High perfomance human resource initiatives relation to employee development

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Researchers (Huselid, 1995; Becker and Gerhart, 1996) believe that the adoption of high performance human resource initiatives like motivational pay and reward management systems can bring about employee development in terms of skills and knowledge, and positively affect employee retention and organizational performance. With this in mind, theorists (Nankervis and Compton, 2006; Brown et al, 2010) believe that organizations have started utilizing performance and reward management systems to influence employee behavior and attitude and ultimately, performance. Theoretically, performance and reward management has always been treated as a balanced, purposeful and accurate process by researchers. But, the scenario is often different in reality. Performance and reward management systems are strewn with cases of organizational politics and often questioned over fair and equitable distribution of reward. The result of an appraisal process has the potential to affect employee retention and can be the cause of intellectual property drain from the organization. Thus, it is evident that the positive outcomes from a performance appraisal are dependent on its perceived quality. This research studies a performance appraisal of a peculiar kind and tries to evaluate the consequences of such an event on the employee behavior.

On the more academic side, Koys (2001) suggests that the proper use of people management techniques has a direct bearing on the organizational effectiveness. As a result, the study of equity, fairness and justice in organizational processes has gained vital importance in recent years. There has been an increasing emphasis on the study of the perception of equity and fairness in performance and reward management systems. Theorists (Kickul et al, 2005) have given due significance to understanding how the employees react to organizational and managerial decisions, and how these decisions impact the organizational effectiveness in the long run. Academicians (Mowday et al, 1984; Huseman et al, 1987; Mckenna and Beech, 2002) have uncovered that there are crucial dissimilarities in individual notions of fairness, and employees may not prefer to share the same impression of justness. This plays a fundamental role to judge how the employees perceive the outcome of an organizational process and the magnitude by which it affects individuals is very different. Schuler and Jackson (1999) say that when the rewards are tied to the ratings, the consistency and appropriateness of the appraisal process has an even more intense effect on the employees' perception of fairness. Research by Landy et al (1978) confirms that the perception of equity and fairness does affect job satisfaction. Thus, the employee decisions are shaped by these notions.

Along with that, the justice perceptions of employees are also linked to organizational outcomes like commitment and turnover intentions, and act as a criterion for evaluating the effectiveness of performance appraisals (Folger and Konovsky, 1989; Konovsky and Cropanzano, 1991). Greenberg (1986) believes that the judgement of a fair performance evaluation may also be based on the procedures upon which the evaluation is formulated. Statistical analysis by Cohen-Charash and Spector (2001) postulates that employees job performance, counterproductive work behaviour and organizational commitment are all affected by their perceived sense of justice. Thus, these factors shape employee behaviour and this in turn act as critical reasons for employees turnover decisions. There is a general consensus among researchers (Porter and Steers, 1973; Cotton and Tuttle, 1986) over the fact that turnover is costly for organizations. This research considers turnover as it seemed to be an immediate and obvious response of employees to the event that occurred.

There is a definite rationale for setting this research in the software industry. The software industry in India has seen massive boom in the past decade and is one the major reasons for the strong economic performance of India. This growth has been fuelled by hoards of talented graduates, which the software companies relish. But, as this industry in much dependent on the market conditions in USA and European countries, a slight jolt to these economies translates into trouble for this industry. Then, as the recession kicks in, organizations start to cut down on resources and incentives and ultimately, this leads to many complications. This is a tough time for Human Resource personnel as they have to constantly juggle between company interests and employee well-being. This research sprouts from one such incident in a software organization where in the heat of the recession there was a negative variable 360 degree appraisal. Agarwal and Thite (2003) acknowledge the fact that voluntary attrition caused by such events is cause of major concern for organizations. This research studies the consequences of this event on the employee turnover and in the course analyses the importance of perceived equity, fairness and justice in performance and reward management and relationship between motivational complications and brain drain.

Literature Review

In order to lay a theoretical foundation for the research, prominent themes in the literature like equity, fairness, justice, psychological contract and employee turnover, which affect organizational effectiveness, have been discussed. Elaborate analysis of the pros and cons of performance appraisal, which forms the backbone for this research, has also been undertaken.

