5

Introduction to
Performance Management

UNIT 1

UNIT I
6
Performance Management:
Systems and Strategies
 7
LESSON Introduction to
Performance Management

1
INTRODUCTION TO PERFORMANCE MANAGEMENT

CONTENTS
1.0 Aims and Objectives
1.1 Introduction
1.2 Overview of Performance Management
1.3 Standards of Performance
1.4 How to Develop Written Performance Standards
1.4.1 Developing Standards Collaboratively
1.4.2 Writing the Standards
1.4.3 Guidelines for Performance Standards
1.4.4 Checking your Standards
1.5 Performance Metric
1.5.1 Uses of Performance Metrics
1.5.2 Effective Performance Modeling
1.5.3 Human Side of Performance Metrics
1.5.4 Customer Focused Metrics
1.5.5 Designing Metrics
1.6 Human Resources Valuation
1.6.1 Human Resource Accounting under the Lev and Schwartz Model
1.7 Encouraging Performance - Setting Goals, Targets and Performance
1.7.1 Strategic Compensation Design
1.7.2 Strategic Compensation Policies
1.8 Let us Sum up
1.9 Lesson End Activity
1.10 Keywords
1.11 Questions for Discussion
1.12 Suggested Readings

1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z Understand the concept of performance management
z Comprehend the overview of performance management
z Analyze the issues related to performance standards
z Know the systems and process of developing performance standards
8 z Understand the concept of performance metric
Performance Management:
Systems and Strategies z Understand the process of performance modeling
z Understand HR valuation process based on performance achievement

1.1 INTRODUCTION
"Performance management is the integrated process of objective setting, appraisal and
pay determination which supports the achievement of the company's business
strategies. At an individual level it will result in action plans related to performance
improvement, career development and training."
It is an ongoing process that involves both the manager and the employee in:
z identifying and describing essential job functions and relating them to the mission
and goals of the organization
z developing realistic and appropriate performance standards
z giving and receiving feedback about performance
z writing and communicating constructive performance appraisals
z planning education and development opportunities to sustain, improve or build on
employee work performance.

1.2 OVERVIEW OF PERFORMANCE MANAGEMENT

The evolution of the concept of performance management as a new Human Resource
Management model reflects a change of emphasis in organizations away from
command-and-control toward a facilitation model of leadership. This change has been
accompanied by recognition of the importance to the employee and the institution of
relating work performance to the strategic or long-term and overarching mission of
the organization as a whole. Employees' goals and objectives are derived from their
departments, which in turn support the mission and goals of the organization.
The performance management process provides an opportunity for the employee and
performance manager to discuss development goals and jointly create a plan for
achieving those goals. Development plans should contribute to organizational goals
and the professional growth of the employee. To sustain excellence in a changing
environment organizations worldwide now require making the transition from a
bureaucracy to a network organization. The new organizational model emphasizes a
focus on decision-making and accountability at the level where the work is done,
development of a service culture that rewards team performance, and integration of
operations. Critical to the success of this new model is the adoption of a customer
service orientation, a flexible attitude in the face of constant change, and streamlined
business processes supported by networked administrative systems.
New conceptual framework of new Human Resource Management Initiatives also
underscores the vital role of education, training and development in the envisioned
network organization. In this organization, continuous learning is a prerequisite to
successful job performance and organizational effectiveness. Employees must be able
to learn work, developing effective technical and people skills in order to assume new
responsibilities, and keep pace with and anticipate the changing nature of work and
our workplace.
For managers and employees alike, responding to these changes requires the ability to
learn, adapt to change, solve problems creatively, and communicate effectively in
diverse groups. In addition, employees must take personal and proactive responsibility
for their careers to ensure future employability and advancement. The realities of the
contemporary workplace will continue to challenge existing paradigms and should be
considered in managing the performance of employees in a dynamic working 9
Introduction to
environment. Performance Management
A manager is involved in performance management when he:
z establishes specific job assignments
z writes job descriptions assign responsibility for strategic initiatives develop and
apply performance standards
z discusses job performance with the employee and provide feedback on strengths
and improvements needed
z conducts an annual performance evaluation plan for improved performance and
employee development goals.
Setting right objectives is critical for effective performance management. Such
objectives as higher profits, shareholder value, customer satisfaction may be
admirable, but they don't tell managers what to do. "They fail to specify priorities and
focus. Such objectives don't map the journey ahead – the discovery of better value and
solutions for the customer."
The objectives must be:
z be focused on a result, not an activity
z be consistent
z be specific
z be measurable
z be related to time
z be attainable

