Unit 2 - Introducing performance management

Most definitions of performance management suggest that:

•        it communicates a strategic vision to the organisation

•        it sets individual and departmental targets

•        a formal review of performance is involved

•        the review process identifies training, development and reward outcomes

•        it evaluates and refines the whole performance management process.

Managing individual performance is an issue of strategic importance; an organisation’s purposes are achieved through the sum of individual performances. Performance management is the means to link the two together; it is concerned with improving the performance of employees so that organisational objectives are achieved.

It could be argued that there is no single view of performance management. In the widest sense it can mean all of the processes directed towards performance improvement in an organisation or the focus can be much narrower, concentrating on initiatives such as performance related pay, bonuses, sales incentives and non-monetary rewards (see Figure 2.2).

There are also different degrees of emphasis on two of the main approaches to performance management:

1.            Formal systems of performance using targets, feedback and corrective action.

2.            Improving individual performance through personal development and support – a ‘people management’ approach.

The extent to which one or the other is emphasised gives very different experiences of the process. At the heart of performance management is the idea that organisational performance can be improved by designing, in a holistic way, a series of interconnected practices which encourage individual and group performance and link it to organisational goals. These interconnected practices are known as performance management systems.

Regardless of definition or emphasis central features of performance management could be said to include:

•      Improving performance. The emphasis on how to achieve this may be on systems and procedures or on personal development and motivation, or a combination of the two

•        a range of measures and approaches coordinated to achieve improved performance; this is known as a performance management system (PMS)

•        key processes common to nearly all approaches: the setting of targets and objectives, monitoring, performance review and performance improvement

•        Managers needing to understand the nature of work in organisations (the inputs, the transformation process and the outputs) to correctly interpret information on performance.

Performance management systems (PMS)

The idea of improving organisational performance is central to management thinking. In competitive markets, businesses need to strive constantly to improve their performance so that they remain viable. In many industries and also many countries too, these pressures have grown as domestic markets have become increasingly open to international competition. In the public and not-for-profit sectors, the growing use of performance benchmarking (that is, comparing performance with best practice in other organisations) has introduced similar pressures. As a result, the measurement and management of performance have become increasingly important preoccupations.

Some of the components of performance management, such as goal setting, appraisal, personal development and performance-related pay may be familiar to you already. What is important is the way they are put together or integrated. It is the integration of the components – horizontal and vertical – which provides a system to manage performance:

•        vertical integration is the linkage between corporate goals, departmental objectives and individual target setting

•        horizontal integration is the coordination of individual and team goal setting, performance standard definition, communication, monitoring, feedback, analysis of training needs and rewards to bring about the desired performance.

Figure 2.3 Vertical and horizontal integration in action

In an organisation, large or small, each department or section reviews its purposes in relation to the overall business strategy. (Ideally corporate strategy may be amended in the light of feedback from departments!) Individual objectives are then set to achieve the departmental purposes. Following evaluation of performance, performance-related payments may be triggered and/or personal development undertaken. This leads into a further round of objective setting, making the process and ongoing one and not just an ‘annual ritual’.

A number of aspects of this model are worth highlighting:

First, in its pure form, performance management assumes an (arguably) overly rational and mechanistic model of management. It draws on the idea of the control loop that you may have met in earlier Open University modules. Central to PMS are the three elements of setting objectives, reviewing performance and revising objectives and plans based on the outcomes of the review. In essence, this is a simple learning model: deviations from given objectives can be detected and corrected in the light of experience.

Second, the model assumes that organisations are unitary; that is, that clear organisational goals can be specified and that these will be shared by others in the organisation. Little allowance is made for the fact that different people and units may have their own interests and interpret organisational goals in different ways, or for the ambiguities and uncertainty of organisational life.

Third, as you will probably notice, many features of the model are not new. At the heart of PMS are the practices of individual performance appraisal, and the related aspects of performance-related rewards and development. However, what the proponents of PMS claim is new is the way in which these different aspects of managing people are linked together to form an interlocking system, along with the way in which units and individual performance are related to the overall strategy.

Unit 1 - Michigan Model

This model would be described as ‘hard’ HRM because it emphasises treating employees as a means to achieving the organisation’s strategy, as a resource that is used in a calculative and purely rational manner. Hard HRM focuses more than soft HRM does on using people as resources and as a means towards the competitive success of the organisation.

