Chapter 1 Performance Management and Reward Systems in Context A manager is responsible for the application and performance of knowledge. —Peter F. Drucker Learning Objectives By the end of this chapter, you will be able to do the following: • Explain the concept of performance management (PM). • Distinguish performance management from performance appraisal. • Explain the many advantages and make a business case for implementing a well-designed performance management system. • Recognize the multiple negative consequences that can arise from the poor design and implementation of a performance management system. These negative consequences affect all the parties involved: employees, supervisors, and the organization as a whole. • Understand the concept of a reward system and its relationship to a performance management system. • Distinguish among the various types of employee rewards, including compensation, benefits, and relational returns. • Describe the multiple purposes of a performance management system including strategic, administrative, informational, developmental, organizational maintenance, and documentational purposes. • Describe and explain the key features of an ideal performance management system. • Create a presentation providing persuasive arguments in support of the reasons that an organization should implement a performance management system, including the purposes that performance management systems serve and the dangers of a poorly implemented system. • Note the relationships and links between a performance management system and other human resources functions, including recruitment and selection, training and development, workforce planning, and compensation. • Describe and explain contextual and cultural factors that affect the implementation of performance management systems around the world. 1.1 Definition of Performance Management Consider the following scenario: Sally is a sales manager at a large pharmaceutical company. The fiscal year will end in one week. She is overwhelmed with end-of-the-year tasks, including reviewing the budget she is likely to be allocated for the following year, responding to customers’ phone calls, and supervising a group of 10 salespeople. It’s a very hectic time, probably the most hectic time of the year. She receives a phone call from the human resources (HR) department: “Sally, we have not received your performance reviews for your 10 employees; they are due by the end of the fiscal year.” Sally thinks, “Oh, those performance reviews....What a waste of my time!” From Sally’s point of view, there is no value in filling out those seemingly meaningless forms. She does not see her subordinates in action because they are in the field visiting customers most of the time. All that she knows about their performance is based on sales figures, which depend more on the products offered and geographic territory covered than the individual effort and motivation of each salesperson. And, nothing happens in terms of rewards, regardless of her ratings. These are lean times in her organization, and salary adjustments are based on seniority rather than on merit. She has less than three days to turn in her forms. What will she do? She decides to follow the path of least resistance: to please her employees and give everyone the maximum possible rating. In this way, Sally believes the employees will be happy with their ratings and she will not have to deal with complaints or follow-up meetings. Sally fills out the forms in less than 20 minutes and gets back to her “real job.” There is something very wrong with this picture, which unfortunately happens all too frequently in many organizations. Although Sally’s HR department calls this process “performance management,” it is not. Performance management is a continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization. Let’s consider each of the definition’s two main components: 1. Continuous process. Performance management is ongoing. It involves a never-ending process of setting goals and objectives, observing performance, and giving and receiving ongoing coaching and feedback.1 2. Alignment with strategic goals. Performance management requires that managers ensure that employees’ activities and outputs are congruent with the organization’s goals and, consequently, help the organization gain a competitive advantage. Performance management therefore creates a direct link between employee performance and organizational goals and makes the employees’ contribution to the organization explicit. Note that many organizations have what is labeled a “performance management” system. However, we must distinguish between performance management and performance appraisal. A system that involves employee evaluations once a year without an ongoing effort to provide feedback and coaching so that performance can be improved is not a true performance management system. Instead, this is only a performance appraisal system. Performance appraisal is the systematic description of an employee’s strengths and weaknesses. Thus, performance appraisal is an important component of performance management, but it is just a part of a bigger whole because performance management is much more than just performance measurement.2 As an illustration, consider how Merrill Lynch has transitioned from a performance appraisal system to a performance management system. Merrill Lynch is one of the world’s leading financial management and advisory companies, with offices in 37 countries and private client assets of approximately US$ 1.6 trillion (http://ml.com/). As an investment bank, it is a leading global underwriter of debt and equity securities and strategic adviser to corporations, governments, institutions, and individuals worldwide. Recently, Merrill Lynch started the transition from giving employees one performance appraisal per year to focusing on one of the important principles of performance management: the conversation between managers and employees in which feedback is exchanged and coaching is given if needed. In January, employees and managers set employee objectives. Mid-year reviews assess what progress has been made toward the goals and how personal development plans are faring. Finally, the end-of-the-year review incorporates feedback from several sources, evaluates progress toward objectives, and identifies areas that need improvement. Managers also get extensive training on how to set objectives and conduct reviews. In addition, there is a Web site that managers can access with information on all aspects of the performance management system. In sharp contrast to its old performance appraisal system, Merrill Lynch’s goal for its newly implemented performance management program is worded as follows: “This is what is expected of you, this is how we’re going to help you in your development, and this is how you’ll be judged relative to compensation.”3 As a second example, consider the performance management system for managers at Germany-based Siemens, which provides mobile phones, computer networks, and wireless technology and employs 475,000 people in 190 countries (www.siemens.com). At Siemens, the performance management system is based on three pillars: setting clear and measurable goals, implementing concrete actions, and imposing rigorous consequences. The performance management at Siemens has helped change people’s mind-set, and the organization is now truly performance oriented. Every manager understands that performance is a critical aspect of working at Siemens, and this guiding philosophy is communicated in many ways throughout the organization.4 Performance management systems that do not make explicit the employee contribution to the organizational goals are not true performance management systems. Making an explicit link between an employee’s performance objectives and the organizational goals also serves the purpose of establishing a shared understanding about what is to be achieved and how it is to be achieved. This is painfully clear in Sally’s case described earlier: from her point of view, the performance review forms did not provide any useful information regarding the contribution of each of her subordinates to the organization. Sally’s case is unfortunately more common than we would like. A survey conducted by the consulting firm Watson Wyatt showed that only 3 in 10 employees believe their companies’ performance review systems actually helped them improve their performance.5 In subsequent chapters, we describe best practices on how to design and implement performance management systems. For now, however, let’s say that well-designed and implemented performance management systems make substantial contributions to the organization. This is why a recent survey of almost 1,000 HR management professionals in Australia revealed that 96% of Australian companies currently implement some type of performance management system.6 Similarly, results of a survey of 278 organizations, about two-thirds of which are multinational corporations, from 15 different countries, indicated that about 91% of organizations implement a formal performance management system.7 Moreover, organizations with formal and systematic performance management systems are 51% more likely to perform better than the other organizations in the sample regarding financial outcomes, and 41% more likely to perform better than the other organizations in the sample regarding other outcomes including customer satisfaction, employee retention, and other important metrics. Based on these results, it is not surprising that senior executives of companies listed in the Sunday Times list of best employers in the United Kingdom believe that performance management is one of the top two most important HR management priorities in their organizations.8 Let’s describe these performance management contributions in detail. 