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Performance management when innovation and learning become critical

performance indicators

Article  in  Personnel Review · February 2003

DOI: 10.1108/00483480310454745

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Personnel Review Vol. 32 No. 1, 2003

pp. 93-113 # MCB UP Limited

0048-3486 DOI 10.1108/00483480310454745

Received September 2001 Accepted July 2002

Performance management when innovation and learning become critical performance

indicators Eric Molleman

Faculty of Management and Organization, University of Groningen, The Netherlands, and

Hugo Timmerman Turner Solutions, Leusden, The Netherlands

Keywords Performance management, Performance indicators, Innovation, Culture, Management roles, Knowledge creation

Abstract If the organization’s leading performance indicators shift towards innovation and the creation of knowledge, this will result in more non-routine work and a higher level of interdependency among workers. We argue that a contingent performance management (PM) system has to focus on learning and group processes, on qualitative as well as quantitative goals and on both the individual as well the interpersonal level. Employees of three R&D departments of a firm producing advanced communication systems evaluated a PM system with four stages: accountability, engagement, appraisal, award. The results support our theoretical model. Furthermore, the results show that the firm’s system is perceived as somewhat imbalanced. While the first two stages are in line with our model, the latter two are not. We give suggestions for modifying the PM system to make it balanced, and we discuss the role of the manager.

Introduction If innovation and learning become part of a firm’s leading performance indicators, this is sure to have implications for performance management (PM). Before we deal with the consequences for PM, we shall first consider the implications for work processes and the management of these processes in general. Next, we will deduce what the consequences will be for PM. We will compare these implications for PM with the results obtained from an empirical study, in which we focus on the attitudes towards a new PM system that was designed to improve innovation and learning. In the empirical part of this paper, we will first depict the organization in which we conducted the study, describe its performance management policy, and explain the research methods that we have used. In the sections that follow, we will present the results of our study and subsequently discuss them in the context of our theoretical framework. We shall end the paper with a few theoretical and practical conclusions.

Implications of innovation and learning for work processes Firms that have innovation and learning as important performance indicators typically operate in highly dynamic environments and have to deal with

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complex and ambiguous transaction processes (Volberda, 1996). To survive, such organizations often have proactive strategies, or at least to some extent. That is, they not only deal with environmental demands in a reactive way, but they also shape environmental demands and consider innovation as a major determinant for long-term success. Organizations that opt for innovation have a competitive advantage if they come up with new ideas and create services and products that are, at least partly, unique. The strategies they employ will have a substantial impact on the processes of transformation (i.e. the work to be done). Such processes will tend to become more ambiguous and complex in nature. In the following paragraphs we will describe both these changes in work processes. First, we will deal with the increase in ambiguity: work becomes more non-routine and non-repetitive in nature. Next we will look at the increase in complexity of work processes, which often leads to a division of the work among several highly qualified and specialized professional employees. We will argue that a division of the work, especially non-routine work, results in highly interdependent workers (see Figure 1; see also Wood, 1986).

Non-routine. When work is non-routine, the outcome as well as the processes leading to the outcome cannot be specified in detail beforehand (Cummings and Blumberg, 1987; Cohen and Ledford, 1994; Cohen et al., 1996). In such a situation it is harder to find standard solutions, which can be embedded in standardized work processes. The progress and outcome of each processing step may vary considerably and the outcome of each action will affect the content and course of other processing steps. This means that while work progresses the exact goals emerge and that during processing decisions

Figure 1. Theoretical framework

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frequently have to be made or modified in terms of `̀ what’’, `̀ how’’ and `̀ when’’. In other words, work processes become more dynamic. In such a work environment, a hierarchical decisional structure will become inefficient and ineffective. From a management point of view this indicates that it becomes attractive to give workers the authority to make decisions on these issues (Evans and Fischer, 1992; Molleman, 2000). Giving workers the opportunity to take such decisions at the local level adds value to the overall process and benefits the whole organization, as the occurrence of problems requires frequent adjustments to be made on the local level. Workers are allowed to analyse or reanalyse the problem, appraise or reappraise the best working method and, if necessary, reconsider the required output. This is in line with a classical law of systems theory, the law of requisite variety (Ashby, 1969; see also Cherns, 1987; Molleman, 1998), which, amongst other things, involves variety being dealt with as close as possible to its point of origin. In the case of non-routine work, the point of origin of the variations is the work of employees and therefore it is desirable to allocate decision making as close to the action of these workers as possible (e.g. Ashkenas et al., 1995; Smith and Comer, 1994). This requires employees to be able to tolerate high levels of ambiguity, to be able to acquire and process information successfully and to have the capability to learn and to develop their problem-solving capacity (Manz, 1992; Molleman and Broekhuis, 2001). As such, workers will often become the most critical production factor in innovative firms, and the individual worker’s growth and development will become strategic HRM issues, with which we deal in the next section.