SMART Objectives
Specific
Measurable - that can quantify the results
Achievable
Relevant
Time bounded - are governed by deadlines

The Starting Point in Setting Objectives

Assess Yourself Assess Your Unit
Who am I? What is its role?
What are my strengths? What are its resources?
How do I work? How does it function?
Where do I belong? What is my function within it?
What is my contribution? What are the functions of others?

1.3 STANDARDS OF PERFORMANCE

Standards of performance are written statements describing how well a job should be
performed. Performance standards are developed collaboratively with employees,
whenever possible, and explained to new employees during the first month on the job.
The performance standard provides a benchmark against which to evaluate work
performance. While the job description describes the essential functions and the tasks
to be done, the performance standard defines how well each function or task must be
performed in order to meet or exceed expectations.
10 Standards of performance are usually:
Performance Management:
Systems and Strategies
z developed in collaboration with the employees who do the tasks or functions
z explained to new employees within the first month on the job.

1.4 HOW TO DEVELOP WRITTEN PERFORMANCE

STANDARDS
When performance standards are in place, both the managers and employees will
know what the expectations are for the performance of essential functions and related
tasks. This common understanding provides the basis for ongoing feedback and
performance counseling between appraisals as well as for the formal performance
appraisal process.

1.4.1 Developing Standards Collaboratively

There are a number of approaches to developing written performance standards. One
is the directive approach in which the performance manager writes the standards, in
consultation with management and the Employee Relations representative for his or
her department. Then the standards are shared with the employees affected for their
information and to address any questions they may have.
Another is a collaborative approach in which employees work with you to develop the
performance standards for their positions. While it is a legitimate option to develop
the standards without employee input, the benefits of a collaborative approach are
important. Both the manager and the employee bring valuable information to the
process and the end result is more likely to be supported by everyone involved.
As the manager, however, one need to make the final decision about the
appropriateness of the standards in consultation with management and the Employee
Relations consultant for the department. Mutual agreement with the employee about
standards is preferable, but not always possible. Mutual understanding and
recognition of the standards is necessary.
In the collaborative process of developing standards for a task or function, include all
of those employees whose work will be evaluated according to those standards. If the
task or function is unique to one position, then include the employee in that position in
the development process. If the task or function is performed by more than one
employee, then involve all employees whose job description includes For the sake of
fairness and consistency, consider collaborating with other units in your department if
employees reporting to different performance managers perform the same tasks or
functions.
Before the meeting, explain to everyone involved exactly what performance standards
are, why they are important, and how they will be used. Confirm that the employees
understand the process and solicit their comments and questions. Tell them that you
would like to work together to develop standards for their positions and that their
recommendations and concerns will be considered seriously. Describe the process you
will follow. Also explain that it is your responsibility to make the final determination
about the appropriateness of the standards.

