ACCA P3 Business Analysis - 2010 - Study text

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Chapter 16: Leadership and human resources management

3.3 Performance appraisal

Performance appraisal is a formal process for reviewing and assessing the

performance of:

 individual employees, and

 possibly work groups.

The appraisal process involves an interview or discussion between the employee

and a manager. Usually, staff appraisals are between the employee and his or her

immediate manager. However, a more senior manager may carry out the interview.

Appraisal interviews should be carried out within a formal appraisal system. In

many organisations, there are annual appraisal interviews for every individual.

The aim of an appraisal interview should be to have a discussion between the

employee and his or her manager, in which the following matters are discussed:

 How are things going?

 What has gone well?

 What has gone badly?

 What have been the problems and difficulties?

 What is needed to develop the employee and improve his or her competence?

 What can be done to meet these needs?

Two aspects of assessment and performance appraisal: judgement and

development

There are two different aspects to performance appraisal:

 Appraisal is a judgement by management on the individual. Performance

appraisal is a form of judgement, carried out on the individual employee by

another person who is usually in a position to decide what rewards the

individual will receive for his performance. An individual might be criticised for

performing badly, and rewards are often based on success or failure in achieving

specific performance targets.

 Appraisal systems are also used to discuss ways in which an individual can

improve performance and acquire new skills and knowledge.

The main components of staff appraisal

A staff appraisal may have three different components.

 A reward review. The annual appraisal interview may be seen as an opportunity

for the employee and his or her manager to discuss pay and other rewards. The

employee may have an opportunity to ask for more pay, or express a wish for

promotion. The manager might use the appraisal interview to say what the

individual’s pay will be for the next 12 months.

However, although rewards will be discussed in an appraisal interview, it is

normally inappropriate to combine the annual appraisal interview with the

annual pay review. This is because the interview will then focus on pay to the

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virtual exclusion of everything else. The annual pay review – telling the

employee what his pay and bonuses will be – should be a separate process.

Even so, if a separate pay review is used to discuss annual cash bonuses and

other rewards, rewards are still an important part of the performance review

process.

 A performance review. An appraisal system might be used to assess the

performance of the employee since the previous performance appraisal. One

way of doing this is to agree a target or objective for the individual, and to

compare the individual’s actual performance against this objective or target at

subsequent appraisal interviews. The target that is set for an individual may be a

target to complete a particular task. Alternatively, it might be a more general

target, such as getting on better with colleagues in the work team. For a trainee

accountant, the target might be to get through a particular examination within

the next 12 months.

 Potential review. Staff appraisal interviews can also be used to discuss the

employee’s potential for career development and promotion. However, to make

this discussion meaningful, there has to be a system of reporting to senior

management and making recommendations that particular employees:

- should be considered for promotion, or

- should be considered for development, with a view eventually to promotion.

The benefits of staff appraisal

There are several possible benefits of staff appraisal for the employer.

 It provides a formal system for assessing the performance and potential of

employees, with a view to identifying candidates for promotion.

 It provides a system for identifying ways of improving the competence of

employees, in order to raise the general level of efficiency and effectiveness of

the work force.

 In a large organisation, it is therefore a valuable system for human resource

planning, and ensuring that employees are ready for promotion, to fill

management job vacancies that arise.

 If it is well-managed, it can improve communications between managers and

their employees, and so improve working relationships.

Staff appraisal also offers benefits to the employee.

 The employee gets feedback about his performance at work, and an assessment

of his competence.

 A formal appraisal system offers the employee an opportunity to discuss his

future prospects and ambitions.

 An appraisal interview may be used as a basis for considering pay and rewards.

 Appraisal can be used to identify and agree measures for further training and

development, to improve the employee’s competence.

Chapter 16: Leadership and human resources management

Barriers to effective staff appraisal

At an operational level, potential barriers to an effective appraisal system are as

follows:

 It has no purpose. Employees see the appraisal interview as nothing more than

an informal chat with the manager. Nothing happens as a result of the interview,

which is badly organised. The entire process is seen as a waste of time and a

pointless exercise.

