CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

In this section, major concepts that relate to the subject-matter of this study were
scholarly defined and they include performance management, productivity,
performance appraisal, employee recognition, employee feedback and labour-
management relations. This we did to ensure that issues of ambiguity/vagueness in
the meaning of concepts did not arise. For instance, Wurim (2012) defines
performance management as the process used to identify, encourage, measure,
evaluate, improve and of course, reward employee performance in an organization.
Also, Idemobi and Onyeizugbe (2011) have defined it as a tool which focuses on
managing the individual and work environment in such a manner that an individual
or team can achieve set organizational goals.

2.1.1 PRODUCTIVITY

In another development, Herman (2009) defines productivity as output of goods

and services per unit of resources used in the production process and with respect
to performance appraisal, Aswathappa (2005) perceives it as the assessment of an
individual‟s performance, and that it is always measured against such factors as
job knowledge, quality and quantity of output, initiative, leadership abilities,
supervision, dependability, cooperation, judgement, versatility, health and the
likes.

2.1.2 PERFORMANCE APPRAISAL

He was of the opinion that performance appraisal entails time to time evaluation of
employee‟s performance with a view to determining whether he/she is performing
up to expectation.

2.1.3 EMPLOYEE RECOGNITION

In the same vein, employee recognition has been defined by Rowley (2011) as the
acknowledgement an organization gives to an employee for accomplishment. He
notes further that it satisfies an employee‟s esteem need. According to him, it is
imperative for organizations to recognize achievements, assign important projects
and provide status to make employees feel valued and appreciated.

2.1.4 EMPLOYEE FEEDBACK MECHANISM

In another development, Jackson and Schuller (2012) have defined feedback as a

mechanism used by management for conveying level of performance and
shortcomings to the employees in an organization. They note that through the
process, employees are intimated of what their performance are with respect to the
expectations of the organization.

2.1.5 LABOUR MANAGEMENT RELATIONS

Concerning labour-management relations, Armstrong (2004) defines it as

consisting of all those areas of human resource management which involves
relationships with employees directly and/or through collective agreement where
trade unions are recognized. The idea of industrial or labour-management relations
involves collective bargaining and group negotiation. He notes in addition that it is
a regulation of employment situation by the employer or management in the
interest of industrial harmony.

2.1.6 PERFORMANCE MANAGEMENT

The study of performance management has been popular within human resource
management study. I attempt to define performance, as deploying and managing
the components of the causal model that lead to the timely attainment of stated
objectives within constraints specific to the firm and to the situation (Lebas, 1995).
At an organizational level of analysis I assume that an organization that is
performing well is one that is successfully attaining its objectives; in other words,
one that is effectively implementing an appropriate strategy (Otley, 1999).

The AMO-model(Appelbaum et al., 2003) claims performance which is a function

of employees’ Ability, Motivation and Opportunity to participate. This means that
an organization will benefit most if it organizes the work process in such a way
that non-managerial employees have the opportunity (O) to contribute
discretionary effort and it could be achieved by giving them autonomy in decision
making, by providing in good communication and by employee membership in
self-directed and/or off-line teams. For their effort to be effective, employees need
to have the appropriate skills and knowledge (A). Hence, organizations can achieve
this by attracting employees who already poses this knowledge, or by providing
employees with formal and/or informal training. Finally, the organization needs to
motivate these employees to put their abilities into the best effort for the
organization (M).

2.1.7 PERFORMANCE MANAGEMENT SYSTEM

In different literature, there are various models of performance management. Each

model has its importance as a system for managing organizational performance,
managing employee performance, and for integrating the management of
organizational and employee performance. Performance management involves
multiple levels of analysis, and is clearly linked to the topics studied in strategic
HRM as well as performance appraisal. Different terms refer to performance
management initiatives in organizations, for example, performance-based
budgeting, pay-for-performance, planning, programming and budgeting, and
management by objectives (Heinrich, 2002). A performance management system,
according to Rudman (2003), is increasingly seen as a means of integrating HRM
activities with the business objectives of the organization, where management and
HR activities areworking together to influence individual and collective behavior
to support the organization's strategy. Besides, he also stressed that the
performance management system must fit with the organization's culture.
Performance management system is a kind of completed and integrated cycle for
performance management. The emphasis of performance management systems is
on continuously improving organizational performance, and this is achieved
through improved individual employee performance (Macky& Johnson, 2000).

