Performance Management – A Historical Overview

Performance Management is a shared process between managers and individuals, based on the principles of an agreed contract rather than top down task directives. It involves agreement on objectives, knowledge, skills and competency requirements to do the work and supported by development plans to close agreed gaps. It involves a joint and continuing dialogue that constantly reviews and improves the contract between the individual and the manager. It is an integrating process linking corporate, functional, team and individual objectives in a partnership approach. It is not handed down or 'done' to people by superiors and neither is it an imposed HR chore. Performance Management is a process and not a system. It is about the actions that people take to deliver day-to-day results and manage performance in themselves and others. It is about an understanding of what high performance and competence looks like and what those subjects are about in any given organisation. It is an approach to managing and developing people (a way of working day-to-day). Ultimately Performance Management is about the success of individuals in their jobs, making best use of their abilities, realising their full potential and ensuring their alignment to the corporate agenda, therefore maximising their contribution to the success of the organisation.

Performance Management emerged in the late 1980's with the arrival of Strategic Human Resource Management (HRM) as an integrated approach to the management and development of people which saw the decentralisation of this critical function to line management. HRM recognised that the management of performance was something to be carried out on a continuous basis, not a yearly event controlled centrally by HR, and could only be done by the line manager. It paralleled the 'new' thinking on corporate culture, driven by core values and the need for processes that would help to change behaviour and align employees to corporate values and goals. Recognition of the need for employee participation and engagement in any process regarding their performance, brought about by the expansion on motivational theory beyond Maslow (1943) and Herzberg (1959) to include more integrated accounts based on the work of McGregor (1960) Vroom and Deci (1974), Nadler and Lawler (1983)  and Steers and Porter (1987), established a need for a process that would incorporate these ideas and move beyond the now discredited precursors to Performance Management of the 'Merit System', 'Management by Objectives' and 'Performance Appraisal'.

Whilst Performance Management incorporates elements of each of its predecessors, in its most developed form, Performance Management is distinguishable and unique. The Merit System or Rating System originated in the 1940's and 1950's and required managers to rate employees on both work and personality factors. A rating scale of 1 to 5 was the normal ranging from 1 (poor) to 5 (Outstanding).  Work factors were typically defined as knowledge of job, output, accuracy etc. whilst personality factors were typically defined as confidence, attitude, judgement etc. Invariably the Merit System was used to trigger pay reviews. As they were not tied to objectives they tended to generalise, were inherently subjective and attempted to quantify the patently unquantifiable judgements of personality. Although simple Merit Systems have been discredited and no hard evidence exists to demonstrate they actually improve performance they still, in practice, exist today - in some cases masquerading as Performance Management systems. 

Management by Objectives was popular in the 1960's and 1970's, the term being coined by Drucker in 1955. Management by Objectives was in essence the principle of the cascade – from corporate objectives to unit objectives to individual objectives to review of individual objectives, review of unit objectives and back to review of corporate objectives. It was a feedback loop characterised by extensive paperwork and adherence to rules and methods of the system as opposed to a process of working. Furthermore it concerned itself primarily with the managers of the organisation with the employees invariably subjected to the pre-existing merit system. It was a top down process which did not engage with employees and paid little attention to core values or their communication.

Performance Appraisal systems emerged in the late 1970's and into the 1980's. They were a mix of the Merit system and Management by Objectives. They were more often than not the property of the Personnel Department and were imposed bureaucratic systems. They tended to operate top down and were focused on the annual appraisal meeting which was retrospective in its approach.  They quickly became perceived as the trigger for reward and hence the emergence of the concept of pay-related–reward or performance-pay. The word appraisal itself undermines the process as it conjures images of something that is done to individuals, with neither the manager nor subordinate comfortable with the notion of one person telling another person what they think about them.

True Performance Management where it is practised today is unique and distinguishable from its predecessors. It does contain elements of all previous systems from the merit scale to the cascade to the annual review meeting. It differs in the following:

1. Performance Management is a way of continuous working for all participants in a partnership. It is about day-to-day not year-to-year.
2. Performance Management is primarily concerned with what needs to be done both in terms of objectives to be achieved and the individual's development needs to achieve them. It is about tomorrow and not yesterday.
3. Performance Management is owned by line management and the employee and not the preserve of HR.
4. Performance Management is a primary tool in corporate communication and employee engagement and delivery of the desired corporate culture.
5. Performance Management is about aligned and integrated effort, recognising the importance of everyone and everyone's responsibility and accountability for performance.
6. Performance Management is about developing the individual to maximise their performance capabilities and recognises the differences in individual capability.
7. Performance Management measures performance objectively with equal concern for input (knowledge, skills, expertise and competence) and output (results and contribution).
8. Performance Management is embedded in the inverted hierarchy. Employees deliver output, quality and customer satisfaction, managers provide strategy and structure. It is the manager's role to support the employee and not the other way around. Managers can only be successful if their reports are successful. It is their job to remove any barriers to performance.
9. Performance Management does not rely on elaborate forms and systems. The less administrative burdens on all concerned the better the process. Performance Management is more concerned with the nature and value of the process for the manager and the employee than it is in the content of the Performance Management documentation and system.
10. Performance Management demands training for all involved, particularly in the areas of goal setting, coaching and feedback.
11. Performance Management is concerned with standards and equality of practice and will always have a quality assurance process.
12. Performance Management will always be high on the Senior Executive team's agenda.

