This chapter discusses the difficulties associated with measuring performance. Performance reviews are used for a wide variety of organizational decisions, one of
which is to guide the allocation of merit increases. Unfortunately, the link between performance ratings and organizational outcomes may be lacking. Performance
ratings—things entered into an employee’s record—are influenced by numerous factors besides the employee behaviors observed by raters. These factors include:
organization values; competition among departments; differences in status between departments; and economic conditions. Thus, employees often voice frustration about
the appraisal process. The biggest complaint from both employees and managers is that appraisals are too subjective. In addition to subjectivity is the possibility of
unfair treatment by a supervisor. Some experts argue that rather than throwing out the entire appraisal process, total quality management principles should be applied
to improve the process. One method of improving appraisal processes is to recognize that part of performance is influenced more by the work environment and system than
by employee behaviors. Another way to improve performance appraisal focuses on identifying strategies for understanding and measuring performance better.
The central focus of this chapter is on the strategies to improve the understanding and measurement of job performance. These strategies address the following issues:
• The various appraisal formats and suggestions to improve them
• How to select the right raters
• Understanding how raters process information
• Training raters to rate more accurately
Next, the key elements of the performance evaluation process that ensure a good outcome in the appraisal process are outlined. Legal issues—Equal Employment
Opportunity (EEO) and affirmative action—affecting performance appraisal are presented. Based on the legal issues, guidelines are provided to establish a performance
appraisal system. The chapter concludes with a discussion of the issues associated with tying pay to performance appraisals using merit pay guidelines.
Lecture Outline: Overview of Major Topics
I. The Role of Performance Appraisals in Compensation Decisions
II. Strategies for Better Understanding and Measuring Job Performance
III. Putting It All Together: The Performance Evaluation Process
IV. Equal Employment Opportunity and Performance Evaluation
V. Tying Pay to Subjectively Appraised Performance
VI. Promotional Increases as a Pay-for-Performance Tool
VII. Your Turn: Performance Appraisal at Burger King
VIII. Appendix 11-A: Balanced Scorecard Example: Department of Energy (Federal Personal Property Management Program)
IX. Appendix 11-B: Sample Appraisal Form for Leadership Dimension: Pfizer Pharmaceutical
Lecture Outline: Summary of Key Chapter Points
I. The Role of Performance Appraisals in Compensation Decisions
• Performance reviews are used for a wide variety of decisions in organizations—only one of which is to guide the allocation of merit increases.
• It is common to make a distinction between performance judgments and performance ratings.
• Performance ratings—the things employer’s enter into an employee’s permanent record—are influenced by a host of factors besides the employee behaviors observed
o Organization values (e.g., valuing technical skills or interpersonal skills more highly)
o Competition among departments
o Differences in status between departments
o Economic conditions (labor shortages which make for less willingness to terminate employees for poor performance)
• There is even some evidence that much of job performance ratings can be attributed to a general performance factor (after accounting for error) that is present
across a wide variety of jobs and situations. Thus, employees often voice frustration about the appraisal process.
o The biggest complaint from employees (and managers too) is that appraisals are too subjective.
o Lurking behind subjectivity, is the possibility of unfair treatment by supervisors.
A. Performance Metrics
• Huge advances in the development of metrics have been made over the past 15 years. Most of these, though, are in metrics for measuring performance of HR
• Some reliable estimates suggest that between 13 percent of the time (hourly workers) and 70 percent of the time (managerial employees), employee performance is
tied to quantifiable measures.
• Just because something is quantifiable, though, does not mean it is an objective measure of performance. Such potential for subjectivity has led some experts
to warn that so-called objective data can be criterion-deficient and might not provide all the details.
• Despite these concerns, most HR professionals probably would prefer to work with quantitative data. Sometimes, though, performance isn’t easily quantified.
o Either job output is not readily quantifiable or the components that are quantifiable do not reflect important job dimensions.
• Perhaps the biggest attack against appraisals in general and subjective appraisals in particular, comes from top names in the total quality management area.
o Edward Deming contended that the work situation (not the individual) is the major determinant of performance.
? Variation in performance arises many times because employees don’t have the necessary information, technology, or control to adequately perform their jobs.
? Further, Deming argued, individual work standards and performance ratings rob employees of pride and self-esteem.