1.2 The Performance Management Contribution There are many advantages associated with the implementation of a performance management system.9 A performance management system can make the following important contributions:10 1. Motivation to perform is increased. Receiving feedback about one’s performance increases the motivation for future performance. Knowledge about how one is doing and recognition about one’s past successes provide the fuel for future accomplishments. 2. Self-esteem is increased. Receiving feedback about one’s performance fulfills a basic human need to be recognized and valued at work. This, in turn, is likely to increase employees’ self-esteem. 3. Managers gain insight about subordinates. Direct supervisors and other managers in charge of the appraisal gain new insights into the person being appraised. The importance of knowing your employees is highlighted by the fact that the Management Standards Centre, the government-recognized organization in the United Kingdom for setting standards for the management and leadership areas, has recognized that developing productive relationships with colleagues is a key competency for managers (http://www.management-standards.org, Unit D2). Gaining new insights into a person’s performance and personality will help the manager build a better relationship with that person. Also, supervisors gain a better understanding of each individual’s contribution to the organization. This can be useful for direct supervisors as well as for supervisors once removed. 4. The definitions of job and criteria are clarified. The job of the person being appraised may be clarified and defined more clearly. In other words, employees gain a better understanding of the behaviors and results required of their specific position. Employees also gain a better understanding of what it takes to be a successful performer (i.e., what are the specific criteria that define job success). 5. Self-insight and development are enhanced. The participants in the system are likely to develop a better understanding of themselves and of the kind of development activities that are of value to them as they progress through the organization. Participants in the system also gain a better understanding of their particular strengths and weaknesses that can help them better define future career paths. 6. Administrative actions are more fair and appropriate. Performance management systems provide valid information about performance that can be used for administrative actions such as merit increases, promotions, and transfers as well as terminations. In general, a performance management system helps ensure that rewards are distributed on a fair and credible basis. In turn, such decisions based on a sound performance management system lead to improved interpersonal relationships and enhanced supervisor–subordinate trust.11 For example, a good performance management system can help mitigate explicit or implicit emphasis on age as a basis for decisions. This is particularly important given the aging working population in the United States, Europe, and many other countries around the world.12 7. Organizational goals are made clear. The goals of the unit and the organization are made clear, and the employee understands the link between what she does and organizational success. This is a contribution to the communication of what the unit and the organization are all about and how organizational goals cascade down to the unit and the individual employee. Performance management systems can help improve employee acceptance of these wider goals (i.e., organizational and unit levels). 8. Employees become more competent. An obvious contribution is that employee performance is improved. In addition, there is a solid foundation for helping employees become more successful by establishing developmental plans. 9. Employee misconduct is minimized.13 Employee misconduct is an increasingly pervasive phenomenon that has received widespread media coverage. Such misconduct includes accounting irregularities, churning customer accounts, abusing overtime policies, giving inappropriate gifts to clients and potential clients hoping to secure their business, and using company resources for personal use. Although some individuals are more likely to engage in misconduct compared to others based on individual differences in personality and other attributes, having a good performance management in place provides the appropriate context so that misconduct is clearly defined and labeled as such and identified early on before it leads to sometimes irreversible negative consequences. 10. There is better protection from lawsuits. Data collected through performance management systems can help document compliance with regulations (e.g., equal treatment of all employees regardless of sex or ethnic background). When performance management systems are not in place, arbitrary performance evaluations are more likely, resulting in an increased exposure to litigation for the organization. 11. There is better and more timely differentiation between good and poor performers. Performance management systems allow for a quicker identification of good and poor performers. Also, they force supervisors to face up to and address performance problems on a timely basis (i.e., before the problem becomes so entrenched that it cannot be easily remedied). 12. Supervisors’ views of performance are communicated more clearly. Performance management systems allow managers to communicate to their subordinates their judgments regarding performance. Thus, there is greater accountability in how managers discuss performance expectations and provide feedback. Both assessing and monitoring the performance of others are listed as key competencies for managers by the Management Standards Centre (www.management-standards.org, Units B3, B4, and B7). When managers possess these competencies, subordinates receive useful information about how their performance is seen by their supervisor. 13. Organizational change is facilitated. Performance management systems can be a useful tool to drive organizational change. For example, assume an organization decides to change its culture to give top priority to product quality and customer service. Once this new organizational direction is established, performance management is used to align the organizational culture with the goals and objectives of the organization to make change possible. Employees are provided training in the necessary skills and are rewarded for improved performance so that they have both the knowledge and motivation to improve product quality and customer service. This is precisely what IBM did in the 1980s when it wanted to switch focus to customer satisfaction: the performance evaluation of every member in the organization was based, to some extent, on customer satisfaction ratings regardless of function (i.e., accounting, programming, manufacturing, etc.).14 For IBM as well as numerous other organizations, performance management provides tools and motivation for individuals to change, which, in turn, helps drive organizational change. In short, performance management systems are likely to produce changes in the culture of the organization and, therefore, the consequences of such cultural changes should be considered carefully before implementing the system.15 As noted by Randy Pennington, president of Pennington Performance Group, “The truth is that the culture change is driven by a change in performance. An organization’s culture cannot be installed. It can be guided and influenced by policies, practices, skills, and procedures that are implemented and reinforced. The only way to change the culture is to change the way individuals perform on a daily basis.”16 14. Motivation, commitment, and intentions to stay