 Confrontation. Employees see the appraisal interview as an occasion for

criticism from the manager. The manager (interviewer) might use the interview

as an opportunity to tell the employee about his weaknesses and failures. When

this is the attitude, the appraisal interview will a confrontation, and the

employee will either be on the defensive throughout the interview, or will use

the interview to argue back and to accuse the manager of failure. These

interviews will not have a constructive outcome.

 The interview is one-sided. Staff appraisals might be one-sided, with the

manager telling the employee about his strengths and weaknesses, and giving

him an assessment of his competence. Employees will often resist a system of

appraisal in which they do not have an opportunity to answer back and give

their own opinions.

 Annual event. The appraisal process might be seen as an annual event, that

happens every 12 months, and nothing more happens afterwards until 12

months later. To have any purpose, appraisal systems must include:

- follow-up action after the appraisal interviews and

- procedures for monitoring results.

 Lack of a records system. There must be formal records for an appraisal system.

Records should be kept of each appraisal interview, and what was agreed in the

interview. If the employee and interviewer agree on targets or objectives for the

employee, these should be recorded so that they can be discussed at the next

appraisal interview. Similarly, a record should be made of any agreement about

training that the employee needs or about work that the employee should be

given to encourage his development. Records provide a basis for follow-up

action and feedback.

 Performance management is about directing and supporting employees to

work as effectively and efficiently as possible in line with the needs of the

organisation. (Walters 1995)

 A systematic approach to improving individual and team performance in

order to achieve organisational goals. (Hendry, Bradley and Perkins 1997)

3.4 Performance measurement

In order to assess the performance of individuals, there should be a benchmark,

target or standard that the employee is expected to achieve. Actual performance can

then be measured and compared with the benchmark.

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Measures of performance should ideally be capable of objective assessment, and

should not rely on the judgement and opinion of the person making the appraisal.

Objective measures include:

 Milestones for achievement. When an employee is expected to make progress

toward a longer-term objective, performance can be measured in terms of

whether or not the individual has reached agreed ‘milestones’ or targets on the

way to the final objective.

 Accomplishment of agreed tasks. An employee might have been given tasks to

complete. Performance can be judged in terms of whether or not the tasks were

completed successfully.

 Performance might also be measured in terms of quantitative outputs. For

example, a salesman might have been given the target of making annual sales of

$X, and annual performance can be measured against this target.

Individuals might have more than one target for achievement. Performance might

therefore be measured against several different targets.

The purpose of performance measurement is to provide an objective basis for

performance appraisal, and the objective of performance appraisal is to improve the

performance of individuals so that the entity implements its business strategies

successfully. It is therefore important that the measures that are used to assess

individual performance are consistent with the strategic objectives of the entity.

In practice this does not always happen. A lack of consistence between performance

measurements and strategic objectives is a major problem for many reward systems

that are based on performance appraisal.

Chapter 16: Leadership and human resources management

Reward management

 The scope ofrewardmanagement

 Methodsofreward

 Rewards asincentives

4 Reward management

4.1 The scope of reward management

Reward management refers to all the monetary, non-monetary and psychological

payments that an organisation provides employees in exchange for the work they

perform.

 For the employee, rewards are the benefits that are received in exchange for

doing the work.

 The employer must reward employees, but reward systems and methods of

rewarding employees can be used to improve performance – provided that

employees are motivated to perform better by the prospect of more rewards.

Bratton developed a five-stage model of reward management, which sets out the

objectives and scope of a reward management system.

Perspective Aim Comment

Strategic Cost leadership

Differentiation

Organisations pursuing a cost leadership

strategy are likely to be interested in

relatively ‘cheap’ employees.

A differentiation strategy needs employees

who are capable of designing, producing

and delivering differentiated products and

services. Those employees are likely to have

higher skills and will be more expensive

Providing a

reward system

Performance

improvement

Improve the

commitment of

staff to their

work and their

motivation.

Recruit and

retain staff

Suitable employees have to be attracted and

retained. Then their performance must be

directed towards desired behaviour and

standards.

