ACCTG 533: Module 11: Performance Evaluation. [Slide Content]: Performance Evaluation. [Jeanne H. Yamamura]: Performance Evaluation.

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1 ACCTG 533: Module 11: Performance Evaluation Performance Evaluation Performance Evaluation Employee Performance Critical element of organizational success Performance evaluation = measurement Employee performance is a critical element of organizational success. Evaluation of the performance of employees is yet another form of measurement, but one with HUGE behavioral implications and potential impact on the organization. Performance Evaluation Used to o Assess employee productivity o Provide feedback o Incentivize increases productivity Highly motivated employees = Greater productivity Performance evaluation is the means by which we assess employee productivity and provide feedback to help improve performance. We also want to incentivize our employees to increase productivity. The basic idea is that highly motivated employees will be more productive. And you need your employees to be as productive as possible in our competitive environment.

2 Alignment How do you motivate employees to act in ways that add value to the organization? Performance goals and incentives aligned with strategic objectives So how do you motivate employees? More specifically, how do you motivate employees to act in ways that add value to the organization? The key again is alignment the alignment of performance goals and incentives with the strategic objectives. Only Financial Goals Financial goals o Maximizing profit or ROI No direction Will result in efforts which fail [Picture Shown Consider the following: Organizations frequently set financial goals. Sometimes financial goals are the only goals that are set. Financial goals include things like maximizing profit. While important, financial goals are insufficient because they do not provide direction as to how employees don t know what they need to do to maximize profit. Without additional direction, one employee may engage in cost-cutting exercises to reduce expenses. Another employee might offer large discounts to increase sales. Both efforts will likely fail as neither may be linked to the strategic objectives of the organization. Good Performance Measures Good measures o Aligned with strategy o Can be measured effectively o Linked to value creation

3 In order for the organization to reach its strategic goals, performance goals with good performance measures are needed. Good performance measures are aligned with strategy, can be measured effectively, and are linked to value creation. We ve talked quite a bit already about the characteristics of good measures so we won t go through them again. The Magic Number 7, Plus or Minus Prof. Robert Simons Prof. George Miller Easy to remember and work with 10=data overload 7 to 9 performance measures [Picture Show] However, we have not addressed the question of how many measures should be used? Robert Simons recommends the magic number 7, plus or minus 2, based on an article by George Miller from the 1950s. You can easily remember and work with 7 pieces of information. At 10, information overload results. If you are assigned 10 performance measures to focus on, you will find yourself attempting to do too many things and probably will not be successful at any of them. Following the magic number 7 rule, an individual employee should be assigned no more than 7 to 9 performance goals. Target Selection Target = Desired level of achievement Consider o Importance of goal o Availability of benchmarking comparisons The next consideration is how we go about choosing our targets meaning the desired level of achievement. We touched on this topic briefly when we talked about how standard costs were set. In setting performance targets, the following should also be considered: How important is

4 the goal to the successful implementation of business strategy? If it is essential to the successful achievement of the strategy, then there may not be a choice about the amounts. Second: What benchmarking comparisons are available? Obtaining best of class performance numbers from other entities or internally from other divisions can aid in setting performance targets for efficient resource utilization. Motivation Theories and Models Maslow McClelland McGregor Herzberg Vroom Skinner That brings us to motivation. A diverse number of theories and models on work motivation exist including Maslow, McClelland, McGregor, Herzberg, Vroom, and Skinner. They all contain elements of truth and all are perhaps missing one or more key components humans, after all, are very complex creatures whose behavior repeatedly fails to fall nicely within the parameters of a single model/theory. Change Management Research Need to make BIG change Employee buy in and participation essential Let s take a different approach to the question of motivation by looking at change management research. Big changes up the stakes for motivating employees. Without employee buy-in and participation, the changes will fail. So change management recognizes the critical importance of employee motivation.

5 Essential Conditions for Change Price & Lawson (2003) Four essential conditions for employee behavioral change 1. Convincing story 2. Role modeling by leaders and admired peers 3. Reinforcing mechanisms 4. Capacity building Price and Lawson of McKinsey in the Jun 2003 edition of McKinsey quarterly identified four essential conditions for employee behavioral change: 1) A convincing story that makes employees want to change; 2) Role modeling of the change by leaders and admired peers; 3) The presence of reinforcing mechanisms that support the change such as systems, processes, incentives; and 4) The addition of capacity building to ensure employees have the skills needed to make the changes. Why Change Fails Aiken & Keller (2009) Reasons why efforts to create essential change conditions have failed Aiken and Keller in McKinsey Quarterly # then identified several reasons why efforts to create these essential change conditions have failed. Here are some of their reasons: The Convincing Story Change story created, introduced, communicated Two versions o Good to great o Turnaround Motivate leaders, not employees

