Evaluation of the Performance Management Systems of the Bank X

Evaluation of the Performance Management

Systems of the Bank X

By:

Ahmad Rifqi

S1581163

This thesis was written in partial fulfillment of the requirement for obtaining The Degree of Master of Science in Human Resource Management Faculty of Management and Organization - University of Groningen

Supervisors:

Dr. P.H. van der Meer

Acknowledgements

In August, 2004 I started the first year of my master degree at Gadjah Mada University. Since I took the dual degree program - between Gadjah Mada University (MM) and University of Groningen (MSc-HRM), I had an opportunity to go to foreign country in August 2005. I never thought that I could survive in the Netherlands because it was the first time for me to living alone for almost one year.

This thesis is written to finalize my master degree in both universities. I have done this research for the last three months and it deals with performance management system of the Bank. Performance management seems to be an important aspect in achieving the bank’s strategic objective.

That is why I would take this opportunity to pay tribute to the bank that has supported me – socially and financially – throughout this study. Dr. P.H. van der Meer deserves my gratitude for his supervision and for the very interesting and constructive conversations we had concerning my research. I also like to thank Dr. Onne Janssen for being my second supervisor.

My friend, life companion, and devoted wife, Lucy, has been a pillar of support throughout the arduous years of my study. The unwavering support of my children Ari and Dhira have touched my heart. In the same light, I thank my parents, Eni, and my father and mother in law. Finally, I am most grateful to the ALLAH SWT who has kept me alive and healthy enough through my academic struggle. I acknowledge that it is through His will not mine that I have made it, thank you ALLAH.

Groningen, July 2006

Abstract

Table of Content

1.4 Structure of the thesis ……….. 5

1.5 Company profile ………. 5

Chapter 2 Relevant theories about Performance Management System ……… 8

2.1 Background ………. 8

2.2 Purpose ………... 9

2.3 Approach in measuring performance ……….. 10

2.4 Who is rating? ………. 13

2.5 Frequency evaluation ……….. 14

2.6 Performance management system criteria ……….. 15

2.7 SLAP Model ……… 17

Chapter 3 Data and method ……… 19

Chapter 4 Applying the SLAP Model ……… 21

4.1 Introduction ………. 21

4.2 ‘Strategic fit’ among business strategy, HR strategy, and performance appraisal …. 21 4.3 Fit on demand and supply side of labor ……….. 23

Chapter 5 Performance Management System at the Bank …………... 25

5.1 Introduction ………. 25

5.2 Objective and purposes ………. 26

5.3 Rating systems ……… 26

5.4 Who is rating? ………. 28

5.5 Frequency evaluation ……….. 29

5.6 Some basic information about implementation ……….. 29

Chapter 6 Conclusion and Recommendation ……… 32

References 36

Chapter 1 Introduction

1.1 Introduction

Evaluating employees has become more important nowadays for organizational development and other legitimate reasons. In the past, performance evaluations placed primary emphasis on technical aspects such as the advantages and disadvantages of rating systems, sources of error, validity and reliability in measuring performance. However, performance management is not only a technique; it is a process involving people, data, social and motivational aspects (Cascio, 2005). In addition, the links between the performance management and organizational strategic plans can improve organizational effectiveness (Anthony et al., 2005).

Performance management is a useful tool not only for evaluating employees but also for developing and motivating them. In general, the purposes of performance management can be grouped as strategic, administrative, and developmental (Noe et al., 2003). Unfortunately, performance evaluation is very difficult to carry out and almost every appraisal system is flawed because too many purposes have to be served by the same method of performance evaluation (Baron and Kreps, 1999).

One goal of any useful performance appraisal is to differentiate between high and low performers (Anthony et al., 2005). This sounds simple, but it is not easy to implement. Rating scales that tend to place all employees in the middle of the normal curve, supervisors who find it difficult to rate an employee, and cultures that reward seniority instead of performance lead to ineffective performance appraisal systems.

The Bank introduced a new performance management system in July 2005. The bank radically redesigned its performance appraisal in order to identify, reward or penalise the employees based on their performance by using forced distribution method. The new system has also adopted a competency-based approach by introducing five core competencies – continuous learning, integrity, building trust, work standard, and teamwork.

1.2 Purpose of study

The primary objective of this study is to evaluate the performance management system of the bank using relevant theories, and to see whether the bank adopted effective performance management system. Evaluating and identifying effective performance management system could make a contribution to system used by the bank.

1.3 Research questions

The following research questions are addressed in this thesis:

a. Does the bank adopt ‘strategic-fit’ among business strategy, HR strategy, and performance management system?

b. What kind of performance management systems does the bank use? c. How is the bank performance management system applied?

1.4 Structure of the thesis

The thesis is organized into a number of chapters. Chapter 2 presents a review of relevant theory about performance management system. Chapter 3 explain about data and method. Chapter 4 apply the SLAP model (Bax, 2002) to see the link between organization and HR strategy. Chapter 5 provide details performance evaluation system of the bank and basic information about application of the new system. Finally, conclusions and recommendations are given in Chapter 6.

