Measuring Human Capital: Performance Appraisal Effectiveness

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Organizations and employees spend a great deal of time in performance management. Managers consistently work to effectively and efficiently manager the performance of the workforce, but, how does an organization capture the concept of performance appraisal effectiveness? How do organizations decide if they are getting what they want from their performance management system? This paper is an attempt at answering these questions.

Measuring Human Capital: Performance Appraisal Effectiveness

Measuring human performance has long been of interest to researchers and practitioners (Avery & Murphy, 1998, Bernardin & Beatty, 1984, and Hyde, 2001). One process in measuring and evaluating human capital that has received much attention in the literature is performance appraisal (Avery and Murphy, 1998). Performance appraisal research has three general streams (Bretz, et al. 1992). First, research has focused on developing and honing instruments to more accurately and objectively measure human performance (for examples see Tznier et al. 2001, Tznier, et al., 1993). Second, research has focused on supervisor and employee characteristics as sources of potential and actual bias in the performance appraisal ratings (Cleveland & Murphy, 1992; Dewberry, 2001; Ford et al., 1986; Feldman 1981). And third, research has focused on the uses and types of performance appraisal systems within organizations (Scott & Einstein, 2001, and Lam & Schaubroeck, 1999). Literature to date has helped organizations adopt more efficient and effective performance appraisal systems. It has helped administrators understand the challenges with objectively measuring behavior as well as some of the pitfalls associated with employee and supervisor bias in administering performance appraisals. Questions that have yet to be pursued in the literature include: what leads to performance appraisal system effectiveness and how can performance appraisal system effectiveness be defined? Research shows that the measures and systems we now have are not free from bias (Cleveland & Murphy, 1992; Dewberry, 2001; Scott & Einstein, 2001; and Lam & Schaubroeck, 1999), but, how can organizations understand if their performance appraisal system is effectively producing their desired results? This study is an initial attempt at answering these questions.

Human Resources and Competitive Advantage

Resource based view of the firm suggests that in order for a firm to maintain a competitive advantage the resources that the advantage us built on must be rare, no imitable, no substitutable, and sustainable (Barney, 1991). Barney (1986) suggests that an organization's culture can be a competitive advantage if it meets the above criteria. Because an organization's performance appraisal system can play a key role in determining the type and value of an organization's culture, it is important for a firm to be able to determine what and how there performance appraisal system is influencing the culture in the organization.

Typically the dependent variable in performance appraisal and job design studies is employee satisfaction (Lawler, 1970). But, conceptually and practically satisfaction with a performance appraisal does not covary with performance appraisal effectiveness (Porter & Lawler, 1968). Below I will explore why effectiveness should be the dependent variable in performance appraisal studies rather that employee satisfaction. I will then define and discuss antecedents to performance appraisal effectiveness, proposing hypotheses in the relationships between these variables and performance appraisal effectiveness.

The Dependent Variable: Performance Appraisal Effectiveness

Tznier, et. al., (2000) suggest that organizations generally use performance appraisal for two broad purposes. First performance appraisals are used in administrative decisions such as promotions, salary allocations, and assignments. And second, performance appraisals are used as a tool for employee development processes such as offering feedback, critiquing performance, and setting goals for improvement. With these broad purposes organizations establish their own often unique performance appraisal systems to evaluate and develop their employees. But, it is often difficult for organizations to evaluate whether their performance appraisal system is accomplishing their desired outcomes.

The purpose of the performance appraisal system is set by those in the organization who establish the performance appraisal system itself. As discussed above there is generally some type of evaluation portion of the performance appraisal that allows for the results to discriminate between employees for the purpose of evaluation and reward distribution. There is also a portion of the performance appraisal intended on helping the employee develop him or herself. The mix of development and evaluation as well as the areas that are being evaluated and developed is completely dependent on the intent of the performance appraisal process as established by the individuals who establish and administer the performance appraisal system.

It is clear that in order to get the desired results the organization must develop, evaluate and reward the desired behaviors. In determining the dependent variable in performance appraisal research, it is important to view the performance appraisal system through the intentions of those who established and administer the performance appraisal system. Therefore, in establishing the dependent variable in a study of performance appraisal system effectiveness, the dependent variable should be the desired outcome of the performance appraisal process. The dependent variable should be unique to each performance appraisal system. Examples of dependent variables include: organizational/employee goal alignment, employee motivation, performance assessment, rewarding top performers, and developing employees in stated areas.

