According to Salaman et al (2005) the essence of performance management is establishing a framework in which performance by human resources can be directed, monitored, motivated and refined, and that the links in the cycle can be audited. The principle theoretical foundation of performance management is social psychology, with its consideration of the ways in which people are motivated to perform. The goal-setting theory, established by Locke in 1968 argues that goals pursued by employees can play an important role in motivating superior performance. SHRM involves integrating the wider objectives of the organisation with the behaviour of its employees, so if managers can intervene to establish the organisation's goals, or adapt them for groups or individuals in a fashion that they are seen as worthwhile to the employees, they can harness a source of motivation to perform, and direct it to securing strategic outcomes. Vroom's 1964 expectancy theory hypothesises that it is the anticipated satisfaction of valued goals which causes an individual to adjust their behaviour in a way which is most likely to lead to the attainment of the goals. In practice, if a person sees it as being clear that performing in a certain way will bring about a reward which they value, then the individual is more likely to attempt to perform in that way. There are difficulties in performance management systems as some of the dimensions are either not available from existing management information systems, or may not even be measureable. As an example increasing customer satisfaction is identified as an outcome to be rewarded and encouraged, but no adequate measure exists to report this. Another problem is with quantitative measures and that is with their quality and their arbitrariness. Profitability as an example is often held up as a measure yet accountants argue that profits are highly subject to decisions made by managers on how to treats costs and revenues, and when paper gains should be released onto the profit and loss account.
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All aspects of performance management arouse controversy, especially appraisals and performance-related pay (PRP). Weaknesses in their methodology and the underlying philosophy have been criticised. Employees are frequently dissatisfied with the methods used by performance management systems and managers are frequently reluctant to engage in the process because of its confrontational nature. Some have argued that if commitment exists, there is no requirement for performance management, and its enforcement results in the reluctant participation of an unhappy workforce (Price 2007). Against this view, Pettijohn et al (2001) argue that a positive attitude towards appraisal can be engendered if managers are provided with information designed to increase the benefits of engaging in the evaluation process and more consideration is given to appropriate measurement criteria. These factors are echoed by the Advisory, Conciliation and Arbitration Service (ACAS) who state that employees may welcome the introduction of well designed and implemented appraisal related pay schemes as a fairer means of recognising that more effective performers should receive higher pay, but caution that if not suitably designed and introduced sensibly into an environment where trust is high and there is a readiness to adapt to change, employee relations may suffer (ACAS website 2009).
The various SHRM concepts which affect performance include planning for future needs and attracting talented people who meet the current strategic and operational needs of the organisation, providing a good working environment, encouraging learning and development, sharing knowledge, increasing motivation and enabling meaningful performance management which drives commitment, and offering a reward scheme which values people according to their contribution.
Employees can be demotivated if they are unclear about their responsibilities or performance standards, are uninformed about how well they are doing, or feel that their performance assessments are unfair. In order to ensure avoidance of this, he recommends that performance requirements are couched in terms of difficult but attainable goals, known in some circles as stretch goals. In addition there should be agreement between manager and employee on the goals, and the required steps to be taken in their achievement. Regular, informative and easily understood feedback from manager to employee, together with positive feedback when merited allows for any performance problems when they arise to be addressed and corrective action taken. A key aspect is that manager should be trained in the techniques of performance review and that employees should be fully informed as to how the systems works and for their feedback on this aspect taken into consideration (Armstrong 2008).
Always on Time
Marked to Standard
Gratton (1999) offers three prominent views as to how performance management may be used to regulate performance, through focusing either on behaviour, or on skills, or on outcomes. Monitoring behaviour is largely concerned with articulating operating procedures which are initiated top-down through a centralised framework, with the intention of monitoring employee performance closely, with appraisal used mainly as an auditing tool to correct deviations from expected norms. A less rigid approach is the use of competency frameworks in controlling behaviour. Competencies can specify desirable behaviours and skills for employees, with the criteria for their attainment set by the organisation, and forming an important part of the evaluation process. This type of control allows employers to decentralise control and gives relatively objective criteria for evaluation. While employees do not choose the targets for the required performance, they are given discretion as to how they achieve them. These approaches are sometimes mixed by companies, with elements of each being applied. The problem with such performance management methods is that they tend to be inflexible and not suitable for fast-changing environments.