Chapter 2 Relevant theories about Performance Management System

2.1 Background

In this chapter the ideas and thought mentioned in chapter 1, which determined the direction of this thesis, will be explored and discussed in more detail to the relevant theories.

Most large and small companies have formal or informal tools for appraising their employee’s performance. Performance appraisal means evaluating an employee’s current and past performance to the performance standard (Dessler, 2005). While the idea of performance appraisals is to improve employee performance, many managers take the integrated process of

performance management system – setting goals, training employees, appraising and

rewarding their employees – more seriously today than they have in the past (Dessler, 2005).

The increasing use of performance management system reflects several things (Dessler, 2005). It reflects, first, the total quality management (TQM) concepts by integrating nature of goal setting, appraisal and development. Second, performance management as a process also recognize as a tool for the company to achieve continuous improvement. Central to this philosophy is the idea that each employee must continuously improve their personal performance, from one appraisal to the next. So, performance management is crucial because it consolidate goal setting, performance appraisal, and development into single, common system, the aim of which to ensure that the employee performance is supporting the company’s (continuous improvement) strategic objectives (Dessler, 2005).

Knowing the useful, advantages and why we need performance management systems raised the next question: do they work? A survey from the Society for Human Resources Management found that more than 90% of appraisal systems were not successful (Coens & Jenkin, 2002). The drawbacks of performance appraisal are not the result of evaluating employee performance. Rather, they result from how the appraisal system is developed and use (Noe et al, 2003). Organizations usually fix ineffectiveness of their performance appraisal system by focusing on one of two areas: (1) improving the design of the process or (2) improving the implementation.

average, and poor performers; ensures all employees doing similar job are evaluated to the same standard – performance appraisal can provide several valuable benefits to the company and employee.

2.2 Purpose

Performance management system evaluates two dimension of employee performance: results and behavior (Grote, 2004). The results dimension focuses on the ‘what’ of the job; the measurable deliverables of job performance. The behavior dimension focuses on the ‘how’ of the job, the way the person goes about doing what’s required – commonly use the term competencies.

In general, the purpose of performance management system consist of strategic, administrative and development (Noe et al, 2003). Strategic purpose means that performance management system should link employee activities with the organizational goals. A competency-based performance management system is a formalized way of establishing the skills and behaviors of the employee. It is a way of informing employee to the company expectations, and it sets them on a clearly defined path toward achieving organizational goal (Martone, 2003). Essentially, goals for both individual employees and the organization become the key to individual and organizational success.

Organization use performance management information in many administrative decisions such as salary administration, promotion, retention-termination, layoffs, and recognition of individual performance. Despite the importance of these decisions, many managers see the performance appraisal only as a necessary process that they must go through to fulfill their job requirement (Noe et al, 2003). They feel uncomfortable evaluating others and tend to rate everyone high or at least the same that making the performance appraisal information relatively useless.

2.3 Approach in measuring performance

A vital step in performance management is to develop the measures by which performance will be evaluated. According to Noe et al (2003) there are some techniques that company use for measuring their employee performance i.e.:

2.3.1 Comparative Approach

The comparative approach compares an individual’s performance with others. This approach usually uses overall assessment of individual within a work group. At least three techniques that can be grouping into this approach: ranking, forced distribution, and paired comparison (Noe et al, 2003).

The comparative approach is an effective tool to differentiate employee performance; it eliminates problem of leniency, central tendency and strictness. This is will valuable if the results of the measures are used for administrative decision such as pay raise and promotions. This system is relatively easy to develop, easy to use, and often accepted by users.

One problem with this technique is their common failure to be linked to the strategic goals of the organization (Noe et al, 2003). Although raters can evaluate the extent to which individuals’ performance support the strategy, this link is seldom made explicit. In addition, because of the subjective nature of the ratings, their actual validity and reliability depend on the raters themselves. Some firms use multiple evaluators to reduce the biases. So, it can be conclude that their reliability and validity are modest (Noe et al, 2003).

2.3.2 Attribute Approach

This approach focuses on the extent to which individuals have certain attributes behavior (characteristic or traits) that believed for the company success. The techniques that use this approach define a set of traits – such as initiative, leadership, and competitiveness – and evaluate individuals on them (Noe et al, 2003). This approach consists of graphic rating and mixed-standard scales.

same method (list of traits, comparisons) is generalize across any organization and any strategy. In addition, these methods usually have very vague performance standards that are open to different interpretations by different raters. Because of this, different raters often provide extremely different ratings and rankings. The result is that both the validity and reliability of these methods are usually low.

2.3.3 Behavioral Approach

Behavioral approach attempts to define the behaviors an employee must exhibit to be effective in the job. There are five techniques that rely on behavioral approach such as (1) critical incident, (2) Behaviorally Anchored Rating Scales (BARS), (3) Behavioral Observation Scales (BOS), (4) Organization Behavior Modification (OBM) and (5) assessment centre.

