MANAGING PERFORMANCE:

EXECUTIVE SUMMARY AN EXECUTIVE SUMMARY BY ROBERT W. ROGERS PRESIDENT, DDI PAUL BERNTHAL MANAGER, ASSESSMENT DESIGN AUDREY SMITH SENIOR VICE PRES., EXECUTIVE SOLUTIONS DDI EXECUTIVE SUMMARY MANAGING PERFORMANCE: 1 MANAGING PERFORMANCE: BUILDING ACCOUNTABILITY FOR ORGANIZATIONAL SUCCESS STUDY OBJECTIVES This study examines the practices and system qualities associated with performance management. The objectives of this study are to: > Describe the structure of performance management systems. > Benchmark practices associated with planning, tracking, and reviewing performance. > Identify trends in performance management practices.1 > Identify the most common barriers. > Measure employee and manager perceptions of effectiveness. > Identify best practices for system effectiveness. > Establish the relationship between performance management and individual and organizational performance. This report is based on responses from 278 organizational members of DDI s HR Benchmark Group. A subset of these organizations also contributed data from 1,818 employees and 1,814 managers. 1 Bernthal, P.R., Sumlin, R., Davis, P., & Rogers, R. (1997). Performance management practices survey report. Pittsburgh, PA: Development Dimensions International. Rogers, R.W., Miller, L.P., Worklan, J. (1993). Performance management, what s hot what s not. Pittsburgh, PA: Development Dimensions International. A full report providing additional explanations of findings, graphics, and tables is available. Details on how to order the full report appear at the end of this executive summary. GENERAL PROFILE A clear majority of the organizations (91 percent) use a company-sanctioned performance management system. On average, these systems have been in place for about four and a half years (about one year longer than systems in 1997). Organizations are using a consistent performance management system with a higher percentage of their workforces. Most organizations (74 percent) use their performance management system with at least 70 percent of their employees. Although performance management systems tend to be used by most of the workforce, some employees rely on other approaches. The percentage of employees using the same system has increased somewhat in the past five years. In 1997 less than half (46 percent) of organizations used the system with 91 100 percent of their employees. Today, almost two-thirds (61 percent) do. Many organizations (40 percent) intend to make significant changes to their performance management systems in the next two years. Many organizations recognize that they need to make changes in their performance management systems. Today, 40 percent of

2 organizations intend to make significant changes to their system in the next two years. Five years ago, the same percentage of organizations (41 percent) expressed their intent to make changes. Performance reviews are occurring more frequently not just once a year. In 1997, 78 percent of organizations conducted yearly performance reviews. Today, 58 percent have a yearly review, while 41 percent perform reviews more often than once a year. By having more than one performance review each year, employees can better gauge their progress toward goals. They benefit from more frequent feedback, and the review process provides them with a more formalized assessment of their performance. Few organizations (20 percent) use online or software-based performance management systems, but many plan to introduce them. Online or software-based performance management systems are a relatively new development. Few organizations in our sample (20 percent) use these delivery formats, but more than one-third plan to move in that direction. An equal number of organizations are undecided about making the transition. For the majority of e-system users, web-based or online delivery is the preferred approach. In most cases (59 percent), users of web-based systems rely on performance management software that is independent of any other existing system. Most organizations (68 percent) discuss compensation apart from the performance review meeting. Discussing compensation during the performance review might have an impact on the quality and focus of the review. Organizations recognize that performance reviews are much more than just compensation reviews. Most organizations in our sample (68 percent) discuss compensation at some time other than during the performance review meeting. CURRENT AND PAST PRACTICES Respondents used a 6-point scale to rate how frequently their employees used 15 performance management practices. Included in this list were many conventional practices as well as more progressive approaches that reflect the changing role of performance management. Many of these practices were assessed in DDI s past two surveys on performance management (conducted in 1993 and 1997). An examination of the current most frequently used practices and how extensively they were used in the past reveals trends in performance management over time: > Frequency of manager and non-manager training has doubled in the past 10 years. Managers also are being held more accountable for the effectiveness of the performance management system. > Relying on input about performance from outside perspectives (peers, customers, direct reports, etc.) is not common but has increased somewhat. > Managers rely on a balance of subjective (66 percent) and objective (71 percent) data in performance reviews. > Organizations are increasing their use of competencies in performance planning and tracking. > Numbers-based ratings often are combined with summary statements. > Over the past five years, forced rankings have become more common; however, few managers find them to be effective.