in the organization are enhanced. When employees are satisfied with their organization’s performance management system, they are more likely to be motivated to perform well, to be committed to their organization, and not try to leave the organization.17 For example, satisfaction with the performance management system is likely to make employees feel that the organization has a great deal of personal meaning for them. In terms of turnover intentions, satisfaction with the performance management system leads employees to report that they will probably not look for a new job in the next year and that they don’t often think about quitting their present job. As an illustration of this point, results of a study including 93 professors at a university in South Africa suggested that the implementation of a good performance management system would be useful in preventing them from leaving their university jobs.18 15. Voice behavior is encouraged. A well-implemented performance management system allows employees to engage in voice behavior that can lead to improved organizational processes. Voice behavior involves making suggestions for changes and improvements that are innovative, challenge the status quo, are intended to be constructive, and are offered even when others disagree.19 For example, the performance review meeting can lead to a conversation during which the employee provides suggestions on how to reduce cost or speed up specific process. 16. Employee engagement is enhanced. A good performance management system leads to enhanced employee engagement. Employees who are engaged feel involved, committed, passionate, and empowered. Moreover, these attitudes and feelings result in behaviors that are innovative and, overall, demonstrate good organizational citizenship and take action in support of the organization. Employee engagement is an important predictor of organizational performance and success and, consequently, engagement is an important contribution of good performance management systems.20 Table 1.1 lists the 16 contributions made by performance management systems. Recall Sally’s situation earlier in the chapter. Which of the contributions included in Table 1.1 result from the system implemented at Sally’s organization? For example, are Sally’s employees more motivated to perform as a consequence of implementing their “performance management” system? Is their self-esteem increased? What about Sally’s Table 1.1 Contributions of Performance Management Systems Motivation to perform is increased. Self-esteem is increased. Managers gain insight about subordinates. The definitions of job and criteria are clarified. Self-insight and development are enhanced. Administrative actions are more fair and appropriate. Organizational goals are made clear. Employees become more competent. Employee misconduct is minimized. There is better protection from lawsuits. There is better and more timely differentiation between good and poor performers. Supervisors’ views of performance are communicated more clearly. Organizational change is facilitated. Motivation, commitment, and intentions to stay in the organization are enhanced. Voice behavior is encouraged. Employee engagement is enhanced. Box 1.1 What CEOs Say About the Contribution of Performance Management Systems A study conducted by Development Dimensions International (DDI), a global human resources consulting firm specializing in leadership and selection, found that performance management systems are a key tool that organizations use to translate business strategy into business results. Specifically, performance management systems influence “financial performance, productivity, product or service quality, customer satisfaction, and employee job satisfaction.” In addition, 79% of the CEOs surveyed say that the performance management system implemented in their organizations drives sthe “cultural strategies that maximize human assets.”21 insight and understanding of her employees’ contributions to the organization? Is Sally’s organization now better protected in the face of potential litigation? Unfortunately, the system implemented at Sally’s organization is not a true performance management system but simply an administrative nuisance. Consequently, many, if not most, of the potential contributions of the performance management system are not realized. In fact, poorly implemented systems, as in the case of Sally’s organization, not only do not make positive contributions but also can be very dangerous and lead to several negative outcomes. 1.3 Disadvantages/Dangers of Poorly Implemented PM Systems What happens when performance management systems do not work as intended, as in the case of Sally’s organization? What are some of the negative consequences associated with low-quality and poorly implemented systems? Consider the following list: 1. Increased turnover. If the process is not seen as fair, employees may become upset and leave the organization. They can leave physically (i.e., quit) or withdraw psychologically (i.e., minimize their effort until they are able to find a job elsewhere). 2. Use of misleading information. If a standardized system is not in place, there are multiple opportunities for fabricating information about an employee’s performance. 3. Lowered self-esteem. Self-esteem may be lowered if feedback is provided in an inappropriate and inaccurate way. This, in turn, can create employee resentment. 4. Wasted time and money. Performance management systems cost money and quite a bit of time. These resources are wasted when systems are poorly designed and implemented. 5. Damaged relationships. As a consequence of a deficient system, the relationship among the individuals involved may be damaged, often permanently. 6. Decreased motivation to perform. Motivation may be lowered for many reasons, including the feeling that superior performance is not translated into meaningful tangible (e.g., pay increase) or intangible (e.g., personal recognition) rewards. 7. Employee burnout and job dissatisfaction. When the performance assessment instrument is not seen as valid and the system is not perceived as fair, employees are likely to feel increased levels of job burnout and job dissatisfaction. As a consequence, employees are likely to become increasingly irritated.22 8. Increased risk of litigation. Expensive lawsuits may be filed by individuals who feel they have been appraised unfairly. 9. Unjustified demands on managers’ and employees’ resources. Poorly implemented systems do not provide the benefits provided by well-implemented systems, yet they take up managers’ and employees’ time. Such systems will be resisted because of competing obligations and allocation of resources (e.g., time). What is sometimes worse, managers may simply choose to avoid the system altogether, and employees may feel increased levels of overload.23 10. Varying and unfair standards and ratings. Both standards and individual ratings may vary across and within units and be unfair. 11. Emerging biases. Personal values, biases, and relationships are likely to replace organizational standards. 12. Unclear ratings system. Because of poor communication, employees may not know how their ratings are generated and how the ratings are translated into rewards. Table 1.2 summarizes the list of disadvantages and negative consequences resulting from the careless design and implementation of a pserformance management system. Once again, consider Sally’s organization. What are some of the consequences of the system implemented by her company? Let’s consider each of the consequences listed in Table 1.2. For example, is it likely that the performance information used is false and misleading? How about the risk of litigation? How about the time and money invested in collecting, compiling, and reporting the data? Unfortunately, an analysis of Sally’s situation, taken with the positive and negative consequences listed in Tables 1.1 and 1.2, leads to the conclusion that this particular system is more likely to do harm than good. Now think about Table 1.2 Disadvantages/Dangers of Poorly Implemented Performance Management Systems Increased turnover Use of false or misleading information Lowered self-esteem Wasted time and money Damaged relationships Decreased motivation to perform Employee job burnout and job dissatisfaction Increased risk of litigation Unjustified demands on managers’ and employees’ resources Varying and unfair standards and ratings Emerging biases Unclear ratings system Box 1.2 What Happens When Performance Management Is Implemented Poorly? One example of a poorly implemented performance management system resulted in a $1.2 million lawsuit. A female employee was promoted several times and succeeded in the construction industry until she started working under the supervision of a new manager. She stated