MEASURING AND EVALUATING PERFORMANCE

1
MEASURING AND EVALUATING PERFORMANCE






2
Annoucements

• Midterm exam
• February 25th 100 MC questions, Chapters 1
  through 7
• All chapters will be equally represented in the
  exam
• Questions will be from BOTH text as well as the
  material covered in class
• From the text you can exclude the topic
  forecasting human resource needs (pp. 109-112).
  Just read lecture notes for this topic
• You can also exclude the topic HRIS from the text
  (pp.137-144).
• Everything else is fair game.
• If you have any questions feel free to contact me
• GOOD LUCK!

3
Agenda

• What is performance
• What to measure
• Limitations of various measures
• Performance Appraisal
• Ratings and rater errors
• General recommendations

4
What is performance?

• Performance
• Observable behavior that contributes to the
  accomplishment of an organizations goals
• Task
• Citizenship
• Counterproductive
• Performance Criteria
• Measures of job performance that capture
  individual differences in the proficiency of
  job-related behaviours

5
Performance Management

• HR system that includes processes used to
  identify, encourage, measure, evaluate, improve,
  and reward employee performance
• Related to terms such as performance appraisal,
  performance evaluation, etc.
• Performance appraisal the process by which
  organizations evaluate employee performance
• Although Performance Management is often
  considered to be a broader term

6
Common Uses of Performance Appraisal

• Administrative to make employment decisions
• Promotion, termination
• Trainingwho to train what to train
• Compensationmerit increases
• Developmental
• Provide feedback / coaching
• Seek to improve performance address weaknesses
• Motivation

7
What is performance? The Criterion Problem

• Difficulties involved in determining what
  performance is and how to measure it
• Criterion Deficiency
• When performance standards fail to capture the
  full range of employees responsibilities
• Behaviours that are important for job performance
  are not assessed
• E.g., Salesperson - focused on sale revenue but
  ignore customer service
• Criterion Contamination
• When criterion measure is influenced by other
  factors that are not part of job performance
• E.g., factors outside of employees control
  influence his/her performance - machine
  breakdowns differences in sales regions

8
What is performance?

• Objective Measures
• Output
• Units produced, items sold, sales, commission
  earnings, etc.
• Quality measures
• of errors, of errors detected,
  complaints/grievances, commendations, rates of
  scrap/breakage
• Employment data
• Absences (unexcused), Lateness/tardiness,
  Accidents
• These suffer from unreliability, deficiency, and
  contamination
• Also, many jobs dont have objective outcomes

9
Potential Performance Criteria

• Ratings
• Performance appraisals by trainers, supervisors,
  peers, self
• Performance in work samples, simulations, etc.
• Others
• Counterproductive behaviours
• Safety records, accidents
• Citizenship (voluntary) behaviours

10
The Appraisal Process
11
What is performance?

• Behaviours??
• Behaviours that contribute to fulfilling job
  requirements
• Focuses on what employees do and what they have
  control over
• PA - what ees should start, stop, and continue
  doing

12
What is performance?

• Measuring behaviours requires use of ratings
• Relative Judgments
• Rankings / comparisons with other employees
• Absolute Judgments
• Comparisons with job-related standards
  checklists, rating scales, etc.

13
Potential Performance Criteria

• Ratings - referred to as Subjective Measures
• by supervisors, peers, trainers, self
• Limitation
• Ratings depend on human judgment
• Prone to biases and rating errors
• Structured rating scales have been used to reduce
  biases
• 2 common instrument types BARS, BOS

14
BARS Behaviourally Anchored Rating Scales

• Format was developed by Smith and Kendall due
  lack of standardization (and reliability) across
  raters
• Goal was to help the rater rate
• Performance standards are concrete
• Each standard consists of a number of specific,
  behavioural anchors on the rating form itself
• behavioral anchors cover the range of performance
  from excellent to poor behaviour
• Anchors are worded in the form of expectations

15
(No Transcript)
16
BOS Behavioural Observation Scales

• Focus on behaviour
• Based on job analysis often critical incident
  technique
• Performance ratings are based on the frequency
  criterion
• How often employee engages in behaviour
• Using a 5-point frequency scale

