Performance Management as Organizational Control: Breaking Free from the Ghost of PM's Past





Performance management (PM) is in a rut. It has remained mostly unchanged for the past 40 years with companies making periodic adjustments when the noise level from employees rises. Tinkering with PM is a favorite organizational pastime for good reason--it doesn’t do what it is designed to do…drive performance. Why do companies remain in this rut? My sense it is equal parts resignation (“it can’t be fixed”), rationalization (“every process has warts”), and apathy (“it’s too hard to change”). Companies have learned to tolerate noise from employees about PM, because, after all, “it’s just HR stuff,” it isn’t critical to business success. This attitude is unfortunate because PM is worth fixing. It touches every employee and manager, and it consumes millions of hours of time. The ratings it produces affect the work lives and careers of every employee and they affect the distribution of an estimated $345B in merit increases and bonuses each year, just in the US.[1] Performance management is a constant headwind for employees and a pebble in the shoe of organizations, depressing the mood of the workforce and dragging down the productivity of the organization.


Stepping back—Why do we have PM?

Our approach to fixing PM reflects what organization development expert Chris Argyris called single-loop learning.[2] When you try something and it fails, you try something else. If a 3-point rating scale doesn’t work, you try a 5-point scale. If your variable pay program isn’t working, you adjust the mix. Real transformation requires what Argyris called double-loop learning. After trying and failing…repeatedly, the problem may be with your assumptions and beliefs about the problem, not with your solutions. In double-loop learning, instead of adjusting the variable pay mix, you ask if you need variable pay at all. Does money motivate? We need double-loop learning to fix PM and this requires stepping back.


The first step to meaningful PM reform is examining why organizations have it in the first place. When you ask this question of organizations and academics, you get a variety of answers (development, direction, alignment, evaluation, rewards, legal defensibility, etc.). Chris Argyris provides helpful wisdom on this subject as well. He asserts that people hold theories or maps in their heads about why they do what they do. Few people are aware the theories they use to take action aren’t the theories they explicitly espouse, and even fewer are actually aware of the maps or theories they do use. [3] Organizations and academics say PM does many things (espoused theory), but PM is primarily about reward distribution (theory in use). Distributing and differentiating rewards is the raison d'être for PM.[4] Propose getting rid of it and people don’t ask, “how will we develop people?”, they ask “how will we pay people?” Performance management is a fundamental part of a company’s pay-for-performance (P4P) philosophy. And I will argue this purpose isn’t the result of deliberate, conscious design, but of decades of institutionalization and neglect. This role for PM is deeply embedded in organizations--it is a given. Consider for example, quotes from two recent, widely read articles on PM:


“Performance is the value of employees’ contributions to the organization over time. And that value needs to be assessed in some way. Decisions about pay and promotions have to be made.”

--Goler, Gale, & Grant, 2016 [5]


“…you really do need some form of a documented administrative evaluation of the year to make any employment decisions, or you treat everyone exactly the same. This is just a basic legalese version of ‘you need something’.”

--McKinsey, 2018 [6]


“Decisions about pay have to be made.” “You need something.” The editors of a respected professional journal recently sent out a call for papers for a special issue devoted to PM. This special issue would contain the most up to date, state-of-the-art thinking on the subject from the best thinkers in the field. In their message to prospective contributors, the editors lamented the noise about companies getting rid of performance ratings or PM entirely, expressing their bias and this same institutionalized theory in use:


“The fact remains that as long as there are individuals performing some kind of work in organizations, there will be a need for some manner of performance management in order to evaluate, compensate, and reward those individuals.”


Facts are facts. The problem with this “theory in use” is it limits our thinking. I find the durability of this PM purpose surprising given the overwhelming evidence that PM has failed to deliver on it.[7] Consider this quote, from the leading voice for the HR profession:


“Despite embracing the concept of pay for performance, a surprisingly large number of employers say their programs aren’t doing what they were designed to do: drive and reward individual performance.”

--SHRM, 2016 [8]


Companies know their PM practices aren’t working, but they don’t know what else to do. Their assumptions and beliefs about PM don’t allow them to see alternatives. The durability of this purpose for PM is even more surprising when you consider the history behind it. A look at this history in light of how organizations have evolved over the past 40 years casts serious doubt on the logic, legitimacy and value of this purpose. If you want to change something, you need to understand why it is the way it is.


