ASAP - Career development paper (just the limitations section)

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The International Journal of Human Resource Management

ISSN: 0958-5192 (Print) 1466-4399 (Online) Journal homepage: http://www.tandfonline.com/loi/rijh20

Performance appraisals and job satisfaction

Patrick Kampkötter

To cite this article: Patrick Kampkötter (2017) Performance appraisals and job satisfaction, The International Journal of Human Resource Management, 28:5, 750-774, DOI: 10.1080/09585192.2015.1109538

To link to this article: https://doi.org/10.1080/09585192.2015.1109538

Published online: 01 Jan 2016.

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The InTernaTIonal Journal of human resource managemenT, 2017 Vol. 28, no. 5, 750–774 http://dx.doi.org/10.1080/09585192.2015.1109538

Performance appraisals and job satisfaction*

Patrick Kampkötter

Department of Personnel economics and hrm, university of cologne, Köln, germany

Introduction

Formal performance appraisals1 (PA) by supervisors are one of the most important human resource management practices (Murphy & Cleveland, 1995). They are designed to control and motivate employees to manage and improve their future performance (DeNisi & Pritchard, 2006; Selvarajan & Cloninger, 2012). Many decisions such as future promotions, pay raises, and career development moves are based on the results of the PA process. One important application of formal PAs is performance-related pay (PRP) systems, which are often used to align

ABSTRACT The research in this article is focused on formal performance appraisals (PA), one of the most important human resource management practices in firms. In detail, the study analyzes the effect of PAs on employees’ overall job satisfaction. We are able to differentiate between appraisals that are linked to monetary outcomes, such as bonus payments and promotions, and appraisals that have no monetary consequences. Building on a representative, longitudinal sample of around 10,500 German employees, we apply fixed effects regressions that allow us to more closely estimate the causal effect of appraisals on job satisfaction compared to previous cross-sectional studies. We find a significantly positive effect of PAs on job satisfaction, which is primarily driven by appraisals linked to monetary outcomes. The results demonstrate that PAs linked to monetary outcomes are a powerful HR management tool that is appreciated by employees. Furthermore, we explore the moderating effects of personality traits (Big Five, locus of control) on the relationship between PAs and job satisfaction. The results show that if tangible benefits cannot be provided or are not tied to the assessment procedure, the use of appraisals with no monetary consequences can be detrimental for open- minded and self-determined employees, as appraisals could then potentially raise expectations that are not fulfilled. Theoretical and practical implications of these results are discussed.

© 2015 Informa uK limited, trading as Taylor & francis group

KEYWORDS Big five; job satisfaction; locus of control; performance appraisal; performance assessment; soeP

CONTACT Patrick Kampkötter [email protected] *seminar of Personnel economics and human resource management, albertus-magnus-Platz, 50923 Köln, germany.

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the objectives of employees with those of the firm and to motivate and reward employees (Milkovich & Newman, 2004). Recent evidence demonstrates that PRP is associated with higher levels of employee well-being (Böckerman, Bryson, & Ilmakunnas, 2012).

Appraisals typically consist of both a developmental and an evaluative dimen- sion (Boswell & Boudreau, 2002). In addition to evaluating employee perfor- mance, for instance, by means of goal and target setting, the developmental use of appraisals focuses on experiences and skills that employees should acquire and that are identified through the use of a PA (e.g. training and development needs). Furthermore, PAs are well suited to detect the strengths and weaknesses, i.e. room for improvement of employees. Especially, poor performers can be identified and provided feedback on how to improve in the longer run.

The aim of this study is to investigate the effect of formal PAs by a supervisor on an employee’s overall job satisfaction using longitudinal data to control for unobserved, individual heterogeneity. This research question is highly relevant because it has been shown that employee participation, feedback, and goals, which are all characteristics of formal PAs, are positively related to job satisfaction, which in turn is a predictor of productivity and performance (Fletcher & Williams, 1996; Judge, Bono, Thoresen, & Patton, 2001; Nathan, Mohrman, & Milliman, 1991; Patterson, Warr, & West, 2004; Whitman, Van Rooy, & Viswesvaran, 2010).2 Furthermore, PAs are characterized by huge investments of firms in the amount of time supervisors and subordinates spend on the PA process (opportunity costs) in order to minimize, for instance, potential rater biases and distortions.

This study contributes to the literature in several ways. There has been some debate as to whether PAs do more good or bad for HR management in terms of ‘soft’ indicators such as job satisfaction. Prior research on this topic is mainly based on cross-sectional data-sets with a small number of observations that reveal major identification problems, ‘making it impossible to draw inferences of causality or rule out the possibility of reverse causality’ (Kuvaas, 2006). This problem is also relevant for the literature on high-performance work practices, where many cross-sectional results even disappear when applying fixed effects to control for heterogeneity across establishments (Huselid & Becker, 1996). To our knowledge, we are the first to analyze the direct effects of PAs on job satisfaction based on a representative, individual-level panel data-set. As a research method, individual fixed effects regressions are applied. By controlling for individual time-constant heterogeneity, the causal effect of appraisals on job satisfaction is estimated more precisely, which has often been neglected in previous studies. Additionally, this study is among the first to differentiate between the monetary and non-monetary outcomes of PAs and their relation to job satisfaction.

In addition to organizational and situational factors, the impact of HR instru- ments such as PAs is typically also determined by a third factor: personality. The literature on the person-organization-fit assumes that differences in individuals’ personality traits impact the effectiveness of management practices in changing

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employees’ behaviors and attitudes. Applicants are attracted to organizations and retained in those organizations whose (corporate) values reflect their own val- ues (Zhang & Gowan, 2012). Based on the attraction-selection-attrition model (Schneider, 1987), the same organizational condition, in our case the instrument of performance appraisals, will have a different impact on employees’ attitudes such as job satisfaction in different work environments. Hence, it might be the case that employees with different personality traits are affected by HR practices to different extents (Cable & Judge, 1994). One explanation is that there is signif- icant between-organization variability in personality traits and personal values (Giberson, Resick, & Dickson, 2005). This study contributes to the literature by investigating whether the relationship between performance assessments and job satisfaction is moderated by personality traits, which to the best of our knowledge has been largely ignored in the previous literature. As a personality framework, the Big Five personality traits (Barrick & Mount, 1991; Costa & McCrae, 1995) and locus of control (Rotter, 1966) are applied.