• Some experts argue that rather than throwing out the entire appraisal process, total quality management principles should be applied to improve it.
o One way to improve performance appraisals would be to recognize that part of performance is influenced more by the work environment and system than by employee
o Another way to improve performance appraisal concerns identifying strategies for understanding and measuring performance better.
II. Strategies for Better Understanding and Measuring Job Performance
• Efforts to improve the performance rating process take several forms.
o First, researchers and compensation people alike devote considerable energy to defining job performance: what exactly should be measured when evaluating
o Managers can be grouped into one of three categories, based on the types of employee behaviors they focus on.
? One group looks strictly at task performance, how the employees perform the responsibilities of their job.
? A second group looks primarily at counterproductive performance, evaluating based on the negative behaviors employees show.
? The final group looks at both types of behaviors.
o Studies that examine more specific factors focus on such performance dimensions as:
? Planning and organizing
? Developing subordinates
? Technical proficiency
A. The Balanced Scorecard Approach
• A balanced scorecard approach is a way to look at what contributes value in an organization. It acknowledges that bottom line success depends on satisfied
customers buying products and services from effective and satisfied employees who both serve the customers and produce goods (or deliver services) in the most
operationally efficient way possible.
• If this is true, then employers need to measure all four of the following dimensions and be prepared to say that success depends on high scores for each:
o Customer satisfaction
o Employee internal growth and commitment
o Operational efficiency in internal processes
o Financial measures
• Besides the widespread enthusiasm in industry for this approach, there is data that suggest implementation of a balanced scorecard can have positive impacts on
the bottom line.
• A second direction for performance research notes that the definition of performance and its components is expanding.
o Jobs are becoming more dynamic, and the need for employees to adapt and grow is increasingly stressed.
o This focus on individual characteristics, or personal competencies, is consistent with the whole trend toward measuring job competency.
• A third direction for improving the quality of performance ratings centers on identifying the best appraisal format.
o If only the ideal format could be found, raters would use it to measure job performance better, that is, make more accurate ratings.
• Recent attention has focused less on the rating format and more on the raters themselves.
o This fourth direction identifies possible groups of raters (supervisors, peers, subordinates, customers, self) and examines whether a given group provides more
or less accurate ratings.
• The fifth direction attempts to identify how raters process information about job performance and translate it into performance ratings.
• Finally, data also suggest that raters can be trained to increase the accuracy of their ratings.
B. Strategy 1: Improve Appraisal Formats
• Types of Formats
o Evaluation formats can be divided into two general categories:
• Ranking formats require that the rater compare employees against each other to determine the relative ordering of the group on some performance measure.
Exhibit 11.1 illustrates three different methods of ranking employees.
o The straight ranking procedure is just that: employees are ranked relative to each other.
o Alternation ranking recognizes that raters are better at ranking people at extreme ends of distribution. Raters are asked to indicate the best employee and
then the worst employee.
? Working at the two extremes permits a rater to get more practice prior to making the harder distinctions in the vast middle ground of employees.
o The paired-comparison ranking method forces raters to make ranking judgments about discrete pairs of people. Each individual is compared separately with all
others in the work group.
? The person who “wins” the most paired comparisons is ranked top in the group and so on. Unfortunately, when the size of the work group goes above 10 to 15
employees, the number of paired comparisons becomes unmanageable.
• The second category of appraisal formats— ratings—is generally more popular than ranking systems. The various rating formats have two elements in common.
o In contrast to ranking formats, rating formats require raters to evaluate employees on some absolute standard rather than relative to other employees.
o Each performance standard is measured on a scale whereby appraisers can check the point that best represents an employee’s performance. In this way,
performance variation is described along a continuum from good to bad.
o It is the types of descriptors used in anchoring this continuum that provide the major difference in rating scales. These descriptors may be:
• When adjectives are used as anchors, the format is called a standard rating scale. Exhibit 11.2 shows a typical rating scale with adjectives as anchors.
• Switching to behaviors as anchors, behaviorally anchored rating scales (BARS) seem to be the most common format using behaviors as descriptors.
o By anchoring scales with concrete behaviors, firms adopting a BARS format hope to make evaluations less subjective.
o When raters try to decide on a rating, they have a common definition for each of the performance levels.
o This rating format directly addresses a major criticism of standard adjective rating scales: Different raters carry with them into the rating situation
different definitions of the scale levels.