The behavioral approach can be very effective. It can link the company’s strategy to specific behavior necessary for implementing that strategy. It provides specific guidance and feedback for employees about the performance expected of them (Noe et al, 2003). Most of the techniques rely on in-depth job analysis, so the behaviors that are identified and measure are valid. Because those who will use the system develop the measures, the acceptability is also often high. Finally, with a substantial investment in training raters, the techniques are reasonably reliable.

The major weaknesses have to do with organizational context of the system (Noe et al, 2003). Although the behavioral approach can be closely tied to a company’s strategy, the behaviors and measures must be constantly monitored and revised to ensure that they are still linked to the strategic focus.

2.3.4 Result Approach

The results approach minimizes subjectivity, relying on objective, quantifiable indicators of performance. Thus, it is usually highly acceptable to both managers and employees. Another advantage is that it links an individual’s results with organization’s strategies and goals.

However, objective measurements can be both contaminated and deficient – contaminated because they are affected by things that are not under the employee’s control, such as economic recessions, and deficient because not all the important aspect of job performance are amenable to objective measurement. Another disadvantage is that individuals may focus only on aspect of their performance that is measured, neglecting those that are not. A final disadvantage is that, though results measures provide objective feedback, the feedback may not help employees learn how they need to change their behavior to increase their performance. Feedback focusing on the exact behavior that needs to be changed would be more helpful (Noe et al, 2003).

2.3.5 Quality Approach

As non traditional method, improving customer satisfaction is the primary goal of the quality approach. Two fundamental characteristics of the quality approach are a customer orientation and a prevention approach to errors. Customer can be internal or external to the organization. A performance management system designed with a strong quality orientation can be expected to: emphasize an assessment of both person and system factors in the measurement system; emphasize that managers and employees work together to solve performance problems; involve both internal and external customer in setting standards and measuring performance; use multiple sources to evaluate person and system factors (Noe et al, 2003).

According to Cascio (2005), the rating system can be categorized into two groups: relative and absolute method. Relative method consists of: rank order; paired comparison; forced distribution. For absolute rating system consists of: essay, behavioral checklist, forced-choice system, critical incident, graphic rating scale, and BARS.

2.4 Who is rating?

In view of the purposes served by performance appraisal, who conduct the rating is important. In addition to being cooperative and trained in the techniques of rating, raters must have direct experience with, or firsthand knowledge of, the individual to be rated. According to Anthony et al (2005), there are five potential sources of raters:

2.4.1 Supervisors

The most common evaluator is the employee’s immediate supervisor. To be able to evaluate the employee effectively, the supervisor should have frequent contact with the employee and be able to obtain the specific information regarding his or her performance. Although it might be assumed that this degree of contact occurs regularly, many supervisors do not actually have much opportunity to observe their employee’s behavior (Anthony et al, 2005). Besides, the supervisor may be able to gather relevant information from other potential source of performance raters.

2.4.2 Coworkers

In certain situations coworkers may evaluate their peer’s performance. Although coworkers may be somewhat uncomfortable and resistant to evaluating their peers, one study has shown that peer evaluations are more stable over time and may be the most accurate evaluations of employee performance (Anthony et al, 2005). An organization may choose to encourage peer evaluations, particularly if the contact between supervisor and employee is limited. Also, if self-managed work teams are used, peer rating is an important component in the performance appraisal (Anthony et al, 2005).

2.4.3 Employees

supervisor for months, they might be concludes that they are performing well or poorly. Research has found that employees who are given the opportunity to evaluate themselves have a tendency to inflate their ratings (Anthony et al, 2005). Self evaluations will be helpful when used for employee development purposes. Self evaluation can encourage discussion about employee’s strength and weakness from the employee’s and supervisor’s point of view.

2.4.4 Subordinates

Subordinates are valuable sources of information when examining the performance of supervisory employees (Anthony et al, 2005). Information from subordinates is helpful not only for determining how well a manager leads, communicates, plans, delegates, and organizes but also for identifying general problem areas within a department. The use of subordinate input for managerial evaluations can be valuable if the information is gathered in an atmosphere of trust.

2.4.5 Costumers

In service organizations the consumer is in a perfect position to provide performance feedback (Anthony et al, 2005). Using customer evaluations of employee performance is appropriate in two conditions (Noe et al, 2003). The first is when an employee’s job requires direct service to the customer or linking the customer to other services within the company. Second, customer evaluations are appropriate when the company is interested in gathering information to determine what products and services the customer wants.

The organization’s choice of type and number of evaluators to use is not easy. The strategy of the firm, the culture, and the purpose of the evaluation must be taken into consideration. Collecting information from a number of different sources can increase reliability and acceptability of the performance appraisal. The review process known as 360-degree feedback, in which an individual receives feedback from subordinates, peers, supervisor, and even internal and external customers (Anthony et al, 2005).

