Analysis of Benefits and Limitations of Performance Management

Introduction

According to Robert J. Greene, the CEO of Reward Systems Inc., “Performance management is the single largest contributor to organizational effectiveness. If you ignore performance management, you fail” (Greene, 2019). Atkinson et al. (2012) state that it is vital for performance management (PM) to do the following:

Key Functions of Performance Management

• Assist an organization in evaluating if expected contributions and suppliers are received.
• Evaluate if an organization provides every stakeholder group with assistance in supporting the organization to meet its key objectives.
• Help an organization to develop and apply procedures which will help to meet strategic goals.
• Assist the organization 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 (Armstrong, 2020). However, the appraisal process has been criticized for a lack of objectivity, the halo/horn error, recent behavior 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 (2010) argue that defining the roles of PM is vital in shaping its effectiveness and influence on an organization’s performance. Additionally, 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.

Challenges in Performance Management

As managers govern each part of the PM process, PM has been criticized 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. This can lead to serious repercussions, such as costly legal action taken against employers (Cascio, 2018).

According to Kaplan and Norton (1996), the negative consequences of solely utilizing financial indicators for developing PM targets are notably evident in the past two decades. Similarly, Atkinson et al. (2012) argue that many organizations utilize official PM procedures that are merely annexes of their financial statements. The limitation of relying on traditional financial accounting measures is that they can produce deceptive indicators for the ways that an organization should improve, as well as the fact that they are not often in line with the skills needed for a current organization preparing for the future.

However, Ittner and Larcker (2003) highlight that when businesses measure non-financial performance, this can also lead to negative consequences. They state that a prominent problem for businesses is where they do not align measurements with procedures, leading to uncertainty about which non-financial measures to apply in the PM process. Additionally, measuring non-financial performance can cause businesses to measure many irrelevant things.

Balanced Scorecard: A Strategic Approach

According to Gomes and Romao (2013), the Balanced Scorecard (BSC) combines financial performance measures with business procedures, customer satisfaction, learning and development, and long-term sustainability, thereby complementing traditional financial PM. One of the strengths of the BSC is that it aligns PM with corporate strategy, which encourages employees to work effectively to fulfill the organization’s goals. Moreover, the BSC is designed so 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 organizations of any size, while 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 (2003), the BSC can be critiqued because it does not focus on the HR aspect of businesses. Additionally, Anand et al. (2005) state that there are issues in the way the strategy has been implemented, making it difficult to accomplish a true balance between financial and non-financial measures; this may be due to businesses not understanding what the BSC strategy comprises. Moreover, according to Atkinson et al. (2012), all stakeholders were not included in the BSC, such as public authorities and suppliers, which is particularly critical for certain businesses.

Social Context and Performance Management

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 (2012), 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 utilization of multisource feedback, and employee recognition procedures. The findings from the questionnaire and phone survey revealed that successful PM results from specific characteristics related to the organization’s specific context. Furthermore, 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 generalizable. Additionally, Haines and St-Onge recognize that their study is limited because their data reflects a collection of data at a single point in time, which means there is a gap in research for a longitudinal study that explores the impact of PM over time.

Conclusion

According to the aforementioned literature, PM has many benefits, limitations, and paradoxes. Evidently, the aforementioned limitations are not due to a characteristic of 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 (2008), “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 linked to PM; however, only a selected number of studies have focused on the procedures that could enhance the PM system, or the impact they have. As mentioned by Micheli and Manzoni (2010), useful strategies of PM are vital for organizations to meet their objectives. For instance, individual employee targets need to align with an organization’s strategies so that specific training needs can be identified, ultimately leading to a positive impact on the organization’s performance as a whole.

References

• Anand, M., Sahay, B. S., & Saha, S. (2005). Balanced scorecard in Indian companies. Vikalpa, 30(2), 11-25.
• Armstrong, M. (2020). Armstrong's Handbook of Performance Management. Kogan Page Publishers.
• Atkinson, H., Brown, J. B., & Collier, P. M. (2012). Performance measurement in the public sector: the case of the UK national health service. International Journal of Business Performance Management, 14(3), 207-222.
• Cascio, W. F. (2018). Managing Human Resources. McGraw-Hill Education.
• Gomes, J., & Romao, M. (2013). Balanced scorecard in SMEs: Perspectives and limitations. In Proceedings of the European Conference on Knowledge Management (pp. 259-267).
• Greene, R. J. (2019). Reward systems: Does yours need an overhaul? Society for Human Resource Management.
• Haines, V. Y., & St-Onge, S. (2012). Performance management effectiveness: Practices or context? The International Journal of Human Resource Management, 23(6), 1158-1175.
• Ittner, C. D., & Larcker, D. F. (2003). Coming up short on nonfinancial performance measurement. Harvard Business Review, 81(11), 88-95.
• Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1), 75-85.
• Maltz, A. C., Shenhar, A. J., & Reilly, R. R. (2003). Beyond the balanced scorecard: Refining the search for organizational success measures. Long Range Planning, 36(2), 187-204.
• Micheli, P., & Manzoni, J. F. (2010). Strategic performance measurement: Benefits, limitations and paradoxes. Long Range Planning, 43(4), 465-476.
• Posthuma, R. A., & Campion, M. C. (2008). Twenty best practices for just employee performance reviews. Compensation & Benefits Review, 40(1), 47-55.