• Exhibit 11.3 illustrates a complete behaviorally anchored rating scale for teamwork.
• Overall employee performance is calculated as a weighted average of the ratings on all performance dimensions in both the standard rating scale and BARS.
• Exhibit 11.4 shows one way to derive an overall evaluation from the dimensional ratings.
• In both the standard rating scale and the BARS, overall performance is calculated as some weighted average (weighted by the importance the organization
attaches to each dimension) of the ratings on all dimensions.
• In addition to adjectives and behaviors, outcomes also are used as a standard. The most common form is management by objectives (MBO).
o As a first step, organization objectives are identified from the strategic plan of the company.
o Each successively lower level in the organizational hierarchy is charged with identifying work objectives that will support attainment of organizational goals.
o Exhibit 11.5 illustrates a common MBO objective- for communications skill.
o At the beginning of a performance review period, the employee and supervisor discuss performance objectives.
o At the end of the review period, the employee and the supervisor meet again to record results formally.
o Results are then compared against objectives, and a performance rating is determined based on how well the objectives were met.
o A review of firms using MBO indicates generally positive improvements in performance both for individuals and for the organization.
o This performance increase is accompanied by managerial attitudes toward MBO that become more positive over time, particularly when the system is revised
periodically to reflect the feedback of participants.
o Exhibit 11.6 shows some of the common components of an MBO format and the percentage of experts who judge this component vital to a successful evaluation
• A final type of appraisal format does not easily fall into any of the categories yet discussed. In an essay format, supervisors answer open-ended questions, in
essay form, describing employee performance.
o Since the descriptors used could range from comparisons with other employees to the use of adjectives describing performance, types of behaviors, and goal
accomplishments, the essay format can take on characteristics of all the formats discussed previously.
• Exhibit 11.7 illustrates the relative popularity of these formats in industry.
• Evaluating Performance Appraisal Formats
o A good performance appraisal format scores well on five dimensions:
? Employee development criterion—feedback has a positive impact on job performance. There is also evidence that different kinds of feedback have different
effects. The desire for feedback doesn’t extend across all cultures.
? Administrative criterion—ease of use of evaluation results for administrative decisions concerning wage increases, promotions, demotions, terminations, and
transfers. Comparisons among individuals for personnel action require some common denominator. Typically this is a numerical rating of performance.
? Personnel research criterion—does the instrument lend itself well to validating employment tests? As with the administrative criterion, evaluations typically
need to be quantitative to permit the statistical tests so common in personal research.
? Cost criterion—does the evaluation form initially require a long time to be developed? Is it time-consuming for supervisors to use the form in rating their
employees? Is it expensive to use?
? Validity criterion—by far the most research on formats in recent years has focused on reducing error and improving accuracy. Success in this pursuit would mean
that decisions based on performance ratings could be made with increased confidence.
• Exhibit 11.7 provides a report card on the five most common rating formats relative to the criteria just discussed.
• The choice of an appraisal format is dependent on the types of tasks being performed.
o Tasks can be ordered along a continuum from those that are very routine to those for which the appropriate behavior for goal accomplishment is very uncertain.
o Different appraisal formats require assumptions about the extent to which correct behavior for task accomplishment can be specified.
o The choice of an appraisal format requires a matching of formats with tasks that meet the assumptions for that format.
? At one extreme of the continuum are behavior-based evaluation procedures that define specific performance expectations against which employee performance is
evaluated. Behaviorally anchored rating scales fall into this category.
? When tasks are less routine, it is more difficult to specify a single sequence of procedures that must be followed to accomplish a goal. For such tasks an MBO
strategy would be appropriate.
? At the other extreme of the continuum are tasks that are highly uncertain in nature. Judgment-based evaluation procedures—as exemplified by standard rating
scales—may be the most appropriate.
C. Strategy 2: Select the Right Raters
• A second way that firms have tried to improve the accuracy of performance ratings is by focusing on who might conduct the ratings and which of these sources is
more likely to be accurate.