Our results show that PAs have a positive and significant impact on the job satisfaction of employees. This relationship is particularly strong when appraisals are linked to monetary outcomes. The results demonstrate that PAs that are linked to monetary outcomes are a powerful HR management tool that is appreciated by employees. Hence, it seems to be very important that appraisals are linked to tangible outcomes, such as a bonus, a promotion, or a pay raise.

Furthermore, for employees scoring high on openness to experience and inter- nal locus of control, receiving a PA that is not related to any monetary conse- quences has a detrimental effect on job satisfaction rates. The results show that if tangible benefits cannot be provided or are not tied to the assessment procedure, the use of appraisals that have no consequences can be detrimental, as appraisals may then potentially raise expectations that are not fulfilled.

Development of hypotheses

Performance appraisals and job satisfaction

Research on goal-setting in firms may help to understand the relationship between PAs and job satisfaction. Measurable and challenging goals are used to align the objectives of individuals and companies, which leads to higher levels of moti- vation and, hence, greater employee work effort (see Locke and Latham (2002) for an overview). Furthermore, goal-setting theory implies that the level of goal achievement, which is frequently linked to PRP, is closely related to employee satisfaction. This notion is supported by previous research showing that PRP is associated with higher levels of overall (job) satisfaction (see, for instance, Bryson, Clark, & Freeman, 2012; Green & Heywood, 2008; Heywood & Wei, 2006).

Another strand of the literature, which is primarily found in management and personnel psychology research, has broadly analyzed the impact of different

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contextual factors of PAs on employee reactions to these appraisals, such as appraisal satisfaction and motivation to improve individual performance (e.g. Levy & Williams, 2004; Pichler, 2012; Selvarajan & Cloninger, 2012). These different fac- tors include, for instance, performance appraisal characteristics (purpose, source, etc.) and perceived fairness and rating accuracy, and have shown to be pivotal for the effectiveness of the performance assessment process. One widely researched factor is the rater–ratee relationship, which includes topics such as rating accuracy, supervisor support, trust, and reliability. This relationship can act as a precondition for the acceptance and usefulness of formal appraisal systems. Rating distortions, which are very prominent in many organizations (Kane, Bernardin, Villanova, & Peyrefitte, 1995; Moers, 2005), lead to less acceptance and satisfaction among employees and decrease incentives to exert effort. There may be very different reasons for such rating distortions, including strategic incentives of the raters such as favoritism, punishment, interpersonal motives, or the raters’ personality traits (Krzystofiak, Cardy, & Newman, 1988; Murphy & Cleveland, 1991, 1995; Poon, 2004). Furthermore, previous research has stated that employees’ evaluations of the perceived justice and fairness of the PA system are also important character- istics (Cheng, 2014; Greenberg, 1986; Lau, Wong, & Eggleton, 2008; Pettijohn, Pettijohn, & d’Amico, 2001; Selvarajan & Cloninger, 2012), because a positive relationship between justice and fairness perceptions and job satisfaction is well established (Colquitt, Conlon, Wesson, Porter, & Ng, 2001). Recent studies further support the positive impact of justice perceptions on employee engagement levels (Gupta & Kumar, 2013) and organizational commitment (Cheng, 2014).

Other important contextual factors include the quality of the appraisal pro- cess as a whole and the performance feedback provided by supervisors. Blau (1999) finds a positive relationship between the impact of four dimensions of PA satisfaction (timeliness, procedures, setting goals, feedback) and overall job satisfaction, even if prior job satisfaction is controlled for. Furthermore, satis- faction with PA feedback is positively associated with job satisfaction, employee commitment (Jawahar, 2006), and affective organizational commitment (Kuvaas, 2006). Sommer and Kulkarni (2012) demonstrate that providing constructive feedback to employees is positively related to perceived career opportunities and perceived respect which, in turn, positively impacts job satisfaction. Additionally, employee participation in the PA process and the quality of the received feedback is positively related to their satisfaction with the PA system, perceived fairness, and acceptance of this practice (Cawley, Keeping, & Levy, 1998; Selvarajan & Cloninger, 2012).

However, formal PAs may also come at a cost. Due to the continuous monitor- ing of individual effort and behavior, some employees might feel restricted in how they can organize and execute their work, which can induce a negative impact on job satisfaction. As discussed in the introduction, PAs are often linked to direct monetary consequences. Particularly in the case of variable payments, employees face a higher income risk if a bonus may be cut in times of economic downturns.

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Furthermore, PAs may induce higher levels of pay dispersion within a company, which potentially reduces employee satisfaction when employees, for instance, dislike inequity. A number of studies have shown that relative pay comparisons among employees, especially their individual rank in income distributions, have negative impacts on job and pay satisfactions and negatively affect effort (Brown, Gardner, Oswald, & Qian, 2008; Card, Mas, Moretti, & Saez, 2012; Clark, Masclet, & Villeval, 2010b; Ockenfels, Sliwka, & Werner, 2015).

To conclude, a voluminous literature is devoted to the analysis of single, con- textual factors in the PA process or in the rater–ratee relationship that are then related to overall job satisfaction. Second, prior studies have examined differences in situations where appraisal systems were already in place. Hence, the overall question, i.e. the effect within-person variations in formal PAs has on job satis- faction, has not yet been studied. Based on these considerations, the following hypothesis is formulated:

Hypothesis 1: Performance appraisals have a positive effect on job satisfaction.