in her lawsuit that once she was promoted and reported to the new manager, the boss ignored her and did not give her the same support or opportunities for training that her male colleagues received. After eight months of receiving no feedback from her manager, she was called into his office, where the manager told her that she was failing, resulting in a demotion and a $20,000 reduction in her annual salary. When she won her sex-discrimination lawsuit, a jury awarded her $1.2 million in emotional distress and economic damages.24 the system implemented at your current organization or at the organization you have worked for most recently. Take a look at Tables 1.1 and 1.2. Where does the system fit best? Is the system more closely aligned with some of the positive consequences listed in Table 1.1 or more closely aligned with some of the negative consequences listed in Table 1.2? One of the purposes of a performance management system is to make decisions about employees’ compensation (e.g., pay raises). For many employees, this is perhaps one of the most meaningful consequences of a performance management system. Chapter 10 provides a detailed discussion of how a performance management system is used to allocate rewards. However, here we will discuss some basic features of reward systems and the extent to which the allocation of various types of rewards is dependent on the performance management system. 1.4 Definition of Reward Systems An employee’s compensation, usually referred to as tangible returns, includes cash compensation (i.e., base pay, cost-of-living and merit pay, short-term incentives, and long-term incentives) and benefits (i.e., income protection, work/life focus, tuition reimbursement, and allowances). However, employees also receive intangible returns, also referred to as relational returns, which include recognition and status, employment security, challenging work, and learning opportunities. A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employment relationship. It should be noted that not all types of returns are directly related to performance management systems. This is the case because not all types of returns are allocated based on performance. For example, some allocations are based on seniority as opposed to performance. The various types of returns are defined next.25 1.4.1 Base Pay Base pay is given to employees in exchange for work performed. The base pay, which usually includes a range of values, focuses on the position and duties performed rather than an individual’s contribution. Thus, the base pay is usually the same for all employees performing similar duties and ignores differences across employees. However, differences within the base pay range may exist based on such variables as experience and differential performance. In some countries (e.g., United States), there is a difference between wage and salary. Salary is base cash compensation received by employees who are exempt from regulations of the Fair Labor Standards Act and, in most cases, cannot receive overtime pay. Employees in most professional and managerial jobs (also called salaried employees) are exempt employees. On the other hand, nonexempt employees receive their pay calculated on an hourly wage. 1.4.2 Cost-of-Living Adjustments and Contingent Pay Cost-of-living adjustments (COLA) imply the same percentage increase for all employees regardless of their individual performance. Cost-of-living adjustments are given to combat the effects of inflation in an attempt to preserve the employees’ buying power. For example, in 2003 in the United States, organizations that implemented a COLA used a 2.1% pay increase. In 2001, this same percentage was only 1.4%. Year-by-year COLA percentages can be obtained from such agencies as the Social Security Administration in the United States (http://www.ssa.gov/OACT/COLA/colaseries.html). Contingent pay, sometimes referred to as merit pay, is given as an addition to the base pay based on past performance. Chapter 10 describes the topic of contingent pay in detail. In a nutshell, contingent pay means that the amount of additional compensation depends on an employee’s level of performance. So, for example, the top 20% of employees in the performance score distribution may receive a 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. 1.4.3 Short-Term Incentives Similar to contingent pay, short-term incentives are allocated based on past performance. However, 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 in advance. For example, a salesperson in a pharmaceutical company knows that if she meets her sales quota, she will receive a $3,000 bonus at the end of the quarter. She also knows that if she exceeds her sales quota by 10%, her bonus will be $6,000. By contrast, in the case of contingent pay, in most cases, the specific value of the reward is not known in advance. 1.4.4 Long-Term Incentives Whereas short-term incentives usually involve an attempt to motivate performance in the short term (i.e., quarter, year) and involve cash bonuses or specific prizes (e.g., two extra days off), long-term incentives attempt to influence future performance over a longer period of time. Typically, they involve stock ownership or options to buy stocks at a pre-established and profitable price. The rationale for long-term incentives is that employees will be personally invested in the organization’s success, and this investment is expected to translate into a sustained high level of performance. Both short-term and long-term incentives are quite popular. Take, for example, the public sector in the United States. A survey administered in late 1998 to 25 state and 400 Box 1.3 Short-Term Incentives for Physicians Short-term incentives are being used in a test pilot program in Colorado Springs, Colorado. Eight health-care providers and three insurance companies have teamed up with the nonprofit Colorado Business Group on Health to pay physicians up to $100 in cash per patient for providing diabetes care that results in positive outcomes for patients. Doctors in the program receive the additional pay as an incentive without an increase to base salary. The program requires doctors to work closely with patients and focus on preventative medicine, including education, goal-setting, and follow-up meetings. Physical indicators, such as blood pressure, blood sugar, and cholesterol, are measured against goals to determine whether successful outcomes are being achieved. The goals of the program are to provide better disease control for the patient and to cut down on expensive future treatments, such as emergency room visits and inpatient stays in the hospital. Additional savings are expected through reduced medical claims and health insurance premiums paid by employers. In summary, the health providers and insurers are utilizing short-term incentives as part of the performance management systems with the goal of motivating physicians to focus on treatments that will enhance the overall health and well-being of the patient in an ongoing manner.27 local governments employing more than six people showed that all but one of the state governments and 242 (i.e., 85%) of the local governments used some type of incentive.26 Some organizations are taking this idea to what may be called “big pay for big performance.” Contingent pay plans will be discussed in detail in Chapter 10. In the meantime, consider the case of a Denver, Colorado, energy company, Delta Petroleum, which gave four top executives 1.5 million shares the day the stock closed at $21.76, for a total value of $32.6 million.28 However, 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. Moreover, 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 second and third batches of stock cannot be cashed in and they simply disappear. 1.4.5 Income Protection Income protection programs serve 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. Take, for instance, the University of Alberta, which offers a monthly income of 70% of salary to employees who become severely disabled. In the United States, employers pay 50% of an employee’s total contribution to Social Security so that income is protected for family members in case of an employee’s death or a disability that prevents the employee from doing substantial work for one year and for an employee when he or she reaches retirement age. For example, a 40-year-old employee earning an annual salary of $90,000 and expected to continue to earn that salary until retirement age would receive about $1,400 a month if he retired at age 62, about $2,000 a month if he retired at age 67, and about $2,500 if he retired at age 70. 