1.4.2 Writing the Standards

Make sure that all participants in the standards writing process have access to the
following documents:
z an up-to-date copy of their job description
z a copy of the department mission and goals, if available 11
Introduction to
Performance Management
z the form for the performance appraisal model
You may find that it is appropriate to define standards, which apply to an entire
essential function, though typically standards are developed for related tasks. It is not
necessary to write a performance standard for every task in a job. Focus on those,
which are most important to the position.
Discuss and describe those behaviors and results, which would constitute the
minimum acceptable performance for the task or function. Performance, which
satisfies those standards, will receive the rating of solid performance. You may also
describe the behaviors and results that would demonstrate performance, which would
exceed expectations, and/or would fall below expectations. The same principles apply
to the development of standards, regardless of the rating.
Standards should be written in clear language, describing the specific behaviors and
actions required for work performance to meet, exceed or fail to meet expectations.
Use specific terms describing measurable or verifiable features of the performance:
1. Describe performance expectations in terms of timeliness (deadlines, dates), cost
(budget constraints, limits), quality (subjective and objective measures of
satisfaction), quantity (how many), customer satisfaction, independent initiative
demonstrated and any other relevant verifiable measure.
2. Specify the acceptable margin for error. It is very rare for perfection to be an
appropriate standard, even for outstanding performance.
3. Refer to any specific conditions under which the performance is expected to be
accomplished or performance assessed.
Written performance standards may also be developed for the general categories to be
evaluated, found under Significant Performance Dimensions of Performance
Appraisal Model Three: initiative/innovation, teamwork/collaboration, leadership,
decision-making, etc. and, when appropriate, optional dimensions such as cost control.
Develop standards for these categories with the particular position as well as the needs
of the organization in mind.
Performance standards may be written to different levels of complexity. The more
general the applicability, the harder it is to be specific.

LEVEL DESCRIPTION

Level 1 Simple description of general expectation.

Example:
Task Description: Assemble widgets.
Standard: Put widgets into the correct slots.
Example:
Task Description: Write annual reports.
Standard: Annual reports will be submitted by agreed upon date.

Level 2 Simple description of specific expectations.

Example:
Task Description: Assemble widgets
Standard: Put widget A into slot B, completing 5 correct placements per
minute.

Contd…
12
Performance Management:
Example:
Systems and Strategies
Task Description: Write annual reports.
Standard: Annual reports will be submitted to the Business Officer 5
working days before January 15.

Level 3 Description of specific expectations and success indicators.

Example:
Task Description: Assemble widgets.
Standard: Put widget A into slot B, completing 5 correct placements per
minute for 95 widgets out of 100.
Example:
Task Description: Write annual reports.
Standard: Annual reports will be produced following the departmental
format and submitted to the Business Officer 5 working days before
January 15.

Level 4 Description of specific expectations, success indicators, and conditions, if

any.
Example:
Task Description: Assemble widgets.
Standard: Put widget A into slot B, completing 5 correct placements per
minute for 95 widgets out of 100, assuming the equipment is in working
order.
Example:
Task Description: Write annual reports.
Standard: Annual reports will be produced following the departmental
format and submitted to the Business Officer 5 working days before
January 15, unless otherwise directed by Department Head.

1.4.3 Guidelines for Performance Standards

Keep in mind the following guidelines when writing your performance standards:
z Performance standards should be related to the employee's assigned work and job
requirements.
z Your reporting systems should be adequate to measure and report any quantitative
data you list.
z Quantifiable measures may not apply to all functions. Describe in clear and
specific terms the characteristics of performance quality that are verifiable and
that would meet or exceed expectations.
z Accomplishment of organizational objectives should be included where
appropriate, such as cost-control, improved efficiency, productivity, project
completion, process redesign, or public service.

