Sara (1999)……………………………………………………………………. 6 2.2 Extended PMS framework……………………………………………………………………………………….

Sara Saki (840916)

Head of course: Matti Skoog

Modern Ideas in Management Control

January 2018

 

 

 

Effective performance management
system framework for an organization

 

 

Table of Contents

Table of Contents……………………………………………………………………………………………………………… 2

1.    Performance management effectiveness…………………………………………………………………………… 3

1.1 Strategic and tactical goals……………………………………………………………………………………… 3

1.2 Alignment with the local culture………………………………………………………………………………… 4

1.3 Alignment between personal and organizational
goals………………………………………………………. 4

1.4 Extent of senior management involvement……………………………………………………………………. 4

1.5 Communication…………………………………………………………………………………………………… 4

1.6 Rater training……………………………………………………………………………………………………… 5

2.    The extended performance management systems
(PMSs) framework…………………………………………. 5

2.1 PMS framework proposed by Otley (1999)……………………………………………………………………. 6

2.2 Extended PMS framework………………………………………………………………………………………. 7

Conclusion……………………………………………………………………………………………………………………. 10

References…………………………………………………………………………………………………………………… 10

 

 

1.  
Performance
management effectiveness

 

According to definition of performance management, it refers
to the range of activities to enhance the performance of individuals and units
and with the ultimate purpose of improving organizational effectiveness. To
example some of the activities, which can be fitted with this definition, are,
the setting of company, department, team, and individual objectives, and the
use of assessment systems, reward strategies, training arrangements and
individual career plans. Therefore, the global goal of performance management
is to ensure that all sub-unites of the organization works together in an
optimum way to achieve organization desires 1.

As respects the question comes from inconsistently in
result about effectiveness of performance management. Inconsistencies may be
related to insufficient understanding of the factors that can enhance the
effectiveness of performance management systems. In the study was done by
Michal Biron et al. 1 was tried to address this issue by investigating
performance management systems in 16 world-leading firms. Understanding the
conditions under which performance management systems are most effective in
achieving organizational goals can help to prepare an extended framework for
effective performance management system which will be discussed in part 2 of
this study.

To evaluate the effectiveness of
performance management Michal Biron et al. 1 used signaling theory
method. According to concept of this method, people need to have enough
information to understand organization aims for future, issues which are
important for organization and what behaviors needs to cover organization
desires. In the study, this theory has been applied to wide range of topics
which cover understanding of how organizational activities may indicate
management concerns for performance management issues, and so enhance the
effectiveness of the performance management system. Four activities that can
bring attention of employees and managers into performance issues are: First,
more comprehensive study needs to be done to reflect not only feedback of
performance management, but also reflect performance management as strategic
tool for the organization, Second, involvement of senior management to success
of performance management by role of alignment between strategy and HR activities.
Third, clear communication between employees may help them to understand expectation
of the managers and organization as general and finally formal rater training
can reflect firm’s efforts to keep performance evaluation unbiased. These four
practices have been examined using qualitative data from 248 interviews in 16
worlds – leading firms across 19 countries.

 

Finding

1.1
Strategic and tactical goals

In the first part of analysis and after examination of
data, one observed that there is a general shift in organization approach from
a tactical to strategic focus. For example, in one of the companies, was
mentioned that their performance management under process shows transformation
from performance evaluation to competence development, showing growth of
individual and organization.

In many studied companies, strategic objectives were
aligned with organization objectives. HR managers can see easily number of
objectives that managers want company to achieve. They challenge themselves to
find their contribution to help reaching those objectives and also looking
around to hire people who can help.

To conclude, at the strategic level, many
organizations developed a comprehensive and long-term method for performance
management with focus on linking between employee interest and organization
goals. On the other hand, in terms of tactical goals, some looked towards
information gathering based on performance evaluation at the individual level.

 

1.2
Alignment with the local culture

Performance evaluation depends on communication with
staff to speak. This can be little linked to local culture. Even though is
almost similar for most of staff in worldwide but also can be a little different
for example in Japan.