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 guide an applicant’s decision to accept a job offer. In fact, 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.29 1.4.6 Work/Life Focus Benefits related to work/life focus include programs that help employees achieve a better balance between work and nonwork 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). For example, 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. Sun believes in a work hard–play hard attitude, as is evidenced by CEO Scott McNealy’s motto: “Kick butt and have fun.”30 1.4.7 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. In South Africa, for example, it is common for a transportation allowance to include one of the following choices:31 • The employer provides a car and the employee has the right to use it both privately and for business. • The employer provides a car allowance, more correctly referred to as a travel allowance, which means reimbursing the employee for the business use of the employee’s personal car. Other allowances can include smart phones and their monthly charges, club and gym fees, discount loans, and mortgage subsidies.32 Although these allowances are clearly a benefit for employees, some of them directly or indirectly also produce a benefit for the 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. 1.4.8 Relational Returns Relational returns are intangible in nature. They include recognition and status, employment security, challenging work, opportunities to learn, and opportunities to form personal relationships at work (including friendships and romances).33 For example, Sun Microsystems allows employees to enroll in SunU, which is Sun’s own online education tool. SunU encapsulates a mix of traditional Table 1.3 Returns and Their Degree of Dependency on the Performance Management System Return Degree of Dependency Cost-of-living adjustment Low Income protection Low Work/life focus Moderate Allowances Moderate Relational returns Moderate Base pay Moderate Contingent pay High Short-term incentives High Long-term incentives High classroom courses with online classes that can be accessed anywhere in the world at any time.34 Sun offers its employees enormous scope for development and career progression, and there is a commitment to ensuring that all employees are given the opportunity to develop professionally. The new knowledge and skills acquired by employees can help them not only to further their careers within Sun but also to take this knowledge with them if they seek employment elsewhere. Thus, some types of relational returns can be long-lasting. Table 1.3 includes a list of the various returns, together with their degree of dependency on the performance management system. As an example of the low end of the dependency continuum, cost-of-living adjustment has a low degree of dependency on the performance management system, meaning that the system has no impact on this type of return. In other words, all employees receive this type of return regardless of past performance. On the other end, short-term incentives have a high degree of dependency, meaning that the performance management system dictates who receives these incentives and who does not. Long-term incentives (e.g., profit sharing and stock options, which are discussed in more detail in Chapter 10) also have a high degree of dependency; although this type of incentive is not specifically tied to individual performance, it does depend on performance measured at the team, unit, or even organizational levels. Between the high and low end, we find some returns with a moderate degree of dependency on the performance management system such as base pay, a type of return that may or may not be influenced by the system. Think about the performance management system of your current employer, the system used by your most recent employer, or the system in place at an organization where someone you know is employed at present. Based on Table 1.3, try to think about the various types of tangible and intangible returns allocated in this organization. To what extent is each of these returns dependent on the organization’s performance management system? 1.5 Aims and Role of PM Systems The information collected by a performance management system is most frequently used for salary administration, performance feedback, and the identification of employee strengths and weaknesses. In general, however, performance management systems can serve the following six purposes: strategic, administrative, informational, developmental, organizational maintenance, and documentational purposes.35Let’s consider each of these purposes in turn. 1.5.1 Strategic Purpose The first purpose of performance management systems is to help top management achieve strategic business objectives. By linking the organization’s goals with individual goals, the performance management system reinforces behaviors consistent with the attainment of organizational goals. Moreover, even if for some reason individual goals are not achieved, linking individual goals with organizational goals serves as a way to communicate what are the most crucial business strategic initiatives. A second strategic purpose of performance management systems is that they play an important role in the onboarding process.36 Onboarding refers to the processes that lead new employees to transition from being organizational outsiders to organizational insiders. Performance management serves as a catalyst for onboarding because it allows new Box 1.4 How Sears Uses Performance Management to Focus on Strategic Business Priorities New leadership at Sears is utilizing performance management practices and principles to align human resources with business strategy. Headquartered in Hoffman Estates, Illinois, Sears Holdings Corporation is the third largest broad-line retailer in the United States, with approximately $55 billion in annual revenues and with approximately 3,900 retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden products, home electronics, and automotive repair and maintenance. The company is the nation’s largest provider of home services, with more than 13 million service calls made annually. Following the merger with Kmart Corp. and Sears, Roebuck & Co., Aylwin B. Lewis was promoted to chief executive and tasked with a strategic culture change initiative in hopes of reinvigorating the struggling retail company. A strategic objective is to move from an inward focus to a customer service approach. A second key objective is to bring about an entrepreneurial spirit where store managers strive for financial literacy and are challenged to identify opportunities for greater profits. Several aspects of the performance management system are being utilized to achieve these strategic objectives. For example, employee duties and objectives are being revised so that employees will spend less time in back rooms and more time interacting with customers to facilitate purchases and understand customer needs. In addition, leadership communication with employees and face-to-face interaction are being encouraged. Lewis spends three days per week in stores with employees and frequently quizzes managers on their knowledge, such as asking about profit margins for a given department. The greatest compliment employees receive is to be referred to as “commercial” or someone who can identify opportunities for profits. All Sears headquarters employees are also required to spend a day working in a store, which many had never done before. Executive management has identified 500 employees who are considered potential leaders and given training and development opportunities specifically aimed at cultural and strategic changes. In sum, the performance management system at Sears is used as a strategic tool to change Sears’ culture because senior management views encouraging key desired behaviors as critical to the company’s success in the marketplace.37 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. 1.5.2 Administrative Purpose A second function of performance management systems is to furnish valid and useful information for making administrative decisions about employees. Such administrative decisions include salary adjustments, promotions, employee retention or termination, recognition of superior individual performance, identification of poor performers, layoffs, and merit increases. Therefore, the implementation of reward systems based on information provided by the performance management system falls within the administrative purpose. For example, the government in Turkey mandates performance management systems in all public organizations in that country with the aim to prevent favoritism, corruption, and bribery and to emphasize the importance of impartiality and merit in administrative decisions.38 1.5.3 Informational Purpose Performance management systems serve as an important communication device. First, they inform employees about how they are doing and provide them with information on specific areas that may need improvement. Second, related to the strategic purpose, they provide information regarding the organization’s and the supervisor’s expectations and what aspects of work the supervisor believes are most important. 