3 BEST QUALITIES AND PRACTICES We conducted an analysis to discover which qualities of a performance management system are most likely to predict overall system effectiveness from general qualities to specific practices. We used regression analysis to determine which qualities were the best predictors. Two analyses were conducted one for system qualities and one for specific practices. The most effective performance management systems are characterized by their consistent use throughout the organization, their integration with other systems, senior management involvement, employee involvement, and their links to organizational strategy. The first regression analysis revealed five qualities that uniquely predicted the effectiveness of a performance management system (in order of decreasing impact): 1. Consistency in use of the system across all managers (i.e., everyone uses the system the same way). 2. Integration of performance management with other systems in the organization (e.g., training, selection, compensation). 3. Involvement of senior management in driving the use of the performance management system. 4. Employee involvement in the performance management process. 5. Value of performance management for driving the organization s strategic goals/vision. The most effective performance management practices include development planning, manager accountability, objective data, and competency guidelines. The second regression analysis focused on the specific practices used to plan, monitor, and review employee performance. The analysis revealed the following four practices uniquely predicted the effectiveness of a performance management system (in order of decreasing impact): 1. Development planning 2. Manager/Supervisor accountability 3. Objective data 4. Competency guidelines Interestingly, specific rating methods were not important predictors of overall success. LINKS TO HR SYSTEMS Performance management systems often have close ties with other HR systems. For instance, performance management data can be used to make succession decisions, facilitate career planning, or guide training selection. Ideally, this data can be closely linked to all these systems. By making use of competencies, organizations should be able to improve the quality of these links. We asked respondents to indicate how closely their performance management system linked to the following HR systems: > Succession planning Data used to identify and develop leaders for future openings in the organization. > Pomotion decisions Data used to help make decisions about who should be promoted. > Career planning Data used to identify and plan career paths for employees. > Compensation Data used to determine levels of pay, pay increases, or other compensation.

4 > Training Data used to determine what type of training employees should pursue. > Selection Data from the selection process (strengths, weaknesses) used to help establish an individual s performance plan. We found that most organizations (74 percent) make a strong link between their performance management data and compensation. Also, performance management systems are most effective when they are linked to other HR systems. BARRIERS TO SYSTEM EFFECTIVENESS Every HR system encounters unique barriers that interfere with the system s overall effectiveness. We asked respondents to indicate which of 10 possible barriers were currently affecting their ability to provide a high-quality performance management system. By using a principle components analysis, we were able to identify three classes of barriers: Poor Compliance or Usage (60 percent selected overall) > Difficult to ensure that all managers and employees are using the system correctly. > No measures available to see how well the system is working. > Users are not held accountable for completing reviews. Lack of Value (38 percent selected overall) > Performance management plan has low relationship to employees daily work objectives. > Employees do not find the system useful (i.e., they have little use for the process and data). > Ratings do not reflect actual performance. Lack of System Direction (26 percent selected overall) > Unclear or changing business strategy makes it difficult to set individual goals. > Poor link between performance reviews and compensation. > Lack of clarity for how the system should be used (i.e., system objectives). > The performance management process keeps changing. The respondents cited poor compliance or usage as the greatest barrier to system effectiveness. In addition, some organizations (26 percent) experience problems with determining the role performance management should play and its links to other systems. EMPLOYEE AND MANAGER PERSPECTIVES Although HR is usually responsible for establishing an organization s performance management system, employees and managers are the real users. So, they have a unique perspective on how well the system is working. We asked employees and managers at the participating organizations to provide ratings for the three stages of the performance management process: > Planning Coming to consensus about performance goals and how performance will be tracked. > Performing Ongoing monitoring of performance, providing feedback, coaching, and promoting development. > Reviewing Reviewing performance and assessing progress. Only about half of managers and employees surveyed agree that their organization s performance management system is effective. Also, managers are much more positive

CONTACT INFORMATION HR BENCHMARK GROUP PAUL BERNTHAL, PH.D. DEVELOPMENT DIMENSIONS INTERNATIONAL 1225 WASHINGTON PIKE BRIDGEVILLE, PA 15017 PHONE 412.257.7533 FAX 412.257.3093 E-MAIL HRBENCH@DDIWORLD.COM WWW.DDIWORLD.COM TO ORDER A COMPLETE REPORT, CALL: DDI BOOKS AND PUBLICATIONS AT 1.800.944.7782. ASK FOR PART NUMBER MICABERSR10. WORLD HEADQUARTERS 412.257.0600 about the performance management process compared to employees. However, that might be due to the managers rating their own behaviors. Our findings also show that employees and managers are most satisfied with a performance management system when it provides data to improve performance and when its reviews reflect actual performance. IMPACT OF PERFORMANCE MANAGEMENT When a performance management system is successful, employees should be able to attain virtually all their performance goals, which will lead to successful business outcomes. Our results show that the average performance management system improves the ability of employees to achieve their goals by 10 percent. Thus, in an organization of 10,000 employees, this would equate to a benefit of approximately $34 million. And as far as effectiveness goes, the best performance management systems yield up to twice the benefit in performance of the lowest rated systems. Depending on the type of result (i.e., hard results like revenue growth, productivity, and profitability, or soft results like customer and employee satisfaction or retention), organizations with strong performance management systems are 41 51 percent more likely to outperform their competitors. CONCLUSIONS 1. Performance management is becoming more dynamic. 2. Performance reviews need a balance and a diversity of data sources. 3. Integration with strategy and involvement at multiple levels drives effectiveness. 4. Manager accountability is on the rise. 5. Development planning has become a critical component of performance management. 6. Performance management predicts employee and business success. E-MAIL INFO@DDIWORLD.COM WWW.DDIWORLD.COM/LOCATIONS EXECUTIVE SUMMARY MANAGING PERFORMANCE: 5 MKTPMGN01-05030MA