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Fundamentals of a Performance Management System and How It Is Linked To Reward Report

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Executive Summary

The report entails analysis of the purposes which motivate firms to incorporate the concept of performance management system in their operation. This is achieved through analysis of NMX supermarket which is a small and medium enterprise based in London, UK.

The two main purposes considered in the report relate to organizational development and improvement of the decision making process. The two purposes are aimed at improving the organization’s performance. In order to achieve this, the report evaluates the core components of a performance management system.

The core components considered relate to performance standards, performance measures, reporting progress, quality improvement process and compensation and reward. The significance of these components in performance management system is illustrated. In addition, the report also includes a comprehensive analysis of the relationship between motivation and performance. As a result, the report illustrates the importance of motivation in improving employee performance.

Considering the fact that rewards are important in motivating employees, the report analyzes the concept of total reward system. The components considered relate to the relational and transactional rewards. Examples of transactional rewards considered include pay and benefits. On the other hand, relational components include work experience and work environment. Finally, a conclusion and recommendations are given.

Introduction

Background to the study

Currently, the concept of performance management system is increasingly being integrated as a new concept in management practices. According to Armstrong (2007, p.37), performance management entails a well developed process which enhances effectiveness and efficiency in managing individuals and teams within an organization.

As a result, the organization is able to attain a high level of performance. It entails a wide range of systematic approaches which are aimed at propelling the firm towards its desired level of performance. An example of performance management practice is employee appraisal which is conducted to evaluate the employees’ performance. The appraisal is designed in such a way to reflect the organization’s goals, values, objectives, responsibilities and core competencies.

In order for organizational performance management to be effective, various resources are necessary in the designing and implementation of the core processes and systems which are fundamental in optimizing performance. Some of these resources include personnel skills, time, knowledge, space and equipments. In addition, performance management system which entails the set of procedures and policies should also be considered.

In an effort to improve employee performance, Small and Medium Enterprises in different economic sectors in the United Kingdom have incorporated performance management systems in their operation. An example such firms is NMX limited which operates within the UK supermarket industry. The firm is based in London and was established in 2000. Over the years it has been in operation, the firm has had a superior performance. One of the factors which have contributed to this is its effectiveness in its management practices.

Aim

The report is aimed at explaining the fundamentals of a performance management system and how it is linked to reward.

Scope

A number of issues are evaluated in the report. The first part entails an analysis of the purposes of performance management system. The second part entails a comprehensive evaluation of the components of performance management system. Evaluation of the relationship between motivation and performance is illustrated in the third section. The components of a total reward system in relation to performance management are analyzed in the fourth part.

Findings

Purpose of performance management system

Pulakos (2009, p.22), asserts that for performance management system to contribute to the firm’s success, the management team must have a well defined purpose. This will limit possible confusion in the firm’s performance management system and hence its inefficiency. According to Pulakos (2009, p. 22), there are two main purposes for implementing performance management system.

One of these entails enhancing a firm’s effectiveness in making decisions. According to Armstrong (2007, p.37), performance management system is vital in supporting various personnel decisions. Some of these decisions relate to employee layoff, promotion and merit pay distribution. This means that the system acts as an evaluation tool.

The other purpose relates to enhancing development in the firm. If a firm’s management team decides to implement multiple purposes, a high degree of care should be given to prevent possible confusion. In their operation, most organizations consider performance as the main purpose for implementing performance management system.

According to Armstrong (2007, p.37), performance management system is aimed at helping a firm’s employees to improve their performance. The resultant effect is an improvement in the level of their productivity and hence the firm’s competitiveness. In its operation, NMX has instituted a comprehensive performance management system. The purpose of the firm’s performance management system is two fold-that is improving performance and enhance decision making.

Decision to implement performance management system resulted from a number of purposes. In its operation, NMX is faced with intense competition from the existing firms and the new entrants. In order to achieve a high competitive edge, the firm’s management team decided to develop and implement a performance management system.

The role of the system is to ensure that the firm’s employees have a clear understanding of their roles. In its operation, NMX is focused at ensuring that its customers achieve a high level of satisfaction. According to Armstrong (2007, p.37), consumers are increasingly becoming quality conscious. Through performance management system, the firm’s employees are able to offer high quality services thus contributing to the firm’s goals.