1.5.4 Developmental Purpose As noted earlier, feedback is an important component of a well-implemented performance management system. This feedback can be used in a developmental manner. Managers can use feedback to coach employees and improve performance on an ongoing basis. This feedback allows for the identification of strengths and weaknesses as well as the causes for performance deficiencies (which could be due to individual, group, or contextual factors). Of course, feedback is useful only to the extent that remedial action is taken and concrete steps are implemented to remedy any deficiencies. Feedback is useful only when employees are willing to receive it. Organizations should strive to create a “feedback culture” that reflects support for feedback, including feedback that is nonthreatening and is focused on behaviors and coaching to help interpret the feedback provided.39 Another aspect of the developmental purpose is that employees receive information about themselves that can help them individualize their career paths. Thus, the developmental purpose refers to both short-term and long-term aspects of development. 1.5.5 Organizational Maintenance Purpose A fifth purpose of performance management systems is to provide information to be used in workforce planning. Workforce planning comprises a set of systems that allows organizations to anticipate and respond to needs emerging within and outside the organization, to determine priorities, and to allocate human resources where they can do the most good.40 An important component of any workforce planning effort is the talent inventory, which is information on current resources (e.g., skills, abilities, promotional potential, and assignment histories of current employees). Performance management systems are the primary means through which accurate talent inventories can be assembled. Other organizational maintenance purposes served by performance management systems include assessing future training needs, evaluating performance achievements at the organizational level, and evaluating the effectiveness of HR interventions (e.g., whether employees perform at higher levels after participating in a training program). These activities cannot be conducted effectively in the absence of a good performance management system. 1.5.6 Documentational Purpose Finally, performance management systems allow organizations to collect useful information that can be used for several documentation purposes. First, performance data can be used to validate newly proposed selection instruments. For example, a newly developed test of computer literacy can be administered to all administrative personnel. Scores on the test can then be paired with scores collected through the performance management system. If scores on the test and on the performance measure are correlated, then the test can be used with future applicants for the administrative positions. Second, performance management systems allow for the documentation of important administrative decisions. This information can be especially useful in the case of litigation. Several companies implement performance management systems that allow them to accomplish the multiple objectives described earlier. For an example of one such company, consider the case of SELCO Credit Union (http://selco.org/selco/about.asp) in Eugene, Oregon, a not-for-profit consumer cooperative that was established in .41 SELCO’s eight branches serve nearly 80,000 members. SELCO offers many of the same services offered by other banks, including personal checking and savings accounts, loans, and credit cards. Being members of the credit union, however, allows individual members a say in how the credit union is run, something a traditional bank does not permit. Recently, SELCO scrapped an old performance appraisal system and replaced it with a new multipurpose and more effective performance management system. First, the timing of the new system is now aligned with the business cycle instead of the employee’s date of hire to ensure that business needs are aligned with individual goals. This alignment serves both strategic and informational purposes. Second, managers are given a pool of money that they can work with to award bonuses and raises as needed, which is more effective than the complex set of matrices that had been in place to calculate bonuses. This improved the way in which the system is used for allocating rewards and therefore serves an administrative purpose. Third, managers are required to sit down and have regular conversations with their employees about their performance and make note of any problems that arise. This gives the employees a clear sense of areas in which they need improvement and provides documentation if disciplinary action is needed. This component serves both informational and documentational purposes. Finally, the time that was previously spent filling out complicated Table 1.4 Purposes Served by a Performance Management System Strategic: To help top management achieve strategic business objectives Administrative: To furnish valid and useful information for making administrative decisions about employees Informational: To inform employees about how they are doing and about the organization’s and the supervisor’s expectations Developmental: To allow managers to provide coaching to their employees Organizational maintenance: To provide information to be used in workplace planning and allocation of human resources Documentational: To collect useful information that can be used for various purposes (e.g., test development, administrative decisions) matrices and forms is now spent talking with the employees about how they can improve their performance, allowing for progress on an ongoing basis. This serves a developmental purpose. Although multiple purposes are possible, a survey of industrial and organizational psychologists working in HR departments in more than 100 different organizations reported that the two most frequent purposes are administrative (i.e., salary decisions) and developmental (i.e., to identify employees’ weaknesses and strengths). Overall, in the organizations that participated in this study, performance management served at least two of the purposes mentioned earlier.42 As will be discussed in Chapter 9, these purposes place conflicting demands on the raters because they must be both judges (i.e., make salary decisions) and coaches (i.e., provide useful feedback for performance improvement) at the same time. Now, think about the performance management system implemented in your organization or the last organization for which you worked. Table 1.4 summarizes the various purposes served by a performance management system. Which of these purposes are being served by the system you are considering? 1.6 Characteristics of an Ideal PM System So far, we have defined performance management, described the advantages of implementing good performance management systems, discussed some of the dangers of not doing a good job with the design and implementation of the system, and described the various purposes achieved by a good system.But what does a good system look like? The following characteristics are likely to allow a performance management system to be successful. Practical constraints may not allow for the implementation of all these features. The reality is that performance management systems are seldom implemented in an ideal way.43 For example, there may not be sufficient funds to deliver training to all people involved, supervisors may have biases in how they provide performance ratings, or people may be just too busy to pay attention to a new organizational initiative that requires their time and attention. Also, there may be organizational or even country-level constraints that prevent the implementation of a good performance management system. For example, consider the case of Ghana, which is a country that espouses collectivist values over individual performance, and it is a society that is male-dominated and dominated by political and administrative leaders, where these socio-cultural norms have a clear influence on organizational decision making and practices.44 These institutional constraints that are so pervasive in Ghana and so many other emerging market countries must be taken into consideration in terms of what type of performance management system will be possible to implement as well as the effectiveness of such a system. However, regardless of the societal, institutional, and practical constraints, we should strive to place a check mark next to each of these characteristics: the more features that