Chapter – 1

Performance Management and

Reward System
By
Prof. Manthan Joshi
 Overview
 Definition of Performance Management (PM)
 The Performance Management Contribution
 Disadvantages/Dangers of Poorly Implemented PM
Systems
 Definition of Reward Systems
 Aims and Role of PM Systems
 Characteristics of an Ideal PM System
 Performance management around the world
 Definition of Performance
Management

1. Continuous Process of
 Identifying
 Measuring
 Developing

The performance of individuals and

teams
Definition of PM (continued)

and
2. Aligning performance

with

Strategic Goals of the organization

Why Performance Management?
OR Why Performance needs to be
Managed?

Activity: Give your inputs by correlating PM

with this movie.
 PM is NOT performance appraisal

• Performance Management
– Strategic business considerations

– Driven by line manager

– Ongoing feedback
• So employee can improve performance
 PM is NOT performance appraisal

• Performance Appraisal
– Driven by HR
– Assesses employee
• Strengths &
• Weaknesses
– Once a year
– Lacks ongoing feedback
• Activity-1: Search and get a performance
appraisal form of any company
• Activity-2: Employee-Manager Role-Play on
How to give a feedback
Shift from Performance Appraisal
System to PMS

• Examples: Merrill Lynch and Siemens.

• Let’s take a look at the Performance

Management System of Dubai Media Inc.
[Link]
 Contributions of Performance Management
For Employees

 Clarify definitions of
 job
 success criteria

 Increase motivation to perform

 Increase self-esteem
 Enhance self-insight and development
 Contributions of Performance Management
For Managers
 Communicate supervisors’ views of performance
more clearly
 Managers gain insight about subordinates
 Better and more timely differentiation between
good and poor performers
 Employee misconduct is minimized
 Employees become more competent
 Contributions of Performance Management
For Organization/HR Function

 Clarify organizational goals

 Facilitate organizational change
 Fairer, more appropriate administrative actions
 Better protection from lawsuits
 Voice behavior is encouraged
 Employee engagement is enhanced
Disadvantages/Dangers of Poorly-implemented
PM Systems
For Employees

• Lowered self-esteem

• Employee burnout and job dissatisfaction

• Damaged relationships

• Use of false or misleading information

Disadvantages/Dangers of Poorly-implemented
PM Systems
For Managers

• Increased turnover

• Decreased motivation to perform

• Unjustified demands on managers’ resources

• Varying and unfair standards and ratings

Disadvantages/Dangers of Poorly-implemented
PM Systems
For Organization

• Wasted time and money

• Unclear ratings system

• Emerging biases

• Increased risk of litigation

Reward Systems
 Reward Systems
Definition

Set of mechanisms for distributing

 Tangible returns

and

 Intangible or relational returns

As part of an employment relationship

Continued...

• An employee’s compensation, usually referred to as tangible

returns, includes cash compensation and benefits.
• Employees also receive intangible returns, also referred to as
relational returns, which include recognition and status,
employment security, challenging work, and learning
opportunities.
• Not all types of returns are directly related to performance
management systems because not all types of returns are
allocated based on performance.
• For example, some allocations are based on seniority as
opposed to performance.
 Reward Systems

Tangible returns

Cash compensation
Base pay

Cost-of-Living & Contingent Pay

Incentives (short- and long-term)

 1. Base Pay

• Given in exchange of work performed.

• Focuses on the position and duties performed rather than an
individual’s contribution.
• Usually the same for all employees performing similar duties and
ignores differences across employees.
• Difference may be observed between wage and salary.
• Employees in most professional and managerial jobs (also called
salaried employees) cannot receive overtime pay and are
considered as exempt employees from regulations of the Fair
Labor Standards Act.
• On the other hand, nonexempt employees receive their pay
calculated on an hourly wage.
 2. Cost-of-living Adjustments(COLA)

• Implies the same percentage increase for all employees

regardless of their individual performance.
• It is given to combat the effects of inflation in an attempt to
preserve the employees’ buying power.
• According to a report of Mercer (global consultancy), projected
salary increase in India will range from 10% to 11% overall in
2017.
• India is having this stabilized salary increase of 10% since last 3
years.
• Asia’s financial hubs like Hong Kong and Singapore are forecast
to see 4.2% and 4.1% increase respectively, said Mercer in their
report “Compensation Planning for 2017”.
 3. Contingent Pay

• Sometimes referred to as Merit Pay.