• To lessen the impact of one reviewer, and to increase participation in the process, a method known as 360-degree feedback has grown more popular in recent
o This method assesses employee performance from five points of view: supervisor, peer, self, customer, and subordinate.
o The flexibility of the process makes it appealing to employees at all levels with an organization; most companies using the system report that their employees
are satisfied with its results.
o Regardless of the positive responses from those who have implemented the 360-degree feedback system, today most companies still use it only for evaluation of
their top-level personnel and for employee development rather than for appraisals or pay decisions.
o Some research indicates that the different types of rates are very similar in their evaluations. Given the extra costs, why ask for multiple views the critics
o Responding to this criticism, recent research shows a distinct impact of rating source-raters do provide differing views.
• The role and benefit of each of the raters are provided below:
o Supervisors as Raters
? Some estimates indicate that more than 80 percent of the input for performance ratings comes from supervisors.
? Supervisors assign what work employees are to perform, which makes them knowledgeable about the job and the dimensions to be rated. Also, supervisors have
considerable prior experience in rating employees, thus giving them some pretty firm ideas about what level of performance is required for any given level of
? On the negative side, supervisors are particularly prone to halo and leniency errors.
o Peers as Raters
? One of the major strengths of using peers as raters is that they work more closely with the ratee and probably have an undistorted perspective of typical
performance, particularly in group assignments. Balanced against this positive are at least two powerful negatives:
? Peers may have little or no experience in conducting appraisals, leading to rather mixed evidence about the reliability of this rating source.
? In a situation where teamwork is promoted, placing the burden of rating peers on co-workers can either create group tensions or yield ratings second only to
self-ratings in level of leniency. One exception to this leniency effect comes from top performers, who it seems give the most objective evaluations of peers.
o Self as Rater
? Some organizations have experimented with self-ratings. Self-ratings are done by someone who has the most complete knowledge about the ratee’s performance.
? Unfortunately, though, self-ratings are generally more lenient and possibly more unreliable than ratings from other sources One compromise in the use of self-
ratings is to use them for developmental rather than administrative purposes.
o Customer as Rater
? This is the era of the customer. The drive for quality means more companies are recognizing the importance of customers.
? Companies either survey customers or hire mystery customers to pretend like a customer, observe the processes, and rate the customer service process.
o Subordinate as Rater
? The notion of subordinates as raters is appealing since most employees want to be successful with the people who report to them. Hearing how they are viewed by
their subordinates gives them the chance to both see their strengths and their weaknesses as a leader and to modify their behavior.
? The difficulty with this type of rating is in attaining candid reviews and also in counseling the ratee on how to deal with the feedback.
? Research shows that subordinates prefer to give their feedback to managers anonymously. If their identity is known they give artificially inflated ratings of
D. Strategy 3: Understand How Raters Process Information
• A third way to improve performance ratings is to understand how raters think—what else influences ratings besides an employee’s performance?
• Research exploring how raters process information about the performance of the people indicates the following kinds of processes occur.
o The rater observes the behavior of a ratee.
o The rater encodes this behavior as part of a total picture of the ratee, i.e., the rater forms stereotypes.
o The rater stores this information in memory, which is subject to both short-term and long-term decay.
o When it comes time to evaluate a ratee, the rater reviews the performance dimensions and retrieves stored observations/impressions to determine their relevance
to the performance dimensions.
o The information is reconsidered and integrated with other available information as the rater decides on the final ratings.
• Quite unintentionally, this process can produce errors, and they can occur at any stage.
• Errors in the Rating Process
o Studies show that performance actually does play an important role, perhaps the major role, in determining how a supervisor rates a subordinate.
o Employees who are technically proficient and who do not create problems on the job tend to receive higher ratings than these who are weaker on these
o On the negative side, performance-irrelevant factors appear to influence ratings, and they can cause errors in the evaluation process.
• Common Errors in Appraising Performance: Criterion Contamination
o Criterion contamination, or allowing non-performance factors to affect performance scores, occurs in every company and every job, and probably affects everyone
sometime during their careers.
o One survey of 1,816 organizations reported that only 4.6 percent of the managers were rated below average.
o The truth is that raters tend to make mistakes. Recognizing and understanding the errors, such as those noted in Exhibit 11.9, is the first step to
communicating and building a more effective appraisal process.
o The potential for errors causes employees to lose faith in the performance appraisal process. Employees, quite naturally, will be reluctant to have pay systems
tied to such error-ridden performance ratings.
o There are several factors that lead raters to give inaccurate appraisals:
? Embarrassment about giving praise
? Taking things for granted
? Not noticing good or poor performance
? The halo effect (seeing one good attribute and leaping to positive impressions on remaining attributes)
? Dislike of confrontation
? Spending too little time on preparation of the appraisal
o Companies and researchers alike have expended considerable time and money to identify ways job performance can be measured better.