2.5 Frequency evaluation

Many organization encourage a combination both formal and informal appraisal. The formal appraisal is most often used as the primary evaluation. However, the informal appraisal is very helpful for more frequent performance feedback. Informal appraisal should not take the place of a formal performance evaluation.

How often should a worker be evaluated? Two general rules follow from theory of firm-specific human capital (Lazear, 1998): Rules 1: workers with more firm-firm-specific human capital should be evaluated less frequently. Rules 2: the frequency of evaluation should be inversely related to experience in the firm and or job.

2.6 Performance management system criteria

There are five criteria to use to evaluate performance management systems: strategic congruence, validity, reliability, acceptability, and specificity (Noe et al, 2003).

2.6.1 Strategic Congruence

Strategic congruence is the extent to which a performance management system congruent with the organization’s strategy, goals, and culture. Strategic congruence emphasizes the need for the performance management system to guide employee in contributing to the organization’s success. The SLAP Model clearly describes the link between business strategy and HR strategy (Bax, 2002). A business strategy needs a congruent HR strategy that brings distinctive competencies from employee as necessary condition for the business strategy to be successful (Bax, 2002).

2.6.2 Validity

Validity is the extent to which a performance measure assesses all the relevant aspect of performance. Performance scores should not be deficient or contaminated (Cascio, 2005). Validity is concerned with maximizing the overlap between actual job performance and the measure of job performance (Noe et al, 2003). A performance measure is deficient if it does not measure all aspects of performance. A contaminated measure evaluates irrelevant aspects of performance or aspects that are not job related. The performance measure should minimize contamination, but complete elimination is seldom possible (Noe et al, 2003).

2.6.3 Reliability

One important type of reliability is interrater reliability: the consistency among the individual who evaluate the employee’s performance (Noe et al, 2003). A performance measure has interrater reliability if two individuals give the same evaluations of a person’s job performance. In addition, the measure should be reliable over time (test-retest reliability). A measure that results in drastically different ratings depending on when the measures are taken lack test-retest reliability (Noe et al, 2003).

Reliability also refers to the degree to which a performance measure is free from random error, due to non standardized procedure, individual fluctuation in feeling (Cascio, 2005). Research consistently reveals that people have limitation in processing information. Because human are so limited, we often simplifying mechanism, to judgment about people (Noe et al, 2003). Performance evaluation may also distort by judgmental bias or rater error such as: leniency and severity, central tendency, halo effect (Cascio, 2005).

There are two approaches to reduce rater errors: rater error training and rater accuracy training, also called frame of reference training (Noe et al, 2003). The former attempt to make manager aware of rating errors and helps them to minimize those errors. And the later attempts to emphasize the multidimensional nature of performance and to familiarize raters with the actual content of various performance dimensions.

2.6.4 Acceptability

Acceptability refers to whether the people who use a performance measure accept the process. Many performance measures are extremely valid and reliable, but they consume so much of manager’s time so that they refuse to use it (Noe et al, 2003). Acceptability is affected by the extent to which employees believe the performance management system is fair. There are three categories of fairness: procedural, interpersonal, and outcomes (Noe et al, 2003).

2.6.5 Specificity

2.7 SLAP Model

The basic assumption underlying this model is the main task of HR manager to engineer a balance or fit between supply and the demand of labor (Bax, 2002). Every production process demands a certain number of specific tasks to be fulfilled by people. In order to perform the works tasks, the HR manager needs a number of people with the required skill and capacities.

Under assumption that the organization is an open system, all sorts of forces continuously affect both the demand and the supply of labor, the probability that equilibrium in the allocation of labor actually will be achieved, must be considered low (Bax, 2002). And if achieved, it is unlikely that it will hold: equilibrium will be succeeded by unbalance. As consequences, HR managers are constantly engaged in managing process of allocating labor and changing the work process within the organization. As the model is about strategic dimensions of allocating labor, it is called Strategic Labor Allocation Process Model (SLAP) as show in Figure 1.

Figure 1: Strategic Labor Allocation Process (SLAP) Model

The external environment affecting the supply and demand sides of the labor allocation process. The fit between supply and demand – which is the core of this concept – is not only to be achieved by manipulating the supply side. If needed HR management should also

• Recruitmnt • Selection • Training • Assessment • Rewards LABOUR DEMAND LABOUR SUPPLY EXTERNAL ENVIRONMENT HR STRATEGY DISTINCTIVE COMPETENCIES

Quality Working Life Conditions Employment

Commitment - Turnover - Absenteeism • Task • Role • Function • Recruitmnt • Selection • Training • Assessment • Rewards • Recruitmnt • Selection • Training • Assessment • Rewards LABOUR DEMAND LABOUR DEMAND LABOUR SUPPLY LABOUR SUPPLY EXTERNAL ENVIRONMENT HR STRATEGY HR STRATEGY DISTINCTIVE COMPETENCIES DISTINCTIVE COMPETENCIES

Quality Working Life

Quality Working Life Conditions EmploymentConditions Employment

Commitment - Turnover - Absenteeism Commitment - Turnover - Absenteeism

redesign the production process in an attempt to close the gap between supply and demand.