• Given as an addition to the base pay based on past
performance.
• For example, the top 20% of employees in the performance
score distribution may receive 10% annual increase, whereas
employees in the middle 70% of the distribution may receive a
4% increase, and employees in the bottom 10% may receive no
increase at all.
 4. Short- Term Incentives

• Similar to contingent pay, short-term incentives are allocated based on past

performance.
• Incentives are not added to the base pay and are only temporary pay
adjustments based on the review period (e.g., quarterly or annual).
• Incentives are one-time payments and are sometimes referred to as variable
pay.
• A second difference between incentives and contingent pay is that incentives
are known to employees in advance.
• For example, an MR knows that if he meets her targets, he will receive a
10,000/- bonus at the end of the quarter. If he exceeds his targets by 10%, his
bonus will be 20,000/-.
• By contrast, in the contingent pay, in most cases, the specific value of the
reward is not known in advance.
• An attempt to motivate performance in the short term.
 5. Long-Term Incentives

• An attempt to influence future performance over a longer

period of time.
• Involves stock ownership or options to buy a stock at a pre-
established and profitable price.
• Employees will be personally invested in organization’s success.
• This investment is expected to translate into a sustained high
level of performance.
• Some organizations are taking this idea to what may be called
“Big Pay for Big Performance”.
 Case Study for Long-Term Incentives

• Denver, Colorado based energy company, Delta Petroleum gave four

top executives 1.5 million shares the day the stock closed at $21.76,
for a total value of $32.6 million.
• But there is a catch: Delta stock will have to reach $40 per share for
the executives to be able to sell theirs. If this value is not reached, the
executives shares cannot be cashed in.
• The executives will be able to sell only one sixth of their shares when
the price reaches $40.
• They will be able to sell another one sixth if and when the stock price
reaches $50, and another sixth if and when it reaches $60.
• And there is yet another restriction: Time.
• The first batch of stock that vests at $40 must reach that value within
13 months of the time the executives received the options.
• If the value of $40 is not reached within this time frame, the 2 nd and 3rd
batches of stock cannot be cashed in and they simply disappeared.
 Reward Systems
Tangible returns (continued)

Benefits, such as
Income Protection

Allowances

Work/life focus
 Income Protection

• Serves as a backup to employees’ salaries in the event that an employee is

sick, disabled, or no longer able to work. Some countries mandate income
protection programs by law.
• For example, Canadian organizations pay into a fund that provides income
protection in the case of a disability. University of Alberta, which offers a
monthly income of 70% of salary to employees who became severely
disabled.
• Other types of benefits under the income protection rubric include medical
insurance, pension plans, and savings plans. These are optional benefits
provided by organizations, but they are becoming increasingly important
and often guided an applicant’s decision to accept a job offer.
• A recent survey including both employees in general and HR professionals
in particular showed that health care/medical insurance is the most
important benefit, followed by paid time off and retirement benefits.
 Work/Life Focus
• Benefits related to work/life focus includes programs that help
employees achieve balance between work and non-work
activities.
• These include time away from work(e.g., Vacation time),
services to meet specific needs(e.g., counseling, financial
planning, on-site fitness program), and flexible work
schedules(e.g., telecommuting, nonpaid time off).
• Sun Microsystems actively promotes an equal balance between
work and home life and closes its Broomfield, Colorado, campus
from late December through early January every year.
• This benefit (i.e., vacation time for all employees in addition to
individual yearly vacation time) is part of Sun’s culture.
 Allowances

• Benefits in some countries and organizations include allowances

covering housing and transportation. These kinds of allowances are
typical for expatriate personnel and are popular for high-level
managers throughout the world.
• Other allowances can include smart phones and their monthly
charges, club and gym fees, discount loans, and mortgage subsidies.
• Some of the employees benefits directly or indirectly also produce a
benefit for employer.
• For example, smart phones means that employees are reachable via
phone, text and e-mail 24/7.
• Similarly if employees take advantage of a gym fee allowance, they
are likely to stay healthier which in turn may lead to less health-
related expenses for the organization.
 Reward Systems

Intangible returns

Relational returns, such as

Recognition and status

Employment security

Challenging work

Learning opportunities
 Returns and
Their Degrees of Dependency
on the
Performance Management System
 Returns with Low Dependency
on the
Performance Management System