1.4.4 Checking your Standards

After you have written your performance standards, check them against the questions
in the following list:
z Are the standards realistic? Standards should be attainable and consistent with
what is necessary to get the job done. Standards for performance, which meets
expectations, represent the minimum acceptable level of performance for all
employees in that position.
z Are the standards specific? Standards should tell an employee exactly which
specific actions and results he or she is expected to accomplish.
z Are the standards based on measurable data, observation, or verifiable 13
Introduction to
information? Performance can be measured in terms of timeliness, cost, quality Performance Management
and quantity.
z Are the standards consistent with organizational goals? Standards link individual
(and team) performance to organizational goals and should be consistent with
these goals. The success of the University's and department's missions depends on
this strategic connection.
z Are the standards challenging? Standards may describe performance that exceeds
expectations. Recognizing performance that is above expectations or outstanding
is crucial to motivating employees.
z Are the standards clear and understandable? The employees whose work is to be
evaluated on the basis of the standards should understand them. Standards should
use the language of the job.
z Are the standards dynamic? As organizational goals, technologies, operations or
experiences change, standards should evolve.

Check Your Progress 1

State whether the following statements are true or false:
1. Performance management is the integrated process of objective setting,
appraisal and pay determination, which supports the achievement of the
company's business strategies.
2. The performance management process provides an opportunity for the
employee and performance manager to discuss development goals and
jointly create a plan for achieving those goals.
3. Development plans should not contribute to organizational goals and the
professional growth of the employee.
4. New conceptual framework of new Human Resource Management
Initiatives also underscores the vital role of education, training and
development in the envisioned network organization.

1.5 PERFORMANCE METRIC

A metric is nothing more than a standard measure to assess your performance in a
particular area. Metrics are at the heart of a good, customer-focused process
management system and any program directed at continuous improvement. The focus
on customers and performance standards show up in the form of metrics that assess
your ability to meet your customers' needs and business objectives.

1.5.1 Uses of Performance Metrics

Most organizations use traditional performance measures, such as profit performance,
return on investment or earnings per share, to determine success. These measures
provide reasonable estimates of whether a company achieves its ultimate goals of
making profits, but does not reveal how the business achieves this position. Was it by
chance? Was it a non-recurrent situation? Should they have done much better?
Many companies have thus created a whole slew of operating and process measures
and ratios to track how well the business manage each process and their use of
resources. Many CEOs (particularly those who have to make quarterly business
forecast) have become endeared to performance models, which integrate a suite of
14 measures to predict future performance. The Balanced Score Card is one of the more
Performance Management:
Systems and Strategies popular conceptual modeling tools.

1.5.2 Effective Performance Modeling

An effective performance model is one, which allows senior management to be
confident that the end results are not guesswork but a summation of all the different
activities and process, given an attainable standard of performance.
The requirements of such a model are:
z Relevant relationships: Process and activity metrics must form a chain of
correlations leading to the ultimate end results of enhancing profits, brand equity
and market valuation.
z Measurability: Data for the Metrics can be accurately collected in a timely
manner without undue cost.
z Comprehensible: It must be easy to understood, impact on the effectiveness of
other process and the end results.
z Actionable: It must be actionable. There is a set of corrective actions that may be
taken.
z Motivating: It must be motivating: cause people to act positively, and not in a
way contrary to the best interest of the business to simply "make their numbers."
z Automation complaint: Data collection and analysis should be automated so that
employees do not have to be diverted from their main activity into data collection
and analysis.

1.5.3 Human Side of Performance Metrics

This has to be alluded to in our statement requirements. For a performance model to
work, employee performance appraisal criteria must be aligned with the performance
metrics, i.e., if an employee does his task well, this is directly linked to process
performance and to ultimate department/division performance and the ultimate goals
of the company.
Enthusiastic acceptance, not mere passive understanding is required from managers
and employees at all levels of the organization. Successful metrics must be capable of
being cascaded down the line and to reinforce the desired behavior.

