The effectiveness of performance management systems determined by
external and internal factors.
Thesis
MSc. in Business Administration – Leadership and Management Track Thesis
Supervisor: Maarten de Haas UvA
Date: 23-06-2017 Word count: 8734 Joost Slagt 10184198
Statement of originality
This document is written by Joost Slagt (10184198) who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of content
Abstract 4
1. Introduction and research goals 5
2. Literature review 8
2.1 High Performance Work Systems 8
2.2 Performance management systems 8
2.3 Performance management effectiveness 10
2.4 Current views on the effect of Performance Management Systems 12 2.5 Five variables influencing performance management system effectiveness 14
2.5.1 Implementation quality 14 2.5.2 Corporate Culture 15 2.5.3 Industry 16 2.5.4 Employees perspective 17 2.5.5 Management contributions 17 2.6 Research Question 19 3. Methodology 20
3.1 Searching and identifying the relevant Performance Management studies 20
4 Results 21 4.1 Implementation quality 21 4.2 Corporate culture 22 4.3 Industry 23 4.4 Employee perspective 24 4.5 Management contributions 26
5. Discussion and future research suggestions 28
5.1 Implementation quality 28
5.2 Culture 29
5.3 Industry 30
5.4 Employee perspective 31
5.5 Other implications for future research 32
6. Implications for management and conclusion 33
7. Reference list 35
Abstract
Performance management effectiveness is determined by two factors: Improved
(organizational and individual) performance and individual well-being. As performance management has a big impact on organizations and individuals, it is important to understand which factors determine performance management effectiveness. Therefore, the research question in this thesis is: Are performance management systems always effective? If not, when are they? Five variables are chosen, based on general performance management literature, to study their effect on performance management effectiveness. These variables are: Implementation quality, corporate culture, industry, the employee perspective and management contributions. A qualitative study is conducted to study these variables. Only a few specific studies were found that study the direct link between performance management and the variables proposed. Therefore, other studies are used that may explain how one or more variables influence performance management effectiveness. The results indicate that the variables influence performance management effectiveness. The contextual factors industry and corporate culture were found to have an influence on performance management
effectiveness. Furthermore, management contributions were found to have a big impact on performance management effectiveness because it influences the implementation quality and the perspective of employees of performance management systems. Based on these results, there can be concluded that performance management systems are not always effective. The effectiveness of performance management systems depends on various factors.
1. Introduction and research goals
In an interview with the Dutch financial newspaper, Het Financieel Dagblad, Hein Knaapen, Global HR Director of ING, urged for a change in performance management (Financieel Dagblad, 2016). He said, “Financial goals will be far less important in ‘new’ performance management. The focus will be on the individual. The demands of these individuals regarding personal development, irrespectively of the employees age, are expected to increase”
(Financieel Dagblad, 2016). Furthermore, Knaapen urged for a learning organization in which employees are consistently learning, not only on the job but also in a far wider range. As Knaapen explained, “We don’t want to make employees dependable on our company, that is a negative development for ING but also for the employees themselves” (Financieel Dagblad, 2016). Performance management is an important part of a company’s HR practices.
Removing performance management practices from the organization is expected to have a big negative impact on employee and organizational performance (Aguinis, 2009). Therefore, performance management systems are an important subject to be studied to develop insight in what factors determine performance management system effectiveness.
Various studies have studied the effect of different HRM practices on organizational performance. HRM is described as an approach to people management which distinguishes itself from traditional concepts of personnel management (Paauwe, 2009). The HRM-Performance relationship can be approached from different perspectives. These different perspectives regard the impact of different combinations of HRM practices on a range of performance outcomes at the individual and organizational level (Paauwe, 2009). Despite extensive research, there is no consensus about the relationship between HRM and
organizational performance. Many difficulties have been discovered in researching this link (Guest, 2001). The biggest challenge was to identify the key variables that explained the link between HRM on the one side and performance of the organization on the other (Paauwe, 2009). Nevertheless, developments in this field of research offers an improved theory why investments in human resources should pay off and which HRM practices may contribute to improving organizational performance (Guest, 2001).
Economic environments are rapidly changing since globalization and market
deregulation have become the new norm (Becker & Gerhart, 1996). Continuous improvement, throughout the whole organization, is a crucial prerequisite to outperform competitors,
reducing costs, being innovative in products and processes and improving quality. The company’s HR architecture must keep up and continuously align its practices with the continuous changes in the environments of organizations.
The HRM function consists of different practices that, on its own and combined, are developed to improve employees’ and organizational performance. To develop a sustainable competitive advantage, HRM practices should be connected to the strategic choices of the organization (Boxall and Purcell, 2000). Huselid (1995) described the importance of the HR practices in creating high employee performance. Performance management systems, can be valuable in creating high employee performance if managed appropriately and effectively (Otley, 1999). By managing employees, which are an essential resource for organizations, HRM and performance management systems can have a substantial (in)direct effect on performance (Aguinis, 2009).
The focus of this thesis will be on performance management systems because performance management systems can have a severe impact on the individual in
organizations. It is an important practice to align, and manage, individual and organizational goals. HRM practices, which are not correctly developed and implemented, may be
destructive for individual and organizational performance. Therefore, it is important to understand which factors determine whether a performance management system is effective or not.
Performance management effectiveness is determined by the degree how performance management practices lead to increased employee well-being and individual and
organizational performance. This definition of what performance management system effectiveness is guides the selection of the variables that are going to be studied. Five
variables, and their effect on performance management system effectiveness, will be studied: Implementation quality, corporate culture, industry, employee perception and management contributions. In the next section, an explanation will be provided why those five variables are chosen and why there is expected that these variables influence performance management system effectiveness.