Regardless of the number or mixture of desired outcomes, it is important to recognize that the dependent variable will vary between systems and between organizations. But in each case, the dependent variable should be the intended result of the performance appraisal system as outlined by those who established and administer the performance appraisal system.

Performance Appraisal Effectiveness

The performance appraisal interview is the crowning event of the performance appraisal system. It is in the performance appraisal interview that the opinions and attitudes toward the performance appraisal are capped. All the performance appraisal system facets (e.g. the instrument, reward structure, ranking system) are typically established prior to the interview and their distribution and assignment is an outcome of decisions completed and recorded during the performance appraisal interview.

In order to capture the effectiveness of the performance appraisal process it is important to look at the performance appraisal interview and those involved. The supervisor and the employee are typically the two individuals involved in the interview (see Lam & Schaubroeck, 1999 for an exception, also excluding the work on the 360 degree feedback). In capturing what leads to a successful performance appraisal interview there are supervisor and employee characteristics that must be taken into consideration. I suggest that there are supervisor and employee cognitive perceptions that will influence the effectiveness of the performance appraisal above and beyond the instrument used or the system facets. Below I will first, describe supervisor perceptions that will have an impact on the performance appraisal effectiveness and second, describe those employee perceptions that will influence the effectiveness of the performance appraisal.

The hypotheses outlined below have two assumptions. First, the characteristics described will affect the performance appraisal effectiveness above and beyond any instrument or system facet effects. And second the dependent variable is outlined by the organization itself and is held constant between performance appraisal interviews. This is critical as any change in the performance appraisal instrument or the purpose of the appraisal (the dependent variable) will also affect the strength of the relationships described below.

Hypotheses

Vroom (1964) in his fundamental book "Work and Motivation" describes an expectancy theory of motivation. He defines motivation as "a process governing choices made by persons of lower organisms among alternative forms of voluntary activity" (p.6). He describes motivation as an outcome of valence, instrumentality, and expectancy. Valence is the "affective orientations toward particular outcomes" (p.15), instrumentality is the link between an outcome of the action performed and the outcomes that stem from the outcome attained by performing the action. Expectancy is the "momentary belief concerning the likelihood that a particular act will be followed by a particular outcome" (p.17). Described further this idea is that if a person desires a given outcome (valence) they will have high motivation to work toward that outcome if the outcome is associated with other desired outcomes they want (instrumentation) and if they also perceive that their efforts are likely to bring about the initial outcome (expectancy).

Since its introduction, Vroom's (1964) expectancy theory has been applied to many situations including assessing student motivation (Geiger, et al 1998), productivity loss in groups (Sheppard, 1993) leadership (Isaac, et al. 2001), and job satisfaction (Darboe, 2000). It has been extended into areas as diverse as managerial ethics (Fudge, R.S. & Schlacter, J.L. 1999), and personality impression cues of athletic performance (Soloman, G.B., 2001). Vroom's original (1964) expectancy theory is still regularly used to explain motivation in work settings and has been strengthened through 30 years of empirical testing both in within-person and between person research designs (Mitchell, 1974, Van Earde & Thierry 1996).

Expectancy theory suggests that the motivation behind a supervisor accurately and effectively completing the performance appraisal process with a given employee is dependent on the degree of the supervisor perceives that effort put into the performance appraisal process will result in an accurate performance appraisal rating (expectancy), the degree of the supervisor's perception that an accurate performance appraisal rating will produce performance appraisal effectiveness (Instrumentation), and the value that the supervisor places on an effective performance appraisal (valence). These three supervisor perceptions, valence, instrumentation, and expectancy, are discussed below.

Valence

Expectancy theory assumes that individuals desire some outcomes over others and that individuals are able to choose their actions. It is a strong departure from behaviorism and hedonism (Higgins, 1997; Vroom, 1964) because it assumes that individuals reflect and select actions not because they are avoiding pain and seeking pleasure, but because they desire different outcomes and make rational choice on the best methods to achieve those outcomes. In a performance appraisal setting, a supervisor must make a cognitive decision on how accurately he or she will complete the performance appraisal process as outlined in the organizations performance appraisal program. The basis for this decision is the level of importance that the supervisor views in the performance appraisal. If the supervisor views the performance appraisal as extremely important (high valence) it is likely that the supervisor will put forth great effort to complete the performance appraisal accurately. If the supervisor does not value the performance appraisal (low valence) he or she will likely not put forth much effort in completing the performance appraisal accurately.