Monetary vs. non-monetary consequences

Prior research suggests that appraisals might be evaluated differently by employ- ees depending on whether the appraisals are linked to monetary consequences. Appraisals that are predominantly used for administrative purposes such as pay raises and promotions might be perceived as being more unfair because there is more room for strategic behavior by supervisors, which should then negatively affect job satisfaction levels (Kuvaas, 2006; Smither & London, 2009). On the contrary, PAs that are also used for developmental purposes are positively related to perceived fairness, which then leads to higher appraisal satisfaction and, hence, job satisfaction (Nathan et al., 1991). However, a recent study by Selvarajan and Cloninger (2012) finds no link between appraisal purpose and perceived fairness with the appraisal system.

Conversely, appraisals linked to monetary outcomes typically require that supervisors and employees discuss goals that need to be achieved by the employees in the subsequent fiscal year. These goals might give the employees a more concrete perception of what is expected of them and helps to direct their efforts toward the goals of the firm. At the end of the year, goal achievement is then reviewed and either rewarded with bonus payments or used as a basis for future promo- tion decisions. Nathan et al. (1991) show that job satisfaction is higher when PAs are based on objective criteria. Pettijohn et al. (2001) demonstrate that appraisal systems with a link to individual performance are positively associated with job satisfaction. Furthermore, previous research has shown that clarity about expecta- tions and the provision of performance feedback increase employees’ satisfaction levels. Brown, Hyatt, and Benson (2010), for instance, find that low PA quality (low levels of trust in the supervisor, poor communication, a lack of clarity about

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expectations, and a perception of a less fair PA process) is associated with lower levels of job satisfaction and commitment.

Additionally, such PAs might be perceived by employees as useless because the feedback provided by the supervisor involves no consequences in terms of income or career progression. Because the perceived usefulness of appraisals is one of the key elements for job satisfaction, the following hypotheses are proposed:

Hypothesis 2: The positive effect of appraisals on job satisfaction is more pronounced when appraisals are linked to monetary outcomes.

Hypothesis 3: Appraisals without any monetary consequences lead to lower levels of job satisfaction.

The moderating role of personality traits

Big Five personality traits We start with the Big Five personality traits, which is a well-established taxonomy that has been validated in a series of psychological studies (Barrick & Mount, 1991; Costa & McCrae, 1995). The five dimensions are conscientiousness, neuroticism (emotional stability), openness to experience, extraversion, and agreeableness.

For employees scoring high on extraversion, the positive effect of receiving formal performance assessments on job satisfaction should be more pronounced because they typically show a higher level of self-confidence and status-seeking behavior and are described as outgoing and assertive (Barrick & Mount, 1991). Additionally, appraisals may have a stronger effect on status within a work unit. Indeed, for managers and sales people, extraversion has been shown to be pos- itively related to job performance (Barrick & Mount, 1991; Tett, Jackson, & Rothstein, 1991). Additionally, extroverted people enjoy social interactions such as the bilateral relationship between a supervisor and her subordinate and are more likely to seek direct feedback from a supervisor (Krasman, 2010). Stronger competition between colleagues and relative performance comparisons, which are typical results of formal PAs, are also more likely to be positively evaluated.

People scoring high on conscientiousness are more responsible and success- ful in their jobs, show higher levels of performance motivation and are more detail-oriented, with a high level of task and goal orientation (Barrick & Mount, 1991; Judge & Ilies, 2002). Because appraisals provide detailed performance feedback, which is a key driver of job performance, conscientious employees are expected to be more satisfied when they are being evaluated. For more responsi- ble and thorough employees, appraisals may be perceived as fair, especially when greater effort translates into higher bonus payments or promotions.

People scoring high on agreeableness are described as tolerant, cooperative, and concerned about other peoples’ well-being, especially for those who live or work closely with them (Barrick & Mount, 1991). Formal appraisal systems reveal information about the relative performance of employees within a work unit and,

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therefore, may induce (perceived) inequality. For agreeable employees who care about their co-workers, being regularly assessed in a formal process may decrease job satisfaction because they try to avoid situations that are characterized by rela- tive performance evaluations. Because these employees are also characterized as being more cooperative, appraisals may be perceived as a barrier to cooperative work relationships because cooperation is often not incentivized.

For emotionally unstable (neurotic) employees, being formally appraised may decrease job satisfaction because these employees are described as being anxious, insecure, and nervous, and they fear negative consequences from performance feedback. It has been shown that these employees tend to be less successful in their jobs and are less goal-oriented (Barrick & Mount, 1991; Judge & Ilies, 2002), so they might fear that they will be placed at the lower end of the performance distribution in their work unit. Additionally, performance assessments that are related to monetary outcomes provide uncertainty about goal achievement and, hence, future payoffs.

Employees scoring high on openness to experience are typically characterized as being curious, original, and creative (Barrick & Mount, 1991; Judge & Ilies, 2002). Formal performance assessments, which typically define a clear and narrow working environment, are likely to be perceived as a barrier to their innovative behavior and active imagination because they also largely rely on short-term- oriented performance indicators. However, because sustainable financial perfor- mance and the success of new products are typically only measurable in the long term (Hultink & Robben, 1995), these employees may feel restricted in their working environment, which then may lead to lower levels of job satisfaction. Additionally, Krasman (2010) shows that people who are more open to experience are more likely to seek reflective feedback instead of direct and explicit feedback.

Based on these considerations, the following hypotheses are proposed: Hypothesis 4: The effect of appraisals on job satisfaction is positively moderated by extroversion and conscientiousness.

Hypothesis 5: The effect of appraisals on job satisfaction is negatively moderated by agreeableness, neuroticism, and openness to experience.