I will contribute with this study to the existing literature by studying how the variables affect the performance management system. As current studies only mention the variables, research is needed how these variables effect the performance management system. This will provide guidance for organizations in how they can optimize these variables to increase the performance management system effectiveness. First, a literature review will be conducted. A
why the variables, that are proposed to have an influence on performance management system effectiveness, are chosen. Secondly, the methodology will explain how the study has been executed. Thirdly, the results of the analysis will be given (in the appendix, a table with statistical outcomes is added). Fourthly, the results will be discussed with future research suggestions. Lastly, the managerial practical implications and an overall conclusion will be formulated.
2. Literature review
2.1 High Performance Work Systems
High performance work systems (HPWS) refer to a set of human resource policies and practices that together produce superior employee performance (Ramsay, Scholarios & Harley, 2000). Performance management systems are generally part of HPWS. The resource based view argues that HR practices alone can be valuable but are relatively easy to imitate (Boxall & Purcell, 2000). Resources can only be a source of competitive advantage if they are valuable, rare, inimitable and non-substitutable. The HPWS are socially complex, causally ambiguous and therefore not easily substituted (Becker & Huselid, 1998). Therefore, the HPWS meet the resource based view criteria and can be a source of sustainable competitive advantage.
2.2 Performance management systems
Performance management systems are a vital part of managing employees’ and organizational performance. Ineffective performance management systems could have a big drawback on employee’s commitment, satisfaction and performance (Farndale & Kelliher, 2013). Furthermore, ineffective performance management systems have a negative effect on
organizational performance (Aguinis, 2009). What exactly is performance management? The definition of performance management is: ‘a continuous process of identifying, measuring and developing performance in organizations, by linking each individual’s performance and objectives, to the organizations overall mission and goals’ (Aguinis, 2009). Performance management practices are developed to ensure alignment between goals and missions of the employee and the organization. Otley (1999) developed a framework to identify what practices are carried out by performance management systems. This framework consists of the following conditions: the identification of organizational objectives and the processes, the formulation and implementation of strategies as well as the criteria for evaluating the
implementation, the performance needed to achieve the objectives, the rewards if those objectives are met and the learning of the organization.
As a follow-up on the five conditions developed by Otley (1999), Ferreira and Otley (2009) defined twelve questions that must be considered when organizations develop
performance management systems. With these twelve questions, they put the emphasis on the alignment between the different dimensions that are incorporated in performance management system development. They argue that each of the twelve factors should be aligned with each other and with other organizational and environmental factors. In figure 1.1, the twelve factors are shown that must be considered. As can be seen in figure 1.1, the contextual factors and organizational culture are variables that surround performance management system development. Ferreira and Otley (2009) argue that especially these factors are important to consider when each of the twelve areas are addressed.
Figure 1.1
Derived from:Ferreira, A., & Otley, D. (2009). The design and use of performance management systems: An extended framework for analysis. Management accounting research, 20(4), 263-282.
Broadbent & Laughlin, (2009) developed a ‘check-list’ of practices to create an effective performance management system. They argue that the implementation of these practices is the most important part of the performance management system process. When not properly implemented, the performance management system will not have its desired
outcomes. Broadbent and Laughlin (2009) gave five areas where the performance management systems should focus on:
Table 1.1 HRM Performance Management Includes 1. Planning work and setting expectations 2. Continually monitoring performance 3. Developing the capacity to perform 4. Periodically rating performance 5. Rewarding good performance
Derived from: Broadbent, J., & Laughlin, R. (2009). Performance management systems: A conceptual model. Management Accounting Research, 20(4), 283-295.
When the practices of Broadbent & Laughlin (2009) and Otley (1999) are compared, a shift in emphasis of the performance management system can be recognized. Otley’s (1999) framework primarily focused on objectives, what kind of performance is needed and how employees are rewarded when objectives are met. Broadbent & Laughlin’s (2009) framework is more concerned with individual development, setting expectations and developing
individual (and organizational) capacity to perform. Performance management is now more concerned with the individual well-being and individual development. Performance
management system effectiveness is determined by how individual and organizational performance is improved and how the performance management system contributes to employee well-being in the organization.
2.3 Performance management effectiveness
Performance management can have several contributions to organizations. On the other hand, poorly created or implemented performance management can have destructive effects
(Aguinis, 2009). The performance management system is nowadays more focused on the individual well-being and development. Therefore, performance management effectiveness is determined by taking two different factors into account: organizational and individual
performance and individual well-being. Those separate levels are related to one another. Aguinis (2009) identified twelve contributions of effective performance management systems.
These contributions can be found in Table 1.2 below. Aguinis (2009) also identified negative consequences when performance management systems are ineffective. These can be found in Table 1.3.
Table 1.2: Positive performance management effects 1. Motivation to perform
2. Self-esteem is increased
3. Managers gain insight about subordinates 4. Definitions of job and criteria are clarified 5. Self-insight and development are enhanced 6. Personnel actions are more fair and appropriate 7. Clear organizational goals
8. Increase in employee’s competencies 9. Better protection from lawsuits
10. Better and timely differentiation between good and poor performers 11. Supervisor view of performance is communicated more clearly 12. Organizational change is facilitated
Derived from: Aguinis, H. (2009). Performance management. Upper Saddle River, NJ: Pearson Prentice Hall.