Hypothesis 1: the level of importance a supervisor views in the performance appraisal process will be positively related to the supervisor putting forth effort to perform the performance appraisal accurately.

In addition to the supervisor's perception of the importance of the performance appraisal, the justice the supervisor views in the organizations performance appraisal system will also affect the effort the supervisor puts into competing the performance appraisal accurately.

Research in organizational justice has been a subject of scholars of organizational science for some time and has increased in recent years (Cropanzano & Greenberg 1997). Cropanzano & Greenberg (1997) review much of the theoretical and empirical work on the organizational justice and identify two areas of justice research. First, distributive justice is the idea that the rewards in the organization are spread throughout the organization with justice. Rewards, raises, promotions are all factors that can be perceived by employees as having been distributed with or without justice. Second, procedural justice is the concept of justice in the processes used in the organization. Distributive justice deals with the 'ends' of a reward system while procedural justice deals with the 'means' (Cropanzano & Greenberg, 1997). These theories have been tested in many situations including groups (Tyler, 1989), during pay cuts in organizations (Greenberg, 1990), and in retaliatory situations in the workplace (Skarlicki & Folger, 1997).

Folger and Cropanzano (1998) apply justice theory to the performance evaluation process. They suggest that academics believe that a 'test' metaphor best describes the process of performance appraisal, but, in reality a political metaphor is what happens in practice. Rather than use performance appraisal as an instrument, organizations use it politically to get to their desired ends. Folger and Cropanzano suggest a trial metaphor is the middle ground between the ideal and what happens in practice. Managers should use the balance of evidence in performance appraisals to come to conclusions. It is suggested that this trial metaphor will produce the higher perception of justice than is now observed in many performance appraisal settings.

If a supervisor believes that there is justice in an organization's performance appraisal system, it is likely that the supervisor will take the evaluation seriously and put effort into completing the performance appraisal accurately. Here it is suggested that a violation of procedural or distributive justice will each have an impact on the supervisor's perception of justice in the performance appraisal system. If a supervisor feels that there is a violation of procedural justice it is likely that the supervisor will not put forth the effort to perform the performance appraisal accurately. Likewise, if a supervisor does not feel that there is distributive justice based on the results of the performance appraisal, it is likely that the supervisor will not put much effort into completing the performance appraisal accurately. For this reason the overall view of justice in the performance appraisal system will affect the supervisor's effort put forth toward completing the performance appraisal accurately.

Hypothesis 2: A supervisor's perception of justice in the performance appraisal process will positively correlated with a supervisor accurately completing the performance appraisal process.

Instrumentation

Instrumentation is the idea that the direct results of an individual's actions are linked to other desired results toward that the individual has a degree a valence (Vroom, 1964). As the supervisor in a performance evaluation setting decides the level of effort that he or she will put into completing a performance appraisal accurately, they also must take into account the link between performance appraisal accuracy and the desired results of the performance appraisal. This link between performance appraisal accuracy and performance appraisal effectiveness is highly dependent on the performance appraisal system in the organization. Clearly different appraisal tools and systems will produce different results (Tziner, et al., 1993, Lam & Schaubroeck, 1999; Tziner, et al. 2000). But, accuracy in completing the performance appraisal instrument itself (whatever the desired result) is expected to produce a more effective performance appraisal than not completing the performance appraisal process accurately.

Hypothesis 3: Accurately completing the performance appraisal process will be positively related to performance appraisal effectiveness.

The supervisor's perception of the link between performance appraisal accuracy and performance appraisal effectiveness is critical. If a supervisor believes that the performance appraisal process itself is important and that it is just for the employee, it is hypothesized that the supervisor will put forth effort to complete the performance appraisal accurately (hypotheses 1 & 2). Also, if an accurate performance appraisal positively relates to an effective performance appraisal, (hypothesis 3), it is likely that the supervisor will put forth effort to complete the performance appraisal accurately. But, if the supervisor believes that there is justice and importance in the performance appraisal process, but believes that an accurate performance appraisal does not positively relate to an effective performance appraisal. It is likely that the supervisor will not put forth the effort to complete the performance appraisal accurately. Therefore it is hypothesized that performance appraisal accuracy will mediate the relationship between performance the supervisor's perception of importance in the performance appraisal process and performance appraisal accuracy. Additionally performance appraisal accuracy will mediate the relationship between the supervisor's perception of justice in the performance appraisal process and performance appraisal effectiveness.