17
Developing Behavioural Observation Scales (BOS)

• Collect critical incidents
• Group similar incidents into a behavioural item
• E.g., 2 critical incidents
• Describes details of organizational change to
  subordinates
• Explains why the change is necessary
• Could be grouped into a behavioural item Provides
  employees with information about organizational
  change
• 2 more critical incidents
• (1) Listens to employee concerns
• (2) Asks employee for help in making the change
  work
• Could be grouped into a behavioural item
  Addresses employee concerns and input regarding
  change

18
Developing Behavioural Observation Scales (BOS)

• Similar behavioural items are grouped into a
  meaningful behavioural criterion
• 2 behavioural items
• Provides employees with information about
  organizational change
• Addresses/responds to employee concerns and input
  regarding change
• Combine to form the behavioural (BOS) criterion
  OVERCOMING RESISTANCE TO CHANGE
• The PA instrument is created by attaching a
  5-point rating scale to each behavioural item

19
Example of a BOS Criterion

• I. Criterion Overcoming Resistance to Change
• Provides employees with information about
  organizational change
• Almost never 1 2 3 4 5 Almost always
• Addresses/responds to employee concerns and input
  regarding change
• Almost never 1 2 3 4 5 Almost always

20
Whos perspective matters?

• Multisource (or 360) PA
• Possible rating combinations include
• Supervisors rating employees
• Employees rating supervisors
• Team members rating each other
• Employees rating themselves
• 3rd parties (customers) rating employees

21
Whos perspective matters?

• Should ratings from multiple sources be
  consistent?
• Does it matter if the appraisal is for
  administrative or developmental purposes?
• What if different sources are not consistent?

22
Factors Distorting PA Ratings aka Rating Errors

• Halo effect / error
• Leniency / Strictness error
• Central tendency
• Recency effect
• Contrast effect
• Matthew effect
• Similarity error

23
Factors Distorting PA Ratings

• Halo effect
• Tendency to provide similar ratings across
  different PA dimensions
• Leniency / Strictness error
• Leniency when ratings are restricted to high
  part of scale
• Strictness when ratings are restricted to low
  part of scale
• Central tendency
• When raters avoid extreme ratings and restrict
  ratings to middle of scale

24
Factors Distorting PA Ratings

• Recency effect
• Ratings are based largely on employees most
  recent behaviour
• Contrast effect
• When an employees evaluation is biased upward or
  downward because of a comparison with another
  employee who was recently evaluated

25
Rating Errors

• Matthew effect
• Tendency of raters to use previous evaluations as
  an anchor for subsequent evaluations
• "the rich get richer and the poor get poorer
• i.e., Employees receive the same appraisal
  results, year in and year out
• Like a self-fulfilling prophecy -- if they have
  done well, they will continue to do well if they
  have done poorly, they will continue to do poorly

26
Rating Errors

• Similarity (similar-to-me) error
• Tendency of rater to inflate ratings when they
  have something in common with the target
• Study middle class managers divided into 2
  groups
• Both groups given a detailed job description and
  then viewed videotape of someone performing the
  job well
• Group 1 heard applicant say he had 2 brothers, a
  father with a Ph.D. in physics and mother with
  MSW
• Group 2 heard applicant say he had 12 brothers
  and sisters, father was a bus driver, mother was
  a maid
• 2nd group gave significantly lower ratings

27
Pop Quiz What type of error is this

• If I dont know how to evaluate someone, I assume
  they are average.
• What type of rating error results in highly
  correlated performance dimensions?
• Using a forced distribution is primarily a
  response to what rating error?
• What is a type of rater error training that
  focuses on teaching raters the meaning of
  different levels of performance?

28
Reducing Rating Errors

• Frame of Reference (FOR) Training
• Encourage supervisors to keep notes about worker
  performance performance diary
• Improves accuracy of recall
• Build accountability into ratings
• Require raters to justify / provide evidence for
  ratings
• E.g., describe specific behaviour include
  someone who can verify etc.