Locus of control Rotter (1966) developed the concept of locus of control to describe individuals’ perception of how much they are able to control the crucial decisions in their life. People scoring high on the internal dimension (internals) believe that they have control over critical situations in their life through their own efforts and abilities. External locus of control describes a situation where individuals have no or very little control over the crucial events in their lives. In jobs with PRP, a feeling of self-determination seems to be a precondition for employees to exert effort or to be satisfied. Because internals often perceive that certain goals are actively achiev- able through their own actions, the process of performance monitoring becomes

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a useful management tool. It has been shown that internal locus of control is positively associated with task performance, job feedback, and job autonomy (Ng, Sorensen, & Eby, 2006). Furthermore, internal locus of control is shown to have a positive effect on job satisfaction (Spector, 1986; Spector et al., 2002) as well as on motivation and commitment (Ng et al., 2006). However, for internals, it seems to be a precondition that PAs must be linked to monetary outcomes, which implies that internals who receive PAs without any monetary consequences should report lower levels of job satisfaction. Employees scoring high on external locus of control will most likely view PAs rather negatively if there is uncertainty about reaching pre-defined goals due to external influences that are out of the agent’s control. Hence, the following hypotheses are formulated:

Hypothesis 6: The effect of appraisals linked to monetary consequences on job satisfac- tion is positively moderated by locus of control.

Hypothesis 7: The effect of appraisals without any monetary consequences on job sat- isfaction is negatively moderated by locus of control.

Method

Sample

This study makes use of the German Socio-Economic Panel (SOEP, v28), which is an annual, representative, longitudinal household survey that samples more than 20,000 individuals per year in the Federal Republic of Germany.3 Due to its panel character, the same employees can be tracked over time. The survey covers, among other items, information on current and previous jobs, education, living standards, demographics, and personality traits. Information on performance appraisals, our key independent variable, is available for three waves of the SOEP, namely the years 2004, 2008, and 2011. Hence, our final sample covers those three years.4 Temporary workers, the self-employed, freelancers, apprentices, and trainees are not part of the sample because PAs are not common for these groups of employees. The final sample consists of 10,453 full- and part-time employees across all industries and occupations (19,947 employee-year observations) with a mean age of 43.9 (SD = 10.1).5 Of these employees, 46% are female, 30% work in the public sector, 94% have a permanent work contract, 21% work part-time and 34% hold a management position.

Measures

Performance appraisal Information on PAs is measured by the item ‘Is your own performance regularly assessed by a superior as part of an agreed procedure?’ Hence, the focus here is on appraisals that have a continuous basis and a formal character, so informal feed- back discussions between supervisors and employees should not be considered.

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Those respondents who answer ‘Yes’ are subsequently asked whether this assess- ment influences their monthly gross salary, a yearly bonus, future salary increases, or a potential promotion. Based on this information, three binary variables are constructed. The first variable is performance assessment, which takes the value 1 if an individual’s performance is assessed in general. The second variable is performance assessment with monetary consequences, which takes the value 1 if an individual’s performance is assessed and this assessment directly influences one of the four categories mentioned above. The third dummy variable captures employees whose performance is assessed, but without any relation to (one of the four mentioned) monetary consequences.6

Job satisfaction Job satisfaction is measured by the item ‘How satisfied are you with your job?’ on an 11-point Likert scale ranging from 0 (totally unhappy) to 10 (totally happy). Information is available for all three waves of our sample, with a mean value of 7.0 (SD = 1.92).

Personality traits The Big Five personality traits are measured by applying a 15-item version of the Big Five Inventory (BFI-S) developed for the SOEP. Each of the five personality dimensions is measured by 3 items, beginning with ‘I see myself as someone who …’ on a 7-point Likert scale ranging from 1 (Does not apply to me at all) to 7 (Applies to me perfectly).7 The Big Five items are available for the 2005 and 2009 waves. Considering the rather small number of items used to measure person- ality, internal consistency, measured via Cronbach’s alpha, is acceptable for all of the personality dimensions (between α = .61 and α = .68) except agreeableness (α = .53). Values of the test–retest reliability for the Big Five in 2005 and 2009 range between r = .50 and r = .62, which can be considered rather acceptable taking into account the large time gap of four years for this construct.8 Because personality traits are quite constant over time (Hahn, Gottschling, & Spinath, 2012; Lucas & Donnellan, 2011), mean values for each individual and Big Five dimension over time are calculated. To facilitate the interpretation, these variables are then standardized with zero mean and unit variance.

Locus of control is measured by 10 items on a 7-point Likert scale ranging from 1 (disagree completely) to 7 (agree completely) based on Rotter (1966). Following Caliendo et al. (forthcoming), one single item that does not load on both factors is excluded. Internal consistency of the remaining nine-item construct is sufficient (α = .68 for 2005 and α = .69 for 2010). Similar to the Big Five, individual values are averaged and standardized.

Control variables We include two sets of control variables. First, a vector of job-specific con- trols comprising years of firm tenure (mean = 12.9, SD = 10.2), job change (0/1; mean = 0.06), part time (0/1; mean = 0.21), permanent contract (0/1; mean = 0.94),

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public sector (0/1; mean = 0.30), West Germany (0/1; mean = 0.76), occupational status (10 dummies of blue and white collar workers as well as managerial employ- ees with different levels of responsibility and task complexity), 2-digit NACE industry sector (7 dummies), firm size (6 dummies), the logarithm of monthly net income (mean = 7.3, SD = 0.58), and job security (three categories ranging from very concerned to not concerned at all). Furthermore, there is an ongoing debate about whether the implementation of single HRM practices or the use of high-performance work systems, i.e. the simultaneous combination of different HR practices, is more effective (Combs, Liu, Hall, & Ketchen, 2006; Huselid, 1995). Overall, the results are quite heterogeneous. Focusing on single practices allows the isolation of the effect of the analyzed instrument, but potential synergies due to a simultaneous implementation of different practices are not addressed. To tackle this problem, dummy variables for other HR practices that an employee is entitled to, such as firm training and overtime, are additionally included in the regressions. The second vector comprises individual-specific controls such as female (0/1, mean = 0.46), age (three categories: 17-34 years, 35-49 years, and 50-67 years), years of education (mean = 12.8, SD = 2.7), risk attitude (11-point Likert scale, mean = 3.7, SD = 2.5), children (0/1, mean = 0.38), and marital status (5 dummies).