The firm also integrated performance management system so as to ensure that its employees understand their current performance relative to the expected level. The firm’s management team is able to address areas of performance which do not meet the predetermined expectations. Through the feedback obtained, the firm’s management team is able to plan the necessary action. By understanding their level of performance, employees can be able to determine on areas where they should improve.

In an effort to improve the employee’s performance, NMX has instituted a reward system. The employees reward system such as increase in the level of salary is based on their performance. The firm’s management team has also appreciated the importance of employee development in its operation.

Through its performance management system, the firm’s management team is able to identify skills which it should impart on its employees. Armstrong (2007, p.37), asserts that through the developmental purpose, a firm’s performance management system is utilized as a tool for improving performance.

Armstrong (2007, p.37), is of the opinion that there is a strong correlation between performance management system and the firm’s objectives. This arises from the fact that performance management system is used to determine the rewards to firm’s employees who achieve the firm’s objectives (Shields, 2007, p. 4). According to Vitez (2010, p.1), performance management system integrates outcomes as one of the performance criterion.

In its operation, NMX uses its performance management system to set its expectations from the employees in relation to its objectives. Performance management system aids in the determination of whether the employee’s outputs contribute towards attainment of the firm’s goal. In its operation, the firm has developed comprehensive objectives regarding the volume of output, units of the products to be sold.

Components of a performance management system

The firm’s management team ensured that it developed a comprehensive performance management system. This was achieved through integration of a number of critical components as discussed below.

Performance standards

To ensure that its performance management system is effective as an evaluation tool, the firm’s management team considered formulating performance standards. This was achieved through development of job descriptions for the various jobs in the firm. Some of the standards entailed a comprehensive description of various categories of performance. These include.

  • Below average performance
  • Average performance
  • Above average performance

The job descriptions were developed in such a way that they integrated the firm’s goals and objectives. To ensure that the firm attains its goals through the performance management system, NMX communicated the set performance expectations to all its employees in the job description. To ensure effectiveness of the system, the firm’s management team ensures that there is an ongoing performance dialogue. In addition, annual performance appraisals are conducted to determine whether the set performance standards are adhered to.

Performance Measures

After formulating the performance standards, the firm established performance measures or indicators which would be used to determine the attainment of the expectations. According to Armstrong (2007, p.37), it is important to ensure that the performance measures or indicators established reflect the firm’s goals. In addition, the indicators set should be quantifiable. In order to be effective, the firm’s job description integrated the expected targets values in relation to each job.

To ensure that these targets are attained, the firm’s management team established various indicators. One of the target values that the firm has integrated in its performance measurement relates to the amount of revenue. Decision to incorporate revenue as in its performance measurement arose from the fact that the firm is aimed at attaining its profit maximization objective. In addition, NMX is focused at becoming the most appropriate employer. To determine this, the firm has established the turnover rate as its key indicator.

Considering the fact that firm is aimed at improving its performance, NMX has also incorporated non-tangible measures such as those geared towards understanding the employees’ behavior. However, it is important to establish comprehensive guidelines so as to eliminate the element of biasness and subjectivity in the evaluation process.

Reporting of Progress

The third component of performance management system entails reporting the progress. All the data obtained should be analyzed and documented. In addition, a feedback system should be implemented. This will ensure that the firm’s employees access information in time.

Through effective feedback, it will be possible for the employees to gain understanding regarding their performance. For example, the employees can be able to identify areas which they need to improve. The reporting cycle should be regular. NMX conducts and communicates findings of employee review every six months.

Quality improvement process

The data obtained should be used in making the decision aimed at improving the firm’s performance policies. Alternatively, the data can be used in developing a program aimed at improving performance. However, all the improvements should be inline with the firm’s performance standards.

Compensation and rewards

Compensation and rewards should also be incorporated in the performance management system. According to Armstrong (2007, p.37), rewards play a significant role in improving employee’s morale and loyalty thus enhancing their performance.

An evaluation of the relationship between motivation and performance

According to Green (2004, p.1), managers of firms operating in diverse economic sectors are faced with numerous challenges due to existence of differences amongst the firm’s employees. In order to improve their performance, it is vital for firm’s management team to consider employee motivation. There is a direct relationship between performance and motivation. According to Green(2004, p.1), performance is a function of ability, motivation and opportunity.

Green (2004, p.1) defines motivation as an internal force or desire which drives an individual towards attainment of a particular goal or task. Alternatively, motivation can be defined as increase in an increment in employee level of satisfaction and hence his or her motivation. In the process of executing their duties, employees have their own goals that they would like to accomplish. Therefore, it is vital for firm’s management team to gain an understanding of what motivates the employees.