29
Performance Management / Appraisal System should

1. Be based on job analysis
2. Be focused on behaviour (use BOS)
3. Be prioritized by senior management
4. Use multiple raters
5. Provide raters with extensive training
6. Ensure performance management is on-going

30
Important Elements of PA

• In general, Performance Appraisal systems like
  selection systems should be
• Valid
• Reliable
• Practical
• Free from bias / Fair

31
3 Dimensions of Fairness / Justice

• Distributive justice
• Perceived fairness of the distribution of the
  rewards
• Procedural justice
• Perceived fairness of the procedure/system used
• Voice
• Interactional justice
• Perceived fairness of the relationship with the
  rater(s) sincerity, etc.

32
Final Recommendations

• No surprises
• Its about process
• Providing feedback
• Improves performance if it focuses on
  task-relevant behaviour
• Makes performance worse if its personal
  implies traits

33
COMPENSATION






34
Agenda

• Strategic issues in Compensation
• Establishing Base Pay
• Performance-based Pay

35
Compensation

• Goals of Compensation
• Attract
• Retain
• Motivate
• Compensation costs are single largest cost
  category in most firms
• 60 in some manufacturing organizations
• Up to 80 in colleges/universities
• http//www.fin.gov.on.ca/english/publications/sala
  rydisclosure/2009/univer09.html

36
Strategic Considerations

• What criteria should determine pay?
• The job, individual KSAOs, performance,
  organizational profitability, what other orgs are
  paying?
• What pay mix should be used?
• Base, benefits, stock, performance rewards
• Should performance rewards be used?
• If so, based on individual, team, org
  performance?
• Optimal strategy is one that adds the most value
  to the firm
• May not be the lowest cost

37
Total Compensation

• Time Not Worked
• Vacations
• Holidays
• Leaves

Wages / Salaries
Base Pay
Commissions

• Insurance Plans
• Medical
• Dental
• Life

Incentives / Performance Pay
Bonuses
Pay for Performance

• Security Plans
• Pensions

• Employee Services
• Educational assistance
• Recreational programs

• can account for up to 50 of pay costs

38
Changing Compensation Systems
Traditional
Modern
39
Designing a Compensation System
Considerations in Developing a Compensation Plan
1. Internal vs External Equity
2. Below-Market vs Above-Market Pay
3. Fixed vs Variable Pay
4. Job vs Individual Pay
5. Egalitarianism vs Elitism
6. Performance vs Membership
7. Monetary vs Non-monetary Rewards
8. Open vs Secret Pay
9. Centralization vs Decentralization of Pay
Decisions
40
Pay Preferences?

• Which of the following pay systems would you
  prefer?
• Straight salary
• Variable pay system with incentives based on
  individual performance
• Variable pay system with incentives based on
  organizational performance

41
Pay Preferences?

• U.S. survey showed following preferences?
• Straight salary (63)
• Variable pay system with incentives based on
  individual performance (22)
• Variable pay system with incentives based on
  organizational performance (12)

42
Pay Paradox

• Psychologists (e.g., Kasser Ryan, 2001) and
  economists (e.g., Stutzer, 2004) have noted
• People who earn a higher income report being more
  happy and satisfied with their lives
• However,
• People who strongly value and seek money and
  financial success are less happy and satisfied

43
Monetary vs Non-Monetary Rewards

• Non-monetary rewards are intangible
• Interesting work, challenging assignments, public
  recognition
• Rank the following in order of importance?
• A) a nice boss
• B) pay level
• C) interesting work
• D) opportunity to learn new skills
• E) flexibility of work hours
• How would other people rank these?