Table 1.3: Negative performance management effects 1. Increased turnover intentions
2. Time and money wasted
3. Damaged relationships between individuals and organizations 4. Increased job burnout and job dissatisfaction
5. Increased risk of litigation 6. Procedural injustice
7. Decreased motivation to perform
8. Managers resist to the performance management system and don’t use it
Effective performance management systems can thus contribute to several factors related to improved individual well-being and individual and organizational performance. As can be seen in Table 1.3, ineffective performance management systems can have a severe negative impact on the organization and individual. Therefore, it is important to understand what variables influence the effectiveness of performance management systems.
2.4 Current views on the effect of Performance Management Systems The continuous process of identifying, measuring and developing performance in
organizations, by linking individual performance and objectives to the organizations overall mission and goals, is a complex and challenging one (Aguinis, 2009). The goal of
performance management is to ensure that the organization and all of it subsystems work optimally to achieve the results desired by the organization (Biron et al., 2011). Ferreira & Otley (2009) show in their analytical framework that contextual factors are important and must be considered during the development and use of the performance management system. Although these factors are important, the literature does not provide an explanation how the contextual factors influence the effectiveness of performance management systems.
Aguinis, Joo and Gottfredson (2011) developed a list of performance management characteristics that together create an ‘ideal’ performance management system. Here, just as Ferreira and Otley (2009), they emphasize the alignment between cultural and contextual factors and the performance management systems. The question still remains how these factors exactly influence performance management effectiveness.
Aguinis (2009) argues that the implementation process of the performance management system is very important and that management has a big contribution to the implementation process. Ferreira and Otley (2009) show that the contextual and cultural factors are important to consider when developing and implementing a performance
management system. As the shift of emphasis is now more on the individual, as can be seen when the conditions of Otley (1999) and Broadbent & Laughlin (2009) are compared, the individual perspective and well-being with performance management practices has become increasingly important. By looking at all these developments, the following five factors are considered relevant to study their effect on performance management system effectiveness:
1. Implementation quality 2. Corporate culture 3. Industry
4. Employee’s perception 5. Management contributions.
The factor implementation quality is chosen to shed light on which implementation practices can influence the effectiveness of performance management systems.
Implementation quality will be determined by two factors. The first is the compliance with the original process of the performance management system and communication (Pritchard, Harrel, Diazgrandos & Guzman, 2008).
The effect of communication on HR practices has been investigated by different authors. The outcomes were that communication can enhance but also decrease the
effectiveness and the perceived effectiveness of employees (Aguinis et al., 2011). Therefore, it is important to understand how communication has a positive or negative effect on
employees, management and performance management effectiveness.
Aguinis et al. (2011) and Ferreira and Otley (2009) argue that organizational culture is an important factor in the development of the performance management system. They argue that the performance management system must be aligned with the organizational culture to enhance its effectiveness. However, it is important to understand which organizational
cultures improve the effectiveness or development of performance management practices and which not.
Ferreira and Otley (2009) emphasized the need to incorporate contextual factors in the development and use process of the performance management system. An organizations environment or industry is a contextual factor that could partly determine how effective HR and performance management systems are and which practices are needed in a certain type of industry (Bowen & Ostroff, 2004). Therefore, the factor industry is used to study how this variable could influence performance management system effectiveness.
Lastly, the perception of employees and management contributions are discussed in this thesis. As mentioned earlier, current literature shows that performance management systems shift to an emphasize more concerned with the individual in an organization. Organizational performance is still an important aspect but performance management
Laughlin, 2009). Therefore, the influence of employee perceptions is incorporated in this study.
Managers are the implementers of the system and therefore an important factor in how performance management procedures and processes are executed. Therefore, the effect of management contributions on performance management system effectiveness will be studied. In the next section the literature on these five factors will be discussed.
2.5 Five variables influencing performance management system effectiveness
In this section the focus will be on five variables that are hypothesized to have an impact on the effectiveness of a performance management system. I will review the literature on the five variables, discuss what they mean and what their possible effects are, positive or negative, on performance management systems. The first variable that is going to be discussed is
implementation quality.
2.5.1 Implementation quality
Two aspects of implementation quality are especially important to ensure that the
performance management practice is effective. Pritchard et al. (2008) demonstrated that when following the original process of a performance management practice or system, as seen with the ProMES performance management system in their study, the positive effects are
substantial but drop off dramatically when a performance management activity deviates from the original process (Pritchard et al., 2008). The second aspect of implementation quality is communication. Biron et al. (2011) state that employees need adequate and unambiguous information regarding performance expectations and performance management practices. Den Hartog, Boon, Verburg & Croon (2013) state that communication has a positive effect on the relationship between manager-rated HRM and employee-rated HRM. This implies that communication improves the insights of the employees in HRM, and thus performance management, practices. In the next paragraph, I will elaborate on these two aspects of implementation by giving two examples of performance management practices: training and reward.
Training consists of planned programs designed to improve performance at the
measurable changes in knowledge, skills, attitudes and behavior (Cascio, 2006). The effect of the training depends on various factors, among which implementation quality (Cascio, 2006). If the implementation quality of the training is low due to a lack of communication before, during and after the training, the effectiveness of the training, the increase in knowledge, skills and behaviors, will be low. If the original training process is not followed and the content deviates from the original training content, the training could even have negative side-effects (Aguinis & Kraiger, 2009). This in turn will not lead to improved organizational performance.