 

1.3
Alignment between personal and organizational goals

Many companies are using scorecard, which help them to
assess hard measurement like financial issues and soft measurement like number
of training days or amount of coaching performance. This method helps companies
to align personal and organizational goals. For example, in one of the
companies ” Powerco” variation in scoreboard was linked to issues of low
performance. Following that variation, through numerous processes such employee
training and mobility help to effectively optimize company performance.

 

1.4
Extent of senior management involvement

Some part of study focused on involvement senior
managers on performance management. Interviewees from 9 out of 16 firms mentioned
while HR is usually responsible for technical aspects of performance management
(for example: annual reports, employee records and comparison of data
analysis), but senior managers are also involved especially for those managers
in charge of defining objectives of performance management. Their involvement
can be important as they can outline future direction of organization
objectives and thus can help to match this direction to performance management
objectives. The visibility of senior managers is also another reason, thus
likely to ensure that objectives are pursued. In addition the duties of low
seniors and high senior managers in respect to role on performance are different.
1

Managers at low levels are more able to identify
immediate needs and potential of their subunits while managers at high levels
expected to have clear vision to define future objectives of organizations.
There are some activities, which help managers to pursue their role on
performance management. One-to-one meetings between personals and their low
manager, review of past objectives of organization and development options
within the context of the individual’s career goals.

 

1.5
Communication

In performance management discussion, one question is
how information regarding performance expectation can be communicated to
employees. One mechanism is supervisor feedback (often can be done during
annual or more evaluation process) provides opportunities for open discussion.  

Second, any events for socialization can be used to develop
and improve certain professional and personal capabilities, mainly in response
to new business opportunities and needs under changing market conditions.  On the other hand, few organization use
communication tools such as intranet, bulletin boards, group/departmental
meetings, internal newspapers and different awards mechanism.

 These tools
provide all employees with access to information about current targets, how well
they are addressed, and how units/individuals may further assist in achieving
them.

 

1.6
Rater training

People who are involved in the performance management
process are subject to rater training.  Studies
show that it is not very common in companies to carry out rater training.
Though as alternatives, the issue of rater bias was handled by means of
multiple raters (for example: evaluation is based on many evaluators whose
scores are collected to reflect the individual’s performance) and balanced
scorecards (for example: evaluation is based on many dimensions reflecting the organizational
overview of performance).

For example, companies Digico and Infoteco mentioned
the importance of a multi-rater’s approach for performance assessments:
supervisor and subordinates’ evaluations to enhance the accuracy of the
program.

On the other hand, company Engineerco, described their
management evaluation as 360 degrees focus on management development. They have
global competencies that measure every one of their managers performance. Also,
there is questionnaire in their company, which can be send it out once a year to
all the employees where they ask questions about the organization, the
management, their thoughts on how well do they think they fit in, and are they
feeling good at work as well.

What is clear is when organization constructed and
implemented properly, performance management systems can offer many benefits.

 

2.  
The
extended performance management systems (PMSs) framework

 

Performance management system (PMS) are widely used
but still has substantial differences of meaning. One meaning is the process of
using the measurement result to evaluate performance of the organization. In
line with this definition, four steps were defined for PMS: design,
implementation, use and review. However before starting performance management
in an organization, the first step is to start strategy development, which is
organization objectives development 2. Except aforementioned general
definition, PMS has also related to some other concepts like:

• To plan work and to set expectations,

• Monitor performance,

• To develop the capacity to perform,

• Evaluate performance and to reward to the good performance,

There are five main issues that often should be
addressed to develop a framework to manage performance in an organization.
These are posed as questions and answers to these questions will help to supply
design of specific framework for PMS 3.

 

1. What are the key objectives that are important for
an organization to success and how evaluation helps to reach each of these
objectives?

2. Which strategies and plans have the organization
and which activities needs for implementation? How does measure the performance
of activities?