Complexity and interdependency. The creation of innovative and highly complex products usually requires such a diversity of knowledge and abilities that it is not realistic to expect a single worker to have all the required knowledge and to master all required skills. Consequently, work will be assigned to teams of employees (teams which may be temporary) which have to cooperate and adjust their decisions and efforts to fit in with others since the creative solutions one member finds will have an impact on the work of others and vice versa (Mintzberg, 1979). As Thompson (1967) has put it, these actors will be highly mutually interdependent and their work will usually be non- routine and dynamic, demanding continuous mutual adjustment (see also Kelly and Thibaut, 1978; Victor and Blackburn, 1987; Liden et al., 1997). Cooperation in such work settings often goes further than mutual `̀ adjustment’’ and also implies knowledge sharing, finding solutions together, learning from each other and finding synergy in innovative and creative processes. All this will contribute to the creation of knowledge needed to create unique products and services and to keep the firm innovative (see e.g. Ilgen and Pulakos, 1999). Alongside innovation, the creation of knowledge will therefore become another performance indicator for the organization. This means that learning and the creation of knowledge can become as important as the processing of the products and services themselves.

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To bring the above-mentioned arguments together, when people as a group do non-routine work, there will be a high level of interdependency as well as a high need for local autonomy, where `̀ local’’ refers to a group of workers. If we focus on the performance of individual workers when they are doing their job, while they are highly dependent on co-workers, there is no doubt that the impact of the social context on individual performance increases substantially (see also Waldman, 1994; Kleingeld and Tuijl, 1995). Another consequence is that the outcomes cannot easily be attributed to single workers and that individual efforts merge in a complex way into collective performance (DeNisi, 2000).

The foregoing indicates that when learning and innovation become the dominant performance indicators this will have drastic consequences for HRM policies. The human factor will become more crucial and of more strategic importance. One policy that will be affected is PM, to which we move in the next section.

Performance management In this section we consider the consequences for performance management of work processes becoming more non-routine and more dependent on the activities of peers. Before doing this, we will discuss a few definitions and objectives of performance management, found in HRM handbooks and in empirical papers. DeNisi (2000, p. 121) defines PM as `̀ the range of activities engaged in by an organization to enhance the performance of a target person or group’’. Waldman (1994, p. 34) states that PM refers to `̀ processes oriented towards coordinating and enhancing work activities and outcomes within an organizational unit’’ and Mondy et al. (2002, p. 555) define it as `̀ a process that significantly affects organizational success by having managers and employees work together to set expectations, review results, and reward performance’’. Although we think that this is not the place to discuss all kinds of definitions of PM extensively, most of these and other definitions (e.g. Brumback and McFee, 1982; Redman and Wilkinson, 2001; French, 1990) have in common that they state that PM relates different organizational levels (organization, unit, group, individual worker) and refers to a cyclical process with different stages, such as planning, appraisal and reward. They differ, however, in their focus. Literature on general management and production management emphasizes the organizational or unit level of performance, while HRM literature primarily focuses on the individual worker. Most of them accentuate the beginning and the end of the process (i.e. planning and appraisal or input and outcomes), while few also stress the in-between stage, in which the actual work is done.

If we move from definitions to performance management systems, it seems that most performance management systems start with a top-down process. That is, objectives at the individual level are, via intermediate steps at the departmental, unit and/or team level, deduced from the objectives of the organization (see, for example, Noe et al., 2000). Ideally these objectives match with individual goals to enhance motivation. The goals have to be defined in

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objective measurable terms to make reliable assessment attainable (e.g. Baron and Kreps, 1999; Bernardin and Russell, 1998). These assessments must provide feedback on a timely basis for the individual worker to be able to adjust his or her behavior. Objectives are formulated in terms of control and improvement of performance and in enhancing the motivation and the development of individual workers (Schneier et al., 1992; Noe et al., 2000; McAfee and Champagne, 1993; Fletcher and Williams, 1996). Most performance management policies primarily concentrate on the level of the individual employee and on objectively measurable quantitative outcomes. In most systems, the manager primarily controls performance by influencing inputs (e.g. skills by training) and by the feedback provided by outputs (assessments). Such feedback loops usually have a relatively long time-span (for example, three, six or 12 months) and the in-between `̀ throughput stage’’ is not a major concern of these PM policies.

As argued in the previous section, if innovation and learning become major performance indicators, the emergence of performance becomes much more a dynamic phenomenon that is strongly embedded in its social context (Klein and Kozlowski, 2000). We will describe both aspects and embed them in the above- mentioned elements of PM definitions and systems.