Reward systems link performance with rewards. Performance includes defining (what is performance) and evaluating performance (how well did we perform). Rewards include bonuses, promotions, and salary increases (Kerr & Slocum, 2005). The implementation of a reward system influences the reward systems effectiveness as perceived by different levels of the organization. On behalf of the reward systems and the perceived fairness of rewards, communication is a very important aspect in the implementation process (Change & Hahn, 2006). Existing studies on reward and appraisal show that increased communication can minimize negative reactions from employees, because better communication can reduce the discrepancy in perceptions between the HR managers who are implementing the system and the employees who are the receivers (Chang & Hahn, 2006). Xavier (2014) found that line managers, employees as well as the compensation and benefits managers related the lack of effectiveness of a reward system to the communication and implementation of the system.
2.5.2 Corporate Culture
Culture refers to values that are shared by the people in a group that tend to persist over time, even when group membership changes (Kotter 2008). Kotter (2008) explains that in some settings organizations emphasize profits and individual performance. In others, the emphasize lies on employee well-being or technological innovation. In a more visible sense, Kotter (2008) explains that culture represents the behavior patterns or style of an organization that (new) employees are automatically encouraged to adopt.
A strong culture that encourages the participation and involvement of organization’s members appears to be one of its important assets (Hartnell, Ou & Kinicki, 2011). Measuring an organizational culture has been a subject of much debate (Denison, 1984). Denison (1990) found that certain types of culture could enhance organizational performance. Abdul Rashid, Sambasivan & Johari (2003) studied the impact of organizational culture on organizational
commitment and performance for four types of corporate cultures: Competitive,
entrepreneurial, bureaucratic and consensual culture. These four different types of cultures are chosen because they represent four different cultures that emphasize different needs of the organization. Deshpande and Farley (1999) describe these needs. There are many different cultures but these four are considered to represent all these cultures together in four general types.
In the competitive culture, the emphasis is on values relating to demanding goals, competitive advantage and profits. The entrepreneurial culture emphasizes innovation, creativity and risk-taking. The emphasis of the consensual culture is on loyalty, personal commitment, team-work and self-management (Deshpande & Farley, 1999). Three of the four types of cultures are used to ensure relevance. Deshpande and Farley (1999) argue that the percentage of bureaucratic culture is low (less then 2% in the private and below 1% in the public sector). They state that the bureaucratic culture is diminishing and its values and practices do not align with how organizations function nowadays. To ensure relevance, bureaucratic culture is not included in the analyses.
Compensation specialists agree that reward systems, as part of performance
management systems, can affect the corporate culture of the organization (Baker, Jensen & Murphy, 1988). Performance management systems thus can also be used as a tool to change a corporate culture by rewarding specific behaviors of employees so that the emphasis of appropriate behaviors shift. In this thesis, I will study which types of cultures or cultural orientations have a relationship with the effectiveness of a performance management system.
2.5.3 Industry
The third variable that will be discussed in this thesis is the influence of the industry on performance management effectiveness. Different industries require different performance management practices. This alignment, developing the performance management practices suitable for that industry, will improve the effectiveness of a performance management system (Aguinis et al, 2011). Limited research attention has been paid to the contextual conditions, as for example the industry, that influence the efficacy of the performance
management practices (Datta, Guthrie & Wright, 2005). Hambrick & Abrahamson (1995) and Hambrick and Finkelstein (1987) have identified four industry characteristics that are linked with features of the HR system and therefore with the performance management system.
work systems and therefore also performance management systems. These four are: Capital intensity, market growth, industry differentiation and industry dynamism.
As contextual factors became increasingly important according to Ferreira And Otley (2009) and Aguinis (2009), there is expected that these four industry characteristics affect performance management system effectiveness.
2.5.4 Employees perspective
The employee perspective of performance management systems is important to understand. The employees must see the performance management system as an effective tool in
managing their own performance. This in turn has a positive effect on the employee’s
commitment and satisfaction (Nishii, Lepak & Schneider, 2008). Employees are the receivers of performance management practices. The employees must cope with for example: the reward system, the feedback system, the amount of training provided and the amount of support in their pursuit of organizational career success. Gruman & Saks (2011) state that improving performance may be best achieved by having the performance management practices promote and stimulate the engagement of employees in organizations. As performance management systems are now more focused on individual well-being, the perspective of the employee has become more important. Individual well-being will be partly determined by how employees perceive the practices of the performance management system.
2.5.5 Management contributions
The factor management contributions relate to the degree of involvement of management with the design and implementation of the performance management system. Biron et al. (2011) studied performance management system effectiveness in sixteen world leading firms, proposing a framework with four performance management facilitators in which the attitude and involvement of management is central. Biron et al. (2011) draw from signaling theory that suggests that people need tangible information to help them understand the organizations future interest and prospects. The attitude of management determines which signals are sent to the employees and which practices management considers to be important. The framework proposed four facilitating practices for management involvement:
1. Taking a broad view of performance management that includes strategic and tactical elements
2. Involvement of senior managers
3. Clear communication of performance expectations 4. Formally training performance raters
Biron et al. (2011) describe that performance management is likely to become more effective when senior executives signal the performance process as an integral, core operation of the HR function in the organization. Employees need to have adequate and unambiguous information regarding performance expectations. Therefore, a major management
contribution to the effectiveness of performance management systems is the communication of expectations. Communication is part of the implementation quality of the performance management system and managers can contribute to this factor. By communicating expectations, the organization secures commitment from both the line-managers and the employees. This positively enhances perceptions of the employer-employee relationship and promotes an integrative work-climate (Biron et all., 2011). This leads to employee retention and motivation (Cascio, 2006). Biron et all. (2011) suggest that those involved in performance management processes are integral to the success or failure of the process and therefore must be adequately trained.