Statistical analyses

To analyze the effect of formal PAs on job satisfaction, individual fixed effects regressions with job satisfaction as the dependent variable are applied. Hence, the causal effect of PAs on job satisfaction is estimated using within-person changes in appraisals over time while controlling for individual, time-constant heterogeneity. While most of the previous literature has only used cross-sectional data-sets, this study reports a more causal effect of performance assessments on job satisfaction.

To transform the ordinal information on job satisfaction into a cardinal variable, which is needed when applying fixed effects estimations, we apply the probit-adapted OLS approach (Ferrer‐i‐Carbonell & Frijters, 2004; van Praag & Ferrer-i-Carbonel, 2004), which has also been used by, for instance, Cornelissen (2009), Clark, Knabe, and Rätzel (2010a), and Breuer, Nieken, and Sliwka (2013). Here, the ordered-dependent variable is rescaled to a normal distributed variable centered around zero, which for each ordinal category then contains the z-value corresponding to the cumulative frequency of the respective category in the original-dependent variable. This transformed variable can then be used in standard fixed effects panel models to control for individual, time- constant heterogeneity. Our baseline specification is represented by the following estimation equation:

sat it = �

0 + �

1 PA

it + �

2 c �

it + �

3 d �

it + �

t + �

i + �

it

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The dependent variable satit indicates the job satisfaction of employee i in wave t. To analyze the effects of the different types of PAs on job satisfaction, our key independent variable PAit is a dummy variable for one of the three different types of PAs. Specifically, we differentiate between appraisals in general, appraisals with monetary consequences and appraisals that are not linked to any monetary consequences.

c ′

it is a row vector of job-specific control variables, and d′

it is a row vector of

individual control variables, which are all described in the section above. All of the controls are used frequently in regressions with job satisfaction as the dependent variable (Brown et al., 2008; Green & Heywood, 2008). Individual fixed effects to control for unobserved, time-constant heterogeneity such as individual ability are denoted by αi, υt are year fixed effects, and ɛit represents the time-dependent error term. The moderating effects of personality traits are investigated by including interaction effects between PAs and the Big Five and locus of control in a further set of specifications. Robust standard errors clustered on the individual level are reported in all of the regressions.

Descriptive statistics

Figure 1 shows the distribution of the different types of performance appraisals in Germany over time. The proportion of employees receiving PAs increased from 32% in 2004 to 39% in 2011, which is equal to a growth rate of 22%. A similar trend can be found for PAs with monetary consequences. Appraisals without monetary consequences seem to play a minor role, with a proportion of 11% in 2011.

Figure 2 presents the distribution of the different types of PAs with monetary consequences for those employees who actually received a performance assess- ment in the respective year.9 The importance of PAs with an impact on bonus pay- ments increased over time by approximately 15% from 2004 to 2011. Conversely,

Figure 1. Distribution of appraisals over year.

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the impact of appraisals related to fixed salaries or pay raises declined over the observed period. PAs are by far mostly relevant for promotion decisions, with proportions ranging between 54% in 2004 and 51% in 2011.

Findings and discussion

Table 1 includes the means and standard deviations of the main variables as well as their correlations. A preliminary finding of note is the positive correlation between performance assessments (in general and with monetary outcomes) and job satisfaction.

Table 2 reports the individual fixed effects regression results for our baseline specification: column (1) represents the baseline model for PAs in general, col- umn (2) considers only assessments related to monetary outcomes, and column (3) shows the results for PAs that are related to non-monetary outcomes. Receiving formal PAs in general has, on average, a positive and both economically and statis- tically highly significant effect on job satisfaction, holding all other factors constant (column 1). This result supports Hypothesis 1. Focusing on appraisals related to monetary consequences, this positive effect becomes even more pronounced (column 2), which strongly provides support for Hypothesis 2.10 In contrast to these results, we observe a negative but statistically not significant coefficient for PAs without monetary outcomes (column 3). Therefore, Hypothesis 3 is only partially supported.11

These results show that receiving formal PAs has a positive and highly signif- icant effect on job satisfaction. The positive effect is mainly driven by appraisals that have monetary consequences, which is consistent with cross-sectional study

Figure 2. Distribution of appraisals with monetary consequences.

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THe InTeRnATIonAl JouRnAl oF HumAn ResouRce mAnAGemenT 763

by Pettijohn et al. (2001), who found a positive link between appraisals used in determining rewards and salesperson job satisfaction. Our results provide support for previous work highlighting that employee participation, feedback, and goals, which are all characteristics of formal PAs, are positively related to job satisfac- tion (Fletcher & Williams, 1996; Judge et al., 2001; Nathan et al., 1991; Patterson et al., 2004; Whitman et al., 2010). Most importantly, in contrast to the previous literature the present study uses a longitudinal data-set applying fixed effects panel models to determine the causal effect.

One potential explanation for our central finding is that employees perceive the appraisal process in general as useful. This notion is supported by previous studies that have shown that the perceived usefulness of the appraisal system, which may be characterized by a discussion about career progression, employee participation, satisfaction with appraisal feedback, and goal setting is positively associated with job satisfaction (Blau, 1999; Cawley et al., 1998; Jawahar, 2006; Linna et al., 2012; Sommer & Kulkarni, 2012). Furthermore, useful appraisals are also considered to be more accurate, which should increase justice perceptions, and justice perceptions are an important contextual factor which is in turn posi- tively linked to job satisfaction (Colquitt et al., 2001; Greenberg, 1986; Lau et al., 2008; Pettijohn et al., 2001; Selvarajan & Cloninger, 2012).