are checked, the more likely it will be that the system will live up to its promise. • Strategic congruence. The system should be congruent with the unit and organization’s strategy. In other words, individual goals must be aligned with unit and organizational goals. • Context congruence. The system should be congruent with the organization’s culture as well as the broader cultural context of the region or country. The importance of context in implementing highly effective performance management systems is emphasized throughout the book. However, for now, consider the example of an organization that has a culture in which communication is not fluid and hierarchies are rigid. In such organizations, a 360-degree feedback system in which individuals receive comments on their performance from their subordinates, peers, and superiors would be resisted and likely not very effective. Regarding broader cultural issues, consider that performance management research published in scholarly journals has been conducted in about 40 countries around the world.45 Taken together, this body of work suggests that culture plays an important role in the effectiveness of a performance management system. For example, in countries such as Japan, there is an emphasis on the measurement of both behaviors (i.e., how people do the work) and results (i.e., the results of people’s work), whereas in the United States results are typically preferred over behaviors. Thus, implementing a results-only system in Japan is not likely to be effective. As a second illustration, a study including 97 multinational corporations suggested that they have adapted their performance management systems in their subsidiaries in Bulgaria and Romania.46 Specifically, although performance is measured similarly around the world (see standardization criterion below), the interpersonal aspects of the system are adapted and customized to the local culture. For example, performance management systems in the subsidiaries are more likely to differ from those in the headquarters as differences in power distance (i.e., degree to which a society accepts unequal distribution of power) increase between countries. • Thoroughness. The system should be thorough regarding four dimensions. First, all employees should be evaluated (including managers). Second, all major job responsibilities should be evaluated (including behaviors and results; a detailed discussion of this topic is presented in Chapter 5). Third, the evaluation should include performance spanning the entire review period, not just the few weeks or months before the review. Finally, feedback should be given on positive performance aspects as well as those that are in need of improvement. • Practicality. Systems that are too expensive, time consuming, and convoluted will obviously not be effective. Good, easy-to-use systems (e.g., performance data are entered via user-friendly software) are available for managers to help them make decisions. Finally, the benefits of using the system (e.g., increased performance and job satisfaction) must be seen as outweighing the costs (e.g., time, effort, expense). • Meaningfulness. The system must be meaningful in several ways. First, the standards and evaluations conducted for each job function must be considered important and relevant. Second, performance assessment must emphasize only those functions that are under the control of the employee. For example, there is no point in letting an employee know she needs to increase the speed of service delivery when the supplier does not get the product to her on time. Third, evaluations must take place at regular intervals and at appropriate moments. Because one formal evaluation per year is usually not sufficient, informal quarterly reviews are recommended. Fourth, the system should provide for the continuing skill development of evaluators. Finally, the results should be used for important administrative decisions. People will not pay attention to a system that has no consequences in terms of outcomes that they value. For example, a recent study compared performance management systems in the former East versus former West Germany. Results showed that in former West German companies, there was a stronger link between the performance management system and administrative decisions such as promotions. This relationship was weaker in former East German companies, and this difference is probably due to the socialist political system in the former German Democratic Republic, which has had a long-lasting effect that is still observed today.47 • Specificity. A good system should be specific: it should provide detailed and concrete guidance to employees about what is expected of them and how they can meet these expectations. • Identification of effective and ineffective performance. The performance management system should provide information that allows for the identification of effective and ineffective performance. That is, the system should allow for distinguishing between effective and ineffective behaviors and results, thereby also allowing for the identification of employees displaying various levels of performance effectiveness. In terms of decision making, a system that classifies or ranks all levels of performance and all employees similarly is useless. • Reliability. A good system should include measures of performance that are consistent and free of error. For example, if two supervisors provided ratings of the same employee and performance dimensions, ratings should be similar. • Validity. The measures of performance should also be valid. In this context, validity refers to the fact that the measures include all relevant performance facets and do not include irrelevant performance facets. In other words, measures are relevant (i.e., include all critical performance facets), not deficient (i.e., do not leave any important aspects out), and are not contaminated (i.e., do not include factors outside of the control of the employee or factors unrelated to performance). In short, measures include what is important and do not assess what is not important and outside of the control of the employee. For example, the gondolieri in the city of Venice (Italy) have had a performance management system for about 1,000 years. Among other relevant performance dimensions, older versions of the performance management system required gondolieri to demonstrate their level of rowing skills and their ability to transport people and goods safely. These are clearly relevant dimensions. However, the system was contaminated because it included the following requirement: “Every brother shall be obliged to confess twice a year, or at least once and if after a warning, he remains impenitent, he shall be expelled...[from the gondolieri guild].”48 • Acceptability and fairness. A good system is acceptable and is perceived as fair by all participants. Perceptions of fairness are subjective and the only way to know if a system is seen as fair is to ask the participants about the system. Such perceptions include four distinct components. First, we can ask about distributive justice, which includes perceptions of the performance evaluation received relative to the work performed, and perceptions of the rewards received relative to the evaluation received, particularly when the system is implemented across countries. For example, differences in perceptions may be found in comparing employees from more individualistic (e.g., United States) to more collectivistic (e.g., Korea) cultures.49 If a discrepancy is perceived between work and evaluation or between evaluation and rewards, then the system is likely to be seen as unfair.50 Second, we can ask about procedural justice, which includes perceptions of the procedures used to determine the ratings as well as the procedures used to link ratings with rewards. Third, we can assess perceptions regarding interpersonal justice, which refers to the quality of the design and implementation of the performance management system. For example, what are employees’ perceptions regarding how they are treated by their supervisors during the performance review meeting? Do they feel that supervisors are empathic and helpful? Finally, informational justice refers to fairness perceptions about performance expectations and goals, feedback received, and the information given to justify administrative decisions. For example, are explanations perceived to be honest, sincere, and logical? Because a good system is inherently discriminatory, some employees will receive ratings that are lower than those received by other employees. However, we should strive to develop systems that are regarded as fair from the distributive, procedural, interpersonal, and informational perspectives because each type of justice perception leads to different outcomes.51 For