Four principles of a good performance measure
Monitoring intensity principle:
Be as precise as economically reasonable
Informativeness principle:
Use all the available information about effort
Equal compensation principle:
Reflect all the activities that are important for the P and reward them in proportion to their contributions
Alignment principle:
Be influenced by A's effort in the same way as the outcome desired by P
Practical applications of performance evaluation principles
More than one performance evaluators/tests: increases the accuracy of performance measure, i.e. the monitoring intensity principle.
More than one criterion for evaluation: captures lots of information relevant for the desired performance outcome, i.e. the informativeness principle and the alignment principles.
Absolute as well as relative performance evaluations: weeds out common shocks to performance, i.e. the informativeness principle.
Performance metrics in practice
Quantitative, that is, physically measurable, vs. qualitative, that includes subjective assessment
Individual vs. group-based
Absolute vs. relative, i.e. rating vs. ranking
Quantitative performance evaluation
Ideally, a performance measure should include whatever is controllable by an employee (e.g. effort), and exclude whatever is uncontrollable (noise to output).
Problem: with true effort often unmeasurable, how to measure performance?
Possible solutions
Measure, and reward, actual performance (i.e. effort plus uncontrollable risk) and pay a risk premium Use a less noisy performance measure, for example:
Group-level output, when individual parts are not observable or measurable
Performance relative to some benchmark (e.g., firm average). In this way the common shocks are canceled, thus more precise performance measure
Measure, and reward, inputs (e.g., working time) rather than outcomes of work. There are typically many more inputs than meaningful outputs.
Balanced Scorecard Approach
Balanced Scorecard summaries the activities that together create value in an organization, as well as measurable outcomes of these activities.
Typical groups of items:
Financial perspective
Customer satisfaction
Operational efficiency
Employee development and commitment
How to better understand and measure qualitative performance
Choose the right evaluation format
Select the right raters
Understand how raters process performance information and use this understanding to combine different evaluation formats, different rates and different evaluation time periods to maximize the benefits of subjective performance evaluations while limiting its costs
Subjective performance evaluation formats
Ranking, i.e. determining relative performance ordering (best to worst in a group). Common shocks to performance are removed.
Straight ranking
Alternation ranking: choose the best, then the worst, then 2nd best, 2 nd worst, etc.
Paired comparison ranking: rank each person in pairs with the rest.
Rating, i.e. evaluating performance on an absolute scale where performance is measured with the help of “anchors".
Behaviorally anchored rating scales (BARS)
Most commonly used format
Performance scales are anchored with concrete behaviors typical of the job being evaluated
Common definition of performance grade reduces subjectivism in ratings
Examples
Selecting the right raters
Supervisors or subordinates:
Good source of knowledge on performance
But, prone to biases from long exposure to employees being evaluated
Peers:
Arguably, more knowledge about performance
But, prone to leniency bias
Self:
One big agency problem. Do not decide big bonuses on this, but do let employees have a voice
Customers:
Best source of customer service quality information
But, individual performance ratings may be unavailable
Use it all: 360-degree feedback
Performance is rated from five points of view: supervisor, subordinate, peer, self, and customer.
Helps to reduce the reliance on one source of information and may cancel some subjective biases in performance evaluation.
Improves feedback and employee participation and engagement.
But, expensive, time-consuming, therefore used mostly for senior employees.
Subjective performance evaluation today
Forced ranking is in decline:
GE, a pioneer of forced ranking, ended it in 2016 https://www.wsj.com/articles/ge-does-away-with-employee-ratings-1469541602
So did some other firms that used to practice it: Microsoft, Adobe, Ford
Amazon abandoned the practice in 2017 https://www.seattletimes.com/business/amazon/amazon-says-it-will-change-performance-reviews-focus-on-staffers-strengths/
But, it is not quite dead:
Can be effective in the short run and in times of change and restructuring. It could be the least bad way of ring people.
Emerging alternatives / best practices: o Generally, move from performance evaluation to feedback
Give and ask for feedback, often
Use IT to facilitate the provision of feedback
Frame feedback in positive, rather than negative, terms
Focus on improvement (∆ Pay = ∆ performance), not grading (Pay = Performance)
—>Auxiliary reading: https://qz.com/428813/ge-performance-review-strategy-shift/
Summary
Performance evaluation is a key management tool aimed at improving performance through supporting incentive pay and other personnel decisions as well as communicating firm values.
Four principles of performance evaluation: monitoring intensity, informativeness, equal compensation, alignment.
Objective performance measures are the best, but often not available.
Subjective performance evaluation is alternative, but often problematic because of subjectivity and the biases it brings.
Possible solutions to subjectivity: BARS, ranking, 360 degree feedback.
The HR world seems to be evolving from performance evaluation to feedback. Does this mean the end of incentives?
Last changeda year ago
