FAIRNESS OF AND SATISFACTION WITH PERFORMANCE APPRAISAL PROCESS

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1 66 FAIRNESS OF AND SATISFACTION WITH PERFORMANCE APPRAISAL PROCESS Suhaimi Sudin Universiti Tenaga Nasional, Muadzam Shah, Pahang ABSTRACT Literature in organizational justice suggest that organizational fairness in decision making processes may encourage employees acceptance of and positive reaction to many organizational decisions including decision in human resource interventions such as performance appraisal system. This study seeks to understand how perceived fairness in the performance appraisal process affects employees satisfaction. The perception of fairness on performance appraisal was discussed and analysed in the light of theory of organizational justice which consist of procedural, distributive, interpersonal and interaction justice as the independent variables, and employees satisfaction as the dependent variable. This study explored employees satisfaction as consist of satisfaction with the last performance appraisal ratings, satisfaction toward supervisor in relation with appraisal process and satisfaction toward the performance appraisal system. Data from companies in Malaysia were collected to test these relationships. The findings showed that distributive and informational justice are significantly related to satisfaction with the last appraisal ratings; distributive, interpersonal and informational justice are significantly related to satisfaction with supervision; and distributive and informational justice are related to satisfaction toward the performance appraisal system. It also showed that distributive, interpersonal and informational justice are related to overall employees satisfaction. Implication of the justice concerns and practice of a more just performance appraisals are discussed. Keywords: Organizational justice, Performance Appraisal, Employee Satisfaction INTRODUCTION Performance appraisal (PA) is an important human resource practice and tool which provides information to many critical human resource decisions such as training and development needs (Taylor et. al. 1995), compensations and benefits (Holland et al., 2005; Boxall and Purcell, 2003; Allen and Meyer, 1990), layoffs, staffing, pay raises, drug testing, and discipline (Cropanzano, 1991; Folger and Konovsky, 1989; Gilliland, 1994; Konosky and Cropanzano, 1991). It has been studied quite extensively over the last few decades (Landy and Farr, 1980), yet scholars continue to argue about the validity and merits of these systems. Due to the paradox facets of performance appraisal system, major issues in related to an intricate dynamic relationship between employee satisfaction and perception of fairness are raised (Allen and Meyer, 1990). Studies on perceived fairness or organizational justice have shown that these perceptions strongly affect the attitude of employees, for examples: job satisfaction, turnover intentions, organizational commitment, and workplace behaviour, such as absenteeism and organizational citizenship behavior

2 67 (Colquitt et al., 2001). Research also showed that the linkages between perceived organizational justice and individual job performance (Earley and Lind, 1987; Colquitt et al., 2001). Most of these studies are established in Western literature; very few studies have examined the relationship between perceived fairness with work attitude and employee behavior in the Malaysian cultural context. We still do not clearly understand, in Malaysian context, how perception of fairness of performance appraisal process affects employee satisfaction. To understand this problem, we need to clearly explore; what are the constructs of fairness (justice) of performance appraisal process and the constructs of employee satisfaction in the light of performance appraisal process. This paper argue that by addressing organizational justice or fairness concerns in the performance appraisal process in a meaningful way would benefit organizations in term of increasing employee morale, employee satisfaction and productivity. This study will explore the relationship between perceived fairness of performance appraisal and employee satisfaction. Based on literature review, perceived fairness is conceptualized as organizational justice which consist of procedural justice, distributive justice, interpersonal justice and informational justice while satisfaction is conceptualized as satisfaction toward the last performance ratings, satisfaction toward supervisor who facilitate the appraisal process and satisfaction toward the performance appraisal system. Better understanding of the perceptions of the fairness based on the concepts of procedural, distributive, informational and interpersonal justice of performance appraisal and related employee reactions to such systems should provide decision makers with more specific information needed to improve the effectiveness of the system in achieving organizational goals. 2.0 THEORETICAL PERSPECTIVES 2.1 Performance Appraisal Performance appraisal is a managerial process that links organizational objectives, performance standards and evaluation, to which the performance review are often applied. Performance appraisal in organization is considered as a key human resource management (HRM) practices for measuring effectiveness and efficiency (Redman et al., 2000). Fletcher (2001) defines performance appraisal more broadly as activities through which organizations seek to assess employees and develop their competence, enhance performance and distribute rewards. Performance appraisal can be simplified as a process of assessing the quantitative and qualitative aspect of a subordinate s job performance. They also identify that the dual purposes of performance appraisal are to develop subordinates and to improve the organizational performance simultaneously. Performance appraisal systems include the processes and procedures involved in implementing, managing, and communicating the events involved in performance appraisal (Walsh, 2003). In many cases it is a formal process and is a part of the human resource management policy and practices. Performance appraisal serves many purposes within organizations, and as summerised by Gabris and Ihrke, (2001) the performance appraisal process has at least three major purposes: (1) to provide employees with feedback, (2) to control employees with feedback, (3) to determine individual merit. Employee performance appraisal enables person to identify, evaluate and develop an individual s performance. It is a tool to encourage strong performers to maintain their high level of performance and to motivate poor performance to do better (Scott, 2001). By its very nature, appraising is a judging