The continuous process of labor allocation is related to both changes in the organization’s external environment and to the formulation of the business strategy. In this perspective the concept of HR strategy has two dimensions (Bax, 2002). First, it referred to the set of ideas concerning both direction of redesigning the organization and the application of HR instrument to achieve fit between supply and demand sides of labor allocation process. Second, it is complementary to the first one.

Chapter 3 Data and method

In this chapter an overview will be given of the way data and information will be gathered in order to get an answer to the research question mentioned in chapter 1.

The methodology used in this study is a general review of HR system of the bank as a whole while it is focused on the performance management system. The scope of the study is review the existing literature on performance management system, by focusing the analysis to the successful performance management system. This study also takes a look at the how the bank’s HR policy and activities produce employee competencies and behaviour in order to achieve the bank strategic objectives.

The study takes a significant look at some of the challenges faced by the bank in the implementation of the new evaluation system and attempts to propose solutions and suggestion as will be discussed in the conclusion and recommendation section.

There are limitations to this study in its capacity to obtain relevant up-to-date data on the bank’s new performance evaluation system. However, secondary data will be used as the main source of information through use of the bank’s documents. As well as this secondary source, a simple experience survey form has been design to get opinion from supervisor and subordinate about the new performance appraisal system. The survey has been filled out by 3 (three) supervisor and 3 (three) subordinate within HR division of the bank. As besides the limitations, personal mistake may be occurred in which I will accept the responsibilities.

In order to analyse the data and information, the bank’s performance management systems are compared with, and evaluated against, theory from related literature by conducting the following steps.

1. Examination of the organization and HR strategy of the bank. Secondary data, especially data from the HR division of the bank, is examined. The SLAP model (Bax, 2002) is used to evaluate the links between business and HR strategy of the bank.

3. Evaluation of steps 2 based on performance measurement criteria. In this step, the characteristic of the bank’s performance management system are evaluated based on strategic congruence, validity, reliability, acceptability, and specificity (Noe et al., 2003). 4. Finally, conclusions are drawn and suggestions made for improving the bank’s

Chapter 4 Applying the SLAP Model

4.1 Introduction.

In this chapter, attention will be paid to strategic purpose of performance management system. The SLAP model will be used to ensure the linkage among the bank strategic objective, HR strategy, and performance management system.

Based on the bank Transformation Program, the bank has redefined their strategic direction – mission, vision, values and strategic objectives

4.2. ‘Strategic fit’ among business strategy, HR strategy, and performance appraisal. The important component of SLAP Model is the linkage between business strategy, HR strategy and HR instrument. A business strategy needs a congruent HR strategy that brings employee behavior as necessary condition for the business strategy to be successful. By the strategic use of HR, firms could develop sustainable competitive advantage (Bax, 2002).

Based on the strategic objectives that related to HR function – ‘strengthen the organization and build highly competent human resources with supporting of a knowledge-based work culture’ – the bank needs to reengineer their HR strategy to become better practice that are align with the Bank’s overall strategic objectives and values (Kearney, 2003).

Figure 2: HR system of the bank

In reengineering HR system, the bank adopts some HR best practices (Kearney, 2003). First, merit system – employee rewards will be based on performance and competencies. Second, harmonizing between organization and their member relationship – employee interest is adopted after organization interest. Third, fairness – respect to diversity among employee. Finally, transparent – every HR policy should be reasonable and explainable. There are seven core HR instruments that should be reengineered: (1) recruitment (2) transfer; (3) promotion; (4) performance appraisal; (5) training; (6) career planning; and (7) succession planning.

In re-designing the performance appraisal, the bank uses a strategic approach by creating a clear linkage between performance evaluation and the bank strategic objectives. The new performance system is designed to link with overall strategic objectives by measuring employee performance that highly related to the working unit output and the bank outcomes. In addition, the bank introduce new behaviour – core competencies (continuous learning,

integrity, building trust, work standard and teamwork) and attendance – to ensure the alignment of employee behaviour with the bank outcomes.

By adopting a competency-based performance management system, the new performance evaluation system is linked to the strategy by setting down at beginning fiscal year, the result and type level of performance that must be achieved. Furthermore, the new appraisal system also can help the bank to enhance their culture and values (competent, integrity, transparent, accountability and cohesiveness) that will reinforce the bank competitive advantage.

Discussion above describes how the bank revises its performance appraisal system in order to align it with the strategic objectives and HR strategy. A congruency between the bank strategic objective and HR strategy has brings employee behavior as a necessary condition for the achievement of ‘strengthen the organization and build highly competent human resources with supporting of a knowledge-based work culture.’

4.3. Fit on demand and supply side of labor

Core of the SLAP Model is the balance or fit between demand and supply of labor allocation process (Bax, 2002). The following discussion describes balancing process of demand and supply of labor when the bank transforms their HRM.