Performance Appraisals

Performance appraisal system is one of the central functions of human resource management. Several theorist and researchers have given importance to it as it acts as a managerial decision tool and is expected to provide accurate data on employee performance (Bretz et al, 1992; Arvey and Murphy, 1998; Dulebohn and Ferris, 1999). In most organizations, the appraisal is carried out periodically, mostly annually or semi-annually, and is normally recorded on a standardized scale (DeNisi et al, 1984). According to Brinkerhoff and Kanter (1980), performance appraisal serves two purposes - evaluation and development. The evaluation cycle consists of setting performance goals at the start of the appraisal cycle for the employees, monitoring their activities and then rewarding them with higher pay if they are successful at it (Milkovich and Wigdor, 1991). The developmental function is more concerned with the future of the employees and helping them to be more efficient and effective leading to satisfaction for the organization too. It is an amalgam of these two purposes that determines the success of a performance appraisal. In practical settings though, Meyer et al (1965) state that the real objective behind the performance appraisal systems is to justify the recommended monetary action and to act as a motivation for employees to further improve their capabilities based on the feedback by managers and subordinates. Organizations invest considerable amount of time and money into developing effective and accurate reward management systems as status, pay and promotions play a crucial role in quality of work life, job satisfaction and organizational effectiveness (Alexander and Ruderman, 1983). The performance feedback has the potential to influence future performance and significantly impact job and organizational attitudes (Jawahar, 2006). Traditional appraisal systems involve quantitative tools to rate employees and subject employees to numerical or scalar ratings (Murphy and Margulies, 2004). These traditional systems, when combined with fair judgement, provide an adequate measure of employee performance but when the complexity of the job increases, it becomes difficult to account for various parameters in the process.

As a result, an increasing number of organizations are adopting more collaborative appraisal techniques like management-by-objective, work planning and review, 360 degree appraisals, peer reviews etc (Murphy and Margulies, 2004). Of particular interest to this case is the 360 degree appraisal process and the forced ranking system. Waldman et al (1998) say that the main reason why organizations are adopting this kind of performance appraisal is to further develop management and leadership, and the emphasis is on improving the communication to match the expectations of the supervisors and subordinates. Receiving feedback from subordinates and colleagues prompts managers to retrospect their performance and aids their personal development. Similarly, Lepsinger and Lucia (1997) believe that multi-source feedback enriches the process by adding perspectives of direct reports by team members and even customers. DeNisi and Kluger (2000) believe that the multisource feedback provides better evaluation results as raters are in the best position to observe certain types of behaviour and the final score would be an amalgam of data from different sources. Thus, with self-evaluation through a formalized 360 degree feedback, the organizational culture becomes more participatory and reacts better to the changing needs of the customers and clients. Some organizations use 360 degree appraisal system for developmental purpose and to bring about organizational change, while some use it to make administrative decisions also. Forced ranking system requires managers to assess how well an employee performed as compared to others at similar levels. Grote (2005) says that it is an effective method of identifying and rewarding high performers, and removing unproductive employees to increase organizational efficacy.

The outcome of a performance appraisal is dependent on how it has been designed and communicated to the employees. Even though there are numerous advantages of the performance appraisal process, understanding the implications of a low quality appraisal process is also very important. Taylor et al (1995) consider that there are questions posed by the accuracy and validity of performance appraisal systems and that is the reason why they face resistance from employees and managers. Pertaining to 360 degree appraisal systems, the feedback obtained from the appraisal process is considered very vital by the employees. Researchers (Longenecker et at, 1987; Fried and Tiegs, 1995) provide evidence that managers meddle with employee performance ratings for political reasons, or inflate or deflate ratings to gain employee goodwill or to avoid confrontations over low ratings. This is a fairly common practice in various organizations and its precision depends on how much the manager can remember about the particular individual. Forced ranking systems do not consider the market conditions or even the requirements of the clients. As a result a low performer maybe given a bad rating but his importance to the client may not be quantifiable. Baker et al (1988) say that forced ranking systems are the source of conflicts in organizations because employees are dissatisfied when compared to other employees and rated low even if their perception of their own performance is good. Moreover, supervisors often apply different standards to the evaluation of employee performance which leads to inconsistent, unreal and invalid results (Folger et al, 1992). Pfeffer and Sutton (2006) draw upon survey findings of more than 200 human resource respondents and report that forced rankings have consequences like lower productivity, inequality, damage to morale, and mistrust in leadership. Heathfield (2007) believes that no system is perfect, and no system can accurately and reliably measure employee performance and thus, it is necessary for organizations to comprehend the drawbacks of the established processes. Such decisions by the management may lead to job dissatisfaction and impulsive staff turnover. Several researchers (Brown et al, 2010; Jawahar, 2006) have concentrated on the link between the outcomes of the performance appraisal process and various parameters like job satisfaction, commitment and turnover. Research by Poon (2004) decisively proves a relation between employees' perception of their performance appraisal rating and job satisfaction, and turnover in the long run. Based on his analysis, Nickols (2007) enumerates the harmful effects of a low quality performance appraisal. They include reduction in productivity, erosion of performance, emotional anguish, damaging morale and motivation and fostering fear and lack of trust. Result from the investigation done by Dailey and Kirk (1992) makes it clear that ineffective performance and reward management system contribute to the employees' perception of unfairness. Organizational efficiency can be affected by the quality of performance appraisals and hence, it is very crucial for organizations to learn from the experiences of a low quality performance appraisals.