Table 2. Individual fixed effects regression results for job satisfaction.

notes: Job satisfaction (measured on a 11-point likert scale and transformed with the probit-adapted ols approach (van Praag & ferrer-i carbonel, 2004)) is regressed on an employee’s incidence of being appraised by her supervisor (0/1). We differentiate between performance assessments in general (Pa; column 1), assessments with monetary consequences such as bonus, pay rise, and promotions (Pa with mc; col. 3), and assessments without monetary consequences (Pa without mc; col. 5). In all columns, individual fixed effects regressions are used. all specifications include a constant. additional control variables include part-time (0/1), permanent contract (0/1), years of education, risk attitude (11-point likert scale), public sector (0/1), marital status (5 dummies), number of children, job security (3 dummies), firm training (0/1), overtime (0/1), West germany (0/1), and industry (seven 2-digit nace dummies), occupational status (10 dummies), firm size (6 dummies), and year fixed effects. ref- erence groups: 117–34  years, 20–10  years. robust standard errors clustered on individuals in parentheses. The symbols *, **, and *** represent significance levels of 10, 5, and 1%, respectively.

Dependent variable

Job satisfaction

(1) PA (2) PA with mc (3) PA without mc Performance appraisal .0670*** .0798*** −.0108

(.0219) (.0248) (.0413) age (35–49 years)1 .0269 .0268 .0614

(.0364) (.0371) (.0482) age (50–67 years) .0305 .0326 .0782

(.0494) (.0502) (.0640) firm tenure (11–20 years)2 −.131*** −.131*** −.112***

(.0252) (.0257) (.0322) firm tenure (more than 20) −.105** −.102** −.0621

(.0410) (.0418) (.0528) ln net income .0598 .0636 .0797

(.0425) (.0434) (.0513) Job change .264*** .269*** .317***

(.0379) (.0389) (.0523)

observations 19,947 19,470 14,254 number of individuals 10,453 10,341 8,379 R-squared within .049 .049 .051

764 P. KAmPKÖTTeR

In line with this notion, we find that appraisals that are not linked to any mon- etary- and career-related outcomes have a negative but statistically not significant effect on job satisfaction. Appraisals without any monetary consequences may be considered useless or dispensable by employees because the performance assess- ments and feedback are not linked to any further explicit actions. Additionally, performance monitoring (in this case not related to any consequences) might crowd out intrinsic motivation, for instance, because the agent feels controlled or her autonomy is reduced which then can lead to lower levels of satisfaction (Deci, 1971; Falk & Kosfeld, 2006; Sliwka, 2007). Furthermore, employees have expecta- tions about their individual contributions to the success of the firm, and employees who actually performed well may feel disappointed when they are not adequately rewarded for their achievements with pay raises, bonuses, or promotions.

Concerning the other control variables, a significantly negative effect of firm tenure on job satisfaction is found, but no age effects. Furthermore, in line with previous studies, net income is positively related to job satisfaction. Additionally, the positive effect of internal or external job changes on individual satisfaction levels is both economically and statistically highly significant.

The moderating role of personality

To analyze the moderating effects of personality, interaction terms between appraisals and the Big Five personality traits are included in Table 3. The results show a strong, positive effect of PAs on job satisfaction for a person with average levels of the applied Big Five dimensions, which is again driven by appraisals linked to monetary outcomes. However, almost all of the personality dimensions show no statistically significant interaction coefficients. Hence, Hypothesis 4 is not supported by the data. We find that receiving a PA that is not at all related to any monetary consequence significantly decreases job satisfaction for employees scoring high on openness to experience (column 3). This result partially supports Hypothesis 5. One explanation for this result could be that these employees might feel restricted in their working environment and perceive appraisals as a barrier to innovative behavior because appraisals largely rely on short-term-oriented performance indicators.

Table 4 presents replications of the regressions above using locus of control as a second personality dimension. The results are similar to those for the Big Five. Contrary to the prediction of Hypothesis 6, we find no significant moderating effect for internal locus of control for appraisals in general or for those with monetary outcomes. However, the statistically significant interaction term for PAs without any monetary outcome (column 3) shows that employees scoring high on internal locus of control report lower levels of job satisfaction, which is in line with Hypothesis 7. This result implies that for those employees, it may have detrimental effects on satisfaction rates when formal PAs are in place that are not linked to any monetary outcomes.

THe InTeRnATIonAl JouRnAl oF HumAn ResouRce mAnAGemenT 765

We caution that the analyses including personality traits are of a more explor- atory nature. The fact that PAs without any monetary consequences may have detrimental effects for employees who have an active interest and belief that they can affect their well-being in life and seek for new experiences is also in line with our previous explanation regarding the usefulness of PAs that are not linked to any career-related outcomes. The insignificance of the interaction coefficients of the other personality traits provides only weak support for previous evidence showing that employees with different personality traits are affected by HR practices to different extents (Cable & Judge, 1994; Giberson et al., 2005).

Because personality traits are time constant, the direct effects of personality on job satisfaction cannot be estimated using fixed effects regressions. To obtain an understanding of how the Big Five personality traits are related to job satisfaction, random effects, and lagged dependent variable models are estimated. For the lagged dependent variable approach, job satisfaction in wave t − 1 is included as a control variable to attempt to determine the causal effect (Angrist & Pischke, 2008).

Table 1A in the appendix reveals that all of the dimensions except neuroticism are positively related to job satisfaction when applying the same set of control variables, with the largest effect for conscientiousness. For more neurotic employ- ees, we find a highly negative effect on satisfaction, which is also of the highest absolute magnitude. This result is in line with those in previous studies showing that emotional stability is one of the key predictors of job satisfaction (Judge & Bono, 2001; Judge, Heller, & Mount, 2002).

