There can be a conflict between the developmental and evaluative purposes.

As
Murphy and Cleveland (1995) have noted using a performance management system to
highlight differences between people (e.g. salary, promotion, validation) is at odds with
using performance management to identify differences within persons (e.g. identifying
developmental strengths and weaknesses). Employees may be left wondering whether
the main purpose of their annual performance review is to help them to develop their
future performance or to reward (or punish) them for past performance.
Critics of traditional supervisory performance appraisal, with its focus on once-
a-year assessment of past performance, have argued that it privileges the evaluative
purpose over strategic, relational and developmental considerations and is prone to
system ‘gaming’ (Lawler 1994b; Mohrman & Mohrman 1995; Wilson 1994: 201–29).
As we have seen, the preferred approach today is that of continuous ‘performance
management’ (Aguinis, Joo & Gottfredson 2011). Does this mean, however, that the
traditional evaluative purpose is becoming less important while the developmental
is becoming more so? Recent survey data suggests that this may be the case. As we
discuss in our final chapter, this phenomenon needs to be seen particularly in the
context of the information technology revolution, the rise of artificial intelligence, the
transformation of work itself and the changing expectations and aspirations of young
workers (e.g. Pelster & Schwartz 2017).

Basic requirements for effective performance management

Irrespective of specific purpose, what are the main requirements for the effectiveness of a
performance management system? The four key requirements are: (1) validity, (2) reliability,
(3) cost-effectiveness and (4) felt-fairness.

Validity
Validity relates, first, to the criteria by which employee ‘performance’ is defined
or ‘constructed’ in terms of desired standards and, second, to how accurately the
performance measures or ‘indicators’ applied to these standards reflect or predict actual
performance. The more valid the performance construct and the measures associated
with it, the more closely and comprehensively these will relate to what employees are
actually required to do in their role. Validity has to do with whether the standards set
and the measures used are relevant to the specific work role involved, whether they
measure enough of the right things, and whether the measures or indicators themselves
accurately reflect or capture what is achieved in relation to desired standards (Drenth
1998: 68–9; Klein 1996).

10 | Managing Employee Performance and Reward

 In relation to performance measurement, validity can be disaggregated into three
dimensions:
1 construct validity (= role relevance of performance standards)
2 content validity (= role representativeness of performance standards)
3 criterion-related validity (= the accuracy of performance measures or indicators
used in reflecting and/or predicting the desired performance standards).
A performance management system is said to be construct valid if the performance
standards and measures are directly relevant to what is required in the job, position
or role involved; that is, construct validity is concerned with the role relevance of the
performance standards and measures applied. The key system design question here is:
are we really measuring the right things for this role?
Content validity refers to the extent to which the performance standards and
measures provide a representative and comprehensive coverage of all desired facets
of role performance. A system would fail the test of content validity if it recognised
and measured some aspects of the job but ignored one or more other aspects that
the job holder had been asked to address. So, for example, content validity would be
compromised if the organisation desired to maximise both labour productivity and
product quality but specified a standard and measure only for productivity. As such,
the key system design question here is: are we measuring enough of the right things for
this role?
Criterion-related validity refers to the closeness of the association between the
performance measures used and what it is that the organisation actually says it wants
from the employee. For example, a system would fail the test of criterion-related validity
if it used, say, observations of personal grooming standards to measure the quality of
customer service provided, or if it used observations of hours worked as a measure
of work effectiveness. This is not to say that the measures used may not be valid in
relation to other performance standards or criteria; the point is that in these instances
neither measure is valid for the particular criterion specified. Here, then, the key design
question is: are we really measuring what we say we are trying to measure?