Equity and Fairness

Leventhal (1980) believes that the manner in which organizations deal with resource and reward allocation has a great impact on its effectiveness, and the satisfaction of its employees. So, one of the major reasons for the discontent of performance appraisal feedback can be drawn parallel to the equity theory. Comparison of results is inevitable after a performance appraisal and it leads to dissatisfaction and cognitive dissonance. Equity theory involves a particular interpretation of this cognitive dissonance. Equity theory postulates that persons in social exchange relationships compare with each other the ratios of their inputs into the exchange to their outcomes from the exchange (Adams, 1963). The inputs are what the person brings to the job like skill and education and the outcome can be distinguished as the rewards that he receives like pay rise or status. Simply put, the equity theory is concerned with a group process and an equitable distribution of benefits. After a performance appraisal, employees compare their results with others and their satisfaction is dependent on the perceived appropriateness of their reward as opposed to others. The amount of dissatisfaction among employees fluctuates when they find that the same process has unequally affected everybody. Winstanley and Stuart-Smith (1996) say that it is a part of the performance management ethics to ensure fair and equitable distribution of benefits to limit the adverse impact on individuals. Goodman and Friedman (1971) quote that if an inequality exists, then the individuals try to make an effort to bring back the equilibrium as that has an effect on their psychological satisfaction and performance. This can be effectively displayed by Vroom's expectancy theory. It states that the force instigating a person to perform certain task is driven by the person's expectancy that his act would be followed by a particular outcome and the attractiveness of that outcome (Hackman and Porter, 1968). This force that drives a person to accomplish a goal is motivation and it is a function of his actions and what he expects the outcome should be (Lawler and Suttle, 1973). Thus, the level of motivation is also influenced by the equity theory.

Distributive and Procedural Justice

Equity theory also encompasses the notion of distributive justice where the employees involved in the process demand a fair and just distribution of reward (Huppertz et al, 1978). Weaver and Trevino (2001) state that the perception of justice among the employees is highly oriented to the social aspect of human interaction and depends upon the way it has been communicated. They further quote that organizational justice research identifies two key dimensions that distinguish between the aspects of fair processes and fair outcomes in terms of procedural and distributive justice respectively. Many theorists (Jacobs et al, 1980; Erdogan, 2002) have identified fairness of performance appraisals as an important criterion to judge their effectiveness and usefulness for organizations. Distributive justice refers to the perceived fairness in the distribution of rewards and procedural justice deals with the fairness of the processes involved in determining the criteria for reward. Dailey and Kirk (1992) say that distributive justice addresses the employees' concern about the managerial decisions relative to the distribution of rewards such as pay, promotion etc. On the other hand, Cropanzano and Folger (1991) quote that procedural justice concentrates on how these decisions are made because the process of making organizational decision is just as important to the employees as their perception of organizational fairness. These two types of justice play distinct roles in influencing the perception about organizational fairness. Landy et al (1978) carried out statistical research on procedural justice and found out that the way in which performance appraisals are executed affects the attitude and behavior of the people being evaluated. In a performance and reward management system, the perception of justice changes based on the comparisons that employees make with others who may or may not be at the same hierarchical level. McFarlin and Sweeney (1992), based on their analysis, summarize that procedural justice is an important predictor of organizational outcomes like commitment and trust while distributive justice influences personal outcomes like fairness in reward management and job satisfaction. Quantitative research by Alexander and Ruderman (1983) demonstrated that procedural fairness is an important criterion in relationships between perceived fairness and organizational outcomes, and that procedural fairness and distributive fairness distinction can be useful in studying the role of justice, fairness and equity in organizational behavior.