Table 3. moderating effects of Big five personality traits.

notes: Job satisfaction (measured on a 11-point likert scale and transformed with the probit-adapted ols approach (van Praag & ferrer-i carbonel, 2004)) is regressed on interactions between an employee’s Big five personality traits and the incidence of being appraised by her supervisor (0/1). In all columns, individual fixed effects re- gressions are used. all specifications include a constant. for details on the definition of variables, see Table 2. all control variables equivalent to those in Table 2. robust standard errors clustered on individuals in parentheses.

***p < .01; **p < .05; *p < .1.

Dependent variable

Job satisfaction

(1) PA (2) PA with mc (3) PA without mc Performance appraisal .0666*** .0752*** .0032

(.0219) (.0249) (.0411) Pa * extraversion .0078 −.0134 .0391

(.0256) (.0298) (.0457) Pa * conscientiousness −.0088 −.0129 −.0249

(.0238) (.0267) (.0441) Pa * neuroticism −.0112 .0121 −.0558

(.0247) (.0280) (.0442) Pa * open to experience −.0006 .0448 −.102**

(.0270) (.0303) (.0501) Pa * agreeableness −.0076 −.0031 .0039

(.0249) (.0274) (.0520)

observations 18,602 18,149 13,195 number of individuals 9,264 9,170 7,432 R-squared within .049 .049 .053

766 P. KAmPKÖTTeR

Appraisals and recognition

The present study is further able to provide deeper insights into the mecha- nism that underlies the PA-satisfaction relationship: Within the formal PA pro- cess, supervisors provide subordinates feedback about their past performance. Receiving positive feedback is likely to be perceived by an employee as recogni- tion for the work she has performed. But even negative feedback may to some extend be viewed as helpful, when supervisors identify potential development or training needs, for instance, because it shows that the supervisor has spent time and effort thinking about the employee’s future development. Thus, recognition seems to play a major role within the appraisal process. For 2011, our data-set contains joint information on job-related recognition (recognition from an employee’s supervisor and an employee’s perception of whether the recognition accorded with the provided effort) and performance assessments.12 While here a longitudinal causal analysis is infeasible, Table 2A in the appendix provides cross- sectional and thus more descriptive evidence. PAs with monetary consequences are indeed positively related to a feeling of job-related recognition from supe- riors. When performance appraisals have monetary consequences, employees are also significantly more likely to state that the recognition accords with their provided effort. However, for PAs without monetary consequences, no signif- icant results are observable. These results indicate that supervisor feedback and recognition, which are typical characteristics of appraisals with monetary consequences, are an important channel for how PAs affect employees’ job satisfaction.

Table 4. moderating effects of locus of control.

notes: Job satisfaction (measured on a 11-point likert scale and transformed with the probit-adapted ols approach (van Praag & ferrer-i carbonel, 2004)) is regressed on interactions between an employee’s locus of control and the incidence of being appraised by her supervisor (0/1). In all columns, individual fixed effects regressions are used. all specifications include a constant. for details on the definition of variables and controls, see Table 2. all control variables equivalent to those in Table 2. robust standard errors clustered on individuals in parentheses.

***p < .01; **p < .05; *p < .1.

Dependent variable

Job satisfaction

(1) PA (2) PA with mc (3) PA without mc Performance appraisal .0618*** .0775*** −.0062

(.0221) (.0253) (.0416) Pa * Internal locus of control

−.0125 −.0090 −.0496**

(.0138) (.0151) (.0230) Pa * external locus of control

−.0018 .0053 −.0036

(.0075) (.0083) (.0146)

observations 18,153 17,710 12,869 number of individuals 8,917 8,829 7,169 R-squared within .048 .048 .053

THe InTeRnATIonAl JouRnAl oF HumAn ResouRce mAnAGemenT 767

Practical implications

The results of this study suggest that formal PAs combined with extrinsic rewards (monetary and career-related consequences) are a powerful HR management tool that is appreciated by employees. It is not only positively related to employee satisfaction, but our longitudinal analysis reveals that it is a causal driver of satis- faction. Organizations are therefore encouraged to adopt such human resources practices within their set of high-performance work practices (Huselid, 1995; Huselid & Becker, 1996).

Because this study is among the first to differentiate between monetary and non-monetary outcomes of the PA process, implications for HR managers with regard to the potential consequences of appraisal systems can be derived. Appraisals without monetary consequences have, in general, no positive impact on job satisfaction. Moreover, for specific types of employees, namely for employees who score high on openness to experience and internal locus of control, appraisals without monetary consequences even reduce job satisfaction. Hence, it seems to be very important that appraisals are linked to tangible outcomes, such as a bonus, a promotion, or a pay raise. PAs with monetary outcomes also come along with a stronger feeling of perceived recognition from superiors. This suggests that HR managers should be aware of the potential consequences of appraisals when designing and implementing formal PA systems.

The fact that the positive effect of appraisals with tangible benefits on job satis- faction is rather independent of the type of personality of the employees implies that appraisal systems do not necessarily need to be adapted to specific employee groups with differing personalities. This finding thus supports the fact that many firms use unified evaluation formats throughout the whole organization. If, how- ever, tangible benefits cannot be provided or are not tied to the assessment pro- cedure, this picture changes: in particular for open-minded and self-determined employees, the use of appraisals that have no consequences can be detrimental. Potentially appraisals may then raise expectations that are not fulfilled. HR pro- fessionals and firms may then be better off without appraisal processes that give feedback but no rewards.

Limitations and suggestions for further research

Although our study is based on a large, representative panel data-set, some lim- itations remain which present some avenues for future research. First, we have no information whether appraisals are solely based on subjective or objective performance indicators or a mixture of both. Further research might therefore analyze whether the results presented here are moderated by the objectivity of the process. Second, we have discussed potential channels of how PAs may impact job satisfaction and presented a more detailed analysis of recognition as one potential channel. Further research should explore further mechanisms driving the positive

768 P. KAmPKÖTTeR

effect of appraisals on job satisfaction in more detail, also by collecting longitudinal data on contextual factors of appraisal processes such as clarity of goals or fairness.