2.6 Research Question
Performance management systems can have positive or negative consequences for the individual in the organization and for the organization itself. The literature on performance management systems can be divided in two types of studies. General studies explain what performance management does and why and how businesses use performance management systems in their HRM practices. Specific studies in the literature investigate the effectiveness of performance management systems and on which factors this depends. Based on general studies I have developed my research question as follows:
Are performance management systems always effective? If not, when are they?
An inventory and analysis of specific studies will be used to answer this question. This will be done in a qualitative study that will review these specific studies. The five variables that are discussed in previous paragraphs are used to analyze the specific studies. The results and discussion will be structured according to these factors.
3. Methodology
3.1 Searching and identifying the relevant Performance Management studies. A review of the literature on performance management is conducted in several steps. The search engines used to get the literature from are Google Scholar and the UvA Online Library. First, studies were searched which studied the direct relationship between performance
management systems and the variables proposed in this study. Only a few studies were found studying this relationship. Therefore, the search went broader into finding relationships between the variables proposed and their effect on HR practices in general. Furthermore, studies were searched which described the effects of the variables on the individual well-being as this became more important in determining performance management effectiveness. The search focused on empirical studies that tested hypotheses with one of the proposed variables included (Implementation quality, corporate culture, industry, employee’s perception and management contributions). The articles must meet some criteria to be
included in this thesis. First, they must be empirical. The hypotheses of the study must have a relationship with performance management practices and systems or one of the variables used. To be relevant and to not present outdated information from articles, this thesis will not use any empirical articles older then twenty-five years old. The articles must be published in a high-valued peer-reviewed journal.
In the analysis phase, the empirical relevant studies are analyzed. Next to the results, the analyses of the researchers in other parts of the studies, such as the discussion and implication, will be investigated to see if these can meaningfully add to the other results.
In the next chapter the results of this empirical literature analysis will be given. After the results, I will follow with the discussion and suggestions for future research, implications for management and a conclusion.
4 Results
4.1 Implementation quality
The following studies were found relevant for the relationship between implementation quality and performance management effectiveness: De Waal & Counet (2009), Den Hartog et al. (2013), Kernan & Hanges (2002), Madlock (2008), Sharbrough, Simmons & Cantrill (2006) and Thomas, Zolin & Hartman (2009).
De Waal & Counet (2009) identified 31 problems regarding performance management implementation. The problems were ranked measuring the frequency x severity. First, they found that most organizations do not have a performance management culture. Secondly, they found a lack of management commitment resulting in having a low priority regarding
performance management implementation. Thirdly, management often doesn’t see the benefits of the performance management system and management is more interested in the end-result of the system rather than the performance management process. The performance management experts interviewed contributed to these findings by arguing that management doesn’t understand the system. Furthermore, they found that when other problems in the organization occur, the performance management system is neglected. These problems have a negative impact on the implementation quality and therefore a negative effect on performance management system effectiveness.
Communication is an important aspect of implementation. No studies were found about the direct relationship between communication and performance management effectiveness. However, other studies may explain how communication can enhance the implementation quality of the performance management system.
Den Hartog et al. (2013) found that communication is a moderator in the relationship between manager-rated HRM and employee-rated HRM. When communication increases, the relationship becomes positively stronger. When communication is low, the relationship becomes negative. Communication aligns the perceptions of the managers and the employees regarding HRM practices. This improved mutual understanding of the HRM practices is considered to have a positive effect on performance management systems.
Thomas et al. (2009) studied hypotheses regarding quantity and quality of communicated information. They found strong positive relationships between quality of information and trust in co-workers, supervisors and top management. Furthermore, they
found that receiving enough information has a positive relationship with trust in supervisors and top management but this was not significant for trust in co-workers.
Kernan & Hanges (2002) studied the effect of quality of communication on justice perceptions. They found a positive relationship between communication and informational and interpersonal justice. This informational and interpersonal justice had in turn a positive relationship with feelings of trust by the employees. Kernan & Hanges (2002) studied these hypotheses in a change management situation but argue that communication always has a positive effect on those two justice perceptions.
Employee commitment and satisfaction can be enhanced by communication. Madlock (2008) found that communication competence has a positive relationship with communication satisfaction and job satisfaction. Sharbrough et al. (2006) found that motivating language effects job satisfaction and that communicator competence has a positive relationship with job satisfaction.
Communication thus improves the mutual understanding of the HRM practices and has a positive effect on employee well-being by improving satisfaction, justice perceptions and trust. Communication can also be used as a form of rewards. This effect needs further investigation but can be useful in the short-term (Bareket-Bojmel, Hochman & Ariely, 2014). Communication can contribute to performance management effectiveness by improving employee’s attitudes, feelings and behaviors regarding performance management systems.
4.2 Corporate culture
The following studies were found relevant for the relationship between corporate culture and performance management effectiveness: Hartog & Verburg (2004) and Shipton, West, Dawson, Birdi, & Patterson (2006). Hartog & Verburg (2004) studied the direct effect of culture orientation on high performance work practices. No other studies were found that studied a direct relationship between corporate culture and performance management systems. Furthermore, the three types of cultures described in chapter two were studied. For the
competitive and consensual culture, no relevant specific studies were found. However, for the entrepreneurial culture the study of Shipton et al. (2006) is used.
