Reward Practices and Performance Management System Effectiveness

V irtually every organization has a performance management system that is expected to accomplish a number of important objectives with respect to human capital management. The objectives often include motivating performance, helping individuals develop their skills, building a performance culture, determining who should be promoted, eliminating individuals who are poor performers, and helping implement business strategies. There is little doubt that a performance management system which can accomplish these objectives can make a very positive contribution to organizational effectiveness, but there is less clarity about what practices make a performance management system effective. There are a large number of design features that potentially can influence the effectiveness of a performance management system, and many of these have been empirically studied to determine their impact. For example, there is considerable research which shows that performance management effectiveness increases when there is ongoing feedback, behavior-based measures are used and preset goals and trained raters are employed. There is one potential determinant of performance management system effectiveness, however, which has received relatively little attention: how tightly the results of the performance management system are tied to significant rewards. The lack of attention to this impact is particularly pronounced when it comes to the issue of using a performance management system to systematically remove lower-performing employees from the organization. There are a number of reasons for believing that systematically tying rewards to the outcome of a performance management system will make the performance management system more effective with respect to Organizational Dynamics, Vol. 32, No. 4, pp. 396–404, 2003 ISSN 0090-2616/$ – see frontmatter 2003 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2003.08.007 www.organizational-dynamics.com