Commitment and motivation do not

necessarily depend on financial rewards.

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Perspective Aim Comment

Selecting the

methods of reward

Basic pay

Performance-

related pay

Other benefits

Basic pay is a constant amount per hour,

week, month or year.

Performance-related pay includes cash

bonuses and the award of shares or share

options.

Other benefits include health insurance, a

company car, a pension entitlement, and so

Deciding the

amount of rewards

to pay

Job analysis

Job evaluation

Appraisal

Job analysis is the process of collecting and

evaluating information about the tasks,

responsibilities and context of a specific job.

It answers the question “What is the job?”

Job evaluation determines the relative

worth of jobs. Note that this is very

important in some anti-discrimination

legislation that states that there should be

equal pay for work of equal value.

Appraisal determines individuals’

performance.

Making rewards

competitive,

compared with

other employers

Reflect

conditions in

the labour

market

The going rate of pay in the labour market

is an inescapable constraint on reward

levels. If pay is set too low, then it will be

difficult to recruit and retain. If it is set (or

becomes too high after a number of years of

pay increases), it will make the organisation

uncompetitive with respect to…

Competitive forces (which put pressure on

profits) constrain the amount that

employers can afford to pay.

Some countries have minimum pay and

maximum working week legislation. Many

larger companies have ranges of pay linked

to grades and this can constrain managers’

freedom to pay employees what they think

is necessary and fair.

Chapter 16: Leadership and human resources management

4.2 Methods of reward

Rewards for an employee might be both extrinsic and intrinsic.

 Extrinsic rewards are rewards provided to the employee by the employer, such

as salary and promotion.

 Intrinsic rewards are the rewards that an individual feels personally as a result

of doing the work, such as job satisfaction.

Extrinsic rewards include items such as status and promotion, and benefits such as a

company car or free medical insurance. However, the main element of extrinsic

rewards is money, and possibly also company shares.

The structure of reward systems varies between different entities.

 Employees might be paid a high basic salary or wage, to attract and retain them.

However, high salaries are not performance-related, and competitors are able (if

they want to) to offer matching salaries.

 There might also be a cash bonus payment, possibly paid annually. The payment

of a cash bonus depends on meeting or exceeding agreed performance targets

for the period. In some reward systems, a cash bonus is a fixed amount for

achieving the target. In many organisations, the size of a cash bonus increases as

performance improves. For example a sales representative might receive a sales

commission based on the value of sales he makes during the year: the total

commission payable increases with sales revenue.

 A cash bonus might be paid to individuals for individual performance.

Alternatively, a cash bonus might be paid to a work group for the collective

performance of the group members. The group bonus is then divided between

the members of the group on an agreed basis, such as an equal share of the total

bonus for each member of the group.

 Cash bonuses are usually linked to short-term performance, often annual

performance, and are paid annually.

 For senior managers, there might also be rewards in the form of the granting of

shares or share options in the company. The purpose of awarding shares and

share options is to give the manager a personal interest in the company’s share

price and long-term performance, not just short-term sales and profits. These

longer-term incentive schemes usually contain conditions that the manager will

not receive the shares or will not be allowed to exercise the share options for at

least a minimum number of years (typically three years).

Many senior executives in large companies therefore receive a reward package that

includes a high basic salary, pension rights, annual cash bonuses and shares or

share options in the company.

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4.3 Rewards as incentives

The purpose of cash bonuses, or the grant of shares and share options, is to give

employees an incentive to perform well.

In principle, employees perform well when they contribute to the successful

achievement of the entity’s strategic objectives.

Unfortunately, there are practical difficulties in establishing suitable performance

targets that are closely linked to strategic objectives.

 Most cash bonus systems are based on annual performance, such as the

profitability of the company or business unit. Strategic objectives are more long-

term. There might be occasions when maximising short-term performance

damages long-term performance. For example, a company might maximise

profits in the current year, but only by taking measures that will damage

profitability in the longer term – such as deferring important new capital

investment projects.

