Stepping up performance management

One of the biggest problems with performance management is that it means different things to different people.

HR administrators focus on the appraisal process, ensuring that managers conduct reviews on time and follow through on development needs. Line managers think of meeting specific business goals, such as manufacturing quotas or sales. The finance department looks at factors such as performance-related reward and profitability, and the head of HR might examine performance in the context of development programmes, and assessing how effectively skills, competencies and knowledge are being deployed across the organisation.

Performance management is a combination of all of these disciplines. However, while each approach has merit in its own right, they are most effective when closely aligned to bring together performance management, human capital management and financial disciplines. This includes incentive and compensation management, learning and development, competency management and individual performance appraisals.

Aligning these different components is a huge challenge, particularly when many organisations struggle to impose the discipline required to ensure individual appraisals are carried out on time. However, high-performing organisations are tackling performance issues by focusing on the areas they know will generate the biggest returns.

Here, we look at two organisations:

US-based Air Products, the Fortune 500-listed chemical company, and Manukau City Council in New Zealand – to see how each has harnessed technology to drive process and cultural change and improve performance.

Case study: Air Products sets out goals for all levels

Founded in 1940, Air Products is now a $7.4bn (4.1bn) turnover multinational company based in the US. Specialising in chemicals and industrial gases, it has nearly 20,000 staff in 30 countries, and sells to a variety of sectors, including energy, and healthcare.

Objective targets
Thomas Micklas, manager of employee systems at Air Products, says that by setting corporate goals at the top of the company and cascading them down through the organisational hierarchy, it has been able to assess individuals, manage their development and compensate them in the context of broader corporate objectives.

The company’s planning process begins months in advance of each financial year, driven by a specialist corporate team. Once its high-level strategic goals have been agreed, each senior manager sets out their objectives, which are reviewed by their manager. In turn, that manager’s direct reports set out their own plans.

At the beginning of the financial year in October, employees document their individual goals using the appraisal application within the company’s human capital management software suite (supplied by SAP), and these are reviewed against performance at the end of the year.

The individual performance management process takes into account both what was achieved and how it was done, using a measurement model known internally as the ‘relative what and how’. Each ‘what’ or ‘how’ can be ranked at low, medium or high level – giving a total of nine permutations of possible value. This scale is then applied to measure performance in terms of skills, competencies and potential, focusing on factors such as how employees meet specific goals, their leadership and communications skills, their work ethic, and so on.

Performance guidelines
As Micklas points out, some components of the process are inevitably open to interpretation – not least the process of ranking individuals against peers in similar roles. What that means in practice, is that “someone, in an absolute sense, may be a great performer, but relative to other people doing similar work, they may be a ‘good’ performer because someone else is better,” he says. In addition, the company issues guidelines – which are specifically not described as ‘quotas’ – as to how the different value assessments should be distributed across the organisation.

“We have general guidelines,” says Micklas. “You can’t have everybody in the company at a high level or at a low level.”

These performance metrics are used in a number of ways. First, with each of the nine possible values, the company issues compensation guidelines covering merit increases and performance awards. In addition, the rankings often open up questions about individual employees’ pay or position. Where an employee is at the top of the recommended salary range and ranks ‘high’ in both ‘what’ and ‘how’, for example, they may be reviewed as a candidate for promotion.

As well as linking the appraisal process, broader performance management and compensation, the company is also moving to standardise competency management. Within the IT division, for example, each job carries a clearly-defined explanation about the skills required and the level of competency, which is used as part of the individual performance measurement process.

Part of Air Products’ capability stems from the fact that it implemented an SAP human capital management system globally. That means, for example, that between 600 and 700 managers can use the ‘self-service’ function of the SAP system for online compensation planning, which enables the organisation to create a company-wide compensation plan more easily.

Case Study: Manukau City Council

Manukau, South Auckland, is the third largest city in New Zealand, and the city council employs about 1,600 people. It serves a population of more than 300,000 people in the largest and fastest-growing region in the country.

Meeting new demands
The council has experienced sweeping changes over the past decade, including the outsourcing of numerous service delivery functions, a restructure, focusing on integrating different operations, and improving the flow of information in the organisation and to its customers.

Three years ago, several divisions found themselves looking to make significant changes to their individual IT infrastructures to meet new demands in finance, HR and customer management. While his colleagues in finance and service delivery were assessing their own IT needs, Phil Wilson, manager of HR and communications at Manukau, was working to an agenda that would bring significant changes to both the strategy and operating mechanisms of his department.

The HR department has long been recognised as a driver of organisational development in the council, and Wilson wanted to continue to refocus it away from transaction processing into more of an advisory and consulting role. In addition, he was looking to give line managers the tools they needed to manage more effectively, and significantly improve the information that Manukau had about its people, including its performance and capabilities.

What the council has now put in place is an advanced human capital management set-up for its 1,600 employees, based on PeopleSoft’s enterprise application suite. It links performance management with training and compensation, and has other strategic applications, such as manager succession planning, running alongside it.

The new set-up is based on a competency management application which is updated with information generated during performance reviews, and is also linked to the council’s training management software module.

Manukau has long used a competency-based approach for job design, recruitment and development, so much of the data gathering required for the new competency module had already been carried out. However, the process still took about five months – primarily because the council took the opportunity to link training courses to specific competencies.

With all Manukau’s internal courses now entered into the training management system, employees can register online for any courses that are identified during the needs assessment stage of their appraisals, and be placed on a waiting list for the appropriate session. They can also assess themselves online against the competency framework, and managers can validate either that employees have completed a programme, or that their knowledge has increased and their behaviour has changed.

This central framework is linked directly to remuneration, which Manukau calculates on a complex, 13-band matrix based on performance and competencies. The council wrote the software to manage the matrix, and has linked that to the PeopleSoft remuneration management module.
Wilson is careful to point out that this is still a “work in progress”, and that all information systems have limitations.

The council went into the project with its eyes open, understanding that it would look to future versions of the software to address changes in what is regarded as best practice in human capital management. This is happening with the latest PeopleSoft version in relation to recruitment and performance management, he says.

Strategic tools
Wilson believes that HR analysis is most valuable when it can be related to other data, such as customer satisfaction. While the council already uses the balanced scorecard as an operational and strategic tool, this is currently taking place outside the main HR system, often on Excel spreadsheets.

“I can check out lots of information about performance, in terms of whether people achieve their objectives,” he says. “But there’s a qualitative dimension missing. In the system, we don’t capture whether the organisation at a high level is successful. It’s not linking between HR performance and organisational performance – we only have half the story.”

This case study is taken from a white paper on human capital management available at


The business case for human capital management

First steps towards human capital management

Human capital management vital for business success

HR must push for change to drive human capital strategy

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