Beardwell et al (2004) argue that current trends in the management of worker performance are fraught with difficulty in an era where emotional labour and the knowledge worker is central to organisational success in many companies. In addition, there is a rise in insecurity of employment, based on economic uncertainty or from feelings of insecurity among line managers who have been burdened with a range of issues they were not previously required to consider. Reward strategies can be used to identify as performance targets those elements which are critical to the successful attainment of a future vision, and the scorecard method can be used to identify specific instruments or measurements which can be used to set interim targets and therefore individual performance objectives. Recent research by the Work Foundation (2003) indicates that where employers are seeking to promote this type of performance management they will allow their employees to identify their own training needs, run regular team briefings, allow and encourage the development of transferable skills, tie reward to service by offering long-service awards and operate a system of in-house brainstorming sessions or focus groups. The report suggests that employers are acknowledging that performance management implies broader HR policies into the attainment of strategic goals of the organisation and that this objective can be achieved by the development of a strong psychological contract. Beardwell et al (2004) conclude that while HR practitioners have applied themselves to the development of systems of reward which are closely integrated with other organisational aims and reflect the strategic role played by reward in the achievement of these objectives, recent surveys suggest that the employment relationship, specifically the wage/effort or reward element, is still in dispute with neither side securing all their objectives.
Armstrong and Baron (2002) describe a model of the link between SHRM and performance developed by Guest et al (2000a). In essence the model indicates that HR practices influence HR outcomes, which in turn leads to lower absence and labour turnover and increased productivity and quality, and these in turn should lead to an increase in sales and profitability. Armstrong and Baron relate that Huselid (1995) conducted research into the impact of HR practices on company performance by analysing the responses of 968 US companies to a questionnaire. In general, he found that if firms increase their high-performance work practices, there are significant reductions in employee turnover and significant increases in productivity and profits. However, Huselid commented that the impact of high-performance work practices on corporate financial performance is in part due to the influence on employee turnover and productivity, but produced little or no evidence that internal or external fit increase company performance, concluding that the simple adoption of high-performance practices is more important that efforts to ensure that these are internally consistent and aligned to competitive strategy.
McCourt and Eldridge (2003) issue a cautionary note on the adoption of performance management strategy. They state that there is a saying that organisations get the behaviour the organisations reward, and that performance indicators (measurements) need to be handled lightly. Otherwise there is a danger that employees will concentrate on their performance indicators to the exclusion of all else,
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Torrington et al (2008) identifies three distinct models to performance. The best practice approach presupposes that certain HR policies and practices will always result in high performance, and the question is to identify exactly what these are. The contingency or fit approach suggests that different HR policies and practices will be needed to produce high performance in different firms depending on their business strategy and environment. Finally the resource-based view of the firm suggests that neither of these approaches is sufficient, but that every organisation and its employees should be considered as unique and that a set of HR policies and practices that will result in high performance will also be unique to that firm. From this perspective no formula can be applied, and the way people and processes contribute to the organisational performance can only be understood within the context of a particular firm.
Organisational and HR strategies
The fundamental aim of SHRM is to generate strategic capability by ensuring that the organisation has the skilled, committed and well-motivated employees it needs to achieve sustained competitive advantage. Its narrower objective is to provide a sense of direction in an often unstable environment so that the business needs of the organisation and the individual and collective needs of its employees can be met by the development and implementation of coherent and practical HR policies and programmes.
Armstrong and Baron (2002) argue that when considering how to integrate business and HR strategies it should be remembered that business and HR issues influence each other and in turn influence corporate and business unit strategies. In establishing these links, account must be taken of the fact that strategies have additionally to be integrated with changes in the external and internal environments. Fit may exist at one point in time, but when circumstances change, there may no longer be fit. An excessive pursuit of fit with the status quo will inhibit the flexibility of approach essential in turbulent conditions. In some cases the business strategy may not be clearly defined, or may be in an emergent state, making a good vertical fit from the HR strategy difficult. Several issues obstruct the vertical integration or strategic fit between business and HR strategies, including the diversity of strategic processes, levels and styles. This is illustrated by the argument that each business unit should tailor its HRM policy to its own product-market conditions and for its own competitive advantage, irrespective of HRM policies being pursued by the business as a whole. Another obstacle to fit between strategies is the evolutionary nature of business strategy, which tends to be naturally incremental, making it difficult to pin down the HR issues likely to be relevant. A resource-based strategy can provide a strong base for strategic HRM and change is especially important in HRM strategies as they are concerned with the future and in thinking and doing things differently, changing the past and managing change implementation. The implication is that the processes of formulating and implementing HR strategies are mainly about making decisions on what needs to be changed and managing those changes. Bratton and Gold (2001) state that a problem with the resource-based SHRM model stems from its implicit acceptance of a unitary perspective of the post-industrial workplace in which goals are shared and levels of trust are high. They argue that advocates of the resource-based SHRM perspective omit the dynamics of workplace trade unionism in the strategic equation. However, the importance of workers' contribution to the labour process, knowledge and skills, synergy, proactive leadership, encouraging innovation and stimulating learning is a dynamic model of strategy in contrast to the matching approach.