Non-routine work and PM. In the case of non-routine work, it is difficult to define clear and precise objectives for individual performance in advance, because these emerge and develop while doing the job. For PM the effect is that the formulation of objectives becomes much more a bottom-up and dynamic process than in settings where the repetitiveness of work processes is high (e.g. Kleingeld and Tuijl, 1995; Moravec, 1996; Strivers and Joyce, 2000). To be creative and innovative, workers need sufficient problem-solving capabilities, and to stay innovative they have to further develop these competences. Argyris and Schön (1996) refer to this as the process of `̀ learning to learn’’. This refers to mastering new learning strategies and enlarging the learning capability that enables one to stay creative and innovative. This implies that in the light of performance management, management has to create good learning conditions and has to facilitate and coach learning processes. The foregoing indicates that for PM the emphasis should be much more on the `̀ throughput stage’’, the stage in which the focus is on work processes (Kueng, 2000; Stewart and Barrick, 2000; Schneier et al., 1992; Sink and Tuttle, 1990; Brumback and McFee, 1982). Moreover, it generally will be difficult to quantify learning and innovation outcomes, and, therefore, when appraising performance, it is important also to incorporate qualitative facets of performance (McAfee and Champagne, 1993; Kueng, 2000).

Interdependency and PM. If non-routine work is done within projects in which employees are highly interdependent, the social context of performance management becomes an important issue (DeNisi, 2000). Individual goal setting in such a work setting may inhibit performance (Mitchell and Silver, 1990) and it may make it difficult to attribute successes – in terms of innovation, knowledge creation, learning and personal growth – to individual

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workers. If individual workers can only control outcomes to a limited extent because they are related to, for example, peer performance, a performance system that is solely focused on the individual is likely to demotivate workers rather than motivate them (Pritchard, 1992). In other words, when the assessment of the performance outcomes is purely at the individual level, the social context, a significant factor in facilitating or obstructing individual outcomes, is ignored (for an extensive discussion, see Kozlowski et al., 2000). Related to this point is the argument that task and outcome interdependence should match up (Wilke and Meertens, 1994; Van der Vegt et al., 2000; DeNisi, 2000). If tasks are much more interdependent than outcomes, workers may be much more focused on peers than on themselves, which may result in social pressure, conflict and, consequently, in inhibition of performance. On the other hand, if workers share rewards but work independently, some may intend to stand back and let others realize the outcomes, a phenomenon known as social loafing (see for instance, Latane et al., 1979). These arguments indicate that when learning and innovation are the leading performance indicators, performance becomes much more a team issue than a phenomenon that is solely at the individual level. This is why several authors advocate a multilevel, system or team approach to PM (DeNisi, 2000; Waldman, 1994; Kleingeld and Tuijl, 1995). The dynamic character of PM in non-routine work settings is further strengthened when performance is the result of teamwork. The manager has to manage learning processes and group dynamics. This will dramatically change the role of the manager in PM. At the end of the paper we will return to this point and discuss some important issues with which the manager has to deal in this phase of the PM cycle.

To sum up, if innovation and learning become leading performance indicators, work will become more non-routine with a higher level of interdependence between workers. For PM this means that the monitoring of collective work processes becomes a major issue. In the next section we will introduce a firm for which innovation and learning have become important goals. To support these goals, management has changed its PM policy. The aim of the study is to evaluate the PM system in the light of our theoretical framework and to find empirical support for this framework. We limit ourselves to the attitudes of employees towards the new PM system and do not link the PM system to actual performance or value creation.

Method The firm `̀ Teletechnics’’ is a large US firm with over 100,000 employees, a yearly turnover rate of about US$30 billion and plants all over the world. Its main business is the development and manufacturing of a wide range of highly advanced communication systems. Its major clients include telephone companies and large providers of electronic services. The activities are carried out within 11 business units. `̀ SWACSO’’, the unit in which we conducted our research has about 16,000 employees and develops and manufactures

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switching and access products such as telephone exchanges, including related software. Research and development activities are part of the core business. The main strategic focus is on the development of equipment that integrates all kinds of communication systems and a main tactical issue is reduction of the time needed to bring new products onto the market.

We conducted our study in three R&D departments (`̀ Operations’’, `̀ Core’’ and `̀ Application’’) of a European plant with 278 highly educated employees. The following characterization of the departments is based on document analysis and interviews, a choice that will be justified later in this section. The main strategic focus of these departments is on quality, innovation and the creation of expertise. Miles and Snow (1978) would classify such a policy as a `̀ prospector’’ strategy, and Mintzberg and Quinn (1992) would identify the firm as an `̀ innovative’’ firm. The emphasis of the R&D work is on development and not on basic research, and the complexity of the technologies used is, in R&D terms, of moderate complexity (Shenhar and Dvir, 1996). Within all three departments, most of the work is organized in the form of projects. The primary goal of the `̀ Operations’’ department is to support the other two R&D departments. This support mainly pertains to trouble shooting and, therefore, the time span of most of the projects carried out by this department is shorter than in the other two departments. Our data, which are described in more detail in the subsection labeled `̀ Instruments and response’’, indicate that the organizational culture within these three departments can be characterized as open, professional, non-hierarchical and task-oriented (cf. Neuijen, 1992).

