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Leading People for High Performance

What is performance management?

"Performance management could be defined as the set of processes by which organisations manage their performance in line with their corporate strategy."

Monica Franco,
Cranfield School of Management

Improved organisational performance is desired by all sectors, private, public and voluntary and to all organisations, small, local, national and global. Most organisations say somewhere in their business plan or marketing materials that " Our people are our most important resource" It is often intriguing to see what follows that statement in terms of actions and reactions - the processes in place for managing and developing people and what the organisation rewards. In a recent survey by the Chartered Institute of Personnel and Development (CIPD) only 35% of employers have formally aligned their strategy for success, and the behaviours, values and performance required from employees to realise that, with how they will reward and recognise those behaviours, values and raised performance.

Competition is getting stronger in both the commercial world, and the public sector. More and better products and services are expected for less. Greater emphasis is being placed on proving that targets and performance indicators are being met. Similarly, the voluntary sector is trying to make scarce funds go ever further.

Better performance comes when people use initiative, communicate better, solve their own problems and resolve conflict. Managers and leaders can have a huge effect on staff performance and yet little time is spent on ensuring that the manager and leader is developing and working to their full potential. We have found that traditional learning and development programmes focus on managers having the right knowledge and skills in the professional/technical area that they are managing, rather than the knowledge and skills required to manage, lead and develop their employees to perform.

Performance Management is a two-way review of the employee's contribution to the organisation. It actively involves employees in understanding what is expected of them, and provides valuable feedback on their performance to date.

What Value Do Performance Management Systems Add?

Organisational researchers and managers have for many years held the view that performance measurement and management systems have a positive impact on business performance. There is however, relatively little research to support this view. For more than 15 years many companies have invested large amounts of time, effort and money implementing and redesigning their performance measurement systems (PMS). But, What value do performance measurement systems add?

Competitive pressures in the business environment are forcing organisations to re-engineer in order to become more competitive. Organisations are placing strong emphasis on performance management systems. Evidence suggests that 44% of organisations worldwide use performance measurement systems as a way of reviewing organisational performance (Marr et al, 2004; Rigby, 2001; Silk, 1998; Franco et al, 2004; Kaplan and Norton, 1992).

Research by the Cranfield School of Management examined two research questions.

1. What are the effects of performance reviews on business performance?
2. What factors moderate the effect of performance reviews?

Evidence from this study on the effects of Performance Measurement and Management Systems in a best practice energy supplier suggested that there are two types of effects on business performance; they are internal effects and external effects.

The evidence points out that the positive internal effects of Performance Management Systems are found in four main areas:

1. People management,
2. Organisational capabilities,
3. Organisational behaviour and
4. Operational performance.

The negative impact resides on the bureaucracy on design of measures.

TOP EIGHT POSITIVE EFFECTS OF Performance Management Systems

TOP SEVEN NEGATIVE EFFECTS OF Performance Management Systems

Focus people's attention on what is important to the company Propel business improvement Improve customer satisfaction Increase productivity Align operational performance with strategic objectives Improve people satisfaction Align people behaviors towards continuous improvement Improve company reputation

Time consuming Demands considerable financial investment Bureaucratic - too many measures make PMS bureaucratic Over-complicated measures - difficult to understand and manage. Misleading prioritisation - 'red' measures can divert attention from most critical measures Mechanistic - can discourage entrepreneurial intuition. Monotonous - managers have to continuously refresh the way in which performance is reviewed.

Does Human Resource Capital link to Profitability?

There is now a wealth of research that suggests there are links between good Human Capital Management on the performance of a company. Lynda Gratton 'living strategy: Putting People at the Heart of Corporate Purpose' 2000, looked at a sample of high performing organisations (Glaxo Wellcome, Hewlett Packard) and created a model linking people and the financial health of an organisation.

Business Goals

People Context

Individual Behaviour & Attributes

Firm Performance

Financial Performance

The National Centre for Educational Quality in the Workforce: 'The Other Shoe, Education's contribution to Productivity 1995', found that investing in training brings higher returns than investment in capital. A 10% increase in individual development is associated with a 9% gain in productivity. A 10% rise in capital stock only gave a 3% gain in productivity. The rise was even more dramatic in the service sector where a 10% increase in development was associated with an 11% gain in productivity. The investment in development and Human Resource Capital is seen as essential to the success of an organisation.