example, a perception that the system is not fair from a distributive point of view is likely to lead to a poor relationship between employee and supervisor and lowered satisfaction of the employee with the supervisor. On the other hand, a perception that the system is unfair from a procedural point of view is likely to lead to decreased employee commitment toward the organization and increased intentions to leave.52 One way to improve all four justice dimensions is to set clear rules that are applied consistently by all supervisors. • Inclusiveness. Good systems include input from multiple sources on an ongoing basis. First, the evaluation process must represent the concerns of all the people who will be affected by the outcome. Consequently, employees must participate in the process of creating the system by providing input regarding what behaviors or results will be measured and how. This is particularly important in today’s diverse and global organizations including individuals from different cultural backgrounds, which may lead to different views regarding what is performance and how it should be measured.53 Second, input about employee performance should be gathered from the employees themselves before the appraisal meeting.54 In short, all participants must be given a voice in the process of designing and implementing the system. Such inclusive systems are likely to lead to more successful systems including less employee resistance, improved performance, and fewer legal challenges.55 • Openness. Good systems have no secrets. First, performance is evaluated frequently and performance feedback is provided on an ongoing basis. Therefore, employees are continually informed of the quality of their performance. Second, the appraisal meeting consists of a two-way communication process during which information is exchanged, not delivered from the supervisor to the employee without his or her input. Third, standards should be clear and communicated on an ongoing basis. Finally, communications are factual, open, and honest. • Correctability. The process of assigning ratings should minimize subjective aspects; however, it is virtually impossible to create a system that is completely objective because human judgment is an important component of the evaluation process. When employees perceive an error has been made, there should be a mechanism through which this error can be corrected. Establishing an appeals process, through which employees can challenge what may be unjust decisions, is an important aspect of a good performance management system. • Standardization. As noted earlier, good systems are standardized. This means that performance is evaluated consistently across people and time. To achieve this goal, the ongoing training of the individuals in charge of appraisals, usually managers, is a must. • Ethicality. Good systems comply with ethical standards. This means that the supervisor suppresses her personal self-interest in providing evaluations. In addition, the supervisor evaluates only performance dimensions for which she has sufficient information, and the privacy of the employee is respected.56 Table 1.5 lists the characteristics of an ideal performance management system. Think about the performance management system implemented in your organization or the last organization for which you worked. Which of the features listed in Table 1.5 included in the system you are considering? How far is your system from the ideal? Table 1.5 Characteristics of an Ideal Performance Management System Strategic congruence Context congruence Thoroughness Practicality Meaningfulness Specificity Identification of effective and ineffective performance Reliability Validity Acceptability and fairness Inclusiveness Openness Correctability Standardization Ethicality (Aguinis 12-22) Aguinis, Herman. Performance Management, 3rd Edition. Pearson Learning Solutions, 01/2012. VitalBook file. The citation provided is a guideline. Please check each citation for accuracy before use. (Aguinis 1-11) Aguinis, Herman. Performance Management, 3rd Edition. Pearson Learning Solutions, 01/2012. VitalBook file. The citation provided is a guideline. Please check each citation for accuracy before use. Learning Objectives After completing this lesson, you will be able to 1. explain the concept of performance management (PM). 2. describe the differences between performance management and performance appraisal. 3. explain the many advantages of, and make a business case for, implementing a well-designed performance management system. 4. describe the multiple negative consequences that can arise from the poor design and implementation of a performance management system 5. explain the concept of a reward system and its relationship to a performance management system. 6. discuss the various types of employee rewards including compensation, benefits, and relational returns. 7. describe the multiple purposes of a performance management system including strategic, administrative, informational, developmental, organizational maintenance, and documentation purposes. 8. describe and explain the key features of an ideal performance management system. 9. define the relationship and links between a performance management system and other HR functions including recruitment and selection, training and development, workforce planning, and compensation. 10. discuss the contextual and cultural factors that should be conserved when implementing a performance management system around the world. ORGB 319v7 13 of 53 May 28, 2015 Review Questions The following questions will test your understanding of the material in this lesson, and its application in real-life organizations. Compare your responses to the suggested answers on the next page. 1. From the reading so far, you have learned that poorly-implemented PM systems can hurt employees, managers, and the organization. Provide at least six examples of adverse effects of poorly-implemented PM. 2. What is meant when we say that an ideal performance management system must be valid? 3. What characteristics of an ideal PM system seem to be absent in systems you have observed? 4. A performance management system is the systematic description of an employee’s strengths and weaknesses. True or False? 5. Short-term incentives are one-time payments typically given quarterly or annually. True or False? 6. Income protection programs include a. pension plans. b. medical insurance. c. social security. d. all of the above. 7. ___________ is/are given to employees in exchange for work performed and focus(es) on positions and duties, rather than on an individual’s contribution. a. Contingent pay b. Base pay c. Cost-of-living adjustments d. Short-term incentives Suggested Answers for Review Questions 1. Possible responses might include: lowered self-esteem employee burnout and job dissatisfaction damaged relationships ORGB 319v7 14 of 53 May 28, 2015 use of misleading information increased turnover decreased motivation to perform unjustified demands on managerial resources varying and unfair standards and ratings wasted time and money derivation of ratings is a mystery biases can replace standards risk of litigation increases 2. When we say that an ideal performance management system is valid, we mean that the measures of performance are relevant (i.e., include important performance facets), they are not deficient (i.e., do not include unimportant performance facets), and they are not contaminated (because they measure only what the employee can control). (see p. 20) 3. Answers will vary according to your own experiences; however, you should be familiar with the characteristics of an ideal PM system: congruent with organizational strategy thorough practical meaningful specific identifies effective and ineffective performance reliable valid acceptable and fair inclusive open correctable standardized ethical 4. False. This sentence describes performance appraisal. 5. True. A one-time bonus is a short term incentive. 6. d) all of the above 7. b) Base pay Key Terms and Concepts Before going on to the next lesson, be sure you have a thorough understanding of the following key terms and concepts. The interactive exercises will help you practice and test your mastery of these terms and concepts. administrative purpose of performance management systems (p. 16) ORGB 319v7 15 of 53 May 28, 2015 correctability (p. 22) developmental purpose of performance management systems (p. 16) employee burnout/job dissatisfaction (p. 9) informational purpose of performance management systems (p. 16) intangible returns (p. 10) meaningfulness (p. 20) performance appraisal system (p. 3) performance management (p. 2) reliability (p. 20) reward system (p. 10) strategic purpose of performance management systems (p. 15) tangible returns (p. 10) thoroughness (p. 19) validity (p. 20)