• Errors in Observation (Attention)
o Generally, researchers have varied three types of input information to see what raters pay attention to when they are collecting information for performance
o First, it appears that raters are influenced by general appearance characteristics of the ratees. Males are rated higher than females (other things being
o Race also matters in performance ratings. Both in layoff decisions and in performance ratings, blacks are more likely to do worse than whites.
o Researchers also look at change in performance over time to see if this influences performance ratings. Both the pattern of performance (performance gets
better versus worse over time) and the variability of performance (consistent versus erratic) influence performance ratings, even when the overall level (average) of
performance is controlled.
o Workers who start out high in performance and then get worse are rated lower than workers who remain consistently low. Not surprisingly, workers whose
performance improves over time are seen as more motivated, while those who are more variable in their performance are tagged as lower in motivation.
• Errors in Storage and Recall
o Research suggests that raters store information in the form of traits. More importantly, they tend to recall information in the form of trait categories.
o For example, a rater observes a specific behavior such as an employee resting during work hours. The rater stores this information not as the specific behavior
but rather in the form of a trait, such as “That worker is lazy.”
o The entire rating process may be heavily influenced by the trait categories that the rater adopts, regardless of their accuracy.
o Errors in storage and recall also appear to arise from memory decay. At least one study indicates that rating accuracy is a function of the delay between
performance and subsequent rating.
• Errors in the Actual Evaluation
o The context of the actual evaluation process also can influence evaluations. Several researchers indicate that the purpose of an evaluation affects the rating
o For example, performance appraisals sometimes serve a political end. Supervisors have been known to deflate performance to send a signal to an employee—“You’re
not wanted here.”
o Supervisors also tend to weigh negative attributes more heavily than positive attributes.
o If the purpose of evaluation is to divide up a fixed pot of merit increases, ratings also tend to be less accurate. Supervisors who know ratings will be used
to determine merit increases are less likely to differentiate among subordinates than they are when the ratings will be used for other purposes.
o Also, being required to provide feedback to subordinates about their ratings yields less accuracy than a secrecy policy. Presumably, anticipation of an
unpleasant confrontation with the angry ratee persuades the rater to avoid confrontation by giving a rating higher than is justified.
o However, when raters must justify their scoring of subordinates in writing, the rating is more accurate.
E. Strategy 4: Training Raters to Rate More Accurately
• Most research indicates rater training is an effective method for reducing appraisal errors.
• Rater training programs can be divided into three categories.
o Rater-error training—goal is to reduce psychometric errors (leniency, severity, central tendency, halo), by familiarizing raters with their existence.
o Performance-dimension training—exposes supervisors to the performance dimensions to be used in rating (e.g., quality of work, job knowledge), thus making sure
everyone is on the same page when thinking about a specific performance dimension.
o Performance-standard training—provides raters with a standard of comparison or frame of reference for making appraisals (what constitutes good, average, and
• Several generalizations about ways to improve rater training can be summarized:
o Straightforward lecturing to ratees about ways to improve the quality of their ratings generally is ineffective.
o Individualized or small-group discussion sections are more effective in conveying proper rating procedures.
o When these sessions are combined with extensive practice and feedback sessions, rating accuracy significantly improves.
o Longer training programs (more than two hours) generally are more successful than shorter programs.
o Performance-dimension training and performance-standard training generally work better than rater-error training, particularly when they are combined.
o The greatest success has come from efforts to reduce halo errors and improve accuracy.
• Leniency errors are the most difficult form of error to eliminate.
o Think about the consequences to a supervisor of giving inflated ratings versus those of giving accurate or even deflated ratings. The latter two courses are
certain to result in more complaints and possibly reduced employee morale.
o The easy way out is to artificially inflate ratings. Unfortunately, this positive outcome for supervisors may come back to haunt them: With everyone receiving
relatively high ratings there is less distinction between truly good and poor performers.
