Implementing an employee performance management system in a ...

Implementing an Employee Performance Management System in a Nonprofit Organization Karen Becker, Nicholas Antuar, Cherie Everett Nonprofit organizations are not exempt from the imperatives of employee attraction, retention, and motivation. As competition for staff, donors, and funding increases, the need to manage employee performance will continue to be a critical human resource management issue. This article outlines a study of the introduction of a performance management system in an Australian nonprofit organization and analyzes its design and implementation. It explores how performance management can be introduced and used effectively within a nonprofit environment to benefit staff and the organization. However, the use of performance management is not without its challenges, and the research also identified initial employee resistance and a resulting initial spike in labor turnover. However, findings indicate that if nonprofit organizations are willing to undertake consultation with staff and ensure that the organization’s specific context, values, and mission are reflected in the performance management system, it can be a useful tool for managers and a direct benefit to employees.

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management systems have been implemented as a means of managing and measuring the performance of individuals or teams by providing clear accountability and measures on which to assess performance. The intent is that such systems support the strategy and goals of the organization, and that by having a transparent system, all employees are encouraged to contribute, individually or in groups, to the strategic direction of the organization. While the need for, and benefits of, performance management can be argued very simply, the

NONPROFIT MANAGEMENT & LEADERSHIP, vol. 21, no. 3, Spring 2011 © 2011 Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.20024

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The management of employee performance, regardless of sector or industry, has long been a contentious issue.

means through which it is achieved is where the complexity exists. In a nonprofit environment, this complexity can be exacerbated by potentially differing needs, motives, and values of the paid employees (Schepers and others, 2005) and by the existence of unpaid voluntary workers. Although performance management and performance measurement are often considered to be closely related, each represents a specific field of literature in its own right. Performance measurement generally focuses on quantitative measuring of performance at the level of organizations or at least organizational divisions (for example, see Cocca and Alberti, 2010; Taylor, 2009), and even when this issue is investigated specifically in nonprofit organizations (for example, Brickley and Van Horn, 2002; Moxham, 2009; Steinberg, 1990), this predominantly financial and organizational focus remains. Although some forms of performance management may draw on performance measurement, in the human resource management literature, performance management typically focuses on the provision of feedback to individual employees or groups of employees, with the underlying philosophy of building an effective employment relationship (Fletcher, 2001; Shields, 2007). The focus of this article remains on the use of performance management, rather than performance measurement, in the nonprofit environment. The goal of this research was to analyze the development and implementation of a performance management system in a nonprofit organization to assess the extent to which general performance management principles and approaches can be applied to a nonprofit context. The findings identify some critical elements of successful development and implementation of a performance management system for nonprofit organizations.

Performance Management: The Literature and a Framework The management of employee performance, regardless of sector or industry, has long been a contentious issue. Although many espouse the virtues of performance management systems for aligning employee effort with the strategic direction of the organization (den Hartog, Boselie, and Paauwe, 2004; Fletcher, 2001), performance management also has some vocal critics who claim that its potential is not being realized; worse still, they charge that ineffective or inappropriate use has detrimental effects (Winstanley and Stuart-Smith, 1996). Performance management is arguably one of the most contentious human resource management topics, with much written about the effective use and misuse of performance management (for example, see Perrin, 1998). It can be argued that performance management should be treated like any other organizational change, and without due regard for organizational culture or effective change

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management processes, it may not deliver the anticipated outcomes (Mento, Jones, and Dirndorfer, 2002; Waddell and Sohal, 1998). Warnings have also been issued against the wholesale importing of performance management systems into nonprofit organizations from the for-profit sector without regard for the particular context of nonprofit organizations (Cheverton, 2007). However, very few comprehensive examples exist highlighting the critical elements for the successful implementation of performance management in the nonprofit sector. Nonprofit organizations have long recognized the importance of their employees and volunteers in the delivery of services; however, managing their performance has often eluded or been avoided by managers in the sector. As Kaplan (2001, p. 356) highlights, making the link between “mission and measures” is a critical issue for performance management and applies to nonprofit organizations just as much as it does to public and for-profit organizations. However, what is often unique to nonprofit organizations is the finding that employees may sacrifice potentially higher salaries or benefits elsewhere to work within an organization whose values align with their own (Cheverton, 2007); in effect, they are providing part of their labor as a donation to the particular cause of the organization. Although not all studies have shown decisive pay differentials (for example, see Goddeeris, 1988; Mocan and Tekin, 2003), it is nonetheless critical that nonprofit organizations consider the potential benefits of providing performance feedback to employees. In addition, researchers have found that employees of nonprofit organizations experience higher job satisfaction and are more intrinsically motivated than their for-profit counterparts (Benz, 2005; Devaro and Brookshire, 2007). Although this is often seen as one of the greatest strengths of the sector, it also offers a challenge to managers to develop an environment to retain and motivate these employees. A systematic approach to performance management begins with defining the exact skills, knowledge, and abilities required; classifying the acceptable behaviors; and identifying how outcomes will be appraised (Shields, 2007). Shields (2007) identifies that such a system can typically measure one or more of these variables: inputs (competencies), processes or the way in which these inputs are applied (behaviors), and outputs (results). All performance management systems are underpinned by at least one of these variables, and often a combination of behaviors and outputs (Mwita, 2000). Recognition is growing that measuring only outputs is not necessarily the best way to align employee performance with organizational objectives—in the worst scenario, sending a message that the end justifies the means. Identifying the critical behaviors for acceptable performance and the competencies that will contribute to the growth of human capital within the organization is also essential (Kong, 2007). As a result of this growing awareness, a more comprehensive and