Hartog & Verburg (2004) studied the relationships between seven high performance work practices (autonomy, pay-for-performance, profit sharing, performance evaluation, team performance, information sharing and job evaluation) and four (supportive, innovative, rules
and goal) culture orientations. The supportive culture orientation had no significant correlations. The innovative culture orientation correlated positively with four high performance work practices (pay-for performance, profit sharing, frequent performance evaluations and job evaluation). The culture goal orientation correlates positively with three high performance work practices (pay-for-performance, profit sharing, team performance). The rules orientation did not correlate positively with any of the practices. Only one
significant negative correlation was found between the cultural rule orientation and feelings of autonomy.
The innovative culture orientation enhanced most high-performance work practices. The effect that different organizational culture orientations enhanced different
high-performance work practices shows that the organizational culture has an impact on which performance management practices are enhanced and in which capacity. Therefore, organizational culture influences the performance management system effectiveness.
In the entrepreneurial culture the emphasis lies on increasing creativity and
innovational efforts of the employees. This culture has an innovative orientation. The study of Shipton et al. (2006) studied HRM as a predictor of organizational innovation. They found that contingent pay does not predict organizational innovation. Furthermore, they found that exploratory learning effects the relationship between contingent pay and innovation. With high exploratory learning, the relationship is positive. When exploratory learning is low, the relationship is negative. Shipton et al. (2006) further found that HRM practices which
promote exploratory learning will predict organizational innovation. Furthermore, they found that extensive training, the amount of team-work and the use of appraisal schemes will predict organizational innovation.
A performance management system can be effective in the entrepreneurial culture when the emphasis is on exploratory learning and when the amount of training and teamwork increases.
4.3 Industry
The following studies were found relevant for the relationship between industry and
performance management effectiveness: Datta et al. (2005) and Combs, Liu, Hall & Ketchen (2006).
Datta et al. (2005) studied four industry characteristics and their moderating effect on the relationship between high performance work systems and productivity. They found that the relationship between high performance work systems and productivity of employees is stronger as industry capital intensity diminishes. Datta et al. (2005) explains this outcome by stating that high capital intensive industries tend to focus on leveraging their investments resulting in a greater concern for cost and efficiency and less on the employee dimension. Therefore, the high-performance work systems do not have their desired effect in a high capital intensive industry. Furthermore, they found that the relationship between high
performance work systems and productivity is stronger when there is high industry growth. In an industry with high industry differentiation they found that the relationship between high performance work systems and productivity became stronger. The fourth variable industry dynamism had no moderating effect on the relationship between high performance work systems and productivity (Datta et al., 2005).
Combs et al. (2006) studied the effect of high performance work practices on organizational performance. They found a positive relationship. Secondly, Combs et al. (2006) found that high performance work practices have a positive effect on organizational performance, but this effect is stronger for manufacturing organizations than for service organizations.
Industry characteristics and different types of industry influence the effectiveness of performance management systems. However, the betas in the study of Datta et al. (2005) were low. Therefore, these findings are less robust.
4.4 Employee perspective
The following studies were found relevant for the relationship between the employee’s perspective and performance management effectiveness: Alfes, Shantz, Truss & Soane (2013), Saks (2006), and Nishii et al. (2008).
Nishii et al. (2008) studied het effect of the employee perception for why HR practices exist. They found that commitment and satisfaction decreases when employees perceive the practice as a controlling factor. HR practices will have a positive effect on commitment and satisfaction when the employees perceive the practices as concerning with their well-being. Improved organizational commitment and satisfaction is in turn related to organizational citizenship behavior.
The employee perception of why HR practices exist determines how committed and satisfied the employees are and therefore influences the employee well-being. Because the employee perception influences the employee well-being, it can be concluded that, according to this study, the employee perspective influence performance management system
effectiveness.
The study of Alfes et al. (2013) is used to determine the effects of the employee perspective. The study of Saks (2006) is used to explain what kind of consequences an, positive or negative, employee perspective has for individuals and organizations. Alfes et al. (2013) found that positive perceived HRM practices have a positive relationship with
employee engagement. Furthermore, they found that positive perceived HRM practices have a positive relationship with organizational citizenship behavior and a negative relationship with turnover intentions.
The employee perspective about the performance management system influences employee’s behavior and engagement towards the organization and the performance
management practices. When the employee perspective is negative, the employees will lose their feelings of engagement and commitment to the organization and this is the opposite of what the performance management system wants to achieve.
Saks (2006) studied the antecedents and consequences of the dependent variable in the study by Alfes et al. (2013): employee engagement. Saks (2006) found that that job
engagement predicted job satisfaction, organizational commitment, turnover intentions and organizational citizenship behavior. Furthermore, they found that organizational engagement predicts job satisfaction, organizational commitment, turnover intentions and organizational citizenship behavior.
Performance management effectiveness is determined by how organizational and individual performance is improved. The consequences of the employee perspective are given to show how individual behaviors and attitudes change when the employee perspective is negative. The employee perspective about the performance management system has an impact on its effectiveness by effecting individual well-being. The employee perspective thus
4.5 Management contributions
Studies used for the factor management contributions overlap with other studies used in previous results paragraphs. Previous variables described factors and practices that could be enhanced to improve performance management effectiveness. Organizational managers are the implementers of the performance management practices and thus can influence
performance management system effectiveness. The following studies were found relevant for the relationship between management contributions and performance management effectiveness: De Waal & Counet (2009), Den Hartog et al. (2013), Nishii et al. (2008) and Thomas et al. (2009)
De Waal & Counet (2009) ranked several performance management implementation problems. The problems, that can mostly be resolved by increased management contribution and commitment to the performance management system, are shown. De Waal & Counet (2009) argue that management doesn’t have a clear understanding of the performance management system and what its benefits are. They state that the other problems identified can be related to this lack of understanding and benefits acknowledgement. They argue, when management doesn’t see and understand the benefits, they will not get committed or triggered to create a performance management culture, follow the performance management process closely or make performance management a high-priority.