1.5.4 Customer Focused Metrics

For most businesses, the end objective of profits, brand equity and market valuation
are dependent largely on how well the organization meets and exceed customer
expectations. Metrics must not therefore be developed to assist internal organization
meet external expectations.
The following process is important to develop a customer-focused metrics:
z Identify your customers and the outputs they require and the processes through
which we create the outputs. (Process Block Diagrams or Flowcharts may help at
this point.)
z Determine your customer needs/requirements in terms of quality and service
standards, determine the existing gaps in your delivery system.
z Determine the direct metrics that will help ensure that we meet customer
expectations
z Cascade these metrics horizontally and vertically through other processes that 15
Introduction to
may impact their performance to develop a full suite of measures that would Performance Management
ensure we achieve customer satisfaction.
z Establish current performance level, short-term objective, long-term objective,
and competitive benchmark that must be attained

1.5.5 Designing Metrics

The development of a proper portfolio of organizational performance metrics has
proven to be the most difficult aspect of the Balanced Scorecard approach. It requires
deep and perhaps unprecedented re-examination of the vision, strategy, and mission of
an organization. The relationship between customers and the organization's own
survival needs will have to be considered.
One way to address the issue is this: if we could create any metrics we wish, what
'instruments' would senior executives like to see the most, to help them to make better
strategic decisions? Ideally, these instruments would have the following 12 features:
z Leading indicators: forecast future trends inside and outside the agency
z Objective and unbiased
z Normalized - so they can be benchmarked against other agencies
z Statistically reliable - small margin of error
z Unobtrusive - not disruptive of work or trust
z Inexpensive to collect - small sample sizes adequate
z Balanced - qualitative/quantitative, multiple perspectives
z Appropriate - measurements of the right things
z Quantifiable - for ease of aggregation, calculation and comparison
z Efficient - can draw many conclusions out of data set
z Comprehensive - show all the significant features of agency's status
Discriminating - small changes are meaningful.
This is a tall order. However, it seems undebatable that these are desirable features of
the portfolio of metrics. By listing these desired features in advance, it may help us to
identify how to design the metrics to meet at least some of these requirements.
A tentative performance metrices covering some of the critical areas can be illustrated
as under:

Quality
Errors per Line of code
Data Throughput rates
Lost, dropped or destroyed packets (network and communication systems)
Peak Capacity
Rework
Discrepancies found
Availability
Mean (or average) Time Between Failures
Failures per hour/day/week/month
Customer Returns
Customer Complaints
16 Mean Time to Repair
Performance Management:
Systems and Strategies Mean Time to Respond
Requirement Change Rate

Customer Satisfaction
Number of Complaints
Customer Returns
Customer Survey
Referrals

Employee Satisfaction
Participation Rates in Company Sponsored Events
Employee Turnover Rates
Employee Exit Interviews/Surveys
Number of Employee Suggestions
Productivity Metrics
Incidents of Violence
Revenue (or sales) per Employee

Financial
ROI
CPI
SPI
RONA
ETC/EAC
Check Your Progress 2
Fill in the blanks:
1. The evolution of the concept of ……………….. as a new Human
Resource Management model reflects a change of emphasis in
organizations away from command-and-control toward a facilitation
model of leadership.
2. ……………….. are written statements describing how well a job should
be performed.
3. A ……………….. is nothing more than a standard measure to assess your
performance in a particular area.
4. The development of a proper portfolio of organizational performance
metrics has proven to be the most difficult aspect of the ………………...

1.6 HUMAN RESOURCES VALUATION

The dichotomy in accounting between human and non-human and non-human capital
is fundamental. The latter is recognized as an asset and is therefore recorded in the
books and reported in the financial statements, whereas, the former is totally ignored
by accountants. The definition of wealth as a source of income inevitably leads to the
recognition of human capital as one of several forms of wealth such as money,
securities and physical capital.
The Lev & Schwartz model has been used to compute the value of the human 17
Introduction to
resources as at 1st April, 2000. Performance Management