44
Monetary vs Non-Monetary Rewards

• Whats the truth??
• People often underreport importance of pay to
  themselves
• Organizations should not underestimate importance
  of pay

45
Pay Secrecy
Advantages
Disadvantages

• Most employees prefer to have their pay kept
  secret
• Gives managers greater freedom
• Covers up inequities in the internal pay structure

• May generate distrust in the pay system
• May erode perceived link between pay and
  performance
• Tendency to overestimate others pay causes
  dissatisfaction

46
Study re the Cost of Pay Cuts

• Greenberg, J. (1990). Employee theft as a
  reaction to underpayment inequity The hidden
  cost of pay cuts. Journal of Applied Psychology,
  75, 561-568.
• Study background
• Company had lost 2 large contracts
• In lieu of layoffs, company made temporary pay
  cuts of 15 in 2 manufacturing plants

47
Research Questions

• Based on equity theory
• Would employees perceive the pay cut as unfair
  and seek to redress this via theft?
• Would the nature of the reason provided for the
  pay cut influence the degree of theft that would
  occur?

48
Rationales for Pay Cut

• In the 2 plants getting pay cut, the explanation
  for pay cut was varied
• Plant A Adequate explanation
• rationale for cut, management showed remorse
• Plant B Inadequate explanation
• rationale was minimal, no remorse
• Plant C Control plant
• A plant owned by same company where cuts were not
  necessary

49
Method

• Data collected every 2 weeks for 30 week period
• 10 weeks before, during, and after pay cut
• Plant A - n 55 Plant B - n 30 Plant C - n
  58
• Measured theft using shrinkage measure ( of
  inventory not accounted for by known usage,
  sales, etc)
• Any guesses?

50
Mean percentage of employee theft as function of
time relative to pay cut
51
Summary

• Increase in theft during underpayment period
• Moderated by adequacy of explanation
• Less theft when decision was not biased,
  authorities were sensitive to employee point of
  view, decision based on adequate information
• Preexisting differences between plants may have
  influenced results
• Conclusion
• Fairness re pay cuts has significant influence
  on employee negative reactions to pay cuts

52
Methods for Establishing Base Pay
Base Pay
Job Evaluation
Market Pricing
Skill-based Pay
53
Market Pricing

• Establishing base pay by determining the minimum
  amount of pay necessary to attract qualified
  individuals from the labour market
• Salary surveys
• Relates to external equity

54
Job Evaluation

• Job Evaluation
• The systematic process of determining the
  relative worth of jobs in order to establish
  which jobs should be paid more than others within
  an organization.
• Point system is most popular method

55
Point Method of Job Evaluation

• Establishes job values by assigning points to
  each job based on compensable factors
• key job characteristics that differentiate the
  value of various jobs,
• Factors are weighted
• Jobs are rated - points assigned
• The point totals are used to create the job worth
  hierarchy.

56
Point Values for Job Factors of The American
Association of Industrial Management
1ST 2ND 3RD 4TH 5TH FACTORS DEGREE DEGREE DEGREE
DEGREE DEGREE Skill 1. Education 14 28 42
56 70 2. Experience 22 44 66 88 110 3.
Initiative and ingenuity 14 28 42 56 70 Effort
4. Physical demand 10 20 30 40 50 5. Mental
or visual demand 5 10 15 20 25 Responsibility
6. Equipment or process 5 10 15 20 25 7.
Material or product 5 10 15 20 25 8. Safety of
others 5 10 15 20 25 9. Work of
others 5 10 15 20 25 Job Conditions 10.
Working conditions 10 20 30 40 50 11.
Hazards 5 10 15 20 25
Source Reproduced with permission of the
American Association of Industrial Management,
Springfield, Mass.
57
Pay Grade

• A grouping of jobs of similar value to the
  organization.
• How many pay grades to use?
• Could range from 4 to 15.
• It depends on the variance of wages and jobs
  across the organization, and the width of the pay
  ranges.

58
PAY GRADE STRUCTURE
575 550 525 500 475 450 425 400
Weekly Salary
V
IV
Max
III
Mid
Pay Policy Line
II
Min
I
100
150
200 250 300 350
Job Evaluation Points
59
Pay Range

• The minimum and maximum pay rates for jobs in a
  particular pay grade.
• Typically we see ranges around 80 of mid-point
  for minimum to 125 for maximum.