According to Fredrick Hertzberg and Abraham H. Maslow theories of motivation, employees are motivated to execute various tasks if their wants are addressed or are offered something they consider to be satisfying. The resultant effect is an improvement in their performance.

Maslow’s theory of motivation stipulates that there is hierarchy of needs which employees desire to achieve (Grote, 2006, para. 5). Some of these needs relate to psychological, social, security need, self-actualization and self esteem. If the employees develops a perception that some of his or her wants are being compromised, his or her level of motivation will decline and hence the productivity. Upon identifying any motivational issue, the firm’s management team should address it so as to prevent the employee from losing focus.

In its operation, NMX has developed a strong relationship with its employees. As a result, the management team is able to identify and access facts related to various motivational problems such as those arising from psychological challenges. In addition, the firm’s management team observes the employees as they undertake their tasks.

Some of the issues evaluated relate to identifying whether the employees outcomes are inline with the laid down standards. In addition, an evaluation of employees past appraisal is conducted so as to establish whether it is a new trend being established. As a result, an action plan to solve such problems is developed.

Performance management system also plays a significant role in motivating employees. This arises from the fact that it ensures that there is an effective and consistent feedback. This provides an opportunity for a firm’s employees to improve their performance through motivation.

Employee’s performance can also be enhanced through creation of an effective working environment. One of the ways through which this can be attained is by creation of a suitable social environment.

According to findings of Hawthorne Studies conducted by Elton Mayo on working environment, it was revealed that creation of an effective working environment can result into improvement in employee performance. According to Honeycutt, Antonis and Simintras (2003, p. 173), motivation is directly related to job satisfaction which entails various elements such as work environment.

Satisfied employees are motivated to work harder and hence their performance is relatively high. In its operation, NMX has incorporated the concept of team dynamics. This has culminated into creation of a good relationship between the firm’s employees. The resultant effect is that their motivation level is improved and hence their productivity. In summation, motivation is a prerequisite for high performance.

Total reward system

Thompson (2002, p. 9), defines total reward system as a comprehensive approach to rewarded employees in such a way that their level of satisfaction arising from work relationship is optimized. In the total reward system, the two categories of reward which include transactional reward and relational rewards are integrated.

Transactional rewards entail tangible rewards such as pay and benefits. On the other hand, relational rewards relate to intangible rewards such as work experience and employee development. As an approach of performance management, total reward system is considered to be holistic in nature. This arises from the fact that the employees’ reward is based on diverse mechanisms which can improve the employee’s level of satisfaction in their work.

According to Ingram (2010, para. 1), firms in different economic sectors are integrating total reward system in their operation. This has resulted from an increment in the degree of rivalry amongst firms in the same industry. In addition, total reward system is being integrated in firm’s effort to be competitive with regard to career opportunity. This arises from the fact that total reward system enables firms to attract skilled human capital and reduce employee turnover.

In its operation, NMX has incorporated the concept of total reward system in its performance management practices. The decision was made in an effort to improve employee performance through ensuring a high level of satisfaction amongst the employees.

To ensure a high level of employee motivation, the firm’s management team integrates both financial and non-financial methods of motivation.

Salary and benefits

According to Armstrong (2007, p.34), salaries and benefits are a form of transactional rewards. These entail various forms of pay such as base pay, contingent pay, shares, profit sharing, cash bonuses and long term incentives. For example, cash bonuses should be given to employees after completion of a particular event. This is one of the ways through which firms can reinforce its reward system (Armstrong, 2007, p. 38).

On the other hand, benefits entail pension, health care, flexibility, and holidays. The management team of NMX has developed an attractive salary package for all its employees. Remuneration of the firm’s employees in form of salaries is based on competitive and flexible options. The firm has also integrated a health plan which is designed in line with the employees health needs. Decision of not to standardize the health plan arose from appreciation of the fact that individuals and their families have got diverse health needs.

Work experience

Through its total reward system, the firm’s management team is committed at improving the employees’ performance through various ways related work experience. For example, the firm acknowledges, appreciates and recognizes employees who have superior performance. According to Thompson (2002, p.9), this contributes towards establishment of a strong bond between the employees and the organization.