Management contributions according to De Waal & Counet (2009) can thus have a significant impact on performance management system effectiveness. Performance
management systems can’t be effective when the implementers, and the ultimately responsible, don’t see the benefits.
Den Hartog et al. (2013) found that communication acts as a moderator in the
relationship between manager-rated HRM and employee-rated HRM. Communication aligns the perceptions of managers and employees and this improved mutual understanding has a positive effect on performance management systems. Management can thus contribute to performance management system effectiveness by improving communication so the rated HRM practices are aligned between both layers in the organization.
Nishii et al. (2008) found that employee attributions regarding performance
management systems predict satisfaction and commitment to those practices. They found that commitment and satisfaction decreases when employees perceive the practice as a controlling factor. HR practices will have a positive effect on commitment and satisfaction when the
that quality of communication predicts trust in co-workers, supervisors and managers. Furthermore, they found that receiving enough information has a positive relationship with trust in supervisors and top management but this was not significant for trust in co-workers.
Management must communicate and signal the performance management system as a HR practice that is concerned about the employee’s well-being instead of a controlling mechanism. Furthermore, they must ensure that the frequency and quality of communication is positive so that employees have trust in the implementers of the performance management system. Management can contribute to performance management effectiveness by influencing the attributions of employees why the performance management practices exist and by
increasing trust.
Organizational management can contribute to the effectiveness of performance management systems and thus influences performance management effectiveness.
5. Discussion and future research suggestions
This qualitative study studied five variables that were expected to influence performance management system effectiveness. To study the effect of these five variables (implementation quality, corporate culture, industry, employee perspective and management contributions) on performance management effectiveness, an inventory and analysis of relevant empirical studies was used. Only a few studies were found about the direct relationship between performance management systems and one or more of the five variables. Therefore, I
included other studies in my analysis that included similar or corresponding factors that might contribute to an explanation of the focal relationships. Analyzing the inventory of results indicates that performance management systems are not always effective, effectiveness depends on various factors.
5.1 Implementation quality
The factor implementation quality is found to influence performance management system effectiveness. Following the designed performance management process correctly appeared to improve effectiveness of performance management systems. Management can have a
substantial impact on the implementation quality factor, as well as the right communications. De Waal & Counet (2009) found a negative relation between lack of management commitment and similar factors and the effectiveness of performance management. Also, deviations from the original design of performance management practices was found to have a negative effect on the performance management system effectiveness. According to De Waal & Counet (2009), the lack of understanding and commitment lie at the heart of the performance management effectiveness problem. Further research is needed to understand why organizations or managers deviate from the performance management system process and how managers can become more committed to the performance management system.
The studies of Den Hartog et al. (2013), Thomas et al. (2009), Kernan & Hanges (2002), Madlock (2008), and Sharbrough et al. (2006) found that improved communication quality, quantity and competence improves employee related dimensions. Management can contribute to performance management system effectiveness by improving communication, so that HRM practices and its effectiveness are acknowledged by managers and employees.
The study of Madlock (2008) found a relationship between communicator competence and satisfaction. The study of Kernan & Hanges (2002) found that improved communication can increase justice perceptions. Thomas et al., (2009) found a direct relationship between the quantity and quality of information and trust. They found that quantity of information predicts trust in supervisors and managers. The quality of communication increased trust in
supervisors and managers but also in co-workers.
No direct relationships were found between communication and performance management effectiveness. However, communication has a relationship with different employee dimensions, influencing the acceptance of a performance management system by employees. Because no direct relationships were found, the direct link still has to be
established by future research. Because communication has a big impact on several employee dimensions, it is important to develop a better understanding of how performance
management systems can become more effective through communication practices. Improved communication quality and quantity improves the well-being of the employees and improves individual productivity. It can be concluded that implementation quality, determined by management commitment and communication practices, influences the effectiveness of performance management systems.
5.2 Culture
The corporate culture or culture orientation of an organization influences performance management system effectiveness. The innovative and goal orientated cultures were found to enhance most performance management practices.
The studies of Broadbent & laughin (2009) and Ferreira and Otley (2009) indicated that contextual factors, like organizational culture, are important factors to consider when a performance management system is developed. Hartog & Verburg (2004) found this cultural effect on performance management system effectiveness. The different culture orientations have a different impact on high-performance work practices. The results indicate that innovative cultures are related with the most performance work practices (pay-for performance, profit sharing, frequent performance evaluations and job evaluation).
Surprisingly, the supportive orientation did not correlate with any practices. The supportive orientation is concerned with the employee well-being and support and improving individual performance through supportive managerial behaviors. Since enhancing individual
performance and well-being is a performance management system goal, there could be expected that the supportive culture enhanced any performance management practices.
Shipton et al. (2006) found that the entrepreneurial culture, were the emphasize is on innovation, can influence the performance management system. When the emphasize is on exploratory learning, extensive training and teamwork, the performance management system effectiveness is positively influenced by the entrepreneurial culture.