1.6.1 Human Resource Accounting under the Lev and Schwartz Model
The Lev & Schwartz Model belongs to the category of the Present Value based
models. The model is a salary based one. The basic assumption of Lev & Schwartz
Model is that the employee will not leave the Organisation till Retirement.
The Lev & Schwartz Model attempts to value the Organisation’s Human Resource
using the economic concept of human capital. The Model uses the employee’s future
earnings as a surrogate of his economic value to the Organisation. According to the
Model, the Value of Human Capital embodied in a person of age “T” is the present
value of remaining future earnings from employment.
Further the model assumes that the employee will stick to the same position, which is
being currently occupied thus ruling out the possibility of change in role because of
promotion or demotion.
The model requires the division of the whole labour force of an organisation into
certain homogeneous groups such as unskilled, semi-skilled, skilled, technical
managerial staff etc. and in accordance with different classes and age groups. Average
earnings stream for different classes and age groups are prepared for each group
separately and the present value for human capital is computed by using the cost of
capital as the discount rate. The aggregate present value of different groups represents
the capitalized future earnings of the firm as a whole.
The Value of Human Resources of the Company, its associates and subsidiary (ies)
companies, used in the IT business, is Rs.11, 996 million. For the purpose of this
valuation, non-technical employees have been excluded.
The valuation is based on the following assumptions:
z Employee compensation includes all direct and indirect benefits earned both in
India and abroad.
z The average annual increment is based on the increment paid during the last 3
years.
z Retirement age is as per company policy.
z Future earnings have been discounted at the weighted average cost of capital of
the company.
A basic break-up of the human resource valuation can be illustrated as under:
18
Performance Management:
Systems and Strategies

Check Your Progress 3

State whether the following statements are true or false:
1. Performance management helps organizations achieve their strategic
goals.
2. Performance management harnesses data to help ensure that an
organization’s data works in service to organizational goals to provide
information that is actually useful in achieving them.
3. Performance management focuses on the Operational Networking
Processes between the performance levels.
4. The main purpose of performance management is to link individual
objectives and organisational objectives and bring about that individuals
obey important worth for enterprise.
5. Performance management tries to develop skills of people to achieve their
capability to satisfy their ambitiousness and also increase profit of a firm.

1.7 ENCOURAGING PERFORMANCE - SETTING GOALS,

TARGETS AND PERFORMANCE
A good organisation has to evolve its strategic compensation design, i.e., a set of rules
and regulations, policies, etc, for its employees to follow. The objective behind setting
up the strategic compensation design remains to encourage the performance of the
employees so as to enhance the productivity and profits and thereby meet the goals
and targets set up by the management of the organisation. Though it is pertinent that
the strategic compensation design of one organisation need not be the same as that of
the other organisation. Thus in one economic zone there may be a number of strategic
compensation designs.
Developing appropriate, strategically vital measures and targets that support the
strategy is an underappreciated challenge, one whose dimensions leaders at first often
don't grasp. It's not simply that "If you don't measure it, you can't manage it"; you've
got to measure it right. Most organizations are awash in financial data and deficient in
measures of non-financial performance. And a large proportion of the measures they
do track are not strategically relevant. With too much data and too little useful
information, many organizations must start their BSC program without 100% of the
right measures in place. This reader helps organizations define the right measures and
targets. Organizations must strike a "Goldilocks" balance: not too many measures as
to burden themselves or complicate analysis, yet just enough to glean a 360-degree 19
Introduction to
picture. Target setting is an equally, if not more, delicate exercise. Organizations must Performance Management
define baseline, reasonable, and stretch levels of performance and then reconcile them
with existing and desired organizational competencies and goals. And the targets they
set must motivate high performance without encouraging risky behavior or attempts to
game the system.