6 Compelling change stories are to be created, introduced, and communicated on an ongoing basis. Two basic versions of change stories are: the good to great story which says we have to change in order to resume our leadership position and the turnaround story (we will not survive if we do not change). Both stories, however, tend to be stories that motivate leaders, not employees. Motivations What motivates you most at work? Impact on society o Impact on customer o Impact on company shareholders o Impact on working team o Impact on individual personally Selection of any one = 80% not convinced Must cover all five Social science research discovered five major reasons given by managers and employees in response to the question what motivates you most at work? Respondents were equally split among the five impact on society (such as environmental protection, community development), impact on the customer (e.g., provision of superior products and service), impact on the company and shareholders (e.g., profits, return on investment), impact on the working team, and impact on the individual personally (e.g., skill development, paycheck). This means that if a leader picks one for his/her compelling story, 80% of the audience will not be convinced. An effective story needs to cover all five. Significant Resource Investment for Communication Listening rather than telling Lottery ticket experiment o Assigned lottery ticket number vs. Selected lottery ticket number o Offers to buy ticket numbers o Selected lottery ticket number participants wanted 5 times more for their tickets

7 Significant resources are often invested in order to communicate the change story. However, consideration should be given to listening, rather than telling, in order to let participants write their own story. The participants in an experiment were either given a lottery ticket number or asked to write down their own on a blank ticket. Then efforts were made to buy the tickets back. The ticket holders who came up with their own numbers charged 5 times more for their tickets than the ticket holders with assigned numbers. Significant Resource Investment for Communication Power of self choice Being able to choose = more investment Need to involve participants in change and change development to increase ownership and commitment This demonstrates the power of self-choice. Being able to choose makes you more invested in the outcome. Involving participants in the change and change development enables them to write their own story increasing ownership and commitment in the process. Leaders as Role Models Role models for the change Leaders think they have already changed Human nature o Consistently believe we are better than we are o 94% of males rank themselves in top 50% in athletic ability Problems if leaders fail to truly model the change

8 Leaders are expected to serve as role models for the change. Unfortunately, leaders often believe that they have already changed so they don t have to do anything else. This distressing tendency is again human nature. We consistently believe that we are better than we are. For example, 94% of men rank themselves in the top half in terms of their athletic ability. This could be viewed as confidence or alternatively as wishful thinking. But it will cause problems if leaders fail to recognize the need to truly model the change. Money is not the Best Motivator Reinforcement through systems, processes, and incentives Efforts to tie compensation to change disappoint Most relevant to this week s discussion of performance evaluation money is not the best way to motivate people. Successful change management requires reinforcement via systems, processes, and incentives. However, organizations that attempt to tie compensation to the change program have found the results disappointing at best. Money is not the Best Motivator Daniel Pink Drive Basic assumptions about money and motivation frequently incorrect Rewarded behavior not repeated Punished behavior not stopped Money rewards do NOT work for creative conceptual tasks Daniel Pink, the author of Drive, has noted that basic assumptions about money and motivation are frequently incorrect. Behavior that is rewarded is not always repeated; behavior that is punished doesn t necessarily stop. Pink also found that money rewards do NOT work for creative conceptual tasks.

9 Money is not the Best Motivator Dan Ariely, behavioral economist Add cash to the equation = monetary transaction Will eliminate motivation from one of the other primary motivators Replace with money The behavioral economist, Dan Ariely, reported that once you introduce cash into the equation, it then becomes a monetary transaction. So if the individual were motivated by one of the other primary work motivators, you have now eliminated the other motivator and replaced it with money. Money is not the Best Motivator David Maister, Managing the Professional Services Firm First Law of Service o Satisfaction = Perception Expectation If employee does not receive what was expected, he/she will be dissatisfied Reality has nothing to do with it Unlimited potential to make employees unhappy David Maister s First Law of Service from Managing the Professional Services Firm was: Satisfaction = Perception Expectation. In employee motivation terms, this translates into if the employee does not receive what he/she expected, he/she will be dissatisfied. An additional commentary is Reality has nothing to do with it. It doesn t matter if the amount was the highest in the company or in the division. The employee s expectation can be based on many things none of which have to reflect reality. The potential for employees to be unhappy with the amounts awarded to them is unlimited!

10 Summary Humans can be motivated Not easy Best chance if performance goals and incentives aligned with strategic objectives Will still take several tries In summary, humans can be motivated. But doing so is not an easy task. You will increase your chances for success if you work to develop performance goals and incentives that are aligned with strategic objectives. And you should expect it to take several tries.