Psychological Contract

In the matters pertaining to the individual, psychological contract refers to the employees' perception of what they owe to their employers and what the employers expect from them (Robinson, 1996). For example, the employee may think that the organization has settled upon certain promises like ensuring job security and growth opportunities in lieu of commitment and hard work. The notion of psychological contract is an entirely subjective matter, partly because of the employee's perceptual and cognitive confines and also because it is related to his sources of information which may or may not be authentic, and this may lead to psychological contract violation (Shore and Tetrick, 1994). Researchers (Rousseau, 1989; Robinson and Morrison, 2000) have recognized two different causes of psychological contract violation: reneging and incongruence. Reneging occurs when an organization knowingly fails to meet its obligations, either on purpose or due to unforeseen circumstances (Pavlou and Gefen, 2005). Incongruence occurs when the organization and the employees have different understanding about the same obligation. Robinson and Morrison (2000) say that either reneging or incongruence may lead to the perception of a contract violation by creating a rift between an employee's understand of what was promised and his perception of what was actually experienced.

Breach of the psychological contract is associated to various negative outcomes like reduced commitment and satisfaction. It is also directly related to the intention to quit and thus, voluntary turnover. Turnley and Feldman (1999), from their research, conclude that psychological contract breach results in increased levels of exit, voice and neglect behavior and decreased level of loyalty towards the organization. Rousseau (1989) believes that the psychological contract breach is a subjective experience referring to an employee's perception that the employer has failed to fulfill the promised obligations adequately. So, for employees who feel that they have been unfairly treated in an appraisal, the breach has occurred and this affects their behavior and attitude, regardless of whether the belief is valid or not. An important construct that contributes to the perception of contract breach is employee vigilance, i.e. the extent to which an employee monitors the organizations efforts to meet the terms in his psychological contract (Robinson and Morrison, 2000). Vigilant employees are on the constant lookout for violation of the psychological contract. There are several employees who patiently wait for consecutive appraisals which they think would meet their expectations, and when this does not happen they feel discriminated. The more the employees feel violated, more would be the decrease in trust. This leads to a cascading effect as trust is based on past experiences and the employees perceive that breach of psychological contract will occur in the future as well. A performance and reward management is one area where employees' perceptions stand in strong contrast and where disagreements are pronounced (Lester et al, 2002). Hence, this study will provide the organizations with valuable know-how about the way in which employees' perspective about their evaluation affects the intensity of their performance, which in turn may lead to turnover and organizational change.

Employee Turnover

Delving deeper into the reasons and consequences of psychological contract breach, the lack of equity and justice in performance and reward management systems is directly related to job dissatisfaction (Dittrich and Carrell, 1979). It has been well documented that low job satisfaction is analogous to low commitment and high turnover rate (Farrell, 1983; Mobley et al, 1978). As a result, turnover research has been a consistent theme in human resource and organizational behavior research for a very long time (Campion, 1991). A plethora of researchers (Zedeck and Mosier, 1990; Porter and Steers, 1973; Mobley, 1977) have devoted significant amount of time to investigate employee turnover because of its importance for managers and individuals. Singh (2003) established that performance appraisal in the organization is significantly correlated to employee turnover. The effects of employee turnover are twofold - it is a matter of great concern for the organization as well as the individuals because of its wide spread consequences. Thus, the theoretical rationale for examining the effects of turnover is crucial to both the individual and the organizations. Turnover may induce several complications for individuals leaving the job (Holtom et al, 2008) and involves giving up known routines and interpersonal connections at the previous place of work which can be very stressful (Boswell et al, 2005). There are several reasons that may force employees to take such a drastic step. Concentrating on voluntary turnover, empirical research by Parasuraman (1982) indicates that the lack of promotion opportunities leads employees to consider quitting. It is also important to acknowledge the role of shocks in turnover decisions. There can be positive as well as negative shocks. A negative shock is classified as a distinguishable event that jolts the employees towards deliberate judgements about their jobs and might force them to voluntarily quit their job (Lee and Mitchell, 1994). Such shocks can include a variable negative 360 degree appraisal which can influence employee turnover (Morrell et al, 2004). Holtom et al (2005) propose the 'Unfolding Model' to study the effects of shocks on employees as well as organizations. They conceptualize several steps and reasons which moderate employees' response to unpleasant events. Their research further strengthens the notion that job dissatisfaction is the main antecedent to employee turnover and thus, managers have to closely monitor job satisfaction regularly.