1.7.1 Strategic Compensation Design

Strategic compensation is a systematic approach, adopted by an organization to
achieve several purposes to assist in recruitment, job performance, and job
satisfaction. It is used, as a tool matching with the business needs, goals, and
availability of resources. Organizations aligns strategic compensation with vision,
mission, values, objectives, strategy, leadership and, performance management
systems of an organization to achieve long-term success. Organizations design such
compensation in a flexible, competitive and performance-oriented way, adopting
following processes:
z Looking into the history and background of the organization to understand the
principles and norms.
z Using various workgroups to understand the issues like cost management,
principles of equity and collective bargaining systems of the organization.
z Focusing on performance management, structure setting and adjustment, job/work
evaluation, pay progression strategies, variable pay, premium/special pay, paid
time off, and other strategic rewards.
z Matching with the legislative and regulatory norms.
z Integrating the results of the entire processes to develop the desired compensation
programme.
z Implementing the new strategically designed compensation plan.
In designing strategic compensation, organizations emphasise on matching with the
competitors’ compensation plans and try to make differences in the variable
components like, bonuses, incentives and stock options. Organizations ensure internal
equity for the base compensation part, but for variables assign more weights on
external competitiveness. Market competition is the major driver for strategic
compensation design. Even some organizations, to derive the benefit of strategic
intent, refrain from adopting a common compensation model. They vary
compensation across the functions and levels to meet specific business needs.
Some of the important areas of strategic compensation design consider aspects like;
job/work evaluation, structure setting and adjustment, pay progression, performance
management, variable pay, premium/special pay and paid time off.
Job evaluation is a formal process to determine the relative worth of various jobs.
Through job evaluation, organizations assign grade structure (commonly based on
hierarchical index of job value). Work evaluation, on the contrary assigns value to
work and not to job. It primarily considers roles or competencies. A pay structure
represents collection of pay rates or ranges. Through the process of structure setting
and adjustment, organizations develop, adjust and maintain a pay structure. After Job
evaluation, organizations place jobs in suitable pay structures, complying with the
principles of internal equity. To make the compensation design more competitive,
organizations also consider market pricing for job/work evaluation. Person-based
approaches, position-based approaches, skill or competency based approaches and
often hybrid approaches are also followed in job/work evaluation systems. Above all,
strategic compensation designs, using job/work evaluations also consider issues like
equity, cost control, accountability and feasibility. Equity issues consider the degree
20 of compensation variation across the employees. Cost control and accountability
Performance Management:
Systems and Strategies issues consider affordability and defensibility of the compensation. Feasibility issues
consider resource constraints to sustain a particular compensation plan.
Pay progression refers to changes in the base pay primarily based on career ladder
promotion, competitive promotion and, performance based promotional issues. It
includes both the within-grade increases and the quality step increases. It is more like
a merit-based pay progression. However, organizations, often feel constrained to
follow time-based pay progression under collective bargaining situation. Systems of
allowing pay progression on attainment of specific skills or competencies are also
common in many organizations.
Use of variable pay as a strategic compensation component is quite common across
the organizations. But this requires adequate precaution, as issues like pay-at-risk
often dissuade trade unions to mandate such compensation plan.
Other issues like, premium/special pay, are considered by the organizations depending
on the degree of hazards, which may be occupational or environmental. Hill station
allowances, winter allowances, etc. are part of such compensation.