The dominant HRM policy is to achieve a highly committed workforce with high standards of performance. Flexibility, innovation, learning and creativity are considered to be the critical competencies of the workers (see Arthur, 1994; Molleman and Broekhuis, 2001). As such, PM is considered to be one of the leading HRM topics contributing to the maintenance and development of these competencies.

The performance management system Although the firm’s new PM system was developed with the aim of stimulating learning and innovation, it was not explicitly deduced from the theoretical framework presented in the previous section. We build this theoretical framework after management had asked us to evaluate their new PM system. In this subsection we will describe the firm’s PM system by mainly applying the terminology that is used by the firm. In subsequent sections we will relate it more precisely to our framework.

The PM policy of the firm has recently been transformed. Previously, its focus was exclusively on inputs and outcomes. Because creativity, learning and innovation have now become more central to the company’s strategy, the modified PM approach pays attention to processes, behaviors, attitudes and personal growth. It is a cyclical system that is composed of four stages: accountability, engagement, appraisal and reward (Figure 2). Basically, such a

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system resembles a learning cycle (Kolb, 1984) as well as the human resource cycle (Devanna et al., 1984).

In the first phase, the employee and his or her manager outline a `̀ personal development plan’’, in which goals are formulated in terms of production and personal growth targets. These goals should correspond with the objectives of the department and organizational strategies, for which the `̀ policy deployment system’’ is used. This system helps to translate corporate goals to the departmental and team level. At the individual level, these are then converted into the `̀ personal development plan’’. There are opportunities to incorporate personal goals, as far as they correspond to the higher-level goals, or at least do not conflict with them. In the second phase (engagement), coaching, training and feedback are the central issues that play a part in improving learning and other critical competencies. In the appraisal stage, the results with respect to productivity and personal development are assessed by applying 3608 feedback, in which the supervisor, colleagues, clients and subordinates may be involved. Self-assessment is also part of this appraisal procedure. Finally, the assessment outcomes are related to pay in the award stage.

The four stages of the PM cycle span a one-year period. The appraisal outcomes constitute an important input for the next-year accountability stage. The new system differs from the old one in its emphasis on growth and development in the accountability phase and in the use of multi-resources for feedback in the appraisal stage. However, the major departure from the previous system is in the focus on the engagement stage. Most of the PM activities take place in this stage, considered to be the most dynamic one. Unlike the other three stages, it is not limited to a specific moment, but spans

Figure 2. The performance management cycle

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the entire period. Recent research suggests that such a PM system may fit well in an R&D work environment (Kerssens-Van Drongelen, 1999; Kerssens-Van Drongelen and Bilderbeek, 1999). However, the new system has been developed for the US part of the firm and not specifically for R&D departments. Management of the three R&D departments within the European plant supposes that the new policy can only be successful if it is accepted by the employees and, accordingly, they wanted to know the attitudes of their personnel towards the new policy. This concern was the main motive for management to ask us to conduct the present study.

Instruments and response. To investigate the attitudes of the personnel towards the new PM policy, we conducted a survey. The questionnaire consisted of 34 structured items, and it was put on the Intranet in English and the national language. A few of the questions related to the general characteristics of the respondents, such as age, nationality and department. Most of the other questions were in Likert-format (statements with which a respondent can agree/disagree) and required respondents to evaluate each of the four phases of the PM system (see Table I). Finally, there were a few questions dealing with the following issues: how well does the respondent know the new PM system, the focus of the PM system (on quantitative and/or qualitative goals), the extent to which individual outcomes are dependent on the social context (peers, management), the attitude toward 3608 feedback, and

Table I. Factor component

matrix after varimax rotation using the

principal components method over 18 Likert-

format items evaluating the four

stages of the PM system

Item Stage Item F1 F2 F3

1 1 Formulation of personal objectives is useful 0.66 2 1 Formulation of goals and objectives for my work 0.76 3 1 My targets match policy deployment 0.60 4 2 Receiving coaching and feedback 0.68 5 2 Insufficient performance needs immediate attention 0.51 6 2 Both positive and negative feedback are important 0.77 7 2 I appreciate feedback from colleagues 0.75 8 2 It is important to give colleagues feedback 0.68 9 2 Those who perform insufficiently need intensive coaching 0.43

10 3 Performance should be compared to goals 0.67 11 3 Assessment needs objective goals 12 3 PM is a good way to assess performance 0.73 13 4 Salary should be related to performance 0.62 14 4 Part of salary should be variable 0.69 15 4 Insufficient performance carries less salary (0.34) 16 4a Salary should be related to experience and age and not to

performance 0.40

17 4 Incentives motivate me to perform 0.63 18 4 It should be made clear in advance how the fulfilment of

targets will be rewarded financially 0.59

Notes: Only loadings > 0.4 are depicted and lower loadings that are used for interpretation are placed within brackets. The content of the items has been summarized; a recoded

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which outcomes are preferred (money, career, good interpersonal relations, appealing work).

