Items Description of Module

Subject Name Human Resource Management

Paper Name Performance and Compensation Management
Module Title Performance Management System
Module Id Module No. - 3
Pre- Requisites Basic understanding of purpose of Performance Management
Objectives To develop understanding of Performance Management System
Keywords Performance, Time dimension, Output, System
 QUADRANT-I

1. Module 3: Performance Management System

2. Learning Outcomes
3. Introduction
4. Relevance and features of Performance Management System
5. Conceptual Model of Performance Management System
6. Summary

1. Module 3: Performance Management System

2. Learning Outcomes:
By the end of this module, students will be able to
 understand the importance and features of performance management system
 get familiar with framework of performance management system in an organization

3. Introduction:
Performance management in any organization strives to develop an expected level of performance
by an employee, a smooth communication between managers and employees, measures actual
performance against pre set standards. In the process of performance management both individual
and organization goals are expected to be achieved. Whether an organization is doing fine totally
depends on the performance of its human components. In order to enable any idea, thought, or
intent work in an organization a well defined system is required. A system approach to any
concept clarifies how the outcome would be achieved, which would be the major components of
the system, how these components are related to each other to give a desired result. A system
approach also defines how a smaller part is contributing to the whole system. Any system works
on three basic elements i.e. input, throughput, and output. These basic elements suggest that for
any system to work efficiently certain input actions are taken including people efforts, planning,
resources and then these inputs go through a series of activities also known as throughput to
eventually get the desired output. In relation to performance, organizations generally introduce a
system that takes care of attainment of organizational goals through continuously keeping a check
on the performance of employees. Such system is popularly known as Performance Management
System or PMS.
An effective performance management system offers a unique set of tools to improve the
performance of the organization at all levels. To handle the challenges of complicated business
environment, organizations require inclusion of right kind of people that possess right kind of
skills for a job to deliver expected performance. With the passage of time, these employees
require an updation in terms of development of competencies. A performance management
system helps in identifying the training requirements at different levels through regular
monitoring and feedback about performance gaps. A successful performance management system
establishes a directly proportional relationship between rewards for performance and competency
of an individual. Apart from justified financial rewards, a PMS also provides opportunities for
development of career at individual level. Here are the few understandings and definitions related
to performance management system.
  Performance management system is a series of activities consisting of identification
of critical performance dimensions, planning of performance, setting of performance
goals, review performance and provides feedback, and finally developing the future
performance by way of training. Bhattacharya[2011]
 Performance management system enables to keep a watch on the performances of
individuals, groups, and organization as a whole.
 Performance management is a resource that is used to keep a track on the
performance of the employees in the organization. It is considered as an effective aid
for business intelligence.
 An effective performance management system establishes true pay for performance
culture in the organization and eventually offers increased employee engagement.

4. Relevance and features of Performance Management System:

Performance does not improve on its own. A system is required to manage the performance at the
expected level. Every performance management system must comprise following:
 Committed apex body: The senior management of the organization must ensure that
they themselves are committed towards improvement of performance. They must be
convinced of the basic idea of introducing performance management system in the
organization. They should believe that a systematic approach is a correct way of
improving performance. Their commitment must be displayed in their actions. If the top
management is committed and display the same through their behaviours, it will give a
positive message down the line. It will also indicate to the lower down the order that
performance would not be compromised at any cost. The top management should
mention in their formal and informal communication with all the levels about the
relevance of better performance.

Essentials of Performance Management System

Committed Complete Performance

Training Incentive
Apex Body Involvement Acknowledgment

 Complete involvement: In order to get desired results from a performance management

system involvement of each and every section of the organization is required. Goal setting
is an important aspect of performance management. As goal setting is done jointly, it
demands participation of all the people in the organization to achieve common goals. A
wholehearted involvement increases the commitment level of employees and facilitates
smooth and effective communication between managers and employees.
 Training: No manager or employee in the organization is perfect. Everyone lacks
somewhere or the other. So it is important to incorporate the component of training to
increase the effectiveness of performance management system. As managers and
employees are the integral part of a performance management system they must be
trained in their area of deficiency so that they could extract maximum benefit out of a
performance management system. A manager should be trained in the area of goal setting
in terms of its clarity and measurability. Also managers require honing of their
counselling and mentoring skills that enables them to provide appropriate feedback and
conduct a correct review of performance. The other human component of the system is
employees. Employees need to be educated to get an understanding about usefulness and
working of performance management system. Other areas that require training of an
employee are communication and skill acquisition. Organization has to understand that
training is not a onetime activity and it is essential to train as and when situation
demands.