The HR function is an important component in the bank Transformation Programme. There are four key roles that HR division should play: strategic partner, change agent, employee champion and administrative expert. Survey result show poor rating for HR as a strategic partner and change agent, even HR is viewed as more administrative expert rather than an employee champion (Kearney, 2001). A new vision for the role of HR introduced new roles to the HR division of which the key element of strategy are changing from:

• Centralised operation and structure Æ client driven HR division • Controllers and policemen Æ strategic partner and change agent • Generalist administrators Æ professional HR specialist

• Primitive administration of personnel Æ technology enabled process • HR controls the workforce Æ managers own their staff

Teams, HR Consulting Teams, and HR Service Teams. The Strategic HR Teams was established and comprised of specialists who set the bank future organization and HR division long-term direction. The HR Consulting Teams are directly accountable for ensuring effective HRM within their assigned areas. The HR Consulting Team is both a new function and skill for the bank. This is related to changing HR role into strategic partner and change agent. Then, HR Service Teams provide support to the Strategic HR and HR Consulting Teams.

Chapter 5 Performance Management System at the Bank of Indonesia

5.1 Introduction

This chapter provides the facts about the new appraisal system of the bank and some basic information about the implementation.

The diagnostic study from AT Kearney concerning the previous appraisal system agreed with the fact that performance appraisal was not contributing to the establishment of a performance culture within the bank – the execution of the performance system provided only a limited benefit to the bank and it was not linked to performance remuneration (Kearney, 2001). The bank’s performance appraisal process was devalued by the lack of preparedness of managers to rate objectively and the average rating was ‘above average.’ The measurement was based on two variables – result and behaviour - which had different weightings for different levels of employees. However, the system only measured the result based on the individual job description and not related to the organizational objectives. As well as this, the rules for allocating a rating to an employee were not well understood and were not clear. The overall view of AT Kearney and the task force – who redesigned the new appraisal system – was that the previous management appraisal system was not objective.

The implementation of the previous system also had problems. It required each individual to have an annual performance review, but individuals in some areas had not received monitoring or coaching conversation during the evaluation periods. Because there had been no procedure for tracking the commitment made in previous system, it was often ignored. Even though there were eight rating levels available for use, only three were usually used. This arose because of an inability to distinguish between top and average performers (The Bank of Indonesia, 2004a).

Some principles that inherent in the bank performance evaluation process are:

(1) High correlation among the bank outcomes, work unit output and employee result; (2) Objective and transparent;

(3) Result oriented without ignoring the working process, and;

(4) Supervisors responsible for the employee’s feedback, development, and performance.

5.2 Objective and purposes

The objective of the bank’s performance evaluation is to measure result and behavior of employee during evaluation period in order to increase their motivation. There are three purposes of the new appraisal system: (1) reward; (2) career planning; (3) coaching and counseling. The bank use performance appraisal as an input in determining reward such as salary and incentive. The result of appraisal will be converted into Performance Index (PI) and used as a multiplying factor in the merit pay system.

The bank uses appraisal system as a basis for career planning, like promotion, transfer, succession planning, and exit policy. Filling out the Individual Development Planning (IDP) forms is a part of the competency-based performance management system process. This form provides employee profiles about competencies gap, planning for the competencies development, evaluation of the competencies development, and future action plan. Additionally, this profile will be a road map for employee career in the future.

The performance appraisal is also facilitates employee coaching and counseling such as: guidance for working assignment and working behavior; coaching and counseling for employee who had problem with performance. The bank thinks it is fundamental component in the appraisal system to have a periodically conversation between supervisor and employee so they can evaluate the agreements they made about the performance plan, competencies and other working behavior.

5.3 Rating systems

competencies, i.e.: continuous learning, integrity, building trust, work standard and teamwork. Hereby the bank gives the employees a level in which they have to be performing. The measurements are done through observations. The second section is attendance. Here the bank set a level of attendance and measure this by using factual attendance rate. Both sections are evaluated on the five point scale. The equation below is used to determine the employee performance level, by assigning the weighted factor as shown in Table 1:

PL = (VEP x WEP) + (VEWB x WEWB) PL = Performance Level

VEP = Value of Employee Performance VEWB = Value of Employee Working Behavior WEP = Weighted for Employee Performance WEWB = Weighted for Employee Working Behavior

Table 1: Weighting System of employee performance and working behavior

Employee Grade What to measure Grade VII – VIII Grade IV – VI Grade I – III Employee Performance 40% 50% 60%

Employee Working Behavior 60% 50% 40%

The performance level will be indicated in the scale system and performance grade as presented in Table 2. Then, the performance level (PL) will be reviewed at working unit level using 2 (two) additional information: (1) peer’s ranking, and (2) distribution grade which is related to the working unit performance, mainly for managerial level (Table 3 and 4). After the appraisal process both raters and employee have to sign the evaluation form.