Future research could investigate why the supportive orientation did not have a positive effect on performance management system effectiveness. Furthermore, to improve the understanding of the results, it would be good to know why especially the innovative and goal oriented cultures had the most positive relationships. No studies were found that studied the consensual and competitive cultural and their effect on performance management systems. Therefore, next to the culture orientations and entrepreneurial culture described in this thesis, future research could study how other organizational cultures influence performance
management system effectiveness.
5.3 Industry
Industry characteristics influence performance management system effectiveness. The industry characteristics growth and differentiation had moderating effects on the relationship between high performance work practices and productivity. The relationship became stronger when industry growth and differentiation were higher. In manufacturing organizations, the relationship between high performance work practices and productivity was found stronger then in service organizations.
Datta et al. (2005) and Combs et al. (2006) studied the relationship between high performance work practices and productivity. Datta et al. (2005) showed that industry
moderates this relationship. However, the betas found in the study of Datta et al. (2005) were low which makes the results less robust. Datta et al. (2005) argue that industry growth and differentiation are industry characteristics that focus on innovation and organizational goals. Interestingly, innovative culture and industry orientations both have a positive effect on performance management system effectiveness. Combs et al. (2006) found that in
manufacturing organizations, there is a stronger relationship between high performance work practices and productivity then in service organizations. They argue that high performance work practices thrive in the standardized procedures used by the manufacturing infrastructure
because they are likely to depend on the ability to adapt to industry changes. Interestingly, Datta et al. (2005) explained the positive effect on performance management systems by pointing on innovative industry characteristic, while Combs et al. (2006) explained this effect by looking at the standard procedures of a manufacturing organization which can adapt rapidly to (innovation) changes. These changes might be, new innovative business processes, practices or products. Future research might investigate what the effects are of other types of organizations, next to manufacturing and service organizations. Furthermore, as the betas were low in the study of Datta et al. (2005), it could be studied if other industry
characteristics, next to growth, capital intensity and differentiation, influence the high-performance practice productivity relationship.
5.4 Employee perspective
The employee perspective influences performance management system effectiveness. This effect is found for how the employee perspective, about performance management systems, influences employee-well-being and behavior.
The employee perspective on HRM practices shape individual behavior (Nishii et al., 2008). It is important that the individual is satisfied, committed and engaged to the
performance management practices. The study of Nishii et al. (2008) found that employees have beliefs of why performance management practices exist. Performance management systems should be perceived as concerning the well-being of the employees instead of being a controlling factor. If so, performance management practices will improve the employee well-being by positively influencing satisfaction and commitment with performance management systems.
Employee engagement, which is enhanced by a positive employee perspective, is another important factor to successfully align individual and organizational goals (Alfes et al., 2013). Saks (2006) found that employee engagement to the job and organization is important. Job satisfaction, commitment, turnover intentions and organizational citizenship behavior are consequences of employee engagement. Further research is needed to investigate how the employee perspective can be positively influenced. A positive employee perspective about HR practices will positively influence employee behaviors that in turn contribute to individual and organizational performance. It still needs to be studied how organizations can develop
practices that are perceived as concerned with employee well-being and are effective in managing performance, instead of being a controlling factor and perceived negatively.
5.5 Other implications for future research
Performance management effectiveness is thus determined by various factors. Future research is needed to study more direct relationships between factors and performance management effectiveness. The factors included in this study are not mutually exclusive and overlap with each other. This study shows that performance management systems are not always effective and that organizations and managers must carefully consider the factors proposed in this study. They must do so to assure that the potential value of the performance management system is realized. Furthermore, this study shows that management of organizations can have a substantial influence on the effectiveness of performance management systems. They can partly influence the factors used in this study because organizational management are the designers, developers and implementers of the performance management system. When they are not committed, engaged and do not see the benefits of the performance management system, it will have a negative effect on individual and organizational performance and it will have a negative effect on the well-being of the individual in the organization. As management contributions are a very important factor, further research is needed to study more direct effects of management contributions on performance management effectiveness.
6. Implications for management and conclusion
As stated above, the findings of this study offer important implications for managers in organizations. I agree with De Waal & Counet (2009) that managers have a strong impact on the implementation quality of the performance management system. Managers must carefully monitor the development and implementation process of the performance management system to assure that the performance management system reaches its potential effectiveness. To effectively design and implement the performance management system, organizations must ensure management commitment, engagement and ensure that the intended implementation process is closely followed. Furthermore, organizational management must ensure the quality and quantity of communication. If so, performance management systems are assumed to become more effective because of the improved implementation quality (De Waal & Counet, 2009).
Management must include the organizational culture and industry in the development process of the performance management system. Both contextual factors, as proposed by Ferreira and Otley (2009), have an influence on performance management system
effectiveness. However, the industry characteristics (capital intensity, differentiation and growth) had low beta’s. Therefore, these findings are less robust.
Employees are the drivers of the organization which must be effectively managed to enhance individual well-being and performance. As shown in the results, the perceptions of employees shape individual behaviors and therefore I argue that employees must be involved in the development, or change process, of performance management systems. This must be done to assure that the employee perspective becomes or remains positive and that employees themselves can positively shape their perspectives due to participation and involvement. The employees and their perceptions about the performance management system must be closely monitored to assure that the performance management system contributes to individual well-being and performance.
Organizations, managers and employees benefit from well designed and implemented performance management systems. Employees experience an increased self-esteem; managers develop a workforce with motivation to perform and organizations develop employee
commitment, engagement and reduced misconduct. Although research on performance management effectiveness was marginal and only a few studies were found that studied the direct relationships between the factors proposed and performance management, there can be
concluded that performance management systems are not always effective and that its effectiveness depends on various factors.
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