3 68 process with a high degree of subjectivity (Nathan, Mohrman and Milliman, 1991). Hence, performance appraisal systems become one of the most intricate human resource techniques (Holland et al., 2005; Roberts, 1992) and serve as great paradoxes of efficient human resource management (Taylor et al., 1995; Gibbons and Kleiner, 1994). Researcher in this area argue that individual performance appraisal presume a questionable of measurement accuracy (Roberts, 1992; Allen and Meyer, 1990; Jordan, 1990), stimulates employee conflict and competition (Boxall and Purcell, 2003; Gibbons and Kleiner, 1994; Allen and Meyer, 1990), dispense an immoderate responsibility to individual employees while underestimate the magnitude of the general work process (Holland et al., 2005; Boxall and Purcell, 2003). 2.2 Fairness of PA Understanding fairness or organizational justice in performance appraisal process and practices is extremely important for organizations because of its relationship with employees job satisfaction and organizational commitment and, subsequently, their propensity to search for another job. Cropanzano, Bowen, and Gillilan (2007) defined organizational justice as a personal evaluation about the ethical and moral standing of managerial conduct. They argued that organizational justice has the potential to create powerful benefits for organizations and employees alike. These include greater trust and commitment, improved job performance, more helpful citizenship behaviors, improved customer satisfaction, and diminished conflict (Cropanzano, Bowen, and Gillilan, 2007). Fullford (2005) argued that the concept of organizational justice is a multi-dimensional construct that describes the role of fairness in an organizational context. Cremer (2005) proposed that the interaction between procedural and distributive justice is most likely to be observed when employees show a strong sense of affiliation with their organization. Specifically, what people perceived to be fair depends on their experience upon endorsed opinions regarding suitable ways to distributive outcomes and to treat others (Greenberg, 2001). Constant exposure to these standards produces expectations that serve as the basis for assessment of fairness (Greenberg, 2001). Behavior in compliance with these expectations is translated as acts of fairness, while breaches of these expectations are translated as acts of unfairness (Greenberg, 2001). Fairness has long been considered one of the key predictors of employees affective states and behaviours. When the employees feel that they are being treated fairly, they reciprocate through satisfaction and commitment. Perceived organizational justice in human resource practices particularly in performance appraisal system was based on the equity theory research and most of the equity theory research was derived from Adams social exchange theory framework (Adams, 1963; 1965). Fairness consists of three types of subjective perceptions, typically referred to as distributive justice, procedural justice and interactional justice (Adams, 1965; Leventhal, 1980; Bies and Moag, 1986). Most recently, interactional justice is viewed by researchers as consisting of two distinct and specific types of interpersonal and informational justice (Greenberg, 1990) Distributive Justice Literally, distributive justice relates with the fairness of allocation of resources (Milkovich and Newman, 2005). In other words, distributive justice refers to the amount of resources or rewards that is distributed to employees (Milkovich and Newman, 2005). Folger and Greenberg (1985) suggest that

