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As we recover from the 2007 financial crisis, many continue to ask what caused the crisis, hoping to prevent such events from recurring. The picture is complicated, but observers place some of the blame at the feet of management, including human resource management. One source of trouble seems to have been performance management in the mortgage lending industry. "Many business managers on performance management knowledge still believe that performance management is used only for adjusting salaries and bonuses. In fact, performance management through the performance appraisal and valuation process finds the flaws in the management process to continuously improve and perfect management measures in order to achieve their long-term strategic objectives and enhance employee value" (Innovation and Development of Performance Management Model in Economic Crisis, n.d.).
Employee value, what does this mean anyway? According to Noe, Hollenbeck, Gerhart, and White (2011), authors of Fundamentals of Human Resource Management, "an employee is referred to as human capital: resources of the employer, employees add economic value to the organization" ( Noe et al, 2011, p. 3). "Managers and economists traditionally have seen human resource management as a necessary expense, rather than as a source of value to their organizations. Research has demonstrated that HRM practices can be valuable. Decisions such as whom to hire, what to pay, what training to offer, and how to evaluate employee performance directly affect employees' motivation and ability to provide goods and services that customers value. Companies can increase their competitiveness; by investing in new technology, promoting quality throughout the organization and by investing in state-of-the-art staffing, training, and compensation practices" (Noe et al, 2011, p. 3). However, there is one vitally important key element in performance management and that is communication; without it, nothing else matters.
"Communication" is the essence and core of performance management. Continuity of management and staff to communicate better, can help employees' complete tasks, and significantly increase job satisfaction. Performance management helps managers and employees identify the problems and seek solutions, which is vital for employee motivation.
In light of the financial crisis, did HR performance management do their job; and were the mortgage and financial institutions considered a business success? The answer depends on how much information the human resource departments knew. I believe that the HR performance management did their job, through hiring, training, and rewarding the best employees who did their job; by helping their companies achieve their goals, and by increasing revenue/profits for shareholders.
Were there any unethical practices taking place at the time? Yes, but as far as the majority of the employees knew, "which was nothing", they did their job; all unethical practices and procedures came from top management, who knew what they were doing was wrong, and did it anyway; regardless, of the consequences that would eventually bring down the company, and the innocent employees as well. The big question is, did HRM know?
Did these ethical/unethical practices make mortgage companies more vulnerable after the real estate bubble burst; did it add to the financial crisis? During the financial crisis, this can only be determined as a business and ethical failure. "During the economic crisis, leaders relied on classic business improvement levers such as cost-cutting and setting aggressive sales goals/targets. 'However, in order to deliver growth, performance management needed to be more strategic and consider the organization's culture and how this would help or possibly hindered their business performance" (Group, n.d.). Yet, research has found that ninety per cent of these firms failed to align performance management with their strategy and culture" (Innovation and Development of Performance Management Model in Economic Crisis, n.d.). One force behind the financial panic that accompanied the bursting of the real estate bubble in 2008 was the trading of risky mortgages that were treated as relatively low-risk investments. Why would otherwise prudent banking and insurance executives do something so foolish? One explanation is that they had financial incentives to do so: performance standards and bonuses that rewarded them for taking chances. Another problem comes from cultures that glorify individuals who bring in lots of business. That might sound like a good thing and in good times, it may well be, but a culture that doesn't glorify prudent decisions, that looks out for the entire company's long-term interests is likely to fall victim to carelessness and excessive risk at some point. "A company may even find that some individuals engage in cheating or questionable activities to boost their star status. Then the company sacrifices its long-term reputation for the glory of a few individuals" " (Noe et al, 2011, p. 16). HRM decisions should be ethical; however, evidence suggests that is not always what happens. "Many ethical issues in the workplace involved human resource management. Some people believe there are lapses related to compensation and other HR policies" (Noe et al, 2011, p. 15).
"Whenever people's actions affect one another, ethical issues arise, and business decisions are no exception. "Ethics refers to fundamental principles of right and wrong and ethical behavior is consistent with those principles" " (Noe et al, 2011, p. 15). For example, "successful companies act according to four principles. First, in their relationships with customers, vendors, and clients, ethical and successful companies emphasize mutual benefits. Second, employees assume responsibility for the actions of the company. Third, such companies have a sense of purpose or vision that employee's value and use in their day-to-day work. Finally, they emphasize fairness; that is, another person's interests, counts as much as their own" (Noe et al, 2011, p. 17).
"Performance management systems are needed by HRM's to ensure that legal requirements are being met; such as, avoiding discrimination, and meeting ethical standards" (Noe et al, 2011, p. 248). "Performance measures should:
Fit with the organization's strategy by supporting its goals and culture.
Performance measures should be valid, so they measure all the relevant aspects of performance and not irrelevant aspects of performance.
Performance measures need to specify how employees can meet company expectations" (Noe et al, 2011, p. 250).