Reliability
Reliability has to do with the consistency and accuracy of the measurement task itself
as opposed to the performance criteria and measures used. Reliable measurement
will be impossible where the measurement criteria themselves are wholly or partly
invalid. Yet reliability itself is an elusive ideal. Since information is necessarily partial
and selective, we can never know the true reliability of any measurement instrument;
 only its estimated or probable reliability, expressed as a correlation coefficient between
+1.0 for perfect reliability and −1.0 for total unreliability. A measuring instrument
will have high reliability, first, if it repeatedly produces the same scores over time
for specific levels of performance and, second, if it produces the same scores for any
given performer when administered by a different assessor. A system is more likely
to have high reliability if the measurements made by assessors are free of unintended
or intended mismeasurement or error. Unreliable measurement may arise where
the measures themselves are not explained clearly and consistently beforehand and
where one assessor therefore applies different standards over time or where different
assessors apply different standards at the one time. Unreliability may also arise where
assessments are based on partial, incomplete or invalid measurement data. In sum,
reliability requires construct- and criterion-valid performance measures, measurement
based on full evidence, and the consistent application of measures between assessors
and over time.

Cost-effectiveness
Over the years, a great deal of time and energy has been invested in the pursuit of
reliable performance measurement instruments, and while reliability is clearly a
necessary condition for system effectiveness, it is debatable whether technical accuracy
alone is sufficient for this purpose. Moreover, beyond a point, the time and expense
involved in the pursuit of more reliable performance measurement instruments may
well be cost-prohibitive (if not counterproductive) in terms of return on investment.
Hence, cost-effectiveness is also an important consideration in designing and managing
any performance management system.

Felt-fairness
Those who take a more employee-centred approach to performance management
matters contend that a requirement of no less importance is system felt-fairness (see
Dewettinck & van Dijk 2013). The argument here is that, to be effective, a performance
management system should meet the test of felt-fairness, both in terms of the decision-
making processes involved, or procedural fairness, and the outcomes delivered, or
distributive fairness. We will have more to say about the matter of felt-fairness, or
‘organisational justice’, in the next chapter. For now, we need only note that we are not
dealing here with normative fairness in any absolute moral or ethical sense; rather the
focus is on perceived fairness, which, depending on the employees and organisations
involved, and, indeed, on the national cultural context involved, may be informed by a
variety of normative positions on the nature of fairness and equity.

12 | Managing Employee Performance and Reward

 In sum, validity, reliability, cost-effectiveness and felt-fairness are distinct but
overlapping requirements. Without valid performance criteria, reliable measurement is
impossible; without both of these, it is highly likely that employees will see the system as
being inherently unfair. Further, even if it is fully valid, reliable and felt-fair, the system
will still be unsustainable if, over time, it does not deliver a positive return on associated
costs and investments. Ideally, then, a performance management system should strive
to be simultaneously valid, reliable, cost-effective and fair. As we shall see, however,
balancing these competing requirements is an extremely challenging task.

REWARD MANAGEMENT BASICS

Let us now consider the basics of employee reward management. We begin with the
definition of employee reward, the non-financial and financial reward elements covered
by a ‘total reward’ approach, and the three main categories of financial reward or
remuneration. Then, we examine the general objectives of a reward management system.

‘Reward’ and ‘total reward’

What is a ‘reward’? A reward may be anything tangible or intangible that an organisation
provides to its employees either intentionally or unintentionally in exchange for the
employee’s potential or actual work contribution, and to which employees as individuals
attach a positive value as a satisfier of certain self-defined needs. On this definition,
rewards can be seen as including not only financial rewards (i.e. pay, remuneration
or compensation) but also rewards of a beneficial non-financial nature. Such a broad
definition means that the options for configuring a reward management system are
extremely wide. Such a definition also accords with what is commonly referred to in
the practitioner literature (e.g. Brown 2014; CIPD 2013; Fuehrer 1994; Kao & Kantor
2004; WorldatWork 2007; Zingheim & Schuster 2000b) as a ‘total reward’ approach.
What types of reward fall within the scope of a total reward approach? As figure 1.3
indicates, rewards can be divided into two broad categories: ‘intrinsic’ and ‘extrinsic’.
Intrinsic rewards arise from the content of the job itself, including the interest and
challenge that it provides, the task variety and autonomy, the degree of feedback, and
the meaning and significance attributed to it. It follows that one of the most important
determinants of the level of intrinsic rewards in any organisation is the way in which its
jobs are designed. Extrinsic rewards arise from the factors associated with, but physically
external to, the job that the employee does; that is, from the job context.
Extrinsic rewards are of three main types: financial rewards, developmental
rewards and social rewards. Developmental rewards cover those rewards associated