 Bonus systems might be based on financial performance targets. However, the

successful achievement of strategic objectives depends on non-financial as well

as financial performance. Examples of non-financial performance include

achieving better product quality, successful implementation of a new IS/IT

system, successful implementation of a new process, improving the knowledge

and skills of a work team, and so on. If rewards are based on financial

performance only, non-financial performance will be given ‘second class’ status.

 If rewards are based on non-financial performance measures, there may be

difficulty in deciding which performance measures to use. There are many to

choose from, but some will be more consistent with strategy objectives.

All reward systems have faults, because they fail to link rewards to strategic

objectives, or because they fail to provide a sufficient incentive to employees. For

example, if a cash bonus is small relative to the size of an employee’s basic pay, the

bonus might not provide an incentive to the employee to perform better in order to

earn the extra money.

Reward systems can de-motivate employees when they are seen to be unfair. For

example, when senior managers earn bonuses but other employees do not, the other

employees might consider the system unfair, and react to senior management with

hostility.

Chapter 16: Leadership and human resources management

Job design

 Differentapproachestojobdesign

 Scientificmanagementandjobdesign

 Jobenrichmentandjobdesign:Herzberg

 The Japanesemanagementapproach

 Jobre‐engineering

 ‘Post‐industrial’jobdesign

5 Job design

5.1 Different approaches to job design

There are differing views about the extent to which performance can be improved

through ‘better’ job design. Job design is concerned with the structure of individual

jobs, and the roles and responsibilities of the individual holding that job.

Four different approaches to job design and work performance are:

 scientific management

 job enrichment

 the Japanese management approach

 job re-engineering.

5.2 Scientific management and job design

F W Taylor (1856 – 1915) was a US engineer who is considered the founder of

‘scientific management’. Scientific management is concerned with applying

scientific techniques of analysis and experimentation to improve the efficiency of

work.

Taylor studied the relationship between people and the tasks that they perform. His

approach was to analyse the tasks that individuals perform at work, and break them

down into smaller units of work. Each small unit of work was then analysed to find

ways in which they could be performed with the greatest efficiency (in the shortest

time). Experimentation was used to find ways of improving efficiency for each small

unit of work, and Taylor measured the time that it took to carry out each small task.

Taylor is considered the originator of ‘time and motion study’. Scientific management

resulted in:

 dividing larger tasks into much smaller units,

 employing individuals to specialise in each small unit of work, and therefore

 increasing efficiency through the division of work and specialisation.

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Jobs should therefore be designed by dividing the work into many specialised

activities, and appointing individuals to do each job as specialists.

Taylor is probably best known for the experiments he carried out into shovelling

coal at the Bethlehem Steel Works in the US. Taylor succeeded in improving

productivity through:

 analysing the tasks involved in shovelling coal

 experimenting with different types of shovel (for example, different sizes of

shovel and shovels with different lengths of handle) and the amount of coal that

should be shovelled in a single action, and

 introducing work specialisation within shovelling operations.

5.3 Job enrichment and job design: Herzberg

A criticism of scientific management is that the jobs designed using scientific

management methods are repetitive and boring, and they de-motivate employees.

An alternative approach to job design is to create jobs that are more varied and

interesting, and with more responsibility, so that the employee gets greater

satisfaction from doing the work. Greater satisfaction, it might be argued, will lead

to better work performance.

The concept of job enrichment to motivate employees is associated with theorists

such as Frederick Herzberg.

In the 1950s, Herzberg carried out some research into the factors that motivate

individuals in their work, by interviewing 200 engineers and accountants. He

developed a two-factor theory of motivation, which he set out in his book The

Motivation to Work (1959).

Herzberg identified two groups or categories of factors: those causing

dissatisfaction with work and those causing satisfaction. He called these:

 hygiene factors (= the factors causing dissatisfaction) and

 motivator factors (= the factors causing satisfaction).

The most significant hygiene and motivator factors were as follows:

Factors causing dissatisfaction Factors causing satisfaction

Hygiene factors Motivator factors

Company policy Achievement

Supervision Recognition

Relationship with the boss The work itself

Working conditions Responsibility

Salary Advancement

Relationship with colleagues Growth

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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