 Cost of Living Adjustment

 Income Protection
 Returns with Moderate Dependency
on the
Performance Management System

 Work/Life Focus

 Allowances

 Relational Returns

 Base Pay
 Returns with High Dependency
on the
Performance Management System

 Contingent Pay

 Short-term Incentives

 Long-term Incentives
Purposes of PM Systems
 Purposes of PM Systems:
Overview

 Strategic

 Administrative

 Informational

 Developmental

 Organizational maintenance

 Documentational
Strategic Purpose

• Help top management achieve strategic business objectives by

linking the organization’s goals with individual goals.
• Serves as a way to communicate what are the most crucial
business strategic initiatives.
• Serves as a catalyst for onboarding because it allows new
employees to understand the types of behaviors and results
that are valued and rewarded, which, in turn, lead to an
understanding of the organization’s culture and its values.
Administrative Purpose

 Provide information for making decisions regarding:

Salary adjustments

Promotions

Retention or termination

Recognition of individual performance

Layoffs
 Informational Purpose

Communicate to Employees:
 Expectations

 What is important

 How they are doing

 How to improve
Developmental Purpose

 Performance feedback/coaching

 Identification of individual strengths and

weaknesses
 Causes of performance deficiencies

 Tailor development of individual career path

Organizational Maintenance
Purpose

 Plan effective workforce

 Assess future training needs

 Evaluate performance at organizational level

 Evaluate effectiveness of HR interventions

Documentational Purpose

 Validate selection instruments

 Document administrative decisions

 Help meet legal requirements

 An Ideal PM System:
14 Characteristics
1. Congruent with organizational strategy
2. Thorough
3. Practical
4. Meaningful
5. Specific
6. Identifies effective/ ineffective
performance
7. Reliable
 An Ideal PM System:
14 Characteristics (continued)
8. Valid
9. Acceptable and Fair
10. Inclusive
11. Open (No Secrets)
12. Correctable
13. Standardized
14. Ethical
 Congruent with organizational
strategy

• Consistent with organization’s strategy

• Aligned with unit and organizational goals

 Thorough

• All employees are evaluated

• All major job responsibilities are evaluated

• Evaluations cover performance for entire review

period
• Feedback is given on both positive and negative
performance
 Practical

• Available

• Easy to use

• Acceptable to decision makers

• Benefits outweigh costs

 Meaningful

• Standards are important and relevant

• System measures ONLY what employee can
control
• Results have consequences
• Evaluations occur regularly and at appropriate
times
• System provides for continuing skill
development of evaluators
 Specific

Concrete and detailed guidance to

employees
• What’s expected

• How to meet the expectations

 Identifies
effective and ineffective performance

• Distinguish between effective and ineffective

– Behaviors

– Results

• Provide ability to identify employees with

various levels of performance
 Reliable

• Consistent

• Free of error

• Inter-rater reliability
 Valid

• Relevant (measures what is important)

• Not deficient (doesn’t measure unimportant

facets of job)
• Not contaminated (only measures what the
employee can control)
 Acceptable and Fair

• Perception of Distributive Justice

– Work performed  Evaluation received 
Reward
• Perception of Procedural Justice
– Fairness of procedures used to:
• Determine ratings
• Link ratings to rewards
 Inclusive

• Represents concerns of all involved

– When system is created, employees
should help with deciding
• What should be measured
• How it should be measured
– Employee should provide input on
performance prior to evaluation
meeting
 Open (No Secrets)

• Frequent, ongoing evaluations and feedback

• 2-way communications in appraisal meeting

• Clear standards, ongoing communication

• Communications are factual, open, honest

 Correctable

• Recognizes that human judgment is

fallible
• Appeals process provided
 Standardized

• Ongoing training of managers to provide

• Consistent evaluations across

– People

– Time
 Ethical

• Supervisor suppresses self-interest

• Supervisor rates only where she has

sufficient information about the
performance dimension
• Supervisor respects employee privacy
Integration with other Human
Resources and Development
Activities
• PM provides information for:
– Development of training to meet
organizational needs
– Workforce planning

– Recruitment and hiring decisions

– Development of compensation systems

 Quick Review
• Definition of Performance Management (PM)
• The Performance Management Contribution
• Disadvantages/Dangers of Poorly Implemented PM
Systems
• Definition of Reward Systems
• Aims and Role of PM Systems
• Characteristics of an Ideal PM System
• Integration with Other Human Resources and
Development Activities