The Rise of Pay for Performance and the Marriage of PM and Rewards

There has always been widespread support for the principles behind pay for performance (P4P). Stimulus-response psychology and classical economics formed the foundation of early evaluation and reward practices. They were the basis for Fredrick Taylor’s Scientific Management approach for example, the precursor to modern management and reward practices. But two developments in the late 1980’s and early 1990’s would dramatically alter the nature of rewards and PM.


The first was the emergence of agency theory in the late 1970’s which dramatically increased the focus on incentives. Agency theory is a broad economic theory originally focused on corporate governance.[9] The theory holds that corporate directors and senior executives are “agents” of the company’s shareholders, and boards need to align these agent’s interests with those of the owners’ (the “principals”), primarily using incentives tied to shareholder wealth and stock price (mostly in the form of stock options). Agency theory reflects classical economic assumptions--agents are self-interested, and their interests don’t align with those of principals, so incentives are needed to “align them.” Initial enthusiasm for agency theory was bolstered by research showing there was little relationship between CEO pay and company performance.[10] Activist shareholders immediately jumped on board, seeing incentives as a tool to limit CEO pay and hold them accountable by connecting their pay to organizational performance. Despite the fact that few practitioners in the PM or rewards space have heard of agency theory, it is difficult to overstate the depth and breadth of influence this one theory has had on management and organizational practices.[11]


A second set of developments dramatically increased the popularity of incentives. In 1993, US tax laws eliminated the deductibility of executive compensation in excess of one million dollars, unless it qualified as “performance-based” pay.[12] The use of performance-based incentives (in the form of stock options) exploded after this legislation was enacted. The percentage of executive compensation contingent on stock price increased from 10% in the 1990s to 70% by 2003.[13] Today, variable pay makes up nearly 90% of executive pay in many organizations.[14] Over this time period, variable pay has become more popular at all levels of organizations, increasing from just 3% of pay in the 1980’s to 13% today, and the percentage of employees eligible for variable pay has increased steadily.[15] The vast majority of organizations today link pay to performance for most of their employees.[16]


The popularity of P4P put pressure on the “performance” part of this equation. For most jobs there were few objective, reliable measures of performance on which reward payouts could be based. Performance management provided a ready solution in the form of supervisor ratings and it began to evolve in now familiar ways to fit a reward distribution purpose. When reward is the goal, PM must not just measure performance, it must differentiate it. It is no coincidence that forced ranking and forced distribution practices emerged at this same time, popularized by Jack Welch at General Electric and adopted by many companies, a practice still used in one form or another by many organizations today. Rewards budgets also became a central concern. These budgets are fixed and can’t be overspent, so oversight is necessary to ensure rating targets are hit and appropriate standards are being followed. This led to the emergence of calibration meetings which are increasingly popular in organizations.[17] And performance differentiation requires performance evaluation, which means ratings are central and indispensable elements of PM. And finally, performance evaluation requires something to evaluate. When rewards, evaluation, and differentiation are the goals of PM, objectives look more like contracts, requiring specificity and detail, with metrics, targets, and extensive documentation to support and defend decisions based on them.[18] These developments also changed the feel of PM, turning it into a zero-sum game, creating inequality and competition among employees for top ratings and rewards.[19]


Forty years later, we have the benefit of hindsight and research to judge the legitimacy and value of this marriage. We now know the well-documented problems with agency theory as a model for many organizational practices, including reward practices.[20] We also know that, despite its pervasiveness, it is widely acknowledged that tying executive pay to company performance or using incentive pay for executives (or for many other positions) doesn’t make sense.[21] The outcomes for which they are being held responsible (e.g. company performance and stock price) are affected by many factors, many of which are outside of their control. The relationship between CEO pay and company performance remains low today, despite the fact that upwards of 90% of their pay is comprised of variable pay tied to stock price.[22] Executive jobs (and many non-executive jobs as well) are also complex. The use of variable pay programs makes sense for simple jobs where expectations can be clearly specified, and where performance is unidimensional and can be measured quantitatively.[23]


The logic behind the rapid expansion of variable pay at the executive level and beyond was also suspect. Expansion at the executive level was driven by changes in tax laws and regulations (ironically designed to rein in executive pay growth), not because it was effective in driving productivity.[24] Expansion of P4P deeper in the organization was similarly not based on its effectiveness at the executive level. The logic was simple, “if it’s good for executives, it’s good for everyone else.”