4 69 distributive justice refers to the perceived fairness of the contents and the consequences. On the other perspective, Deutsch (1985) defines distributive justice as perceived fairness on the distribution of outcomes including conditions and goods that will affect individual wellbeing. Perception of fairness of distribution may lead to emotional feelings and emotional behaviors as it relates to individual's cognitive decision (Greenberg, 1987). According to Greenberg and Cropanzano (2001), unfair treatment of individuals tends to produce negative attitudes and behaviors than those who are treated fairly. According to Adams social exchange theory (1965), people were not concerned about the absolute level of outcomes per se, but whether those outcomes were fair. Adams suggested that one way to determine whether an outcome was fair was to calculate the ratio of one s outcomes (e.g., compensation, promotions, and development) to their contributions or inputs (e.g., effort, time, education, intelligence, and experience) and then compare that ratio with that of a comparison other Procedural Justice Procedural justice refers to the means by which outcomes are allocated, but not specifically to the outcomes themselves. Procedural justice establishes certain principles specifying and governing the roles of participants within the decision making process. Procedural justice seems to be essential to maintaining institutional legitimacy (Cropanzano, Bowen, and Gillilan, 2007). Thus, procedural justice refers to the perceived fairness or equity of the procedures used in making decisions regarding the distribution of rewards, such as promotion (Lemons and Jones, 2001). Tang and Sarsfield-Baldwin (1996) revealed that there are five clearly identified factors (aspects) of procedural justice: fairness, two-way communication, trust in supervisor, clarity of expectations, and understanding of the performance appraisal process. Belanger, McNally, and Flint (2006) proposed that there are positive relationships between perceptions of privacy and procedural justice. Perceptions of procedural justice are high if there are standards to insure the results of monitoring are accurate; and that the organization has appeal procedures to correct unreasonable outcomes. They also propose that perceptions of procedural justice are positively related to organizational commitment but not to supervisory commitment or turnover intentions. Hence, procedural justice concentrates on employee attention in related to the procedures in making decisions (Milkovich and Newman, 2005; Folger and Konovsky, 1989). The employee is concerned about whether the decision process is fair and the process used to determine the outcome was just (Folger and Greenberg, 1985). These procedures should be constant, bias free and include the concerns of all groups and be morally acceptable (Leventhal, 1980) Interactional Justice Interactional justice is defines as the quality of interpersonal treatment received during the enactment of organizational procedures (Bies and Moag, 1986). Interactional justice is fostered when decision makers treat people with respect and sensitivity and explain the rationale for decision (Bies and Moag, 1986). Bies and Moag (1986) defined interactional justice as the fairness of the interpersonal treatment that one receives at the hands of an authority figure during enactment of organizational processes and distribution of outcomes. The interactional justice concept has been included as an interpersonal aspect of procedural justice and also as a distinct construct along with procedural and distributive justice (Skarlicki and Folger, 1997). Belanger, McNally, and Flint (2006) proposed that there are positive relationships between perceptions of privacy and interactional justice. Perceptions of informational