Source: [Link]

 Performance acknowledgment: Expecting a good performance is one thing but once a

good performance is delivered it is also equally important to give it proper recognition.
Proper recognition to the excellent efforts of employees acts as a motivation factor not
only to an individual but as team. It is extremely important for developing a performance
oriented culture in the organization. A simple practice of performance recognition offers
the benefit of getting highly committed and motivated team.
 Incentive: Recognising the good performance is not sufficient. A good performance
management system must ensure that excellent efforts of the employees must be suitably
compensated through various financial and non-financial measures. An adequate linkage
between performance and incentives offered induce a high level of motivation among the
employees in an organization. It is also important to see that connecting every
performance to only financial incentive could be risky. It is suggested to create a right
balance of financial and non financial incentives for the good work of employees.

Source: [Link]
In a broader system all the sub-systems strive to achieve the main aim. On the same grounds,
performance management sub system contributes towards attainment of ultimate organizational
goals. It offers a set of techniques and tools to improve the overall attainment of organizational
performance. It encompasses inducting right kind of people in the system and providing
opportunities for continuous career development. A performance management system:
 Gives a sense of fairness and reliability
 Considers only those performance benchmarks which are predetermined jointly by
employees and managers.
 Establishes a regular communication mechanism between the managers and employees to
remind performance expectations
 Fixes accountability of the actions taken by the employees
 Provides flexibility to the whole system to accommodate newer challenges that come up
with the passage of time.
 Correlates compensation and rewards with performance.
 Ensures alignment between individual and organizational goals
 Demands maximum improvement in performance at all levels
 Provides career growth opportunities
 Fitting in right kind of people to perform a job
 Identifies the performance gaps and highlights the training needs of employees through
specific mining out their strengths and weaknesses.
 Provides freedom to teams to device their own way of working for desired performance.
 Establishes a supportive wok environment to help employees in charting out development
plan.

Source: [Link]

Any performance management system could only be established on a strong foundation. There
exist four cornerstones for establishing an effective performance management system. These
cornerstones are setting performance expectation, developing competencies, encouraging
manpower, and timely reinforcement through proper feedback. Setting performance expectations
include deciding on what has to be performed and how to get the desired performance. It acts as a
guiding force for the streamlined effort of the employees in reaching the desired results. Second
cornerstone of PMS states about the development of desired competencies to perform at the
expected level. Such knowledge and skill based competencies could be developed through
identification of training needs and fulfilling them through continuous coaching. It is a fact that
only a competent employee can deliver the high level of performances in the organization. Next
cornerstone describes the value of encouragement to get the desired performance. A highly skilled
but demotivated employee always lack in delivering high level of performance. It is important to
connect achievement of desired performance with various financial and non-financial rewards.
 Presence of performance based reward system in the organization increases the chance of
motivated workforce. Any performance without a feedback is like a ship without a rudder. It is
pertinent to establish a real time feedback system to get timely information about the
performance. Any aberration in expected performance and actual performance could be rectified
in time if a feedback system is in place. These four cornerstones of a performance management
system are committed to enhance the performance of the organization at all the levels.

5. Conceptual Model of Performance Management System

The main aim of any performance management system is to improve the performance. Each
system works on the basis of connecting various elements of the system logically to get the
desired outcome. A performance management system could deliver only through well laid
objectives which are connected through proper measurement of performance followed suitable
reward mechanism. Various elements of performance management system could be understood as
follows:
 Alignment of Objectives: Through performance management system organizational
objectives are aligned with the individual job related objectives. It involves understanding
of organizational goals which in turn helps in deciding various strategic options. Broader
organizational goals guide whether to opt for expansion, stable or retrenchment strategies.
Each such strategy provides further options to choose from. Alignment of objectives
element also focuses on the stand of organization on its competitive position. A
continuous allround effort is required to improve or even maintain the competitive
position. The important ingredients to sustain the competitive position are assessing the
strengths and weaknesses in light of changing business environment situation,
identification of various critical issues that need attention, analysis of internal and
external opportunities with a purpose of detecting potential areas of growth, and
exploration of ways to exploit maximum opportunities with the existing competencies
and resources. Here optimum utilisation of internal competencies is crucial to increase the
performance of the organization. These essentials are crucial and influence on the
organizational objectives and strategies.

Source: [Link]
 Performance Need Estimation: Once the organizational objectives are set and strategies
are finalised an assessment of performance related needs is required. Performance need
estimation involves concerns ranging from identification of competencies to the
acknowledgment of organizational value system. Identification of competencies in terms
of skills and resources is done. These competencies are instrumental in creating
competitive advantage for an organization. In today’s world, know how is considered as
the most valuable competency of an organization. The know-how is totally based on skills
and knowledge of its employees. Although each competency is susceptible to
reproduction by the competitors but highly knowledgeable workforce provides
uniqueness which is difficult to copy. An intelligent workforce is an asset to any
organization. Next step under performance need estimation involves collecting vital
concerns related information. These vital issues listing enables the organization to
identify grey areas whose presence could hamper the production of high level of
performance. need assessment aims at identifying future requirements of the organization
in the light of changing business scenario. It provides a basis for developing key success
factors related to framework, performance, and incentive.
 Identification of performance related issues, their coverage area, and magnitude of impact
on the overall attainment of organizational goals needs to be done. Once identified these
problems need to be prioritize in order of their urgency to be taken care of. So priority
setting is done for the critical issues with a backdrop of newer challenging scenario. The
final aspects of performance need estimation focus on setting a boundary for the conduct
of all the activities of the organization. This boundary is set through acknowledging the
core organizational values. These core values help the employees to obtain the desired
level of performance by using ethical means only.