Discretionary Effort - It's Never Crowded on the Extra Mile

If investing in employee development increases the performance of an organisation how can performance management support this? Research has shown that the role of the manager is pivotal to employees giving discretionary effort. Research undertaken by Purcell et al 'Understanding the people and performance link' looked at the links between employee attitudes, discretionary behaviour and organisational performance. Employee and manager discretions were considered. There was evidence to suggest that employee discretion, going the extra mile, was linked to the effectiveness of managers and the amount of managerial discretion managers gave.

'Managerial discretion' and employee perceptions were explored around the following areas:

• Involvement and communication
• Dealing with problems in the workplace and treating employees fairly
• Respect employees get from their immediate line manager
• The extent to which their line manager provided coaching and guidance
• How good employees felt the organisation was at sharing and exchanging knowledge and experience

The group that scored highest in terms of employee perception, across the five areas was the highest performing group.

It feels appropriate to draw the conclusion that the difference in the performance of employees is linked to how the manager applies their discretion when managing employees. In a study of Canadian banks in 2000, Bartel showed that "managers can create a human resource environment that can impact on performance" The way in which managers apply policies and practices seem to have a link to how much discretionary effort employees give. In particular it was the quality of the performance feedback system and communications between the manager and staff that had significant affects on performance.

Organisations are increasingly looking for committed and engaged employees who are willing to go the extra mile. Engaged employees are less likely to leave, more likely to act as advocates for the organisation and are more focused on customer service. Engagement benefits both employers and employees.

Research for the CIPD by Kingston Business School and Ipsos Mori in 2006 suggested that employee engagement has three components:

• Emotional - being very involved
• Cognitive - focusing very hard
• Physical - being willing to 'go the extra mile'

The emotional element of engagement can't be demanded of employees but organisations need to harness it. It is the passion and enthusiasm that can be seen in individuals who enjoy what they are doing and are committed to their work and to doing a good job. The CIPD research concluded that the positive emotions, such as enthusiasm, cheerfulness, optimism, calmness and relaxation, have more that twice the impact on performance than negative emotions. The study found that the top three drivers of employee engagement are:

• An employer that listens, so employees can feed their views upwards
• Employees who feel well informed and understand how their work contributes
• Managers who are committed to the organisation and show respect for employees

The Case for Performance Management

Many research organisations have looked at the link between performance and profitability. Many people have written about what makes a 'good performance management system'. Demystifying the concepts of human resource capital, discretionary effort and managing performance for profits can feel daunting. A whole range of models, methods, concepts and techniques can be found in bookshops, journals and good practice guides to help people understand what managing performance is all about. It is no wonder that managers end up feeling bemused or daunted at the prospect of managing employee performance when there are so many things to consider and get wrong!

So what are the fundamental rules of performance management? And what makes a performance management system good?

Lets go back to what performance management is all about and what the research tells us.

Performance Management is a two-way review of the employee's contribution to the organisation. It actively involves employees in understanding what is expected of them, provides valuable feedback on their performance to date and identifies current and future development needs.

Research tells us that employees feel more engaged when they are listened to, know what is expected of them and feel that their manager is committed to them and the organisation. Systems that are complicated and bureaucratic stop important conversations happening and distract mangers from dealing with the real issues. So the system needs to be focused but simple and provide a framework from which managers can have a conversation with their employees about 'how they are doing'.

Performance management systems that encourage employee engagement and provide opportunities for employee development provide the greatest opportunity for increased profitability and return on investment.

Why should organisations invest in developing their leaders and managers to manage performance?

How much does the role of the manager matter? Substantial research in the last 10 years has established the link between good people management practices and organisational performance. It has been shown that the leadership and management style of the line manager is critical to the amount of discretionary effort an employee gives to an organisation. One study concluded that for every one percent increase in supporting staff there is a two percent increase in revenue through increased productivity and customer satisfaction.

How can developing managers help? The answer must lie in the research. Effective managers influence people management practices and the behaviour of employees. The research offers qualified support to the proposition that well managed employees can influence organisational performance.

Developing leaders and managers to manage performance and focus on positive attitudes and employee engagement, can equip managers to lead people to higher performance and provide an organisation with a valuable return on its investment.