5 70 justice are high if the outcomes are presented in a respectful manner; and if the process is open. Korsgaard, Roberson and Rymph (1998) referred interactional justice as the interpersonal side of decision making, specifically to the fairness of decision maker s behavior in the process of decision making. They pointed out that proper treatment is defined as (a) being truthful in communication and treating people with courtesy and (b) showing respect. Further, they argued that proper enactment of procedures is defined by five behaviors: (a) adequate consideration of the employee s input, (b) suppression of personal biases, (c) consistent application of decision-making criteria, (d) timely feedback, and (e) justification for the decision. They further argued that these interactional factors play an important role in affecting employees perceptions of fairness, acceptance of decisions, and organizational attitudes (Korsgaard, Roberson and Rymph, 1998). Interactional justice factors are recognized by researchers as an important component of creating perceptions of fairness in the performance appraisal system. Two ways communication between managers and subordinates, and the manager s willingness to discuss how ratings were made influence the perception of fairness (Korsgaard, Roberson and Rymph, 1998). Interactional justice has been postulated as consisting of two specific types of interpersonal treatment: interpersonal and informational justice (Greenberg, 1990; Organ and Moorman, 1993; Colquitt et al., 2001; Bies and Moag, 1986). Interpersonal justice refers to treatment with politeness, dignity, and respect by those who execute procedures or determine outcomes. Interpersonal treatment includes interpersonal communication (Folger and Cropanzano, 1998; Greenberg, 1990). Interpersonal justice reflects the degree of which people are treated with politeness, dignity, and respect by authorities. Informational justice refers to the explanations of why procedures were used in a certain way or outcomes were distributed in a certain fashion. Informational justice focuses on the enactment and explanation of decision making procedures (Greenberg, 1990). 2.3 Satisfaction with the performance appraisal Employee satisfaction towards performance appraisal has been the most frequently measured (Keeping and Levy, 2000) and it has been primarily conceptualized in three ways: (a) satisfaction with the performance appraisal interview, (b) satisfaction with the appraisal system, and (c) satisfaction with performance ratings. Keeping and Levy (2000) argued that it is necessary to address employees reactions toward their performance appraisal for many reasons, including (a) the notion that reactions represent a criterion of great interest to practitioners and (b) the fact that reactions have been theoretically linked to determinants of appraisal acceptance and success but have been relatively ignored in research. Pettijohn, Pettijohn and Taylor, (2000) indicate that appraisals can have a positive impact on job satisfaction when employees believe that they are being evaluated by the "proper" criteria. This finding makes a strong case for the implementation of either salesperson participation in the development of the evaluation criteria used or for managers to communicate the "logic" underlying their use of specific criteria in the evaluation process. Boswell and Boudreau, (2000) investigate how perception of performance appraisal use relates to employee satisfaction with both appraisal and appraiser. They bring renewed support for the importance of individual development in the performance appraisal

6 71 process and focused on employee perceptions of performance use, thus the result support the importance of employees perceiving developments as part of the performance appraisal process. Organizations should perhaps make the developmental aspect of the performance appraisal process clear so employees understand and believe that a primary purpose of their performance appraisal is for job and career development. Managers may conduct appraisals primarily to affect employee input through the feedback process, or to justify some sort of human resource action (termination, transfer, promotion, etc.) (Cocanougher and Ivancevich 1978). Jaworski and Kohli (1991) identify other benefits that can he obtained from performance appraisals. Among these benefits are increases in role clarity, performance, and job satisfaction. Given the positive returns obtained from performance appraisals, one could reasonably expect that organizations would devote considerable resources to the appraisal process. Correspondingly, it may be anticipated that managers try to make certain that the dimensions of the appraisal process are known, understood, and supported by the participants. Contrary to expectations, research has indicated that performance appraisals are often conducted on only annual and perhaps perfunctory basis. (Morris et al.,1991) contend that most managers fail to use the evaluation process to its fullest potential in motivating employees. In one study, Jawahar (2006) reported that satisfaction with appraisal feedback was positively related to job satisfaction and organizational commitment and negatively related to turnover intentions. Blau (1999) also reported that employees satisfaction with performance appraisal system significantly affected overall job satisfaction. In his study, Blau (1999) measured general satisfaction with appraisal and not satisfaction with appraisal feedback. Ratees who are satisfied with the appraisal process, especially with appraisal feedback, should have higher levels of commitment. In summary, theoretical arguments and empirical evidence suggests satisfaction to be among the most important of reactions to the appraisal process. Based on the above literature review, this study developed the following research framework as shown in Figure 1 and relevant hypotheses as shown in Table 8. Figure 1: Research Framework of Relationship between Perception of Fairness of PA and Satisfaction