Similarly from the suggestion of Lawler (2003), the objectives often include
motivating performance, helping individuals develop their skills, building a
performance culture, determining who should be promoted, eliminating individuals
who are poor performers, and helping implement business strategies. The main
purpose of the performance management system is to ensure that:

1. The work performed by employees accomplishes the work of the company;

2. Employees have a clear understanding of the quality and quantity of work

expected from them;
3. Employees receive ongoing information about how effectively they are
performing relative to expectations;

4. Awards and salary increases based on employee performance are distributed

accordingly;

5. Opportunities for employee development are identified; and

6. Employee performance that does not meet expectations is addressed.

2.1.8 DEVELOPING AND PLANNING PERFORMANCE

Planning is the first stage in the performance management system process cycle
and offers the foundation for an effective process. Planning is a continuous process
in performance management and should be executed with great care (Schneier et
al., 1987). Planning helps to encourage commitment and understanding by linking
the employees' work with the organization's goals and objectives (Schneier et al.,
1987). It usually includes identifying key value drivers of stakeholders, for
example, shareholders, customers and employees of the organization. Similarly,
according to Armstrong and Baron (2004), objectives or goals describe something
to be accomplished by individuals, departments and organizations over a period of
time. They can be expressed as targets to be met, for instance, sales, and tasks to be
completed before the deadline. Armstrong and Baron (2004) further state that
objectives need to be defined and agreed on. The objectives relate to the overall
purpose of the job and define performance areas--all the aspects of the job that
contribute to achieving its overall purpose. Targets then are set for each
performance area.

Rogers and Hunter (1991) stated that goal setting is the fundamental aspect for an
organization. They further indicated that productivity gains will correlate with the
extent of top management support for and employees' participation in the process
of setting objectives. It is a motivational process which also gives the individual
the feeling of being involved and creates a sense of ownership for employees. At
the same time, part of the planning phase includes the agreement on a formal
development plan for the employees. Actually this plan should be based on
requisite skills, behaviors and knowledge and key competencies that will be
required to achieve the objectives and targets set. The development plan can also
include long-term development initiatives which are usually based on potential and
good performance (Nyembezi, 2009).

2.1.9 MANAGING AND REVIEWING PERFORMANCE

Managing performance is the second element of the performance management

system cycle. This step distinguishes performance management as a process from
performance appraisal as an activity (Schneier et al., 1987). According to Schneier
et al. (1987), every employee is responsible for managing his or her own work
performance. This involves: (1) maintaining a positive approach to work, (2)
updating and revising initial objectives, performance standards and job
competency areas as conditions change, (3) requesting feedback from a supervisor,
(4) providing feedback to supervisor, (5) suggesting career development
experiences, and (6) employees and supervisors working together, managing the
performance management process. According to the view of Fletcher, in the
second stage, enhancing communication within an organization is important for
employees to be aware of objectives and contribute to the future development.

2.1.10 REWARDING PERFORMANCE

According to Schneier, Beatty and Baird (1987), the rewarding performance phase
includes three activities: personnel development, linking to pay and identifying
theresults or performance. In Rahdert's (1960) view, the function of personnel
development is that the growth of people can be accelerated over and above that
which would take place naturally and normally, and then maximum the employees'
contribution to personal and group goals. Personnel development has some
development principles. First one is personal involvement. All personnel
development is basically self-development. Opportunity for development is
valuable only if the individual capitalizes on it himself. In fact, the organization
can and should offer encouragement and help, but development activities seem to
be successful only to the degree that individuals become personally involved in
them. Second one mutual objective. The premise of any development activity in
organization, there should be a clear understanding and acceptance of mutual
objectives by both the individual and organization. If the objectives are understood
and accepted, the efforts expended will be far more likely to succeed.
The company should offer universal opportunity to every employee instead of
single out a few of its people and make opportunities available only to them. In
fact, it is difficult to make long-term predictions concerning the ambition, drive,
and growth potential of individuals. The forth principle is individual planning.
Development is individual and should be tailored to fit the individual and the
situation; attempts to squeeze everyone into the same model may even prove a
waste of effort. Moreover, development should be designed to improve
performance on the current job firstly, and then prepare the employee for
promotion. Employees who get promoted are those who are currently doing
outstanding work and thus have been able to demonstrate their capacity to assume
greater responsibilities. Next principle is continuity. If a man who abandoned his
efforts to keep updating skills or information, he will become antiquated.
Especially for nowadays, the new knowledge and skills are constantly being
introduced. Rahdert (1960)

2.2 THEORETICAL FRAMEWORK

We adopted Expectancy Theory for the study. Vroom propounded the Expectancy
Theory in 1964. The choice of the theory was informed by the fact that the issues
involved in the phenomenon under investigation can effectively be explained
within the framework of the theory. The theory is popularly called Valance
Instrumentality-Expectancy (VIE). It assumes that if one thing happens, it will lead
to another and that expectancy in the proposition is the probability that an action or
effort will lead to an outcome. Vroom clarifies thus:“Where an individual chooses
between uncertain outcomes, it seems clear that his behaviour is affected not only
by his preferences among these outcomes but also by the degree to which he
believes these outcomes to be possible. Expectancy is a momentary belief
concerning the likelihood that a particular act will be followed by a particular
outcome”.In fact, according to Vroom, the model is based on the assumption that
man is a rationalbeing, and that he will always try to maximize his pay-off. He will
at any time choose the alternative that would give him the most benefit. Hence,
according to the theory, motivation to work is strongly determined by an
individual‟s perception that certain type of behaviour will lead to certain type of
outcome and his personal preference for that type of outcome (Chandan, 1987 in
Egbo and Okeke, 2009).
Goal setting theory had been proposed by Edwin Locke in the year 1968. This
theory suggests that the individual goals established by an employee play an
important role in motivating him for superior performance. This is because the
employees keep following their goals. If these goals are not achieved, they either
improve their performance or modify the goals and make them more realistic. In
case the performance improves it will result in achievement of the performance
management system aims (Salaman et al, 2005).