Through recognition, the employees’ intrinsic needs are sustained. According to Armstrong (2007, p.35), recognition is one of the ways through which organizations can fulfill employees’ self esteem needs as stipulated by Abraham Maslow. In addition, the firm has also incorporated the concept of work life balance through development of flexible work schedules. The firm also offers its employees an opportunity to develop their skills so as to attain their career goals.

Work environment and learning

According to Armstrong (2007, p.35), conducive working environment plays a significant role in motivating employee performance. As a component to total reward system, work environment entails a wide range of issues. For example, the total reward system should consist of employee voice.

This means that employees should be given an opportunity to contribute in the organization’s decision making process. This arises from the fact that, the decisions implemented in the organization will either directly or indirectly affect the employees’ performance. Establishment of such a relationship is paramount in improving team performance in the organization.

In addition, work environment can be improved through job enlargement. This involves giving the employees challenging tasks to undertake thus giving them an opportunity to learn new skills. In its operation, NMX has incorporated the concept of job rotation amongst the various departments. This gives an opportunity to the firm’s employees to develop new skills. The resultant effect is that the employees are able to understand various concepts related to the firm’s operation.

Total reward system should also include employee training program. According to Armstrong (2007, p.35), this will give the employees an opportunity to develop their careers. Inclusion of training programmes is a powerful motivator in an organization. Armstrong (2007, p.36) asserts that employee training is vital in firms where upward growth is limited.

Conclusion and recommendations

From the analysis, it is evident that performance management system can enable an organization to attain a high competitive advantage. This arises from the fact that the employees are motivated in the process of executing their duties. However, the effectiveness with which a firm’s performance management system contributes towards attainment of its goals and objectives is dependent on the purpose of its implementation.

Before implementing a performance management system, it is important for firm’s management team to have a well defined purpose. Lack of clear definition can result into the firm failing to attain the desired objective. The two main purposes which motivate firms to implement performance management system relate to organizational development and the need to improve the firm’s decision making process.

For performance management system to be well developed, there are a number of key components which should be integrated. These include development of performance standards, instituting performance measures, instituting report of progress, developing compensation and rewards and quality improvement process.

Performance standards should define the various categories of performance. This will help in ranking the employees in relation to their performance. As a result, it will be possible for the management team to identify employees’ performance. The performance measures developed should reflect the firm’s goals and objectives. As a result, it will be possible to determine whether the employee’s performance is contributing towards attainment of the firm’s goals and objectives.

Performance management system should also integrate an effective reporting system. This will ensure that the employees receive feedback regarding their performance. As a result, it will be possible for them to identify areas of performance which they should improve. The data obtained should be used in developing a programme which will contribute towards improvement of employees’ skills.

In an effort to achieve their goals, firms should integrate the concept of employee motivation. This arises from the fact that performance is directly related to motivation. Some of the issues which should be considered relate to employees needs as stipulated by various motivational theories. Creation of a suitable working environment can also contribute towards improvement of employees’ motivation. As a result of job satisfaction, employees can be highly motivated in their work thus improving the level of their performance.

In order to enhance performance, firms should ensure that they implement a total reward system. This will entail inclusion of both relational and transactional forms of reward. Relational rewards such as recognition as a result of work experience will contribute towards establishment of strong bond between the firm and the employees.

In addition, the employees’ level of motivation will be improved due to attainment of their self esteem needs. On the other hand transactional rewards such as salaries and benefits will enable the employees to achieve their financial needs.

Reference List

Armstrong, M., 2007. A handbook of employee reward management and practice. London, UK: Kogan Page Publishers.

Green, T.B., 2004. Performance and motivation strategies for today’s workforce: a guide to expectancy theory application. Westport, CT: Greenwood Publishing.

Grote, D., 2006. Looking to increase employee performance? Motivation is critical. Web. Toronto, Canada: Klebanoff Associates, Inc. Available at: .

Honeycutt, E.D., Ford, J.B. & Simintras, A.C., 2003. Sales management. London: Routlege Publishers.

Ingram, N., 2009. What are the elements of a total reward system? Web. Available at: .

Pulakos, E.D., 2009. Performance management: a new approach for driving business results. New York: Wiley-Blackwell.

Shields, J., 2007. Managing employee performance and reward: concepts, practices, strategies. Cambridge: Cambridge University Press.

Thompson, P., 2002. Total reward. New York: CIPD Publishing.

Vitez, O., 2010. Performance management system components. Web. Available at: .

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