Arguably, the strength and the major limitation of their approach is that it focuses on the organisation and how it can best rationally respond to its external environment. Focusing on the level of the organisation has the advantage of drawing attention to aspects partly under the control of management, such as formal strategy, structure, and preferred culture. On the other hand, attending to the organisational level may lead managers to assume that, through organisational strategy, structure, and HR systems, they have more power than they really have to change individuals and influence the external environment.

Hard HRM assumes that increasing productivity will continue to be management’s principal reason for improving HRM.

The authors proposed a framework for strategic HRM that assumes the needs of the firm are paramount. They said in their view organisations exist to accomplish a mission or achieve objectives and that strategic management involves consideration of three interconnected issues. First, the mission and strategy must be considered because these are an organisation’s reason for being. Second, the organisation’s structure, personnel requirements, and tasks, must be formally laid out, including systems of accounting and communications. Third, HR systems need to be established and maintained because, as the authors state: ‘people are recruited and developed to do jobs defined by the organisation’s formal structure: their performance must be monitored and rewards allocated to maintain productivity’.

The Michigan model observes the different business strategies and related organisation structures can lead to contrasting styles of HRM in activities such as selection, appraisal, rewards, and development. For example, a single-product company with a traditional functional structure (that is, structured according to the various functions of the business – finance, accounting, marketing, sales, production and operations, personnel, etc.) will select its people on the basis of their expertise in the specific functions. Appraisal of employee performance will be largely informal and administered via personal contact; the reward system will vary unsystematically across the functions and employee development will be limited primarily to the functional area in which the employee works. On the other hand, a company with a multi-divisional structure and a strategy for product diversification may have a very different system of HRM. Selection would be systematic and according to both functional experience and general management ability. The appraisal system would be formal and impersonal based on quantitative criteria such as productivity and return on investment and on qualitative, subjective, judgements about individual performance. The reward system would systematically reward contribution to the diversification strategy, and it is likely that bonuses would be paid according to achievement of profitability targets. Employee development would be more complex and systematic than it would be in a company with a single-product strategy. In the multi-divisional company, employees are accustomed to being periodically transferred to different functions and areas of business. Individual development would be cross-divisional, cross-subsidiary and corporate.

The Michigan model represents the external and internal factors of HRM as a triangle

Finally, the Michigan model argues that within HRM there is a human resource cycle affecting individual and organisational performance (see Figure 2.5). It describes the four functions of this cycle as follows:

 

Performance is a function of all the human resource components: selecting people who are best able to perform the jobs defined by the structure, appraising their performance to facilitate the equitable distribution of rewards, motivating employees by linking rewards to high levels of performance, and developing employees to enhance their current performance at work as well as to prepare them to perform in positions they may hold in the future.

 

The Michigan model is ‘hard’ HRM because it is based on strategic control, organisational structure, and systems for managing people. It acknowledges the central importance of motivating and rewarding people, but concentrates most on managing human assets to achieve strategic goals. Subsequent empirical research has not produced evidence of organisations systematically and consistently practicing hard HRM, although a longitudinal study (by Truss et al., 1997) of large organisations (including BT, Citibank, Glaxo, Hewlett Packard, and Lloyds Bank) found that employees were strongly managed towards organisational goals. A company practising hard HRM would have a style of management that treats employees in a calculated way, primarily as means to achieving business goals. Its top management would aim to manage the organisation rationally and achieve a ‘fit’ between the organisation’s strategy, structure, and HRM systems.

 

 

Unit 1 - Guest Model

A second ‘soft’ HRM model came from David Guest in 1987. Guest argued that HRM in the UK should be about designing policies and practices to achieve four main outcomes: strategic integration (planning/implementation); high employee commitment to the organisation; high workforce flexibility and adaptability; and a high-quality workforce. Strategic integration means ensuring that the organisation’s business plans are implemented through appropriately designed HR polices and practices. Companies have been criticised for trading HRM and strategy separately, therefore failing to combine HRM with the business strategy.