Performance Management System

Activate Measuring
Performance Setting
Alignment of Perfromance Performance
Need Performance
Objectives Management Management
Estimation Expectations
Prosess Effectiveness

 Setting Performance Expectations: The next move after estimating performance related
needs is to set performance expectations for managers and employees. Achievement of
these expectations eventually results into attainment of organizational objectives. Major
deliberations under this stage involve concerns ranging from determining current
performance situation to the linkage between individual and organizational goals. Here it
is important to decide the priority of a performance on the grounds of essential to
desirable. Such exercise acts as a guide to adopt focus approach for achievement a
particular performance first. A thorough analysis of current performance clearly extracts
the area of deficiency. A gap analysis helps to identify the thrust area of improvement.
Once the actual and expected performance status is clear, both managers and employees
come together and deliberate upon the key focus areas of performance. Such key
performance parameters act as a benchmark for the success or failure of a performance
management system. They also strive to develop a strategy for effective communication.
End result of such deliberations is an agreement towards performance expectation in the
backdrop of organizational objectives. Each section of the organization is assigned key
performance parameter that becomes performance target for an individual performing a
specific job in a department. So, achievement of individual performance leads to
department or working unit performance achievement. If working unit performs well on
pre-decided parameters it eventually helps the organization achieve desired level of
performance. This stage also demands a proper alignment of individual goals with
organizational strategy otherwise the situation might deviate an employee from his
committed effort for performance.

 Activate Performance Management Process: In this phase, the manager and the
employees come together and set the tone of performance for the upcoming year. Both
the parties jointly come to a consensus regarding performance related matters for the next
 year. The focus of planning is in relation to identification of major areas where employee
has to deliver performance oriented results, specific goals that needs to be attained by the
employee in the decided areas, decision about the benchmark or performance standard
against which results are to be compared, identification of performance factors that
facilitate the smooth attainment of results, decision about the frequency of joint meetings
to provide a feedback, and finally, completion of development plan.
After planning, in execution both the parties i.e. managers and employees performs
certain tasks. The period of execution is considered as appraisal period. An employee
carries out all the activities as per planning. On the other hand a manager carries out a
regular monitoring of activities of employees and provides ongoing feedback and
suggestion for improvement. After that the actual performance of an employee during the
appraisal period is assessed. Both manager and employee independently work on their
assessment task. An employee goes for the self assessment on how he or she is able to
achieve the pre-planned goals. On the other hand manager also prepares a list on how
well the employee is able to achieve established performance factors. Then a meeting of
manager and the employee to review the performance of the appraisal period is carried
out. They meet to discuss what has been achieved and where are the gaps that need
correction. Here, the comments of manager are discussed with the employee and chance
is given to the employee to freely express his views.

Source: [Link]

 Measuring Performance Management Effectiveness: Major concerns related to

measurement of performance management effectiveness underline that employees of the
organization must be developed in order to improve on the areas of underperformance. A
holistic feedback by the manager also pinpoints the major areas low performance on
which counselling could be provided. Another issue worth mentioning under this heading
is creation and proper execution of reward management system. This system
acknowledges the efforts of an employee and links it with a suitable reward. The presence
of reward system is instrumental in keeping up the motivation level of the employees. A
performance management audit is also the integral part of performance management
system. It is used as a diagnostic tool that identifies views of employees regarding
performance management system and possibility for its benchmarking.

An effective performance management system strives to manage an organizations’ human

resource to for optimum performance. It commences at the time starting of a job end ends
when the employee get separated from the organization. Designing and planning a
performance management system demands consideration of several issues from setting of
organizational goals to the audit of the system.
6. Summary:
In relation to performance, organizations generally introduce a system that takes care of attainment of
organizational goals through continuously keeping a check on the performance of employees. Such
system is popularly known as Performance Management System or PMS. Performance management
is a resource that is used to keep a track on the performance of the employees in the organization. It is
considered as an effective aid for business intelligence. An effective performance management system
establishes true pay for performance culture in the organization and eventually offers increased
employee engagement. Every performance management system must possess certain essentials related
to issues like Committed apex body, Complete involvement, Training, Performance acknowledgment
and Incentive. Conceptual model of performance management system includes elements such as
Alignment of Objectives, Performance Need Estimation, Setting Performance Expectations, Activate
Performance Management Process and Measuring Performance Management Effectiveness.