7 METHODOLOGY Measurements of distributive justice, procedural justice, interpersonal justice, interactional justice, satisfaction with the last performance appraisal ratings, satisfaction with the supervisor, and satisfaction with the appraisal system were adopted and developed on the basis of established existing variable from previous studies. All variable were measured with 7-point Likert-type scale with anchors of 1 = strongly disagree and 7 = strongly agree. Non-probability sampling was adopted for this study. Data were obtained from full time employees of six public listed companies in Klang Valley of Malaysia. 300 survey questionnaires were distributed and 229 employees returned completed questionnaires with response rate of 76.3%. The selection of the companies and respondents were based on convenience and willingness to participate. Survey questionnaire consisted of the demographic characteristics of the respondents and multiple-item (positively and negatively worded) survey instruments. Data analysis was conducted in two stages. Firstly, checking for data entry includes validity and reliability of variables, identification outliners and normality of the data. Secondly, a correlations and regression analysis were conducted to test the above hypotheses. 4.0 FINDINGS The majority of the sample was middle management (39.2%), followed by lower management (35.4%), non-managerial employees (23.1%) and top management (2.2%). The educational level reported was 61.6% at baccalaureate or first degree, 28.8% at SPM/MCE/O level, 8.7% master level and 0.9% PhD level. The majority of respondents were female (51.1%). The average employment with the company is 7.12 years ranging from 1 to 32 years. While the majority of respondents were in the age group of years old (47.6%), followed by age group of years old (35.4%), years old (15.7%) and 50 years old and above (1.3%). Demographic data were summarized in Table 1. Table 1: Demographic Data The reliability of composite variables is presented in Table 2. Hair et al. (2009) suggested that usual lower limit for Cronbach alpha is.70, but in exploratory research, as being conducted in this study, this limit may decrease to 0.6. The Cronbach alpha of all the variables for this study is above 0.6.

8 73 Table 2: Cronbach s Alpha, Mean, and Standard Deviation of all variables Table 3: Correlations of all variables ** Correlation is significant at the 0.01 level (2-tailed). Correlations analysis was conducted to test relationship between organizational justice factors with satisfaction factors. Table 3 shows these relationships. It was found that procedural justice, distributive justice, interpersonal justice and informational justice were significantly related with satisfaction with the last performance appraisal ratings, satisfaction with supervisor and satisfaction with the performance appraisal system. It was also found that overall satisfaction is significantly correlated to all justice variables (procedural justice, distributive justice, interpersonal justice and informational justice). Their correlation coefficient (r) values are 0.540, 0.608, 0.532, and respectively, and they were significant at p = 0.01 level. To further test hypotheses in this study, a stepwise regression analysis was conducted. The purpose of stepwise regression is to select a small subset of variables that account for most of the variation in the dependent or criterion variable (Malhotra, 2010). Table 4 shows the regression analysis result between organizational justice variables and satisfaction with the last performance ratings. It was found that informational justice and distributive justice were significantly related with satisfaction with the last performance ratings. Adjusted R2, the strength of

9 74 association or the explanatory power of the model in Model 1 is and in Model 2. The models are significant at 0.01 levels. Table 4: Regression Analysis between Organizational Justice Variables and Satisfaction with the Last Performance Ratings 4a - Model Summary 4b - Coefficients Dependent Variable: Satisfaction with the PA Ratings Table 5 shows the stepwise regression analysis result between organizational justice variables with satisfaction with supervisor. The result shows that informational justice, interpersonal justice and distributive justice were significantly related with satisfaction with supervisor. Adjusted R2 for Model 1, Model 2 and Model 3 are 0.413, and respectively. The models are significant at 0.01 levels. Table 5: Regression Analysis Organizational Justice Variables with Satisfaction with Supervisor 5a - Model Summary

10 75 5b - Coefficients Dependent Variable: Satisfaction with Supervisor Table 6 shows the stepwise regression analysis result between organizational justice variables and satisfaction with performance appraisal system. The result shows that distributive justice and informational justice were significantly related with satisfaction with performance appraisal system. The strength of the relationship (Adjusted R2) for Model 1 and Model 2 are and respectively. The models are significant at 0.01 levels. Table 6: Regression Analysis Organizational Justice Variables with Satisfaction with the Performance Appraisal System 6a - Model Summary

11 76 6b - Coefficients Dependent Variable: Satisfaction with PA System Table 7 shows the stepwise regression analysis result between organizational justice variables with overall satisfaction. The result shows that informational justice, distributive justice and interpersonal justice were significantly related with the overall satisfaction. Adjusted R2 for Model 1, Model 2 and Model 3 are 0.544, and respectively. The models are significant at 0.01 levels. Table 7: Regression Analysis Organizational Justice Variables with Satisfaction with the Overall Satisfaction 7a - Model Summary