Respondents were asked to fill out the questionnaire on-line and their responses were directly written to a database. All 278 (over 93 per cent male) employees received an e-mail from the head of the department they worked in requesting them to fill out the questionnaire that was linked to the mail (by URL). It was emphasized that the responses would be confidential, would only be available to the authors, and would only be reported on in terms of overall and not individual results. This request was repeated after one week. The survey was on-line for two weeks. The total response was 66.5 per cent (n = 185) and was about the same for each of the three departments, for gender and for age (see Table II), and thus, as far as these characteristics are concerned, the response seems to be representative.

To get a general impression of the company and to be able to characterize the three departments, we studied documents and attended meetings. We also interviewed 19 employees: the manager and five workers from each department as well as the human resource account manager of the three departments. These interviews were structured by means of the questionnaires developed by Neuijen (1992) (see also Hofstede et al., 1990) and Kerssens-Van Drongelen and Bilderbeek (1999). These interviews were also used to obtain additional qualitative data concerning attitudes towards the PM system.

Results To measure the attitudes of the employees towards the four stages of the PM we formulated 18 four-point Likert-like items (see Table I). We conducted a factor analysis over these items. The eigenvalues of the five first unrotated factors are respectively, 4.3, 1.9, 1.7, 1.4 and 1.1. The results of the rotated three- factor solution indicate that the first factor represents the items that refer to the second stage of the PM cycle. All but one of the items belonging to the first and third stage load on the second factor. One of these items loads on none of the factors (item 11). All the items that pertain to the award stage load on the third rotated factor. In a three-factor solution this last factor splits into two separate factors. These results indicate that the engagement and award stage are clearly distinguished by the respondents, while the items referring to the accountability and appraisal stage are mixed up. Therefore, it is not surprising that the correlation between the scales measuring the attitude towards the first

Table II. Response rate for department, gender and agea

Departmenta % Genderb % Agec %

Operations 60.0 Male 66.8 < 30 67.2 Core 57.1 Female 63.1 30-40 65.1 Application 71.4 40-50 66.0

> 50 60.0

Notes: a Chi2 = 0.68, df = 2, ns; b Chi2 = 0.10, df = 1, ns; c Chi2 = 0.48, df = 3, ns

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and the third stage is the highest (see Table III). Possibly this is because most of these items have the noun `̀ target’’, `̀ objective’’ or `̀ goal’’ in their wording. In the next step we tested the reliabilities of the four scales by calculating the Cronbach’s alphas, each referring to one of the stages. The results of these tests, the scale means as well as the correlations between the scales, are presented in Table III. The alphas indicate that the scales are moderately, but sufficiently, reliable (Nunnally, 1967). The correlations show that an attitude towards one stage is positively related to the attitudes towards the others. In other words, some employees are positive to PM in general (i.e. all the stages), while others are less positive to PM. Moreover, the more informed the workers consider themselves about the PM system, the more positive their attitudes are (r = 0.24, p < 0.01). The means show that the employees favor the engagement stage most and the reward system least. We will discuss these results in more detail in the following subsections.

Accountability Over 81 per cent consider a delineation of the accountability stage as the common responsibility of the supervisor and the employee. About the same percentage have a positive general attitude towards this stage (score > 2.5 on the scale referring to this stage, Table III). However, 24 per cent consider the fact that the `̀ policy deployment system’’ solely focuses on goals in quantitative terms to be problematic for the formulation of their own personal development plan. Some of the workers indicate that emphasizing the quantitative side weakens the dynamic aspect of PM and the wording of growth and learning goals. Over 95 per cent of the workers regard it as desirable that personal goals should be at least partly phrased in qualitative terms. As one of the respondents indicated, `̀ my work outcomes can only be quantified for less than 10 per cent’’. Those who think that goals should be formulated in both qualitative and quantitative terms (n = 137) favor this stage more than those who only want to set qualitative goals (n = 37; t = 2.98, p < 0.01).