Expectancy theory had been proposed by Victor Vroom in 1964. This theory is
based on the hypothesis that individuals adjust their behavior in the organization
on the basis of anticipated satisfaction of valued goals set by them. The individuals
modify their behavior in such a way which is most likely to lead them to attain
these goals. This theory underlies the concept of performance management as it is
believed that performance is influenced by the expectations concerning future
events (Salaman et al, 2005).

2.3 EMPIRICAL REVIEW

According to Fletcher (2001), who gave a completed and comprehensive HR

related performance management definition which is “an approach to creating a
shared vision of the purpose and aims of the organization, helping each individual
employee understand and recognize their part in contributing to them, and in so
doing manage and enhance the performance of both the individual and the
organization”. Similarly, performance management is a management process for
ensuring employees is focusing on their work efforts in ways that contribute to
achieving the organization's mission. It consists of three phases: (a) setting
expectations for employee performance, (b) maintaining a dialogue between
supervisor and employee to keep performance on track, and (c) measuring actual
performance relative to performance expectations.

Armstrong (2004) defined performance management as a means of getting better

results from the whole organization by understanding and managing within an
agreed framework, performance of planned goals, standards and competence
requirements.

“Performance management is a process of designing and executing motivational

strategies, interventions and drivers with on objective to transform the raw
potential of human resource into performance. All human beings possess potential
within themselves in a few or more functional areas. However, utilization and
conversion ofthis potential into deliverable performances is often sub optimal due
to a variety of reasons. Performance management acts as an agent in converting the
potential into performance by removing the intermediate barriers as well as
motivating the human resource". (Kandula, 2006:5).

Comprehensively, Bacal (1999) defines performance management as an ongoing

communication process, undertaken in partnership, between an employee and his
or her immediate supervisor that involves establishing clear expectations and
understanding about: the essential job functions of employee are expected to do;
how the employee's job contributes to the goals of the organization; what doing the
work well means in concrete terms; how employee and supervisor will work
together to sustain, improve, or build on existing employee performance; how
performance management will be measured, and identifying barriers to
performance and removing them. The similarities of general performance
management and HR related performance management are the goal setting,
planning, evaluation, feedback and rewarding activities. However, the HR related
performance management focus on the management of employee or managers,
then motivating employees and managers. Moreover, general performance
management was defined more widely than HR related performance management.
It considers the definition of goals and the measurement of goal attainment) not
just financially but also in terms of meeting all stakeholder aspirations.

Amrstrong and Baron (2004) pointed that at its best, performance management is a
tool to ensure that managers manage effectively. Therefore, performance
management system should ensure the manager of employees or teams know and
understand what is expected of them, and have the skills and ability to deliver on
these expectations and be supported by the organization to develop the capacity to
meet these expectation are given feedback on their performance; and have the
opportunity to discuss and contribute to individual and team aims and objectives.
Moreover, according to Armstrong and Baron (2004), performance management
system is also about ensuring that managers themselves are aware of the impact of
their own behavior on the people they manage, and are encouraged to identify and
exhibit positive behaviors. The actual performance is compared to the desired
performance, so the outcome is evaluated and a development plan is set according
to the weakness with reference the strategy. This outcome also provides a feedback
mechanism to employees. In order to improve the feedback and update and discuss
initial objectives, the organization should also focus on communication within
employees and between employees and managers. It is important for managers to
develop a fully integrated strategy which enables the different forms of
communication to contribute to the success of the firm's mission or common goal
(Marion, 1998). Moreover, continuous communication or exchanging information
between an organization's strategic managers and its internal stakeholders should
be designed to promote commitment to the organization and aware of its changing
environment and understanding of its evolving aims (Welch&Jackson, 2007).

The aim of this master thesis is to define performance management system,

employee performance and employee performance measurement, and also analyze
the relationship between performance management system with employee
performance.

The 2004 WERS data was analyzed in order to test the impact of performance
management system on employee performance by using a package STATA for
windows. The Kruskal-Wallis test and Ordered logit regression were used to test
the relationship and the results show the activities: continuous communication
within organization and personnel development impact significantly and positively
on employee performance. However, the results show that the performance
management system has a positive but insignificant relationship with employee
performance.

2.4 SUMMARY

This chapter delves into the literature review from a study focusing on
performance management and its various aspects. It defines and discusses key
concepts such as productivity, performance appraisal, employee recognition,
employee feedback mechanisms, and labor-management relations. Performance
management is examined through different models, including the AMO model and
various theoretical frameworks like Expectancy Theory and Goal Setting Theory.
The document emphasizes the importance of aligning performance management
systems with organizational goals, integrating HR activities, and continuously
improving both individual and organizational performance. Empirical studies are
reviewed to analyze the relationship between performance management systems
and employee performance, using data analysis methods like the Kruskal-Wallis
test and Ordered logit regression. The findings suggest that continuous
communication and personnel development significantly impact employee
performance, while the overall performance management system shows a positive
but not statistically significant relationship with employee performance.