India's Performance Management Problem
Business Journal

India's Performance Management Problem

by Pooja Luthra and Mala Jain

All systems for evaluating and rewarding employees fail if workers question those systems' credibility

When evaluating their company's performance management system, managers and executives must understand this: Any system will fail if employees doubt its credibility.

Indian employees need to establish an emotional connection with their superiors or peers at work.

A system may appear to have all the right elements that encourage employees to perform better in a team or that help a team perform better in the organization -- communication, coaching, development, and recognition. Still, if employees lack faith in the system, it will not achieve its intended purpose.

This is particularly true in India. Studies, such as those of well-known psychologist Geert Hofstede, Ph.D., suggest that Indian employees need to establish an emotional connection with their superiors or peers at work. Workers respect a company's need for processes and procedures, but that respect is influenced by the personal trust among the members of a workgroup.

This poses a challenge to any company with operations in India. Though processes are extremely important in ensuring uniformity of a performance management system, emotions play an equally important role in managing employee perceptions of those systems.

Our analysis of the data shows that companies in India struggle because many employees doubt whether a performance management system can actually identify superior performance; they also question whether these systems effectively reward good performance. These emotional responses affect employees' perceptions of how robust the system is and whether it can distribute rewards fairly and effectively.

Perceptions of performance management systems

In 2010, Gallup asked employees in several different industries across India for their opinions on various aspects of performance management systems. Gallup found that Indian employees, especially those with three to 10 years of experience with an organization, strongly feel that most performance management systems are not capable of distinguishing superior performance.

Unfortunately for managers and executives, there is a strong relationship between this perception and an employee's level of engagement in his or her workplace. Of employees who strongly disagreed with the statement "The performance appraisal system at [my company] clearly distinguishes superior performance," 51% were actively disengaged. On the other hand, of the employees who strongly agreed, 2% were actively disengaged.

The Three Types of Employees

Employees tend to have a similarly negative perception of how well performance management systems distribute rewards. When asked to rate their level of agreement with the statement "Good performers in [my company] are rewarded significantly better than others," 41% of those who strongly disagreed were actively disengaged. In contrast, 3% of the employees who strongly agreed were actively disengaged.

Systems and emotions

Before delving into the underlying emotions that surface in a performance management system process, managers and executives must make sure that the criteria used to evaluate an employee's performance are clear. Employees from India or anywhere else want their appraisal rating to reflect their output and achievements. Companies must ensure that workers understand what is expected of them and how they will be rated on meeting those expectations.

This approach returns some obvious benefits. Gallup's analysis found that of the employees who strongly agreed with the statement "I am clear about the criteria by which my performance is evaluated," 66% were engaged. In contrast, only 1% of employees who strongly disagreed were engaged.

The emotions that underlie these opinions are just as common everywhere else as they are in India. People tend to form opinions based on how easily supporting examples come to mind. And as many studies have shown, negative examples are particularly easy to recall. Furthermore, if employees perceive that their rewards are not commensurate with their productivity in relation to others in the group, their psychological reaction affects their level of engagement.

Employees may perceive that the performance management system is unfair in distributing rewards to better performers. It doesn't matter whether or not this is actually the case -- for employees, "feelings are facts." And unfortunately for the company, employees may deal with this perceived imbalance between effort and reward by altering their performance. They accept the lack of reward as a grim reality and decide to put in less effort.

This feeling of inequality may be aggravated if employees compare themselves to another point of reference and think that they deserved better. Interestingly, research shows that the relatively unskilled population tends to suffer from "illusory superiority," which makes them rate their ability higher than it actually is.

What companies can do

If companies want employees to put their trust in a performance management system, they must do more than merely ensure that workers understand how their performance will be appraised. People are motivated by emotion as much or more than by reason, research has shown. And Gallup has found that performance increases when employees' emotional needs are met, including their needs for care, recognition, development, and the opportunity to do what they do best.

By recognizing some of the underlying emotions associated with performance management systems, managers and executives can begin to address the rational and emotional concerns that employees have with a system. For example, rational concerns, such as a gap in communication or alignment issues, are easier to remedy when a team is engaged.

Companies must acknowledge emotional responses when analyzing employee reactions to a performance management system. Further, to preempt and prepare, companies should not only be explicit -- on the date of hire -- in communicating how performance bonuses or other variable pay will be awarded, they should strive to remove any vagueness associated with the criteria for calculation and payout. Even if some element of the performance bonus is dependent on factors that are outside the employees' control (such as organization-wide performance bonuses), it is imperative that these conditions are explicitly noted on the date of hire.

Such forethought can alleviate emotional distress for both the employee and the company. And considering the impact of emotion on engagement, employees who are not distressed may be much more receptive to the very unemotional nature of performance management systems.

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