He proposed that these four HRM outcomes will lead to the desirable organisational outcomes of: high job performance, stronger problem solving, greater change consistent with strategic goals and improved cost-effectiveness, while also reducing employee turnover, absences, and grievances. However, Guest warned that these outcomes will be achieved only if an organisation has a coherent strategy of HRM policies fully integrated into the business strategy and supported by all levels of line management.

Guest’s model is similar to the Harvard but has seven HR policy categories instead of four.

Policy formulation and implementation/management of change means establishing HR policy to explicitly identify the nature of the change required in a business and manage the process of change. Employee appraisal, training and development involve both informally and formally evaluating employee performance and the need for training and development. Once these have been evaluated, policies must be in place to ensure that timely and appropriate training and employee development occur. Communication systems are the various processes and media that the organisation uses to encourage two-way flows of information between management and employees.

Guest described progress in the UK towards HRM as being somewhat slow and ‘crab-like’. British trade unions, he wrote, have started to become more positive about HRM and will work more openly and productively with management; however, many senior managers still retain a short-term perspective on their businesses. The result is that many HR initiatives appear to employees to be management fads rather than a genuine long-term commitment to the organisation and its people.

Guest’s model constitutes soft HRM for the same reasons that the Harvard model does: both give strong recognition to the needs of employees (for example, motivation and development) in the running of the organisation. Also, both are committed to employees’ needs as long as the measures taken to meet those needs remain consistent with the strategy of the organisation and management aims

Unit 1 - Harvard Model

In 1985, Richard Walton published an article in the Harvard Business Review called ‘From Control to Commitment in the Workplace’, which popularised soft HRM as a distinctive approach to managing human resources. His argument was that effective HRM depends not on strategies for controlling employees but on strategies for winning employees’ commitment.

The Harvard model proposes that many of the diverse personnel and labour relations activities can be dealt with under four human resource (HR) categories: employee influence, human resource flow, reward systems and work systems. These are general issues that managers must attend to regardless of whether the organisation is unionised or not, whatever management style is applied, and whether it is a growing or declining business.

Employee influence
Employee influence is the question of how much responsibility, authority, and power is voluntarily delegated by management and to whom. One of the critical questions here is, if management share their influence, to what extent does this create compatibility (the word the authors used is ‘congruence’) of interests between management and groups of employees? The assumption the authors make is that any influence employees have should be compatible with management’s purpose and priorities.

Human resource flow

Human resource flow concerns managing the flow of people into, through, and out of the organisation. This means making decisions on recruitment and selection, promotion, termination of employment, and related issues of job security, career development, advancement, and fair treatment. Managers and personnel specialists, according to the Harvard model, must work together to ensure that the organisation has an appropriate flow of people to meet its strategic requirements.

Reward systems

Reward systems regulate how employees are extrinsically and intrinsically rewarded for their work. Extrinsic rewards are tangible pay and benefits: pay, overtime pay, bonuses, profit sharing, pensions, holiday entitlement, health insurance; and other benefits, such as flexible working hours. Intrinsic rewards are intangible benefits and are said to strongly influence employees’ motivation, job satisfaction, and organisational commitment. Intrinsic rewards are rewards from the work itself, such as sense of purpose, achievement, challenge, involvement, self-confidence, self-esteem, and satisfaction. The Harvard model recommends that employees should be highly involved in the design of an organisation’s reward systems but observes that final decisions, besides meeting employees’ needs, must be consistent with the overall business strategy, management philosophy, and other HRM policies.

Work systems

Work systems are the ways in which people, information, activities, and technology are arranged, at all levels of the organisation, so that work can be performed efficiently and effectively.

Policies in these four areas must be designed and applied in a coherent manner because, Beer and his co-authors argue, HRM is considerably less likely to be effective where policies are disjointed, made up of odd combinations of past practices, and are ad hoc responses to outside pressures. The four policy areas must satisfy the many stakeholders of the enterprise – for example, shareholders, employees, customers, suppliers, communities, trade unions, trade associations, and government. Employees are major stakeholders of the enterprise and it is the responsibility of managers to establish systems that promote employee influence. Some people would say that managers do not consider enough how to facilitate employee influence: indeed, Beer et al. claim that, of the four issues discussed, employee influence is the central feature of an HR system, as illustrated in the triangle in Figure 2.2.

