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The role of human capital, competence and people issues is ascending on the
strategic agenda of both public and private enterprise. On the back of a period
with heavy focus on capital efficiency, asset values and shareholder returns,
managers of private corporations and public organisations now seem to augment
their approach to physical and financial capital through an upgrade of issues
relating to human capital management. We see two important reasons for this
development. Firzst, there is the pathbreaking development of new
technologies, no longer limited to the IT, media and telecom industries. Rather,
new innovations have made their way into virtually all sectors of the modern
economy. People and competence are crucial for the productivity of these
technologies, and therefore also to the performance of public enterprise, and to
the competitiveness of private companies. Second, strong economic growth has
led to capacity pressures in large parts of the OECD area, not least in the labour
market. The result is that high-skill labour is an increasingly scarce input for
competitive firms and organisations. Consequently, strategic issues of human
capital management have gained strength throughout the economy. Performance
appraisal has become increasingly important in this respect, whereby the key
idea is to establish a reward system that maximizes the efforts and contribution
of leaders and employees to the general performance of their organisation. As
noted by Cleveland et al. (1989), the propagation of performance appraisal
systems is motivated by a broad range of concerns, including promotions,
terminations, salary administration, and the development of adequate
competence and expertise. Moreover, performance appraisal may be useful both
in the cross-sectional dimension (for comparison between individuals) and for
the time dimension (for comparison of individual performance over time). There
is a large body of research on performance appraisal systems. The early
literature was dominated by psychologists, and focused largely on the
psychometric properties of appraisal, in particular the role of supervisors and
the precision on their performance evaluation (see Milkovich and Wigor, 1991,
for a survey) Recent psychological literature has put more emphasis on worker
reaction to appraisals, and the social context in which appraisal occurs (see
Keeping and Levy, 2000; Levy and Williams, 2004). Issues of employee
satisfaction with performance appraisal systems are explored by Boswell and
Benson (2000) and Brown and Benson (2003), both arguing that individual
involvement and development opportunities play an important role for the
success ratio of performance appraisal systems. Kuvaas (2006) investigates the
capability to change both for leades and employees. On the other hand, issues
related to change capability is perceived as negative for the career opportunities
among leaders. Further, units and departments focusing on active management
of skills and expertise are also associated with higher scores for the approval
with both performance appraisal systems and career opportunities. Our
performance appraisal measures also show a clear and positive connection to
issues of trust and identity, both for leaders and employees. Finally, concerns for
health, safety and environmental (HSE) issues exerts a negative influence on
our measure of performance appraisal, whereas perceived career opportunities
are positively influenced by local HSE concerns. Any imbalance between
perceived individual efforts on the one hand, and reward and recognition will
act as a disturbance both for performance and job motivation. The interest of
managers should therefore be to secure alignment of expectations and
realisations, and management resources should be allocated accordingly. Our
results provide useful input to this important balancing act. First, this study
suggests that disapproval with performance appraisal systems may be somewhat
more of challenge among men then among women, both for leaders and
employees. Second, senior people report a somewhat larger gap between
individual efforts and rewards than young and newly employed people,
especially for employees. Third, the prevalence of fairness in performance
appraisal is influenced by characteristics and properties in the local work
environment. These results could be applied to rank the requirements of various
parts of the organisation with respect to management attention and corrective
measures. Finally, our results demonstrate that the mechanics of backwardlooking performance appraisal (reward and recognition) is not necessarily
identical to the formation of expectations with respect to future performance
appraisal (career opportunities). As an example, this study demonstrates that an
agile working environment, with capacity and capabilities for change, is usually
accompanied by gratifying systems in terms of backward-looking performance
appraisal. On the other hand, exactly the same properties correlate negatively
with perceptions regarding career opportunities. The paper is organized as
follows. Section 2 gives a brief overview of the processes of performance
appraisal in the company which forms the subject of our case study. The data set
is presented and variables are defined and discussed in Section 3. An
econometric model is outlined and estimated in Section 4, with subsequent
discussion of key results. Concluding remarks are offered in Section 5.