial and non financial
rewards to employees for their services rendered to the organization.
 Compensation is a return received in an exchange for employees efforts
and ideas at workplace.
 CM is concerned with designing and implementation of total compensation
packages
Objectives
To establish a fair and equitable remuneration
To attract and retain competent personnel
To improve productivity
To improve union management relations
To improve motivation and job satisfaction of employees
To increase self-confidence
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 Components of compensation
A) Financial Compensation
– Direct Financial Compensation
 Salary: money paid on monthly or annual basis to employees whose
output can not be easily quantified. E.g. Fulltime workers
 Wage: payments based on the number of units (hours, days) that a
person works
 Bonus: Payment offered to employees in recognition of successful
performance
 Commission: special form of incentive in which payments to sales
representatives are made on the basis of a percentage of the
sales value they generate
– Indirect Compensation/Fringe benefits
– Employee benefits such as insurance, paid time off, …
06/22/2024 – Employee services such asB.education,
By: Semu (Ph.D.) recreation, … 31
 Insurance Benefits: insurance coverage for employees or
their families. Here organizations can purchase life, health and work
related accident insurance.
 Security Benefits: These are non-insurance benefits that
provide income protection to employees before and after
retirement. Provision of such benefits is based on earnings and years
of services in the organization. The benefits are effective during
separation, retirement, death, and disability.
 Time-off Benefits (PTO): In this type of benefit employees
are paid for time not involved in performance. Time-off benefits
include sick leave, holidays, maternity leave, paternity leave,
study (education) leave, sabbatical leaves and other related
leave of absence.
 Employee Services: These services include educational
assistance, subsidized food services, financial and social
services and the like.
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B) Non-Financial Compensation
– The Job itself
 Interesting duties and responsibilities
 Mentally challenging task
 Opportunity for growth
 Opportunity for recognition
 Opportunity for achievement
– The Job Environment
 Sound policies
 Comfortable working condition
 Job sharing
 Competent supervision
 Trust, respect and cooperation
 Flexi-time etc.

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 Compensation management process

Determine the critical goals for the

organization
Translate critical goals into realistic
performance expectations
Establish specific performance
responsibilities

Develop accurate performance measures

Compensate employees for results and

values received
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 Determinants of compensation plan
External factors
– Nature of human resource market: Demand and supply;
Productivity; Prevailing market rates
– Cost of living
– Social factors
– Trade union and legal framework
Internal factors
– Organization’s strategy
– Organizational attitudes
– Ability to pay
– Nature of job
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