III. Putting It All Together: The Performance Evaluation Process
• Some of the key elements in the total process that from day one make for a good appraisal outcome are outlined below:
o A sound basis for establishing the performance appraisal dimensions and the scales associated with each dimension is needed.
? Performance dimensions should be relevant to the strategic plan of the company.
? Performance dimensions also should reflect what employees are expected to do in their jobs, that is, their job descriptions.
o Employees need to be involved in every stage of developing performance dimensions and building scales to measure how well they perform on these dimensions.
? In cases where this occurs, employees have more positive reactions to ratings, regardless of how well they do. They are happier with the system’s fairness and
the appraisal accuracy.
? Managers also respond well to this type of ‘due process’ system. They have higher job satisfaction and less reason to distort appraisal results to further
their own interests.
o Raters should be trained in the use of the appraisal system and all employees should understand how the system operates and what it will be used for.
o Raters should be motivated to rate accurately.
? One way to achieve this is to ensure that managers are rated on how well they utilize and develop human resources. A big part of this would be evaluation and
feedback to employees.
o Raters should maintain a diary of employee performance, both as documentation and to jog memory.
o Raters should conduct a performance diagnosis to determine in advance if performance problems arise because of motivation, skill deficiency, or external
o Feedback to employees should be timely.
o Exhibit 11.10 recaps the important steps in the appraisal process.
IV. Equal Employment Opportunity and Performance Evaluation
• Equal employment opportunity (EEO) and affirmative action have influenced HR decision making for more than 40 years. While there are certainly critics of these
programs, at least one important trend can be traced to the civil rights vigil in the workplace.
o EEO has forced organizations to document decisions and to ensure they are firmly tied to performance or expected performance.
• Performance appraisals are subject to the same scrutiny as employment tests. This interpretation of performance evaluation as a test, subject to validation
requirements, was made in Brito v. Zia Company.
o Zia Company used performance evaluations based on a rating format to lay off employees.
o The layoffs resulted in a disproportionate number of minorities being discharged.
o The court held that Zia, a government contractor, had failed to comply with the testing guidelines issued by the Secretary of Labor, and that Zia had not
developed job-related criteria for evaluating employees’ work performance to be used in determining employment promotion and discharges which is required to protect
minority group applicants and employees from the discriminatory effects of such failure.
• The courts stress six issues in setting up a performance appraisal system.
o Courts are favorably disposed to appraisal systems that give specific written instructions on how to complete the appraisal. Presumably, more extensive
training in other facets of evaluation would also be viewed favorably by the courts.
o Organizations tend to be able to support their cases better when the appraisal system incorporates clear criteria for evaluating performance. Performance
dimensions and scale levels that are written, objective, and clear tend to be viewed positively by courts in discrimination suits. In part, this probably arises
because behaviorally oriented appraisals have more potential to provide workers feedback about developmental needs.
o The presence of adequately developed job descriptions provides a rational foundation for personnel decisions. The courts reinforce this by ruling more
consistently for defendants (companies) when their appraisal systems are based on sound job descriptions.
o Courts also approve of appraisal systems that require supervisors to provide feedback about appraisal results to the employees affected. Absence of secrecy
permits employees to identify weaknesses and to challenge undeserved appraisals.
o The courts seem to like evaluation systems that incorporate a review of any performance rating by a higher-level supervisor.
o The courts consistently suggest that the key to fair appraisals depends on consistent treatment across raters, regardless of race, color, religion, sex, or
• The focal question then becomes: Are similarly situated individuals treated similarly? This standard is particularly evident in a court case involving
performance appraisal and merit pay.
o A black male filed suit against General Motors, claiming race discrimination in both the timing and the amount of a merit increase.
o The court found this case without merit.
o General Motors was able to show that the same set of rules was applied equally to all individuals.
• Experts note that firms approaching performance appraisal primarily as a way to defend against discrimination claims may actually create more claims.
o Documentation of performance to discourage claims only causes poor employee relations.
o A better strategy is to follow the guidelines discussed earlier, as they permit both effective performance reviews and a strong foundation in case legal issues
V. Tying Pay to Subjectively Appraised Performance
• The central issue involving merit pay is, “How do we get employees to view raises as a reward for performance?”