12 77 7b - Coefficients Dependent Variable: Overall Satisfaction As shown in Table 4b, 5b, 6b and 7b, the tolerance value for all variables are above 0.5 as well as VIF values are all quite close to 1.0, thus the result from this study denotes low collinearity between the independent variables. Tolerance is a measure of collinearity between two independent variables or multicollinearity among three or more independent variables (Hair et al., 2009). It is the proportion of variance in one independent variable that is not explained by the remaining independent variables. Multicollinearity is a data problem that can adversely impact regression interpretation by limiting the size of the R-squared and confounding the contribution of independent variables (Hair et al., 2010). For this reason, two measures, tolerance and VIF, are used to assess the degree of collinearity among independent variables. Each independent variable will have a tolerance measure and each of measure should be close to 1 (Hair et al., 2009). A tolerance of less than.5 or large VIF values (a usual threshold is 10.0, which corresponds to a tolerance of 0.1) indicate a high degree of collinearity or multicollinearity problem (Hair et al., 2009).

13 78 Results of hypotheses testing are summarized in table 8. Table 8: Summary of Hypotheses Testing 5.0 DISCUSSION The main objective of this study is to explore the relationship between fairness of performance appraisal system and employee satisfaction toward the system. Literature on organizational justice in performance appraisals predicted that, organizational justice is significantly and positively related to satisfaction to performance appraisal. This study found that specific organizational justice components (i.e. distributive, interpersonal and informational justice) are significantly and positively related to specific component of employee satisfaction while procedural justice was not found to be related to any of satisfaction variables. Procedural justice failed to show any relationship with satisfaction variables. Even though this is contradicted with current literature, some organizational justice research conducted in Malaysia (e.g.

14 79 Nasurdin and Khuan, 2007) found that procedural justice did not show any significant relationship with job performance. One explanation for this phenomenon is that procedural justice or perception of fairness of the procedures or the means of appraising employee s performance is perceived less important by the respondents as compared to other justice components. Since performance appraisal system is part and parcel of their routine human resource practices; it was perceived as the system must have been complying with all procedural standards. Further research is needed to examine this problem. This study found that distributive justice is significantly and positively related to satisfaction with the appraisal ratings as well as satisfaction with the supervision. This is congruent with the previous studies which found that perception of fairness of allocation of resources or rewards or outcomes that are distributed to employees (Milkovich and Newman, 2005; Deutsch, 1985) may lead to emotional feelings and emotional behaviours (Greenberg, 1987). Distributive justice or perception of fairness of distribution of outcomes affects employee satisfaction with the performance appraisal ratings and satisfaction with the supervisor who facilitate the appraisal process. Interpersonal justice was found to be significantly and positively related to employee satisfaction with supervisor. This finding shed some light to our understanding of relationship between interactional justice, which consists of interpersonal justice, and informational justice, and employee satisfaction. Literature does recognize the important of this relationship but empirical evidence has yet to surface to test this relationship. Interpersonal justice or treatment of employee with politeness, dignity and respect during performance appraisal process do affect employee satisfaction with the supervisor. Finally, this study found that informational justice is significantly and positively related to employee satisfaction with the performance ratings, satisfaction with the supervisor and satisfaction with the performance appraisal system. This finding again provides some evidence to the importance of informational justice in performance appraisal process which may affect the satisfaction of employee towards the system and process. Literature in performance appraisal fairness postulates this relationship but little empirical evidence has been provided to prove this relationship. This study found that informational justice or explanation of why procedures were used in a certain way or outcomes were distributes in a certain fashion is significantly and positively related to employee satisfaction with the performance ratings, satisfaction with the supervisor and satisfaction with the performance appraisal system. 6.0 CONCLUSION This study explores the relationship between perception of fairness of performance appraisal system under the purview of organizational justice theory and how this perception of fairness affects employee satisfaction. Overall, this study found that fairness of performance appraisal does affect employee s satisfaction. Cardy and Dobbins (1994) suggest that dissatisfaction feelings of unfairness in the performance appraisal process and perceived inequality in evaluation may doom any performance appraisal system to failure. Murphy and Cleveland (1995) also contend that reaction criteria are almost always relevant and unfavourable reactions may result in the failure of the most carefully constructed performance appraisal system. The important of employee reactions toward performance appraisal system may play an increasingly important role in the performance appraisal practices because the continuous development and improvement of the system (Hedge and Borman, 1995). Findings from this study could possible contribute to our understanding of relationship between organizational justice in performance

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