It is generally viewed that employee turnover and organizational effectiveness are negatively related. The turnover also impacts the organization and has detrimental effects on employee morale, culture and the organizational memory (Dess and Shaw, 2001). Widespread discontent leads to corrupting the company environment. High turnover means an influx of inexperienced staff and this might translate to a negative effect on the business outcome (Koys, 2001). Moreover, the costs of turnover are difficult to estimate and are hidden, buried in activities like recruitment, selection, induction, training, transfer, relocation and quality related overheads (Cheng and Brown, 1998; Hom and Kinicki, 2001). The retention of the right employees has a direct relation to the quality of work and in turn determines the health of the client relationship. Thus, employee turnover has an important effect on organizational productivity (Huselid, 1995). Similarly, analysis by Glebbeek and Bax (2004) showed that turnover can have a negative effect on organizational performance. Thus, it is important for organizations to study the role of shocks in turnover and organizational effectiveness. This research will try to evaluate the linkage between a distressful event and voluntary turnover among employees, for whom the company image was disfigured as a consequence of that event.

Indian Software Industry

To get the so far discussed topics into perspective, it is essential to understand the context of the research and the reason why it is being undertaken in the given setting. Researchers (Bhatnagar and Madon, 1997; Athreye, 2005) point out that the Indian software industry has seen phenomenal success when taken into account growth in sales, employment and, and boosted the Indian economy more than any other industrial sector in the country. India has become one of the largest exporters of software and related services and this can be attributed to continuous inflow of proficient English speaking skilled graduates, competitive billing and good quality work along with backing by the government (NASSCOM, 2006). This resulted in a boom in the job market with huge manpower requirement and availability of choice for trained individuals. But this growth was not without its share of complications. The liberalization of the Indian economy put pressure on the HR department that resulted in changing the employment relationship in the IT sector (Budhwar et al, 2006). Dayasindhu (2002) notices that the spurt in the market has left software industry with a dynamic work culture which is characterized by high employee turnover rates, low commitment, and has difficulty in finding the right talent. Despite getting paid substantially above the Indian industry standard, the growth in this industry has seen high employee turnover and retention of talented professionals is a major problem (Scholarios and Marks, 2004). Although compensation is not the ultimate motivator in this industry, the rising employee turnover rate means that the Human Resource Personnel have to be constantly on their toes to devise appropriate pay packages for the employees. This also means that the employees are more sensitive to performance evaluations and reward distributions. The employee turnover rate in this industry has been around 25 to 60 percent (Nagadevara et al, 2008) which is substantially higher than other industries. This makes it essential to delve deeper and research some of the events that lead to employee dissatisfaction and high turnover and how in turn it affects an organization over a period of time.

Significance of this Research

Though research on effect of performance and reward management systems in IT companies has been undertaken earlier (Singh, 2003; Paul and Anantharaman, 2003), this research concentrates on a particularly uncommon event and analyses negative variable 360 degree appraisals in a software company. Theorists have not specifically touched upon this topic and no significant literature points in this direction. Previous studies have deciphered links between employee turnover and unfair distribution of rewards (Dailey and Kirk, 1992), and ungainly processes used to affix distribution of rewards and its effect on job satisfaction and commitment (Moorman et al, 1993). This research goes a step further and analyses the negative 360 degree appraisal in detail. Thus, this research will provide useful insights in the study of negative appraisals and the manner in which they affect the employees' perception of equity, justice and breach of psychological contract. This work would prove useful for Human Resource professionals in the software industry to understand the effect of appraisals, negative appraisals in particular, on employees' psyche and turnover decisions. It will possibly act as a guide for the top management to understand in detail how the employees are affected by the decisions made by the company.