• From a pragmatic perspective, organizations frequently grant increases that are not designed or communicated to be related to performance.
o Many companies view raises not as motivational tools to shape behavior but as budgetary line items to control costs. Frequently this results in pay increase
guidelines with little motivational impact.
• There are three pay increase guidelines that particularly fit the low-motivation scenario.
o General increases—provide equal increase to all employees regardless of performance. These increases are typically found in unionized firms. A contract is
negotiated that specifies an across-the-board, equal increase for each year of the contract.
o Across-the-board increases—provide equal increase to all employees regardless of performance. These increases are often linked to cost-of-living changes. When
the Consumer Price Index (CPI) rises, some companies adjust base pay for all employees to reflect the rising costs.
o Seniority increases—comes somewhat close to tying pay to performance. These increases tie pay increases to a preset progression pattern based on seniority.
• In practice, tying pay to performance requires three things:
o A company needs some definition of performance.
o The company needs some continuum that describes different levels from low to high on the performance measure.
o The company needs to decide how much of a merit increase will be given for different levels of performance.
o Decisions about these three requirements lead to some form of merit pay guide. In its simplest form a guideline specifies pay increases permissible for
different levels of performance (Exhibit 11.11).
• A more complex guideline ties pay not only to performance but also to position in the pay range. Exhibit 11.2 illustrates such a system for a food market firm.
o The percentages in the cells of Exhibit 11.12 are changed yearly to reflect changing economic conditions. Two patterns are evident in this merit guideline:
o In a pay-for-performance system, lower performance is tied to lower pay increases.
o Pay increases at a decreasing rate as employees move through a pay range. For the same level of performance, employees low in the range receive higher
percentage increases than employees who have progressed further through the range.
? In part this is designed to forestall the time when employees reach the salary maximum and have their salaries frozen. In part, though, it is also a cost-
control mechanism tied to budgeting procedures.
• Merit increases may be linked to employee ability and willingness to demonstrate key competencies. For example, showing more of the following behaviors might
be tied to higher merit increases:
A. Competency: Customer Care
• Follows through on commitments to customers in a timely manner
• Defines and communicates customer requirements
• Resolves customer issues in a timely manner
• Demonstrates empathy for customer feelings
• Presents a positive image to the customer
• Displays a professional image at all times
• Communicates a positive image of the company and individuals to customers
B. Performance- and Position-Based Guidelines
• Given a salary increase matrix, merit increases are relatively easy to determine.
• As Exhibit 11.12 indicates, an employee at the top of his or her pay grade who receives a “competent” rating would receive a 4 percent increase in base salary.
• A new trainee starting out below the minimum of a pay grade would receive a 10 percent increase for a “superior” performance rating.
C. Designing Merit Guidelines
• Designing merit guidelines involves answering four questions.
o What should the poorest performer be paid as an increase?
? Wage cuts tied to poor performance are very rare.
? Most organizations give no increases to very poor performers, perhaps as a prelude to termination if no improvements are shown.
o How much should average performers be paid as an increase?
? Most organizations try to ensure that average performers are kept whole relative to cost of living. This dictates that the midpoint of the merit guidelines
equal the percentage change in the local or national consumer price index (CPI).
o How much should the top performers be paid?
? In part, budgetary considerations answer this question.
? There is growing evidence that employees do not agree on the size of increases that they consider meaningful.
o Matrixes can differ in the size of the differential between different levels of performance. A larger jump between levels would signal a stronger commitment to
recognizing performance with higher pay increases.
? Most companies balance this, though, against cost considerations.
? Exhibit 11.13 shows how a merit grid is constructed when cost-constraints (merit budgets) are known.
VI. Promotional Increases as a Pay-for-Performance Tool
• Firms have methods of rewarding good performance other than by giving raises
o One of the most effective is a promotion accompanied by a salary increase, generally reported as being in the 8 to 12 percent range. This method of linking pay
to performance has at least two characteristics that distinguish it from the traditional annual merit pay increases:
? The very size of the increment is approximately double a normal merit increase. A clearer message is sent to employees, in the forms of both money and
promotion, that good performance is valued and tangibly rewarded.
? Promotion increases represent a reward to employees for commitment and exemplary performance over a sustained period of time.
• Promotions are not generally annual events. They complement annual merit rewards by showing employees that there are benefits to both single-year productivity
and continuation of such desirable behavior.
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