Analysis of Benefits and Limitations of Performance Management

According to Robert J. Greene, who is the CEO of Reward Systems Inc., “Performance management is the single largest contributor to organizational effectiveness. If you ignore performance management, you fail”. Atkinson et al. states that it is vital for PM to do the following:

1. Assist an organisation in evaluating if expected contributions and suppliers are received.
2. Evaluate if an organisation provides every stakeholder group with assistance in supporting the organisation to meet its key objectives.
3. Helping an organisation to develop and apply procedures which will help to meet strategic goals.
4. Assist the organisation in overseeing and measuring whether strategic planning is linked to the agreed targets and values of the central stakeholders.

Performance appraisal (PA) is an official method of assessment and evaluation of employees and a team, which is used in the performance management process. PA should include frequent and continuous open communication and reviews of performance after performance expectations have been outlined. Therefore, it should be regarded as an opportunity to solve problems, rather than highlight faults in the employees’ performance. However, the appraisal process has been criticised for a lack of objectivity, the halo/horn error, recent behaviour bias, central tendency error, leniency/strictness, causing conflict between managers and their juniors, failing to motivate employees and failing to direct employees’ development. Therefore, a corporation should implement a strategic method to PA where the corporation’s values, vision and mission coincide with the PM method. Similarly, Micheli and Manzoni argue that defining the roles of PM is vital in shaping its effectiveness and influence on an organisation’s performance. As well as this, businesses should outline whether PM will be implemented for the purpose of control or developing knowledge. Therefore, businesses should establish whether PM is linked to an established strategy which empowers and positively adapts strategies.

As managers govern each part of the PM process, PM has been criticised for a lack of objectivity, which can be seen when managers permit stereotyping and personal bias, regarding race, age or gender, to influence their assessment and evaluations of employees. Thus, this can lead to serious repercussions, such as costly legal action taken against employers.

According to Kaplan and Norton, the negative consequences of solely utilising financial indicators for developing PM targets are notable evident in the past two decades. Similarly, Atkinson et al. argues that many organisations utilise official PM procedures that are merely annexes of their financial statements. The limitation with relying on traditional financial accounting measures is that they can produce deceptive indicators for the ways that an organisation should improve, as well as the fact that they are not often in line with the skills that are needed for a current organisation which is preparing for the future.

However, Ittner and Larcker highlight that when businesses measure non-financial performance this can also lead to negative consequences. Ittner and Larcker state that a prominent problem for businesses is where they do not align measurements with procedures, which lead to them being unsure of which non-financial measures to apply in the PM process. As well as this, Ittner and Larcker argue that measuring non-financial performance can cause businesses to measure many irrelevant things.

According to Gomes and Romao, the Balanced Scorecard (BSC) combines financial performance measures with business procedures, customer satisfaction, learning and development and long-term sustainability, thereby complimenting traditional financial PM. One of the strengths of the BSC is that is aligns PM with corporate strategy, which encourages employees to work effectively in order to fulfil the organisation’s goals. As well as this, the BSC is designed that that the objectives reflect the strategies of the company. It also provides ongoing feedback and evaluation through effective communication. Another benefit of the BSC is that it can be applied to organisations of any size, whilst identifying the significance of internal procedures that can accomplish business results and external aspects, such as customer and market position.

Nevertheless, according to Maltz, Shenhar & Reilly, the BSC can be critiqued because it does not focus on the HR aspect of businesses. As well as this, Anand et al. state that, there are issues in the way that the strategy has been implemented, which makes it difficult to accomplish a true balance between financial and non-financial measures; this may be due to the fact that businesses may not understand what the BSC strategy comprises. Moreover, according to Atkinson et al., all of the stakeholders were not included in the BSC, such as public authorities and suppliers, which is particularly critical for certain businesses.

Another limitation of PM is due to a lack of understanding of the social context in which the system was applied. This is related to Haines and St-Onge, who state that PM needs to be strategically incorporated within Human Resource (HR) management so that PM is more successful . In their research, Haines and St-Onge, concentrated on the extent of PM training managers received, the utilisation of multisource feedback and employee recognition procedures. The findings from the questionnaire and phone survey revealed that successful PM is as a result of specific characteristics that are related to the organisation’s specific context. As well as this, Haines and St-Onge found that businesses that highlight employee recognition and offer more PM training produce valuable outcomes that contribute positively to the businesses’ key objectives, vision and mission. Nevertheless, a limitation of this study is that the research was conducted using a sample of businesses in Quebec, Canada; this means that the study is not representative of businesses situated in other countries and cannot be globally generalisable. As well as this, Haines and St-Onge recognise that their study is limited because their data reflects a collection of data at a single point in time, which means that there is a gap in research for a longitudinal study that explores the impact of PM over time.

According to the aforementioned literature, PM has many benefits, limitations, as well as paradoxes. Evidently, the aforementioned limitations are not due to a characteristic of the performance management as an approach, but rather, reveal an inappropriate implementation of the approach. It appears that some PM strategies may be more advantageous than others. According to Posthuma and Campion, “too much attention has been placed on the design of a [performance management] system, and not enough on how it works when implemented”. A great deal of research has observed and investigated technical or measurement problems that are linked to PM, however, only a selected number of studies have focussed on the procedures that could enhance the PM system, or the impact that they have. As mentioned by Micheli and Manzoni, useful strategies of PM are vital for organisations to meet their objectives. For instance, individual employee targets need to align with an organisation’s strategies so that specific training needs can be identified and so that this can ultimately lead to a positive impact on the organisation’s performance as whole.