3. What level of performance is needed to achieve?

4. What rewards will managers (and other employees)
gain by achieving these performance targets?

5. What are the information flows that are necessary
to enable the organization to learn from its experience, and to adapt its
current behavior in the light of that experience? 3

 

Issues regarding answering those questions are complex
and intertwined and one possible way is to simplify those question is to prepare
the performance management systems framework as a research tool for describing
the structure and operation of performance management systems (PMSs).  In particular, this framework, was prepared based on
answering to 5 questions of Otley’s 4.

 

2.1
PMS framework proposed by Otley (1999)

The framework proposed by Otley (1999) highlights 5 areas,
which needs to be considered to develop structure for performance management in
an organization.

The first area addressed by his framework is to
identify organization objectives and level of achievement in each of
objectives. The second area is related to how formulate and implement strategies
and plans, this area also includes measurement of performance and assess its
implementation. The third area addressed process of setting performance targets
and level of this setting and the fourth is to bring the attention to rewards
system used by firms. Finally, the last area concern about different types of
information which needs to monitor performance 4.

 

Even though there are number of strengths for this
framework like focusing on both profit and non-profit organization, easy to
integrate with other frameworks to complement its interpretations and clear
addressing of questions which will be appeared at different level of management
but there are also number of weaknesses.  Some to mentions: firstly, it does not
consider the role of mission and vision and only touches the key areas of
control system and doesn’t address the issues regarding mechanism to bring the
objectives to the awareness of employees and managers. The second, the
framework, doesn’t emphasize the methods in which accounting and control
information is used by organizations, as against the existence of formal
control mechanisms. The third, the framework tends to look at control systems from
a static perspective, and ignoring the dynamics of control system.

Extended framework was developed by Aldónio Ferreira et al. tries to address weakness of
Otely (1998) framework and to complement interpretation of performance
management. This framework considered effectiveness of PMS and complement Otely
(1998) framework to address all PMS issues. Figure 1 demonstrated the whole
picture of this framework which all parts will be explained in following
section.

 

Figure 1 The extended performance management
systems (PMSs) framework.

 

2.2
Extended PMS framework

i. Vision and mission

What is the vision and mission of the organization and
how is this brought to the attention of managers and employees?

 

Performance management in an organization begins with
fundamental requirement for objectives which will be used to evaluate
performance. It is often organization has multiple and competing objectives.
These objectives set with senior managers and it is according to stakeholders’
expectations.

The overall direction of organization often pursues
and expressed with vision and mission statement. The mission is showing the
stakeholders expectation and vision set out the desired future state. So, the
vision and mission are more observable than objectives in an organization.

Vision and mission statements are the process to
decide what to change and what to preserve in strategic and activities in an organization
5.

 

ii. Key success factors

What are the key factors for future success of
organization and how they came to the attention of managers and employees?

 

The key success factors (KSFs) are those activities,
characteristics, capabilities, and skills needs for an organization to be
succeed at certain point of time. They need to achieve if an organization is in
progress to its vision.

KSFs are a systematization of the vision and mission
in more actual terms. for example, managers can regard growth of revenue in
foreign markets as a KSF for a vision of becoming a global market leader, or
transfer production line of production to countries with lower operating costs
like China and India for a vision of industry in low cost leading 5.

 

iii. Organization
structure

What is the organization structure and what impact
does it have on design of performance management?

The concept of organization suggest that it has been
forming to carry out activities to carry out market to increase efficiency by
reduction of transaction costs. Structure of organization then be formed to
establish any individuals and group task and roles to carry out those
activities.

Organization structure decisions are linked to KSFs and
strategic decisions. To evaluate the suitability of current organization
structure, require identification of KSFs. For example, may KSF require responding
to market quickly, which needs organization to embrace decentralization to form
and reengineer strategic relationship 5.

 

iv. Strategies and plans

What are the strategies and plans for organization
which should be adopted, and which activities required to be succeed?

 

Strategy is the way the
organization choose to achieve organization objectives in long term.  Strategy often considered as variable for
designing performance management system and different strategies have different
effectiveness on performance management 5.

 

v. Key performance
measures

What are the organization’s key performance measures? Which
role they are playing in performance evaluation?