Engagement Just over 96 per cent have a general positive attitude towards this stage (score > 2.5). Nearly 93 per cent of the respondents find it important or very important to get feedback frequently (score 3 or 4 on item 4, Table I). Nearly all (> 97 per

Table III. Reliability coefficients,

scale means and correlations

(all p < 0.01) between scales referring to the

four stages of PM

Stage Alpha Scale mean Stage 2 Stage 3 Stage 4

1 0.65 2.88b 0.34 0.60 0.31 2 0.75 3.21c 0.38 0.31 3 0.571 2.82b 0.23 4 0.62 2.54a

Notes: a,b,c mean with different entries differ significantly (p < 0.01; paired t-tests); d alpha was 0.36 including item 11 (Table I)

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cent) stress that feedback should also include the positive aspects of work and work outcomes (item 6). The attitude towards this stage is not related to other characteristics of the workers, which probably is due to its skewed distribution.

About 90 per cent not only favor receiving feedback, but also giving it to their peers (item 8). As such, they seem to view the realization of individual development plans as a collective responsibility. Such mutual exchange of feedback indicates the dynamic character of regular work and is, according to some of the interviewees, perceived as an important mechanism to coordinate project work. Over half of the respondents consider their workplace to be an `̀ open community’’ and they welcome feedback from multiple sources, as is the case with 3608 feedback. They emphasize the importance of trustful interpersonal relations and the social context within which performance takes place. As one interviewee said, `̀ too much focus on individual targets inhibits cooperation’’. However, in the case of under-performance, nearly 90 per cent of the respondents consider coaching by their supervisor to be the crucial activity. Critical comments on the coaching expressed during the interviews or written down at the end of the questionnaire refer for the most part to leadership style: for example, `̀ he is too much a technical manager and too little a people manager’’. According to these workers, the supervisor’s behavior is too greatly influenced by the policy deployment system as it is laid out at a higher organizational level and which stresses only the quantitative side of performance. In their opinion the supervisor pays insufficient attention to the qualitative and process aspects of personal development. According to these respondents, creativity, learning capabilities and innovative behavior do not receive enough attention.

Appraisal About 67 per cent of the respondents have a generally positive attitude to the appraisal stage (score above 2.5). Although this indicates that the majority is positive, the proportion is smaller than for the preceding stages, and especially the engagement stage. About 78 per cent indicate that appraisals should be based on objectively measurable elements only and about the same number consider it useful to compare these appraisals with the goals expressed in the accountability stage. Those who only want to appoint qualitative targets favor this stage less (t = 2.52, p < 0.05). Although most workers indicated that assessments should be based on objective measures, over 97 per cent find it important that the final outcomes of individual assessments take factors into account such as the dependency on coworkers or decisions made at a higher management level. In the engagement stage, the majority favors feedback from multiple resources, while assessment in the appraisal stage is considered to be the exclusive domain of the supervisor by 83 per cent of the respondents.

Award The award stage is positively evaluated by just over half of the employees (score > 2.5). It is evaluated substantially less positively than the other three

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stages (Table III). A slight majority of the respondents (57 per cent) prefer salary to be based on performance, or at least partly so. The rest indicate that it should be exclusively based on input characteristics such as experience, expertise and tenure. Over 85 per cent of those who favor a pay-for- performance system believe that performance should contribute less than 30 per cent to the total salary. The attitudes towards the first three stages were not related to employee characteristics, though the opinions with respect to pay-for- performance are. The data show that younger employees are more in favor of such a system (r = –0.31, p < 0.001). The same is true for non-routine workers (t = 2.33, p < 0.05). Work content and good interpersonal relations are generally considered to be more important outcomes (43 and 39 per cent) than salary (7 per cent) or career opportunities (11 per cent). However, those who prefer salary and career opportunities above work content and good interpersonal relations have more positive attitudes towards the reward stage (t = 3.64, p < 0.001).

Discussion Overall, the attitudes of the employees indicate that there is a good basis for performance management in the three departments in which we conducted our study. The attitudes are positively related to the extent to which workers have been informed about the new PM system, and thus enlightenment may further improve its acceptance.

The results show that the first two steps of the performance management system (accountability and engagement) are evaluated very positively, while the employees are more critical towards the last two stages, appraisal and award. The remarks made by the respondents at the end of the questionnaire, the interview data and our theoretical framework may help us to interpret these results further and to draw some tentative inferences. The main point we want to make is that the responses indicate that there are several inconsistencies and imperfections in the new performance management system. The main problem seems to be a kind of imbalance between the first two and the last two stages and especially between the engagement and reward phase. There are several reasons for this imbalance.