The final result will be collected by HR division, to check whether there is a consistency between the employee performance and distribution grade. In case there is no consistency, HR division has the right to adjust the employee performance.

Table 2: Scale System & Individual Performance Grade

Scale Individual Performance Grade

5 Outstanding (O)

4.2 – 4.9 Very Good (VG)

3.4 – 4.1 Good (G)

2.6 – 3.3 Adequate (A)

1.8 – 2.5 Not Adequate (NA)

1.0 – 1.7 Poor (P)

Table 3: Distribution Grade for Managerial Level

Ind. Performance Grade Working Unit Grade

</= Adequate (minimal) Good (residual) Very Good (maximal) Very Good (VG) 45% 45% 10% Good (G) 50% 45% 5% Adequate (A) 55% 45% 0%

Table 4: Distribution Grade for Non Managerial Level

Individual Performance Grade

</= Adequate (minimal) Good (residual) Very Good (maximal)

50% 45% 5%

5.4 Who is rating?

In line with the appraisal principles, supervisors are responsible for employee’s feedback, development, and performance. Performance evaluation is conducted by supervisors. He or she knows what is going on the work floor. These evaluations should be approved by the head of division who has responsibility to the working unit performance.

To help ensure fairness in appraisal, the bank uses an appeal mechanism. The mechanism is facilitated by HR division. If the matter is not resolved at this stage, provision may be made for appeal to a panel of high-level managers. Providing employees to express disagreement may reduce complaints and is likely to help strengthen confidence in the system.

5.5 Frequency of evaluation

Evaluation period is started from 1st of January and is ended in 31st of December. Performance monitoring and feedback process will be held in July. The semiannual discussion are both quantitative and qualitative and provide the employee with necessary feedback to ensure that they are on track, focusing on the right things, and have the right tools, training, and support to attain their plan. In the new system, every employee should have a performance plan which is signed by both supervisor and employee. Using a ‘contract’ employee are more able to believe that their performance was rate more accurate and fairly. Currently, the contract is limited to the managerial level.

The bank also thinks that it is important to emphasis communication between supervisor and employee in each phase of the evaluation process. First, a supervisor works closely with employees to develop their performance plan based on their job description and the working unit plan. Second, the supervisor observes, provide feedback and assess the performance during monitoring and feedback discussion. Third, in the final evaluation, the supervisor rates the employee’s performance during the year, documents the evaluation in appropriate form and review the result with the employee. However, the bank still limited these communication processes for managerial level due to time and number of subordinate. For non managerial level, the bank tried to appeal to the supervisor responsibilities.

5.6 Some basic information about the implementation 5.6.1 Number of employee involve in training

5.6.2 Performance appraisal data for 2005

Table 5 Performance Appraisal of the bank employee in 2005 IPG*)

EG**) Poor

Not

Adequate Adequate Good

Very Good Out- standing Total Grade VIII 0 0 22 23 1 0 46 Grade VII 0 0 24 39 2 0 65 Grade VI 0 0 98 128 3 0 229 Grade V 0 0 311 194 11 0 516 Grade IV 0 7 417 571 84 0 1079 Grade III 1 9 1327 1014 69 0 2420 Grade II 0 19 562 602 21 0 1204 Grade I 0 2 406 59 2 0 469 Total 1 37 3167 2630 193 0 6028

*) = Individual Performance Grade; **) = Employee Grade;

From Table 5, we can see that the employee appraisal is in normal curve. Using these data, we also can determine the bank’s working unit performance as shown on Table 6. In general, the bank’s working unit performance is ‘Good’ performer. This classification is based on distribution grade for managerial level (Table 3). To categorize as ‘Good’ performer, the working unit should have minimal 50% for less than or equal to Adequate, 45% for Good and maximum 5% for Very Good. In 2005, the bank’s performances are 53%, 45% and 2%.

Table 6 Distribution Grade for Managerial Level in 2005 IPG*)

EG**) Poor

Not

Adequate Adequate Good

Very Good Out- standing Total Grade VIII 0 0 22 23 1 0 46 Grade VII 0 0 24 39 2 0 65 Grade VI 0 0 98 128 3 0 229 Grade V 0 0 311 194 11 0 516 Total 0 0 455 384 17 0 856 IPG in % 0 0 53% 45% 2% 0 Distribution Grade in 2005 53% 45% 2%

Distr. Grade for

5.6.3 Result from experience survey

By using simple experience survey (Appendix 2 and 3), it can summarize:

1. All of respondent agree that the new appraisal system has improvement than before. 2. All respondent agree that the new system have clearly purpose.

3. Most of the supervisors agree that appraisal process free from bias, but all of the subordinates neutral on this aspect.

4. All of the supervisors agree that feedback from appraisal process have been helpful in managing employee career, while most of the subordinate neutral.

5. All of the supervisors agree that performance plan perform effectively and clarifies what expected from both parties, while most of the subordinates neutral for this.