Key performance measures are financial or
non-financial metrices which use to evaluate success in achieving objectives,
plans, KSF and strategies. They are stated in framework to show the importance
of evaluation metrices both on current organization and individual behavior.
The choice of performance measures is related to organization competitive
environment, strategy and organization design.  Even though it is importance to put these performance
measures on different areas in an organization but applying many metrics reduce
senior managers attention and can reduce their impact 5.

 

vi. Target setting

What level of performance does the organization need to
achieve for each of its key performance measures, how does it go about setting
appropriate performance targets for them, and how challenging are those
performance targets?

 

Setting of targets is one of the main aspects of
performance management. There is a reason of attention to this area in many
studies to use target setting for evaluation and rewarding performance.  There is a discussion in a framework about target
setting which reflect tension between what is desired and what is feasible in
determining targets for all areas of performance management 5.

 

vii.
Performance evaluation

Which process should use and follow for evaluating
individuals, group and organization performance? Is performance evaluation
objective, subjective or mixed?

 

In the above question, both formal evaluation and
informal are covered since middle and low managers like to be more focused in
the areas which are important for senior managers. This question is not
concerned about individuals but also concern about group, team, department and
divisions evaluation. Performance evaluation can be objective, subjective or
between. Under subjective aspect, the main focus will be placed on the areas of
performance management which are unknown. In contrast, under objective
performance evaluation, there is not any scope on unknown parts, but assessment
will be done on any actual results. Therefore, this evaluation is more accepted
in situations where input and output are clear, and performance is controllable
5.

 

viii. Reward systems

What rewards (includes financial or non-financial)
managers or employees can get by reaching to performance targets?

 

Reward is a consequence of performance evaluation and
therefore can be a next logical aspect which should be considered in the
analysis of performance management.

Reward has a broad meaning and may consider from
expressions of approval by managers or financial rewards like bonuses and
salary increases extended to long term promotion and development.

There is a complex relation between rewards,
motivation and performance perhaps more than what appears at the first look. It
has been approved that reward systems are used to motivate individuals to align
their own goals with those of the organization objectives 5.

 

ix.
Information flows, systems and networks

Which kind of information flows includes feedback
information, organization needs to be placed to support the operation of performance
management system?

 

Information flows and networking are necessary to
enable mechanisms for any performance management system, they are the linking all
parts that can keeps the whole system together. This network is like a nervous
system in the human body where information transmits from the boundaries to the
center and vice versa. Therefore, investigation of best network and information
flow system is necessary for effectiveness of performance management 5.

x.
PMS change

How performance management system changes in the light
of changes in the organization and environment?

 

Change has been considered in the extended PMS
framework. Environments change, organizations change can affect of performance
management system change. Therefore any change in the performance management
system needs to apply to both the design of the infrastructure that underpin
performance management and to the way performance management information is used
4. 

 

xi.
Strength and coherence

How strong are links between components of performance
management system?

 

To understand the operation of performance management
is crucial to study the strength of links between components in extended
performance management system framework. Therefore, there is need to align and
coordinate parts of framework together. Sometimes although all parts of
framework are well designed but since they are not fit together, the outcome is
not effective. Therefore, it is necessary to analysis and assess relation of
parts while designing of components for perfect fitting and its operation
functionality 5.

 

xii.
Performance management system use

What type of use is made of information and of the
various control mechanisms in place?

 

The last part of extended framework is belonging to
type of use in framework. The use is made of information and controls is a
basis of the PMSs. These controls can be done by senior managers, operating
managers, face to face challenge and debate, focusing on strategic uncertainly
and facilitating and supportive involvement. Each of these use and controls
need to exist in performance management system for effectiveness of framework 5.

 

Conclusion

The performance management framework discussed in this
study, provide a tool for researchers which can apply to explain the structure
and package of control by management and has been designed to ensure that
organization strategy and plans are effectively implemented. Therefore, this
framework can be designed and used in variety of organization as a research
tool to examine the structure, operation and use of PMSs in a general manner.