Hypotheses 4: Performance appraisal accuracy will mediate the relationship between the supervisor's perception of the importance of the performance appraisal and the supervisor's accuracy in completing the performance appraisal process.

Hypotheses 4a: Performance appraisal accuracy will mediate the relationship between the supervisor's perception of justice in the performance appraisal process and the supervisor effort in completing the performance appraisal process.

Supervisor Summary

The discussion to this point suggests that as a supervisor enters a performance appraisal interview, the supervisor brings with him or herself certain motivations that will impact the effectiveness of the performance appraisal process. These include the supervisor's perception of the importance of the performance appraisal, the supervisor's perception of justice in the performance appraisal process, the supervisor's perception of a link between performance appraisal accuracy and performance appraisal effectiveness. A discussion of expectancy theory (Vroom, 1964) hypothesized how these variables are projected to be related to performance appraisal effectiveness as outlined by the organization.

Employee

Like the supervisor, the employee brings certain characteristics to the performance appraisal process. Social learning theory (Bandura, 1977) argues that an individual's behavior is based on a balance between "Organizational Behavior Modification" and traditional motivation theories" (Kreitner & Luthans, 1984). Social learning theory suggests that an individual's behavior is a result of an interaction among situations, persons, and consequence components of the environment. This theory finds the middle ground between extrinsic motivation theories such as behaviorism (Skinner, 1953) and intrinsic motivation theories such as expectancy theory (Vroom, 1964).

Social Learning theory suggests that an employee enters an organization with individual traits and characteristics that may change or adapt depending on the work environment. The employee's motivations, behaviors and the environment all have an impact on how the employee acts. Particular to performance appraisal, individual employees develop attitudes about the performance appraisal process based on their own motivations as well as their work environment. Two learned employee behaviors that will impact the effectiveness of an employee's performance appraisal are the employee's organizational commitment and the justice the employee perceives in the performance appraisal process.

The literature defines organizational commitment in two ways: first as manifestation of organizational commitment behaviors, and second as a cognitive commitment to the organization (Mowday, et al, 1979). Mowday, et al. (1979) state that organizational commitment can be identified in three ways, "(1) a strong belief in and acceptance of the organization's goals and values; (2) a willingness to exert considerable effort on behalf of the organization; and (3) a strong desire to maintain membership in the organization" (p.226).

If an employee cognitively believes that he or she is tied to the organization and meets the three criteria above, it is likely that the employee will have a more positive perception of the performance appraisal process. If the performance appraisal system in an organization intends to produce certain outcomes in employees (organizational commitment, organizational goal alignment, etc) it is likely that employees who have high organizational commitment will accept the performance appraisal system of the organization and fully participate in the performance appraisal process. The employee's level of organizational commitment will therefore positively correlate with the effectiveness of the performance appraisal process.

Hypotheses 5: An employee's level of organizational commitment will positively correlate with the effectiveness of the performance appraisal

An employee's perception of justice in the performance appraisal process will also affect the effectiveness of the performance appraisal process. As discussed in above in the supervisors section, the literature explores justice deeply. Justice is thought to have three categories, procedural, distributive, and interactional justice. In a performance appraisal setting, a lack of justice in one area is predicted to have the same affect as a violation of justice in all areas. If an employee perceives that the system processes are fair, the supervisor's efforts to distribute rewards and punishments based on outcomes of the process, and that the employee is treated fairly, the employee's perception of justice will be high. I suggest that if an employee perceives that there is justice in the performance appraisal system, the performance appraisal will be more effective in achieving the goals of the organization.

Hypotheses 6: An employee's perception of justice in the performance appraisal system will positively correlate with the effectiveness of the performance appraisal.

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Summary

The supervisor and the employee each have perceptions of the organization in that they work. They each have perceptions of the systems that the organization implements to control and manage human performance in the organization. The above model is an attempt to identify some the cognitive characteristics of supervisors and employees that will explain some of the variance in performance appraisal effectiveness within an organization. It is suggested that organizations and researchers think more deeply about measuring the outcomes of their performance management systems.

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