Daft (2006), referring to multinational companies based in the US, relates that to implement strategies on a global scale, multinationals need to adopt a global mindset and be aware of varying implementation issues. Information, control, and reward systems have to fit the values and incentives within the local cultures. The recruitment, training, transfer, promotion, and layoff of international human resources create an array of problems not confronted in North America. As an example, one multinational formed a task force of US employees to review and revise work-force policies in connection with a new strategy. Employees from different levels and functional areas met for months and surveyed all US-based facilities to ensure wide input. The final draft was reviewed and approved by top executives. However, they were surprised when the streamlined work-force manual, which reduces the number of policies from 120 to 10 core ones, was met with resistance and even hostility by the overseas managers. Mangers lack of a global mindset had led them to assume incorrectly that the international units would accept whatever was handed down from US headquarters. This echoes the work of Hofstede (1994) who studied the impact of national culture on organisations where he found wide national differences in values and behaviour in four dimensions:
Individualism versus collectivism
Masculinity versus femininity
Clearly these factors, in particular power distance and to some extent uncertainty avoidance had influence on the negative feedback from a top-down business/SHRM driven strategic initiative.
An important implication of the varying degrees of integration between SHRM intentions and HR practices which do not all have strategic relevance. For example an HR department focussed on a goal of administrative excellence may have little impact on winning new business or market share. While a knowledge-intensive company such as a professional services firm, the recruitment of specific human capital may make or break the company. There are a number of approaches to the notion of alignment between the business strategy and SHRM strategy. The best-fit approach is one which argues that SHRM strategy will be more effective when it is appropriately integrated within its specific organisational and broader environmental context. This model tends to overlook the employees interests as they have to align their interest with that of the business strategy which may present challenges. One model which attempts the matching of employees needs with the business is that of psychological contracting, which takes into account that HR practices cannot merely manipulate employee behaviour to deliver strategic objectives and emphasises the importance of shared expectations between the employee and the employer. The best practice approach argues that particular sets of best practices will lead to performance improvements, and this model is founded on industrial psychology, which has been oriented to the prediction of human performance. Arguably the best-practice models are not appreciative of context, and what works best in one environment may not work well in another. A combination approach of best fit and best practice has led to best-process as a model. According to this approach, it is the process of implementation of HR practices that has strategic value. The focus of this approach is therefore not continually to change current HR practices to fit with the latest list of best practices; nor does it advocate an alignment with business strategy. It sits within an evolving model of strategy and believes that strategically valuable HR practices evolve through participation. The emphasis in this model of more on people management as a process which is owned by everyone in the organisation, as opposed to an HR department which generates and implements HR policies and practices (Swart et al 2005).
Torrington et al (2008) discuss models of the link between business and SHRM strategy. The separation model where no relationship exists and there may not be an HR strategy in an explicit form within the organisation, a situation which still exists in some small firms. The fit model sees employees as key in the implementation of the declared organisational strategy, and SHRM strategy is designed around this. The relationship in the fit model is exemplified by organisations which cascade their business objectives down from the senior management team through functions, through departments, through teams and so on. The dialogue model takes the relationship one step further, as it recognises the need for two-way communication and some debate. What is demanded in the organisation's strategy may not be viewed as feasible and alternative possibilities need to be reviewed. The debate, however, can be limited if top management decrees a particular HR-driven outcome which SHRM feels is the responsibility of line management. In this situation top management's views tend to prevail. The holistic model represents the people of the organisation being recognised as the key to competitive advantage in themselves rather than just a way of implementing organisational strategy. In this case HR strategy becomes critical. This concept has been developed in relation to companies where overall strategy can be interpreted as broader than mere competitive strategy. In this case business strategy can encompass a variety of other strategies including HRM, with the individual parts viewed as pieces of a jigsaw. This suggests mutual development and some form of integration, rather than a slavish response to a predetermined business strategy. The HR-driven model offers a more extreme form, which places human resource strategy in prime position. The argument here is that if people are the key to competitive advantage, there is a need to build on employees strengths. This model is a reflection of a resource-based strategic HRM perspective and sits well with the increasing attention being given to the notion of 'human capital' where it is the collective nature and quality of the people in the organisation which provide the potential for future competitive advantage.
The adoption of models and thinking about SHRM can have influence on the performance of organisations, but this influence is limited and its effectiveness is the source of continuing debate. In knowledge-intensive businesses SHRM clearly has influence on planning, selecting and developing employees to the benefit of the companies, but has lesser effect in other sectors of employment. The influence of combined business and HR strategy implementation of driven top-down may not be effective in multinationals where there are cultural differences.
The links between organisational and business strategies have received much attention and various models have been employed to date, but successful examples in practice are dependent upon circumstances and often struggle with the pace of change of modern business.