Stepping Back--PM as Organizational Control

It’s clear after 40 years the marriage between PM and rewards is on shaky ground. But, if PM shouldn’t be about reward distribution, what should it be about? An organization design lens can be useful in answering this question.


Like any organizational process, PM is embedded in the specific context of the organization. This context is defined by the strategy of the organization and the design that executes that strategy. An organization’s design aligns the efforts and attention of employees to the strategy and priorities of the organization. The typical organization design model contains several elements (structure, process, people, etc.) and most contain an element that defines the management, control and governance processes of the organization. I will argue this is where PM best fits and others argue similarly for this strategic positioning. [25] It helps the organization translate strategy and organizational priorities into individual priorities. It provides direction for employees, aligning their efforts to the goals and objectives of the company. It is part of the organization’s control system, ensuring the right things get attention and the wrong things don’t. There is a large body of research on organizational control, dating back to the 1940’s with Max Weber’s study of bureaucracy and Henri Fayol’s study of the four functions of management. Control is defined as “mechanisms that mangers use to direct attention, motivate and encourage individuals to act in ways that support the organization’s objectives.[26] This seems like an obvious fit for PM. Goals direct attention and motivate, and reviews with employees ensure they stay focused in productive ways.


Decades of research in this area describes two broad categories of control mechanisms: Coercive and Enabling. Coercive control is the corporate standard and those of us who have lived in organizations knows the tools well: Hierarchy, chain of command, written policies and procedures, management directives, centralization of decisions, formalization of processes and roles, and the like. Coercive mechanisms are formal, codified, and bureaucratic; they limit employee action in more rigid ways with little flexibility or transparency. Coercive control mechanisms work by restraining employees, like the loading chutes and cattle prods ranchers use to load cattle onto stock trailers. Managers know where the organization needs to go, and control mechanisms ensure employees go there. Traditional PM and reward practices are familiar tools of coercive control. Managers set or approve objectives that specify what an employee will do and the consequences of doing it (or not). Employees are evaluated based on achievement of these objectives and financial and other administrative consequences are based on evaluations. Traditional PM and reward systems rely heavily on extrinsic rewards--carrots and sticks to motivate and align employees with the goals of the company. Extrinsic rewards are staples of coercive control. Traditional PM systems also involve regular monitoring, surveillance, feedback and reviews to ensure employees are on track, sending messages about future ratings and rewards.


Control researchers highlight several problems with coercive control strategies, advocating organizations shift away from them:


“Research in the control domain in many ways has failed to evolve effectively. Instead, research appears to over-rely on theories and approaches based on an understanding of organizations that dates back to the 1950s, 1960s, and 1970s, thereby limiting our ability to better understand organizations and advise managers today and in the future. Dominant theoretical foundations have underlying assumptions that have slowed empirical progress. These foundations do not fit current organizational challenges and environments because their prevailing emphases lend themselves to applications that encompass a singular view of control (vs. a more holistic view), a focus on coercive control (vs. enabling control), and a focus on formal control mechanisms (vs. informal mechanisms). All three foci are becoming increasingly outdated for modern organizations as both organizations and the world have changed.”

--Cardinal, Kreutzer, & Miller (2017). [27]


Those of us who study PM and P4P are familiar with these “dominant theoretical foundations”-- classical economics and stimulus-response psychology. We continue to rely on these theories despite the fact that many of their core principles were discredited decades ago.[28] And it is becoming painfully clear the environment organizations face today is far different than the environment faced by industrial organizations of the early 1900’s when these principles were established. Organizations are changing and the nature of work and work relationships is changing as knowledge work replaces industrial work, technology and the digital revolution affects every aspect of work and organizations, and as gig, contract, and other non-traditional workers replace full-time employees. Coercive forms of control like traditional PM and reward practices are simply ill-suited for many organizations today.