1.7.2 Strategic Compensation Policies

To frame strategic compensation programme, organizations emphasise at the outset on
developing a compensation policy, duly forming a compensation committee, to decide
on issues like the degree of differences in the pay structures across the hierarchical
levels, functions, degree of market compatibility, differences in the ratio of base pay
and variables, etc. The designated compensation committee, after going through all
these aspects, adopts compensation policies, which become the primary guidelines for
compensation design. Job analysis, job evaluation, determination of pay grades,
establishing pay ranges, developing compensation administration policy, obtaining the
approval of top management, communicating the final compensation plan to all cross-
sections of employees and, monitoring the compensation programmes are common
like any compensation design programme.
Compensation policies and philosophies, however, should not ignore the
organizational business and operations strategy, to make it more compatible with the
business needs.
Some of the compensation strategy statements, for any hypothetical organization can
be listed as under:
z To allow attraction and retention of high quality professional employees.
z To reward employees based on their support of organizational specific mission,
strategies and operating plans.
z To reward employees based on their experience and performance.
z To achieve and maintain consistency, equity and fairness in evaluating and
compensating employees consistent with the organizational vision.
z To promote communication with and participation by different departments of the
organization in developing effective compensation programmes.
Thus framing of compensation strategies for an organization is very important.
Traditionally organizations perceived compensation to an employee as a cost factor,
and minimizing it can add to their revenues. However, modern approach to
compensation negates these percepts and in fact it argues that ROI would be higher if
compensation is strategically designed as it can enhance performance and
productivity. Increased retention of good performers again provides sustainable
competitive advantages to the organization. We have already discussed various kinds
of compensation schemes in earlier chapters. These provide us an insight in to 21
Introduction to
strategic compensation design. Basically it requires identification of suitable variable Performance Management
components of pay and aligns those to the employees’ performance, so that
organizations can refrain from unnecessary expenses on non-performers. These will
help not only in motivating the employees, but also compel him to perform and
deliver better results. Even the concepts of Team Pay, Competency-based pay and
Contribution pay can be strategically determined for increased retention of employees
and for nurturing a culture of high performance.

1.8 LET US SUM UP

In this lesson we have introduced the basics of performance management, duly
delineating its concepts and focusing on its various dimensions. In organizations today
performance management is considered as most important and crucial function, as
leveraging continuous performance improvement of employees, organizations can
sustain in a competitive environment. Performance management systems in any
organization, do not just restrict its scope to employees’ performance appraisal, it
integrates individual and group performances of employees with the overall
organizational performance.

1.9 LESSON END ACTIVITY

Write a study note on the performance management and its linkage with other HR
systems.

1.10 KEYWORDS
Performance Management: It is the process of assessing progress toward achieving
predetermined goals.
Performance Planning: In performance planning goals and objectives are
established.
Performance Coaching: In performance coaching, a manager intervenes to give
feedback and adjust performance.
Application Performance Management: Application Performance Management
(APM) refers to the discipline within systems management that focuses on monitoring
and managing the performance and availability of software applications.
Business Performance Management: Business Performance Management (BPM) is a
set of processes that help businesses discover efficient use of their business units,
financial, human and material resources.
Operation Performance Management: Operational Performance Management
(OPM) focuses on creating methodical and predictable ways to improve business
results, or performance, across organizations.
Integrated Business Planning: Integrated Business Planning (IBP) refers to the
technologies, applications and processes of connecting the planning function across
the enterprise to improve organizational alignment and financial performance.

1.11 QUESTIONS FOR DISCUSSION

1. Define Performance Management. How can we understand that Performance
Management is practised in an organization?
2. What are the important objectives of Performance Management? Develop
SMART objectives for a HR Manager.
22 3. Define performance standards. How such standards are developed? Develop a
Performance Management:
Systems and Strategies tentative performance standard for various levels of employees.
4. Explain the term performance metrics. How it is developed? For designing a
customer-focused metrics, what are the factors need to be considered?
5. How we can value human resources?
6. Write short notes on:
a) Collaborative Performance Standards
b) Performance Modeling
c) Human Resource Accounting
d) Smart

Check Your Progress: Model Answers

CYP 1
1. T, 2. T, 3. F, 4. T
CYP 2
1. Performance Management, 2. Standards of performance, 3. Metric,
4. Balanced scorecard approach
CYP 3
1. T, 2. T, 3. T, 4. T, 5. T

1.12 SUGGESTED READINGS

Suri, Venkata Ratnam & Gupt (ed.), Performance Measurement and Management, Excel
Books, New Delhi, 2004.
R. K. Sahu, Performance Management System, Excel Books, New Delhi, 2006.
Rao and Rao (ed.), 360-Degree Feedback and Performance Management System, Excel
Books, New Delhi, 2000.
B. D. Singh, Compensation and Reward Management, Excel Books, New Delhi, 2007.