6. All of the supervisors agree that supervisor help complete or actively involve initiates action plan to achieve performance plan, while most of the subordinates agree for this. 7. Most of the respondents agree that specific feedback on competencies makes behavioral

changes with noticeable improvement.

8. All of the respondents agree that competency measured is accurately represents the skill to carry out the duties.

9. All of the respondents neutral to the achievement of the latest appraisal on representing target and level contribution that employee made.

Chapter 6 Conclusion and recommendation

This chapter will give an answer to the research question formulated in chapter 1:

a. Does the bank adopt ‘strategic-fit’ among business strategy, HR strategy, and performance management system?

b. What kind of performance management systems does the bank use? c. How are the bank performance management system applied?

6.1 ‘Strategic fit’ among business strategy, HR strategy and performance appraisal By applying the SLAP Model, we can see a clear linkage between the bank strategic objective, HR strategy and the performance appraisal system. A congruency between the bank strategic objective and HR strategy has brings employee behavior as necessary condition for the achievement of ‘strengthen the organization and build highly competent human resources with supporting of a knowledge-based work culture.’

Core of the SLAP Model is the balance or fit between demand and supply of labor allocation process. The bank also experiences the balancing process while transforming their HR management. Adopting competency-based HRM, provide foundation for the bank to define the skill, competencies and behavior employee that need to achieve the bank strategic objectives.

6.2 The Bank’s Performance Management System. 6.2.1 Purpose

The objective of the bank’s performance evaluation is to measure the result and the behavior of employee in order to increase the motivation. The bank uses every purpose, which Noe mentions in his book. They use appraisal system as an input in determining reward such as salary and incentive; it can serve as basis for career planning, like promotion, transfer, succession planning, and exit policy; and it facilitates employee coaching and counseling.

6.2.2 Rating system

it virtually eliminates problem of leniency, central tendency and strictness (Noe at al, 2003). The point of this thesis is about validity and reliability of the appraisal system.

Recommendation:

• The problems with comparative approach are their common failure to be linked to the strategic goals; their validity and reliability depend on the raters (Noe et al, 2003). By combining ranking (person to person comparison) and forced distribution (person to standard comparison) method, it could be an effective tool in reducing these two problems of the comparative approach. In short, the bank employs an effective combining tool in differentiating employee performance while at the same time helps them contributes to achieving the goals.

• The theory behind forced distribution is that the method helps builds a high-performance, meritocracy culture by ensuring manager to differentiate among high, average and low performers (Guralnik et al, 2004). The bank force distribution scheme as presented on Table 3. A better scheme for ‘Adequate’ working unit performers might be to allow some percentage to reflect the reality that the bank rewards their talent employee. Instead of requiring that zero percent of employee be rated ‘Very Good’, I suggest to place up to one percent in that category (Tabel 7) – but there is nothing that says that anyone must be rated ‘Very Good’

Tabel 7 Recommendation for Distribution Grade of Adequate Performer

Ind. Performance Grade Working Unit Grade

</= Adequate (minimal) Good (residual) Very Good (maximal) Adequate (A) 55% 55% 45% 44% 0% 1% 6.2.3 Who is rating?

There are five potential sources of raters: supervisors, coworkers, employees, subordinates, and costumers. At the bank, rater is supervisors also called direct supervisor. He or she knows what is going on the work floor. The performance should be approved by the head of division because he has responsibility to the working unit performance. The bank does not use a 360-degree feedback system because of the reluctances reason.

Recommendation:

to be objective. When the new system is being introduced, the bank has conduct training for 13% of their middle manager. Assumed that the forced distribution system will be effective within 3.5 – 4.5 years after initiating the system (Sculen, 2005), I suggest the bank to increase their training for the rater into 20% - 25% per year.

• In order to increase employee acceptance, the bank should consider using multiple raters for measuring behavior in conjunction with the forced distribution approach. Multiple rater need some readiness criteria, i.e.: top management support, it has clear performance plans and job expectations, and both employee and supervisor have a reasonable amount of trust (Allan, 1994).

6.2.4 Frequency of evaluation

The bank evaluation process is conducted formally once a year. During the periodical evaluation, the supervisor observes, provide feedback and assess the performance. The bank also thinks that it is very important to have regular communication between supervisor and employee in the evaluation process. The bank still limited the communication processes to the managerial level.

Recommendation:

Communication process is important to ensure the employee is on the track. The bank limits the process due to time and number of employee. The bank can encourage supervisor to use informal appraisal session. The informal session can reduce anxiety that connected to the formal session by minimizing unidentified behavior during evaluation period. Providing periodic feedback on performance also is likely to promote acceptance of the system by employees.

6.3 The application of the new system

The new performance appraisal system is launched in July 2005. It is impossible to have appraisal system that will work perfectly when it is initially installed. Some provision needs to be made not only to identify weakness in the system, but also to ensure that the system is being installed properly and accepted by user.

Multiple raters are more accurate than receive feedback from single perspective.

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