PM AND ENABLING CONTROL SYSTEMS

One advantage of using an organization design and management control lens to look at PM is it allows us to see alternatives. Enabling control approaches have been discussed by researchers since the 1970’s but they haven’t been widely adopted by organizations. Enabling control mechanisms use a lighter touch. They provide support, guidance, clarification, and assistance to employees instead of handcuffing them. They are more informal, and they rely more on intrinsic motivation. Enabling control mechanisms allows employees the flexibility to adjust their approach when conditions change. They provide transparency so employees understand the larger context for their work, the logic of the systems they work in, and why the rules and policies are there. Enabling control relies on three general strategies to align employee efforts with company priorities and these strategies have clear implications for PM and rewards practices.


Social and Psychological Mechanisms

People don’t work hard just to get rewards and avoid punishment. Work satisfies deeper social and psychological needs. Despite decades of research supporting their importance and a resurgence in attention to these needs, they are under-utilized as control mechanisms in organizations.


Purpose. People want to be a part of something bigger than themselves. If you want employees to engage in the important work of the organization, show them how their work makes a difference, and you won’t need to handcuff them to it. This means putting goals at the center of PM (instead of evaluation and rewards). Managers should use goals to direct, inspire, and create line of sight for employees. Making goals central also puts more emphasis on assessing progress. Feedback is important but feedback needs to be in the service of making progress toward goals instead of judging performance and keeping score. Supervisors need to do more than just provide feedback to help employees make progress, they need to provide the information, resources, support, and encouragement.


Belonging. People are social animals; they have a deep-seated need to belong. People do things because others they admire, respect, and identify with do them. When a group of people have something meaningful to accomplish together and clear ways of accomplishing it, they behave and interact differently. They bring more enthusiasm to the work and they communicate better, cooperate more, work harder and accomplish more.[29] Work is increasingly being done in teams and competencies like teamwork and collaboration are becoming more important in organizations.[30] For these reasons, PM should be more focused on teams. This starts with a work group planning process that is tightly connected to the organization’s strategic planning and annual business planning processes. It should go beyond simple budget and target setting, providing the important context needed for workgroup PM goals. Individual PM goals should be set in the context of work group PM goals. A team focus should extend to rewards as well with more emphasis on team and organizational reward programs and less on individual reward programs.


Autonomy. Instead of forcing compliance with rules and procedures and using carrots and sticks, employees are more likely to engage when they have the freedom and latitude to manage and control their own work. Even bureaucracy can be enabling when information, transparency, direction and guidance are the goals rather than compliance and accountability. When employees have autonomy, they are more likely to see rules and policies as enabling versus coercive. Performance management should be a high-involvement process with employees providing input to goals and having the latitude to shift their focus and strategies as the needs of their work changes.


Culture and Organization Design

Another way organizations exert control over what employees do is by configuring the organization and culture to socialize employees and shape their experiences. For example, recruiting, onboarding and early socialization practices indoctrinate employees to the norms, values, and beliefs espoused by the organization. Coaching by managers and mentors reinforces key messages about what’s important and what’s valued. The design of formal and informal organizational structures, work processes, and management processes have a strong impact on how employees behave. Performance management should be a continuous, ongoing process with regular conversations about the work to be done and the goals being pursued and why they are important. This regular dialogue and coaching reinforce key messages about what’s important and what’s valued.


Context

Employees want to understand the larger context for their work. They want to know why they are pursuing certain goals and not others and why decisions are made. They want to understand the “why” behind the policies and rules that govern their work. They want to know how the whole system fits together. Sharing this context enables employees to make the right decisions and adjustments “in the heat of battle,” when managers aren’t around. Understanding this context means there is less of a need for detailed policy and procedure manuals and less need to consult them regularly. This context doesn’t get created in a single PM planning meeting. It happens over time, reinforcing the need for a continuous PM process where managers and employees have regular, ongoing discussions about their work and how it aligns to the needs of important stakeholders in the company.[31] These discussions create a “high-context” environment where the purpose, meaning, and direction for their work become internalized and part of the background environment for the workgroup and organization[32], which increases motivation, and performance.[33]


CONCLUSION

Performance management can be a strategic weapon for organizations, but it must break free from its past. This can only happen if we disconnect PM from rewards distribution and replace traditional coercive control practices like monitoring, evaluation and P4P with more modern enabling control practices. This requires that we question today’s practices and use fresh eyes to consider the best ways to direct and control employee efforts in the changing organizations of today. It is clear that organizations will need to adopt more enabling control practices and PM and rewards practices need to evolve accordingly.