MAX
MID
MIN
60
Pay-for-Performance
Performance Pay
Individual Performance
Team Performance
Organizational Performance
61
Individual Incentive Plans

• Straight Piecework
• Employees receive a certain rate for each unit
  produced.
• Differential Piece Rate
• Employees whose production exceeds the standard
  amount of output receive a higher rate for all of
  their work.
• Standard hour plan
• Pay rates set based on predetermined standard
  time for completing a job
• Employees get paid for that amount of time, even
  if they finish earlier

62
Bonuses

• Bonus
• Incentive payment that is supplemental to the
  base pay
• For cost reduction, quality improvement, or other
  performance criteria.
• Spot bonus
• Unplanned bonus given for employee effort
  unrelated to an established performance measure.

63
Merit Pay

• Merit Pay (merit raise)
• Links an increase in base pay to how successfully
  an employee achieved some objective performance
  standard.
• Problems
• Inadequate funding for merit increases.
• Small raises not very meaningful / noticeable
• May undermine motivational value of merit
  increase
• Problems with defining and measuring performance.
• Merit pay decisions influenced by organizational
  politics
• Mistrust between management and employees.
• Strategic utility is questionable
• Merit raises are added to base
• Creates fixed cost, even if perf is not
  maintained

64
Lump-Sum Merit Pay

• Like a bonus
• Year-end merit payment which is not added to
  their base pay.
• Advantages
• Provides financial control does not escalate
  base salary levels
• Contains employee benefit costs often
  calculated as percentage of salary
• Provides a clear link between pay and performance

65
Individual Incentive Systems
Advantages
Disadvantages

• Performance is reinforced regularly
• Reinforcement is quick and frequent
• Effective behaviours are likely to continue
• Wages paid in proportion with performance

• Administration can be complex
• May result in inequities
• Employees may not achieve standards due to
  uncontrollable forces
• Union resistance
• Focus efforts on only one aspect e.g. sales

66
Pay-for-Performance
Advantages
Disadvantages

1. Signal key behaviours and motivate employees
2. Set performance standards
3. Support specific managerial strategies
4. Make pay more variable

1. Employees prefer predictable and certain rewards
2. line of sight shortcomings

67
Criticisms of Executive Incentive Plans

• Incentive payments are excessive compared with
  return to stockholders.
• Time periods for judging and rewarding
  performance are too short.
• Quarterly earnings growth is emphasized at the
  expense of research and development.
• Emphasis is placed upon equaling or exceeding
  executive salary survey averages.
• Benefits do not relate closely to individual
  performance.

68
Compensation

• Pay is a statement of an employees worth by an
  employer.
• Pay is a perception of worth by an employee.
• Pay carries a great deal of information about
  what the organization values
• E.g., Southwest Airlines

69
Advantages of Base Pay

• Flexibility to direct employees to a number of
  different activities or needs.
• Allows employers to recognize and encourage
  non-output based behaviours such as skill
  development.
• Signals a commitment to the employee.
• Simplicity.

70
Disadvantages of Base Pay

• Represents more of a fixed employer commitment
  than performance-contingent pay
• Does not directly motivate task behaviour
• Does not directly contribute to citizenship
  behaviour
• Not self-correcting (for performance)

71

• Group/Team Performance Pay
• Examples include profit sharing, gainsharing,
  team merit increases.
• Organization Performance pay
• Examples include profit sharing, employee stock
  ownership plans (ESOP), stock options, or pay
  based on organization level outcomes such as
  profit or return on equity (ROE).

72
The Pros of Team Incentive Plans

• Team incentives are effective when
• They support group planning and problem solving,
• The contributions of individual employees depend
  on group cooperation.
• They broaden the scope of the contribution that
  employees are motivated to make.
• They encourage cross-training and the acquiring
  of new interpersonal competencies.

73
The Cons of Team Incentive Plans

• Team incentives are ineffective when
• Individual team members perceive that their
  efforts contribute little to team success or to
  the attainment of the incentive bonus.
• Or that others shortcomings undermine their
  performance
• Intergroup social problemsfree-riders
• Complex payout formulas are difficult for team
  members to understand.