Performance Management can be and is distinguishable from its predecessors. It has a much wider remit than improving individual performance or dealing with poor performance. It is about integrated and sustained high performance within an organisation. It is about realising the full potential and capacity of the Human asset and aligning that capacity and potential to organisation aims. It is about creating an environment where individuals can realise their own potential and in the words of McGregor (1960) “create the conditions such that the members of the organisation can achieve their own goals best by directing their efforts towards the success of the enterprise”.

Performance Management – The ODD Consult Approach

Performance Management is a central delivery tool for any organisation. The development of comprehensive skills in Performance Management is essential to the delivery of a high performance culture. These skills must be developed at all levels in the organisation and the primary focus of these skills must be in goal setting.

A fundamental to any Performance Management methodology is the Performance Management Cascade. The cascade assumes that all activities at all levels in the organisation are linked to delivering the mission and strategic objective. In principle, if each individual achieves their goals over time, they will contribute to departmental achievement and collectively the achievement of departmental objectives will deliver the operational objectives year to year culminating in the achievement of the strategic objective.

There are five critical elements to the Performance Management Cascade:

• Job Descriptions
• The goals cascade
• Goal setting skills
• Process and documentation
• Quality assurance

Each of these needs to be addressed in turn. It can take up to two years to fully embed a Performance Management process and it requires considerable effort from the organisation both in terms of time, money and perseverance. None of these can be underestimated. Without an effective and embedded process an organisation cannot expect to achieve its aim of a high performance culture and it is unlikely to achieve its strategic objectives. Failure to address these elements of a process will lead the process into disrepute and see it rapidly become a HR paper exercise and system returning little for the individual or the organisation. Training and support is essential at the outset.

The recommended best practice approach to Performance Management has been successfully implemented in a number of blue-chip organisations based on the five elements above. It is recommended that organisations follow this approach.

Performance Management Operational Costs

As part of our on-going research at ODD Consult we have investigated the actual costs of maintaining a Performance Management system. We have conducted specific Client research where we have used their actual labour costs and system investment costs. For the purposes of this exercise and in an attempt to provide readers with estimated costs we are using an average labour cost of €25.00 per hour. Time inputs are calculated based on average estimated time per review session.

Assuming a 4 cycle Performance Management process as recommended in this document the estimated ongoing costs of a system are as follows:

Based on the above average of 20 hours per employee per annum to complete a four cycle Performance Management process at an average cost of €25.00 per hour labour cost, the annual estimated average cost per employee is €500.00. For an organisation employing 100 the actual time cost is €50,000.00 per annum - for 500 employees €250,000.00 – for 1000 employees €500,000.00. Additional costs that also need to be considered include: - Costs of refresher training and new entrant training - Quality assurance costs based on 4 review meetings per annum - IT associated costs - Consumables – forms, manuals etc. - Management time in Mission development, operational target development and functional/division objectives.

These are real costs and are incurred regardless of the quality of the system or indeed its outputs. The need for quality assurance and a continuous attention to the return on investment has to be a critical element of a developed Performance Management process. It is doubtful if such expenditure in any other area of a business would be considered acceptable without quality assurance and a detailed examination of the return on investment.

Despite the very high costs associated with the maintenance and implementation of Performance Management, it is estimated through research that organisations that achieve a strong and consistent culture, of which a developed and effective Performance Management process is a quintessential element, can gain a productivity return of one/two hour's productivity per employee per day compared to those organisations who do not deliver on Performance Management. The realised returns far exceed the costs.

**The above estimates of time assume practised participants operating in an effective system. In many cases the time to develop and write up goals can take longer. Additionally where a process is appraisal, yearly based, carried out because of its imposed nature and not effective or hold meaning for participants, it may well be detracting from the business. In this instance the opportunity cost must also be added to the overall cost.

For further information on Performance Management and ODD Consult's experience in implementing effective systems contact T.J.Byrne@oddconsult.com or telephone Dublin +353-1-6627861