REFERENCES

[1] The $345B number comes from Shaw, J. D., & Mitra, A. (2017). The science of pay-for-performance systems: Six facts that all managers should know. World@Work Journal, Q3, 19-27. [2] Argyris, C. (1990). Overcoming organizational defenses: Facilitating organizational learning. Boston: Allyn and Bacon. [3] Argyris, C. (1980). Inner contradictions of rigorous research. New York: Academic Press. [4] WorldatWork (2017). Performance management and rewards. WorldatWork research report. A recent study I conducted with Edie Goldberg confirms this finding. [5] Goler, L., Gale, J., & Grant, A. (2016). Let’s not kill performance evaluations yet. Harvard Business Review, November, 90-94. [6] McKinsey, 2018. Straight talk about employee evaluation and performance management. McKinsey Quarterly podcast, October. [7] There are several different lines of evidence documenting the ineffectiveness of these practices. First, pick up any benchmarking report from any reputable consulting firm or HR think tank. Employees do not feel evaluations of their performance are fair, accurate, or consistent, nor do they feel their rewards are fair or based on their performance. And there is plenty of evidence from rigorous scientific research that suggests our evaluation and rewards practices are not effective in motivating employees to work hard, nor do they improve the performance and productivity for employees or organizations. See the following for a summary of this research: Colquitt, A. L. (2017). Next generation performance management: The triumph of science over myth and superstition. Charlotte: Information Age Press.) [8] Miller, S. (2016). Employers seek better approaches to pay for performance. Society for Human Resource Management, February 8th. [9] Jensen, M. C., & and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure, Journal of Financial Economics, 3, 303-360. [10] Jensen, M., & Murphy, K. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 225-264. [11] See the impassioned plea by Sumantra Ghoshal, then president of the Academy of Management about agency theory and its effects on management practices, in the wake of the Enron scandal: Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning and Education, 4, 75-91. [12] Rose, N. L., & Wolfram, C. (2002). Regulating Executive Pay: Using the Tax Code to Influence Chief Executive Officer Compensation. Journal of Labor Economics, 20, 138-175. [13] Hall, B. J., & Murphy, K. J. (2003). The trouble with stock options, Journal of Economic Perspectives, 17, 3, 49-70. [14] Payscale (2018). Variable pay trends into 2018: Who gets it, what types and why? White paper, April 30. [15] For example, see: Cohen, P. (2018). Where Did Your Pay Raise Go? It May Have Become a Bonus. The New York Times, February 10th. Hudner, J., & Oliver, K. (2013). Current trends and new directions in variable pay. Working Report, Pearl Meyer & Partners, 2013. [16] WorldatWork (2018). Inventory of total rewards programs and practices. [17] For example, see: Caruso, K. N. (2013). A practical guide to performance calibration: A step-by-step guide to increasing the fairness and accuracy of performance appraisal. White paper. Djurdjevic, E., & Wheeler, A. R. (2014). A dynamic multilevel model of performance rating. Research in Personnel and Human Resources, 32, 147–176. Miller, L. (2011). Dear workforce how should we conduct performance-appraisal ‘calibration’ meetings with managers? Workforce. Pytel, L., & Hunt, S. (2017). Total workforce performance management: Using talent calibration to effectively manage the reality that all employees are valuable, but some employees are more valuable than others. White paper, Success Factors. [18] Coens, T., & Jenkins, M. (2002). Abolishing performance appraisals: Why they backfire and what to do instead. San Francisco: Berrett-Kohler. [19] For example, see: Colquitt, A. L. (2018). The World’s Worst Disease. Is your Company Infected with it? Blog post. Dominick, P. G. (2009). Forced rankings: Pros, cons, and practices. In J. W. Smither & M. London (Eds.) Performance management: Putting research into practice. San Francisco: Jossey-Bass (pp. 411-443). [20] For example, see: Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning and Education, 4, 75-91. Heath, J. (2009). The uses and abuses of agency theory. Business Ethics Quarterly, 19, 497-529. Jensen, M., Murphy, K., & Wruck, E. (2004). Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them. European Corporate Governance Institute—Finance Working Paper, no.44 (July), via SSRN. [21] For example, see: Cable, D., & Vermeulen, F. (2016). Stop paying executives for performance. Harvard Business Review, February 23. Cohan, P. S., & Cohan, W. D. (2018). Executive compensation and the ethics of misguided incentives. Invited lecture, Bentley University, Center for Business Ethics. Dorff, M. B. (2014). Indispensable and other myths: Why the CEO pay experiment failed and how to fix it. Los Angeles: University of California Press. Lorsch, J., & Khurana, R. (2010). The pay problem. Harvard magazine, May-June. Samuelson, J. (2018). Overpaying CEOs is a terrible way to motivate them. Quartz, August 13. [22] For example, see: Cooper, M., Gulen, H., & Rau, P. R. (2016). Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance. SSRN article. Marshall, R. (2017). Out of whack: US CEO pay and long-term investment returns. MSCI white paper. [23] Pfeffer, J., & Sutton, R. I. (2006). Hard facts, dangerous half-truths and total nonsense: Profiting from evidence-based management. Boston: Harvard Business School Press. [24] Ibid, Lorsch, & Khurana (2010). [25] For example, see: Aguinis, H. (2013). Performance management. Pearson: Upper Saddle River, NJ. Jesuthasan, R. (2013). Performance management as business discipline: Why mastery goes beyond the transactional. People & Strategy, 36, 58-71. [26] Cardinal, L. B., Kreutzer, M., & Miller, C. C. (2017). An aspirational view of organizational control research: Re-invigorating empirical work to better meet the challenges of 21st century organizations. Academy of Management Annals, 11, 559-592. [27] Ibid, Cardinal, Kreutzer, & Miller (2017). [28] The emergence of behavioral economics in the late 1970’s challenged many of the foundational assumptions of classical economics. The cognitive revolution in the 1950’s challenged the sufficiency of reinforcements, punishments and consequences for explaining behavior. The work of Edward Deci in the early 1970’s would further question the extrinsic motivation as a strategy for regulating and sustaining behavior. And research by Maslow, McGregor, and early job design researchers like Ed Lawler and Richard Hackman would challenge assumptions that employees were lazy and unmotivated, pushing back on the need to externally regulate their behavior using rewards and punishments. [29] For example, see: Hu, J., & Liden, R. C. (2011). Antecedents of team potency and team effectiveness: An examination of goal and process clarity and servant leadership. Journal of Applied Psychology, 96, 851-862. Weldon, E., Jehn, K. A., & Pradhan, P. (1991). Processes that mediate the relationship between a group goal and improved group performance. Journal of Personality and Social Psychology, 61, 555–569. Weldon, E., & Weingart, L. R. (1993). Group goals and group performance. British Journal of Social Psychology, 32, 307–334. Courtright , S. H. , Thurgood, G. R., Stewart, G. L., & Pierotti, A. J. (2015). Structural interdependence in teams: An integrative framework and meta-analysis. Journal of Applied Psychology, 100, 1825-1846. [30] Deloitte (2018). The rise of the social enterprise. Human capital trends report. [31] Ibid, Pulakos, Hanson, Arad, & Moye (2015). [32] For example, see: Hall, Edward T. (1989). Beyond culture. New York: Doubleday. Ramos, D. C. (2014). High context. In S. Thompson (Ed.), Encyclopedia of diversity and social justice. Lanham, MD: Rowman & Littlefield Publishers. [33] For example, see: Chun, Y. H., & Rainey, H. G. (2005). Goal Ambiguity and Organizational Performance in U.S. Federal Agencies. Journal of Public Administration Research and Theory, 15, 529–557. Wright, B. E. (2004). The role of work context in work motivation: A public sector application of goal and social cognitive theories. Journal of Public Administration Research and Theory, 14, 59–78.


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