A further recommendation of the Harvard model is that, when making HRM policy decisions, managers should consider the ‘four Cs’: commitment, competence, congruence (compatibility), and cost-effectiveness. That is, managers should ask to what extent the policies they implement will: enhance the commitment of people to their work and the organisations; attract, retain, and develop people with the needed competence; sustain congruence (compatibility) between management and employees; and be cost-effective in terms of wages, employee turnover, and risk of employee dissatisfaction.

The Harvard model is ‘soft’ HRM because it concentrates attention on outcomes for people, especially their well-being and organisational commitment. It does not rank business performance or one of the stakeholder interests – for example, shareholders – as being inherently superior to other legitimate interests, such as the community or unions. Organisational effectiveness is represented in the Harvard model as a critical long-term consequence of HR outcomes, but alongside the equally important consequences of individual and societal well-being. An organisation putting this model into practice would therefore aim to ensure that its employees were involved in their work and were able to participate in decision making. HRM policies would be developed and implemented to meet employees’ needs for influence, but within the limitation of having to be consistent with the overall business strategy and management philosophy.

Unit 1 - Why is SHRM important?

The arguments relating to the importance of strategic human resource management tend to be constructed around the claim that ‘people make the difference’. The point being made here is that other resources are available and purchasable (capital, new plant and equipment etc.) on a relatively open market but it is the creative utilisation of these resources and ideas by people (singularly and in combination) which lies at the root of creating a competitive advantage.

These arguments are in some ways similar to those which stress the importance of the resource-based view or of the role of knowledge and the importance of ‘dynamic capability’. Dynamic capability was defined by Teece et al. as a ‘firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments’ (1997, p. 516). It suggests that intangible assets, including the knowledge and skills of the workforce, can be configured so that traditional routines do not hamper responses to rapidly changing environments. Instead, more flexible, meta-routines can be created which enable organisations to be capable of a higher state of responsiveness to inherently unpredictable forces. Failure to attract, retain and motivate the right numbers and right kinds of people means that opportunities are missed and that other resources are wasted.

HR matters too, it is argued, in the way it can affect customer outcomes – that is the customer experience. The connections that lead from one to the other have been explored by a number of researchers and management consultancies. In Figure 2.1 below, Bowen and Pugh (2009) show the potential linkages across business strategy, employees’ perceptions of human resource management practices, the organisational climates that are shaped considerably by these HRM perceptions and customer outcomes such as satisfaction, quality perceptions, loyalty, and even profitability.

Unit 1 - Developing your HR strategy

Step 1 - Who needs to be involved?

Before an organisation seeks to develop an HRM strategy there is a need to determine who should be involved. The following questions, suggested by the CIPD, represent a useful starting point:

•        Is this the first time strategy is to be formulated or is it an updating of an existing strategy?

•        Does a well-defined business strategy or plan already exist? If not, what information can be obtained about business intentions?

•        What is the initial assessment of the key issues with which the HR strategy should be concerned?

•        What is the initial view of the strategic intent – how are the key issues to be addressed?

•        Are the resources available to develop and implement the strategy?

•        To what extent is top management sympathetic to the idea of an HR strategy?

•        What do top management hope to get out of it and do they recognise the link to business outcomes?

•        Will line managers support strategy initiatives and do they have the skills to implement them?

•        How are staff generally likely to react to the strategy? Can any difficulties be anticipated and, if so, how can they be dealt with?

•        Who should be involved in developing the strategy

Step 2 - Define the business strategy

This is concerned with defining the business aims and objectives. You need to focus on such issues as:
•        Are the business aims clear?

•        Are the aims shared?

•        Who is involved in the establishment of the aims?

•        Are the aims consistent?

Step 3 - Analyse the context

In developing the strategy, the CIPD (2004) state ‘… it is important that not only the provision of the business strategy is considered but also the context in which it is prepared and implemented. This means appreciating the organisation’s strengths and weakness and understanding the threats and opportunities it faces. It also means assessing the core competences of the organisation and identifying critical success factors, especially those associated with people.’

You will need to determine the information you already have available to make an assessment of the strength of the organisation and areas for development. You will also need to consider the competencies of the employees. This can be achieved from:

•        training needs analysis

•        development plans

•        performance management data

•        job descriptions

•        management feedback.