Third, the results for the moderating effect of personality traits are rather weak. It is important to note that in fixed effects models, an attenuation bias is likely to occur due to measurement error in the independent variable. These errors will cause the estimated coefficient to be downwardly biased, leading to smaller coefficients (Angrist & Pischke, 2008). Hence, the results presented here may be interpreted as the lower boundaries for the true effects. Additionally, in large, longitudinal surveys, shorter scales of the personality constructs such as the Big Five are typically applied due to time and budget constraints, which leads to larger measurement errors and lower internal consistency. Gosling, Rentfrow, and Swann (2003) note that the use of short scales may be inevitable in surveys with limited time and budget constraints, which is also true for the SOEP. However, even if shorter scales may achieve acceptable psychometric properties such as test–retest reliability and discriminant validity, prior studies also report substantial differ- ences compared with longer scales in terms of reliability (Rammstedt & John, 2007). Further research should apply longer scales of personality constructs to test whether the predominantly insignificant moderating effects of personality are due to low-scale consistency.

Notes

1. Performance appraisal, performance evaluation, and performance assessment are used interchangeably.

2. Lee and Son (1998), however, find no statistically significant impact of performance appraisals on future performance in a study of a Korean company.

3. The SOEP is similar to the British Household Panel Study (BHPS) and the Panel Study of Income Dynamics (PSID) in the US. See Wagner, Frick, and Schupp (2007) for a description of the SOEP. The data were extracted using the Add-On package PanelWhiz v4.0 (Oct 2012) for Stata. See Haisken-DeNew and Hahn (2010) for details.

4. Grund and Sliwka (2009) and Cornelissen, Heywood, and Jirjahn (2011) analyze the 2004 cross section of the SOEP.

5. Due to panel attrition, this is an unbalanced panel data-set. 6. The reference groups are defined as follows: (1) All employees with no performance

assessments, (2) all employees without appraisals or those whose appraisals have no monetary consequences, and (3) all employees with no performance assessments. Note that differences in the number of observations are related to differences in the responsiveness of employees.

7. Items that are reverse-coded are rescaled before the computation of the means. 8. Only individuals with non-missing values for all items are considered. 9. Note that multiple answers were possible. 10. This result equates to an increase in job satisfaction of 8.7% of its standard

deviation when using standardized values of the dependent variable (using the ordinal information instead the coefficient is 0.171 which amounts to an increase in satisfaction rates of about 2.4%). Using income satisfaction, a specific domain of

THe InTeRnATIonAl JouRnAl oF HumAn ResouRce mAnAGemenT 769

job satisfaction, as a dependent variable confirms our results. The magnitude of the coefficients for income satisfaction is even larger (15.1% of its standard deviation or 4.9% when using the ordinal information).

11. All results are robust when job changers are excluded from the sample. 12. Respondents were asked whether the following statements are applicable to them

(answer possibilities: yes or no): ‘I receive the recognition I deserve from my superiors’, and ‘When I consider all my accomplishments and efforts, the recognition that I've received seems fitting’.

Acknowledgements

I thank the associate editor, three anonymous reviewers, Oliver Fabel, Christiane Niess, Renate Ortlieb, Tommaso Reggiani, Rainer Michael Rilke, Dirk Sliwka, Gari Walkowitz, and participants at the Colloquium on Personnel Economics 2014 in Cologne and the Annual Meeting of the German Academic Association for Business Research (VHB) 2015 in Vienna for helpful comments and suggestions. Support from the German Research Foundation (DFG) through the research unit ‘Design and Behavior – Economic Engineering of Firms and Markets’ (FOR 1371) is gratefully acknowledged.

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Table 1A. random effects and lDV regression results for job satisfaction.

Dependent variable

Job satisfaction

(1) Random effects (2) lDV extraversion .0303*** .0141***

(.0075) (.0044) conscientiousness .0811*** .0354***

(.0072) (.0044) neuroticism −.155*** −.0625***

(.0074) (.0045) open to experience .0241*** .0077*

(.0075) (.0046) agreeableness .0727*** .0369***

(.0073) (.0044) ln net income .0673*** .0469***

(.0151) (.0117) Job change .222*** .382***

(.0165) (.0215) lagged job satisfaction .503***

(.0055)

observations 63,527 51,561 number of individuals 10,650 R2 (within) .040 .361

notes: Job satisfaction (measured on a 11-point likert scale and transformed with the probit- adapted ols approach (van Praag & ferrer-i carbonel, 2004)) is regressed on an employee’s Big five personality traits. In column 1, an individual random effects regression is used, in column 2, a lDV approach. all specifications include a constant. all control variables equivalent to those in Table 2 except lagged job satisfaction in column 2. robust standard errors clustered on individuals in parentheses. The symbols *, **, and ***represent significance levels of 10, 5, and 1%, respectively.

Table 2A. appraisals and job-related recognition.

Dependent variable

Job-related recognition from superior Job-related recognition in accordance with efforts

PA with mc PA without mc PA with mc PA without mc Performance appraisal

.0774*** .0136 .0447** .0414

(.0190) (.0322) (.0193) (.0262) Job satisfac- tion

.0872*** .0885*** .0831*** .0842***

(.0048) (.0058) (.0047) (.0057) lDV Yes Yes Yes Yes

observations 4,137 2,827 4,131 2,822 Pseudo R-squared

.180 .191 .142 .153

notes: an employee’s perception of two different sets of job related recognition (0/1) is regressed on the incidence of being appraised by her supervisor (0/1). In all columns, marginal effects of a probit regression approach controlling for a lDV (recognition in t-1) are estimated. all specifications include a constant. for details on the definition of variables, see Table 2. all further control variables equivalent to those in Table 2. robust standard errors clustered on individuals in parentheses.

*** p < .01; ** p < .05; * p < .1.