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Performance management is key in every organization which strives to remain competitive in the global market place. It refers generally to the management of the performance of employees, teams and organizations. The management process entails that current performance is measured and compared against organizational benchmarks. In the next stage, steps are taken to improve performance in cases where employees, teams or the organization is underperforming. In recent years many tools have been developed to enhance the management of the performance of employees, teams and organizations. The Balanced Score Card for example was developed by Kaplan and Norton (1992) to assist management in managing the performance of their organizations. In the case of employee performance management, performance reviews and output based financial incentives have historically been used as a way of improving employee performance. Martinez and Kennerley (2005) argues that these two measures can be used to align the agents interest with those of the principal thereby alleviating the agency problem inherent in the contract between employees, management and investors (Baiman, 1990). Martinez and Kennerley (2005) further argue that the role of performance reviews is probably far beyond what the above theory (agency theory) posits. Other studies in the area have shown that both measures (performance reviews and financial perspectives) interact and are together positively related to output. This study takes this line of enquiry a step further by reconsidering the role of both measures and the effect the measures have on productivity.
Research Topic: Innovation in performance management; Performance Reviews and financial perspectives
Performance management is an area that has been of interest to a broad spectrum of researchers and practitioners over the past decades. Managers are continually concerned about how to manage and/or measure the performance of their organizations as well as the performance of their employees in a bid to keep their organizations competitive in the global market environment. Taylorism (by Frederick Taylor) introduced the idea that workers could be incentivized to work more and be more productive simply by managing workflows. In his work, Taylor noticed that differences in workers wages could define the performance of employees irrespective of their ability. He (Taylor's) ideas were rebuffed by proponents of the Human Relations Theory such as Elton Mayo (Kyle, 2006). Research in the area has led to the development and advancement of several tools designated to manage performance. The effectiveness of these tools given their costs of implementation has been subject to controversy amongst researchers and practitioners. Again, there is little empirical evidence to support some the claims made by proponents of these tools.
This research shall fill this gap in the literature by finding empirical evidence to answer the following questions;
-What role does performance review and financial rewards play in employee/management performance management?
-What are the effects of performance review and financial reward schemes on management performance?
Martinez and Kennerley (2005) contend that the widespread belief that performance reviews enhance firm competiveness has not been empirically supported. The 2007 financial crises saw huge public criticism on the culture of bonuses for bankers. There has been little research to investigate whether such bonuses are an effective way of ensuring competitiveness. The motivation of the study is to investigate whether the presence of performance reward schemes or a performance review affects firm productivity and to gain further insight on any interaction effects that the two measures may have.
Indication of literature sources
The argument put forward by the Human Relations School is summarily that social relations, employee motivation and job satisfaction play a vital role on performance. There have been a myriad of studies supporting the finding that employee motivation is strongly related to performance (Kominis and Clive, 2006).
The agency theory (Jensen and Meckling, 1976) exposes the problems that could arise in an organization due the separation between the principal and the agent. Baiman (1990) contends that the agent has the tendency to look after his personal interest by diverting some of the principles resources to satisfy his personal gain. The principal agent relationship can be observed between management and employees as well as between investors and management. In the management-employee case, management has paid for time and experience and expects employees to be productive in return. It is ineffective and costly for management to continuously supervise every action of employees. Eisenhardt (1989) posits that firms use performance reviews as a tool to monitor and control their employees in order to influence behavior and guard against opportunism. Martinez and Kennerley (2005) contend that the principal has two ways of improving performance or control outcomes within a firm. The first is by investing in performance reviews and the second is to align the agents interests with that of the principle by contracting the agent based on his output (financial perspectives). Eisenhardt (1989) criticizes the financial perspective due to the fact that it has a high dependence on several externalities such as government regulations, macro economic conditions and the actions of competitors. Studies by Kumar (1989) and Suh and Kim (1989) (forward in Baiman, 1990) have confirmed the link between productivity and performance reviews. Baiman (1990) compares both measures of performance management and noted that both measures together significantly impact on performance when compared to either. This finding has however not been corroborated and the benefits to be gained from using both measures have not been explored.
In this study we will consider performance reviews and financial rewards as tools for performance management.
In summary, research has been carried out by Jensen and Meckling (1976) and Baiman (1990) to develop the theoretical base of this research- the agency problem. Preliminary studies on the effects of management reviews, have been carried out by researchers such as Eisenhardt (1989), Trotman (1985), Baiman (1990), Ismail and Trotman (1995) and Marien (1992). These researchers have established a relationship between performance reviews and productivity in different organizational settings.
Other researchers such as Kominis and Clive (2006) working in the area of motivation have established the relationship between financial rewards, motivation and performance. This study links both groups of studies by jointly studying the effect of both measures on performance and their role as a tool for performance management.
Research method & design
I will use a mixed methodology in the study; case studies and experiments. Like Martinez and Kennerley (2005), I consider the social constructionism approach where I will base my research on a case study and carry out an in-depth analysis. This approach has been recommended by other researchers such as Yin (1994) and Voss et al., (2002). I realize that it is difficult to investigate the effect of financial rewards on performance in a real life setting. This is because there is a need to vary the independent variable while observing the effect on the dependent variable for every observation while holding all other variables constant. Bryman (2004) contends that when there is a need to manipulate variables in a controlled setting, an experimental research design can be used. I will design an experiment that will allow me vary the independent variable (financial rewards) while keeping all interacting variables constant. This will allow me to accurately measure the effect of financial rewards on performance without incorporating the interacting effects of other motivation variables.
I will use an identical sample for both studies and compare the results obtained from the experiments with the results obtained from the questionnaires and interviews.
Potential results and contribution
I hope to support the agency theory explanation that performance reviews act as a monitoring device to alleviate the agency problem. I also hope to find evidence to support the notion that financial incentives are related to productivity. This study will contribute to the literature by investigating the effect of both measures on performance management. I hope to find new insights to suggest that the role of both measures is far beyond their role in mitigating the agency problem.
Given the time constraint, cost prohibitions and the general lack of respondents in this kind of study, I may only be able to work with a limited number of respondents within a single organization. Research has shown that there are generally inherent differences between managers and employees with respect to factors that affect motivation and therefore performance (Kominis and Clive, 2006) and the effects of management reviews on performance (Martinez and Kennerley, 2005). Due to the difficulty of gaining access to top level management, these differences will not be explored.
I hope to add to the discussion of how management reviews and financial incentives affect performance and how both tools can be used to manage employee/management performance. I predict that the role of management reviews in organization far exceeds the need to reduce the agency problem (Eisenhardt, 1989). I also predict that different types of management reviews will have different effects on performance and will therefore have different implications on performance management. Again, I expect an interesting relationship between financial incentives and performance. I envisage that management reviews and financial incentives will compliment each other in the bid to improve organizational performance. This research will be of immense interest to management, investors and regulators.