In the first place, the policy deployment plan that is used in the accountability stage focuses solely on quantitative targets. Most employees mentioned that their performance, especially in relation to growth and learning, is primarily of a qualitative nature. In order to relate assessments to pay, the assessments must be reliable, and, therefore, preferably based on objective and quantifiable indicators. This, however, will ignore the qualitative aspects of the dominant performance indicators such as innovation, the creation of knowledge and personal growth. In other words, such appraisals will probably be perceived as reliable but invalid, only representing part of performance (cf. Pritchard, 1992). The respondents also mentioned that during the engagement phase, the emergence of performance is narrowly related to the social context and individual performance cannot be viewed as independent of the team or

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project level, or at least, not entirely. The appraisal and reward phases as they stand now, however, are purely at the individual level.

Second, the engagement phase is the most valued stage of the PM cycle. It is predominantly focused on intrinsic motivation, while the award phase is dictated by the extrinsic drive of money. In other words, from a motivational perspective, the system seems to be unbalanced. The appraisal phase seems unable to bridge both parts of the performance management cycle. Related to this point is our finding that the respondents value intrinsic factors such as attractive and inspiring work more than pay. As Herzberg (1966) would have put it, money is not perceived as a satisfier, though if insufficient is a dissatisfier, while work content is perceived as a satisfier.

Third, the nature of the engagement and the assessment stage do not match. In the first half of the cycle, the central themes are (or at least should be) personal growth, mutual support, creativity, the creation of knowledge and the development of new learning strategies. Feedback from supervisors, colleagues or clients, irrespective of whether it is negative or positive, can be directed to improvement, learning and personal development and, therefore, be experienced as constructive and intrinsically motivating. Indeed, most respondents indicated that they favor such a 3608 type of feedback. In the appraisal stage, however, negative feedback is likely to be perceived as unpleasant or biased, induce conflicts and affect interpersonal relations, because it will be directly related to pay. While mutual trust among employees is critical in the engagement phase, it may be undermined in the second half of the performance management cycle where assessment, whether by peers or others, is related to pay. Competitive behavior among employees will thus be more likely than cooperation (see also Baron and Kreps, 1999). This will be most likely to happen (though this was not the case in our study) when the total sum of rewards is fixed and a frog-pond model is used to assign rewards (i.e. the more one gets, the less the other gets) (DeNisi, 2000). Moreover, in the engagement stage, feedback is much more multi-directional and focused on processes, while in the appraisal stage it is a one-way communication directed to outcomes.

The previous points indicate that it is particularly the reward aspect as it is now that is at odds with the performance management system. A supplementary explanation might be found in the cultural differences between Europe and the USA. The performance management system was designed by the parent US company and transferred to the European setting. Kirkman and Shapiro have argued (1997) that in the USA, individualism and equity are favored, while in Europe, collectivism and equality are valued more. This may explain why in our study, rewarding individual performance was not appreciated very highly. However, such an explanation is rather speculative and needs further empirical support. A somewhat related aspect is that the system was designed for the company as a whole, and not specifically for R&D environments. In R&D settings with predominantly complex and non-routine work, the level of mutual interdependence will be relatively high, which will be

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likely to invalidate a reward system that is at the individual level (see DeNisi, 2000).

The last point we want to look at pertains to the role of the supervisor. Some of the respondents indicated that the supervisor was focused too much on outcomes and too little on supporting the processes leading to the intended outcomes. They commented that the supervisor should alter his or her role from that of a technical manager to that of a people and process manager. Although most of the projects that the employees are engaged in are considered to be potentially suitable for obtaining knowledge and learning skills that exceed a worker’s own domain, the coaching provided by the manager (or project manager) is considered to be important for actually realizing this potential. The workers want the manager to focus more on processes and on the qualitative side of performance. The managers, however, indicate that the policy deployment system makes them focus on directly observable results, while becoming a people manager is time consuming, less directed to such results and perceived as being `̀ fuzzy’’. To most of them, a `̀ technical manager’’ role is more tangible and less ambiguous than a `̀ people manager’’ role. Furthermore, daily concerns also cost the manager a lot of time, and this may cause them to resist accepting such a PM system (see also McAfee and Champagne, 1993; Taylor et al., 1998). Moreover, in the engagement phase, feedback streams become reciprocal, that is, the supervisor affects the worker and vice versa. This will reduce the power distance between worker and supervisor, which may concern the supervisor. We will return to the role of the manager at the end of the paper.

In our theoretical framework (Figure 1) we assumed several consequences for PM when innovation and learning become the leading performance indicators: that is, the relevance of the `̀ throughput’’ stage, of qualitative goals, of learning processes, of group dynamics and of the social context of PM. The results and the discussion presented above seem to support these suppositions. However, we have to admit that the design of our study and the instruments we used are relatively simple. Our framework should therefore be seen as tentative and there is a need for further empirical evidence. Moreover, the sample size is not very large, which sets limits on the generalizability of our findings. More research is needed to find out if the characteristics of a PM system have to be contingent on the dominant performance indicators and the work processes that stem from them.