Step 4 - Identify business needs

This is the crucial stage concerned with identifying the business issues that should be addressed by the HR strategy. For example, the agreed business strategy might include plans for an approach to selling, adding quality to the level of service offered, reducing the number of offices or enhancing the role of the current support staff.
In this situation, an HR strategy would need to determine the resourcing implications in terms of:

•        job roles

•        staff numbers and skills

•        training needs

•        devise plans to satisfy them.

Step 5 - Identify key HRM issues

The key HR issues are those that directly affect the achievement of business goals. Reflect on the following issues and identify which are important to your organisation at present:

•        Communication strategies

•        Competence development

•        Corporate vision

•        Demographics

•        Diversity management

•        Downsizing

•        Employee commitment

•        Employee control

•        Employee relations

•        Empowerment

•        Ethics

•        Globalisation

•        Government and other forms of political regulation

•        Leadership development

•        Management development

•        Mergers, acquisitions and demergers

•        Mission statement

•        Organisational culture

•        Organisational development

•        Organisational entry

•        Organisational structure

•        Performance appraisal

•        Performance management

•        Political climate

•        Quality assurance

•        Recognition

•        Recruitment and selection

•        Reporting relationships

•        Resources

•        Reward management

•        Stakeholders

•         Succession planning

•        Team working

•        Training needs analysis and delivery

•         Values

Step 6 - Develop the strategic HRM framework

The strategic framework will define the main strategic goals, their interconnections and their priorities. The links between them will need to be identified so that mutually supporting processes can be developed, for example, performance management processes or human resource development programmes. This will enable priorities to be established. In some cases the strategies will be bundled together. In other cases they might be implemented in sequence on the grounds that there is only so much innovation and change that an organisation can cope with at any one time. However, the evidence suggests that a piecemeal approach to change is not as effective. It is important that interrelationships and sequencing are considered with care and nothing should be done without assessing its consequences for other aspects of the business or HR strategy.

Step 7 - Diagnosing HRM priorities

When formulating HR strategies, the key questions are:

•        What are the key components of the business strategy?

•        How can HR strategies support the achievement of the business strategy?

•        What are the strengths and weaknesses of the organisation and the opportunities and threats it faces?

•        What are the implications of the political, economic, social, technological, legal and environmental contexts in which the organisation operates?

•        To what extent is the organisation in a stable or dynamic (turbulent) environment and how will this affect our strategies?

•        What is the nature of the corporate culture? Does it help or hinder the achievement of the organisation’s goals?

•        What needs to be done to define or redefine our values in such areas as quality, customer service, innovation, team working and the responsibility of the organisation to its employees?

•        What do we need to do to increase commitment? How do we communicate our intentions and achievements to employees and what steps do we take to give them a voice (i.e. obtaining feedback from them and involving them in the affairs of the organisation)?

•        To what extent do we need to pursue a strategy of high performance or high-commitment management; what would be the main requirements of such a strategy?

•        How can we increase the resource capability of the organisation?

•        To what extent do existing HR practices meet future business needs? What needs to be done about any gaps or inadequacies?

Step 8 - Change management

The implementation of any HR strategy requires effective change management. There is often a gap between the rhetoric of HR strategies and the reality of what happens subsequently. This is essentially a change management issue. Everyone concerned with implementation needs to be included in a change management programme.
The main features of change management are:

•        hard evidence and data on the need for change

•        strong commitment and visionary leadership from the top

•        clear communication of a vision of a preferable future

•        clear understanding of the levers for change in the organisation

•        appropriate temperament and leadership from those concerned with managing change

•        a learning organisation that creates a climate for change and learns from failures

•        participation in the planning and implementation of change by those most affected by it (the aim should be to get them to ‘own’ the change)

•        a reward system that encourages innovation and recognises success in achieving change

•        strategies for change that are adaptable (the ability to respond swiftly to new situations and demands, which will inevitably arise, is essential)

•        an emphasis on change in behaviour, not enforcing values

•        processes, structure and systems designed and aligned to deliver the required changes

•        anticipation of implementation problems

•        active and visible champions of change

•        ongoing communication on why change is essential and how it will affect everyone

Step 9 - Evaluation

The final stage is to evaluate the effectiveness of HR strategies. Is it possible to demonstrate a business case for SHRM?