Implications Practical implications For the firm, the main problem is that the system is perceived as somewhat imbalanced. In the first half of the performance management cycle (Figure 2), there is more consideration for the social and interpersonal context and for the dynamic side of performance management. In the second half these aspects are ignored and the focus is on the individual level. In other words, according to the theoretical considerations we mentioned in the introductory section, the first

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part of the cycle is more in line with a performance management policy suitable for a firm that opts for innovation and learning than the second part. How to get it more balanced? The most radical solution is to separate rewards completely from the performance management system. Alternatively, management could move the reward and assessment stages, as with the engagement stage, to a higher level by assessing and rewarding the outcomes of project teams as a whole. Related to this is the need for more attention to the qualitative side of performance. Furthermore, the reward system should include motivators that are less extrinsic, such as giving employees more autonomy or responsibility or by facilitating promotion.

Besides these measures to make the system balanced, it would seem desirable to focus on the dynamics of the engagement stage. This stage is the heart of performance management in an organizational setting in which innovation, the creation of knowledge and personal growth are highly valued. We think that the role of the manager is crucial in addressing these dynamics properly and, therefore, this role needs further concern in future research. To give such research some direction, we shall describe this role and relate it to our theoretical framework.

The changing role of the manager We will highlight two facets of the role of the manager: the management of learning processes and that of group dynamics.

The management of learning processes includes the consideration of knowledge transfer at the individual and at the team or collective level. To use the framework of Nonaka (1994), the manager has to facilitate implicit individual knowledge becoming explicit, explicit knowledge of individuals being interchanged among workers or combined into new knowledge, and this new knowledge being internalized by the individual workers. When workers are assigned successively to different project teams, they are able to disseminate their new locally obtained knowledge to other parts of the organization (Golembiewski, 1995). In this way, organizations may become social networks in which locally shared knowledge is disseminated. This contributes to learning at a higher organizational level (Senge, 1990). Kozlowski et al. (2000) refer to this as the vertical transfer of knowledge.

To relate learning processes to group dynamic, these processes are facilitated by good interpersonal relations. An important characteristic of good relations is interpersonal trust (cf. Kozlowski et al., 2000). Trust refers to `̀ a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another’’ (Rousseau et al., 1998, p. 395). Stam and Molleman (1999) found that in IT firms, the interpersonal needs of highly educated workers were narrowly related to growth needs. They conclude that for these professionals, relational needs not only pertain to a good social climate, but also have a more cognitive or learning side. Good interpersonal relations improve feedback and communication, which will facilitate individual learning, development and growth. Such

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relations are based on mutual trust, and this is an important prerequisite for openness and for learning from each other’s mistakes and successes (Agrell and Gustafson, 1996; Jones and George, 1998). If there is no trust, employees will be reluctant to contribute their expertise and knowledge because they will suspect others of being less cooperative. They will only be eager to be open and contribute their knowledge and creative thoughts if they trust their peers. If one supposes that another is going to take the credit for one’s effort, the motivation to be open and to contribute to a collective task will disappear (Jones and George, 1998; Wicks et al., 1999).

A related phenomenon that influences learning in teams is the diversity among its members. Workers can be different in many aspects, including having different cultural backgrounds, demographic and personality characteristics, work related attitudes, skills and knowledge. We will confine our discussion to the last aspects (for the others, see, for example, Van Vianen and De Dreu, 2001; Lau and Murnighan, 1998). If team members are diverse with respect to abilities and knowledge, the potential to come up with new ideas will be greater, and hence there will be more opportunities to learn and a greater probability that new knowledge will emerge. This is especially important if work is non-routine in nature. If workers are highly interdependent, a low diversity with respect to work related attitudes would seem preferable. Similarity with respect to attitudes enhances mutual liking and trust, which, as argued above, facilitates the open exchange of knowledge and expertise (e.g. Jackson, 1996; Glaman et al., 1996). In other words, in non- routine interdependent work settings a high level of diversity with respect to knowledge and skills and a low level of diversity with respect to work related attitudes seem favorable.

A last aspect we want to mention that affects learning is organizational culture. This refers to dimensions such as power distance, uncertainty avoidance and individualism (Hofstede, 1980). As we have stated before, a coaching role will lessen the power distance between worker and supervisor. Moreover, power differences between team members will inhibit openness and learning (Agrell and Gustafson, 1996). Non-routine work settings demand a positive attitude towards innovation and uncertainty and a low level of uncertainty avoidance (Claver and Llopis, 1998; Mendonca and Kanungo, 1996; Schneier et al., 1992). With respect to individualism, there would seem to be a tension between autonomy and interdependency.

Training and development that covers activities such as the management of knowledge, trust, openness, diversity, and culture, may help the supervisor to manage learning processes and group dynamics, which are a crucial part of PM when innovation and learning become critical performance indicators.

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