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Central to performance management systems are the criteria on which assessment will be based.

multidimensional approach to performance management emerged with the introduction of systems such as the balanced scorecard approach (Kaplan and Norton, 1996). Although this approach has been advocated as a means of more effective performance management in the nonprofit sector (Kaplan, 2001; Manville, 2007), its use cannot be claimed to be widespread; even within the private sector, this approach has taken some time to be embraced. With the question of what to measure as the central concern, there is a more detailed issue of how the elements of a performance management system should be aligned and used. While most generic performance management literature discusses the existence of common elements (Camardella, 2003; Gomez-Mejia, 1990; Levy and Williams, 2004), Shields (2007) drew these together into a cycle depicting the links between the elements, and these underpin the assessment of the performance management system in this research. This cycle is shown as Figure 1. Figure 1 reinforces that central to performance management systems are the criteria on which assessment will be based: behavior, results, competencies, or a mixture of these criteria. There are then a number of elements within the system, showing performance management as a cyclical and iterative process.

Methodology This article reports an exploratory case study of a nonprofit organization that has developed and implemented a performance management system for its paid employees. Data were collected for this study using a number of sources. Two extensive semistructured interviews were conducted with the organization’s human resource (HR) executive manager, who provided access to all documentation relating to the performance management system. The interview questions were structured around the Shields model (2007) and sought detail about how each of the stages was undertaken in the case organization. In addition, the results of a questionnaire gathering views of employees in relation to the implementation and impacts of the performance management system have been analyzed. The questionnaire was administered by the HR department at two points in the performance management cycle: after the half-year performance review and after the end-of-year performance review. The results were provided to the researchers to supplement the interview findings and assist with triangulating data. The questionnaire, developed by the HR manager in consultation with other organizational representatives, contained statements relating to the performance management system processes and implications. The questionnaire used Likert scales with labeled end points ranging from 1 (Strongly Disagree) to 10 (Strongly Agree). Some example statements were, “Thinking about my performance review

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Figure 1. Performance Management Cycle

Monitoring

Learning and development

Informal feedback

Performance criteria: • Competencies • Behavior • Results and goals

Formal assessment or rating

Action planning

Diagnosis and formal review

Source: Shields (2007, p. 23). Used with permission.

discussion, I found it to be time well spent,” and, “I have found my objectives very worthwhile in helping me to achieve my work and team goals.” The employees were asked to rate these specifically in relation to either the half-year or end-of-year discussion. In addition, open-ended questions provided an opportunity for respondents to elaborate on areas of importance to them. The questionnaires were provided to all employees who were subject to the performance management system, in electronic and hard copy format, and completion was voluntary and anonymous. Fifty-seven usable responses were obtained from a possible 141 respondents for the half-year questionnaire, and 26 usable responses were obtained from a possible 142 respondents, representing response rates of 40.4 percent and 18.3 percent, respectively. The lower response rate in the second round is directly attributable to the fact that it was administered at a busy time of the year, when many staff were engaged in budgeting and planning and therefore had limited time in which to complete the questionnaire. In-depth statistical analysis of the questionnaires is not included in this article, but key findings are reported as a supplement to the findings from the interviews and documentation review. Because

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the questionnaire was anonymous and gathered only general biographical information about the employee, there was no way to track nonresponse bias or the number of employees who responded to both questionnaires. We recognize this as a limitation of the questionnaire results.

Case Organization The case organization was Cancer Council Queensland (CCQ), a nonprofit organization located in Australia. CCQ was established in 1961 by three individuals with a passion for furthering the understanding of cancer in the community. The organization now employs approximately 240 staff; the average age is 40 years, 82 percent of employees are female, and approximately 90 percent of the staff work in professional roles. The organization has four core business areas: community services, fundraising and marketing, operations, and the Viertel Centre for Research in Cancer Control. The funding for CCQ comes entirely from fundraising and philanthropic donations, and the organization proudly publicizes that it receives no government funding for its operation. CCQ also relies on the services of approximately twenty-five hundred registered unpaid volunteers statewide to support its operations. These volunteers do not currently participate in the performance management system and therefore are not the subject of this article. The CCQ personal planning and development (PPD) process was introduced three years prior to this study, being conducted at a time when a new CEO was appointed. The goal for the process was to introduce greater accountability and link individual and team performance to the organization’s overall goals. In addition, the organization had a large number of long-term staff who potentially required further development and direction due to the rapid growth of the organization—an increase of approximately 100 percent in five years. Although the CEO was new to the position, he had an extensive background in the organization and understood the challenges of rapid growth. There was management recognition that with expansion came the need to better articulate and cascade organizational vision and strategic goals in a more concrete way for all employees, while providing an opportunity to recognize the excellence within the workforce that might become hidden by this rapid growth.

System Development and Implementation Approach Following the decision to establish a performance management system, the HR professionals within the organization embarked on a consultation process with staff in relation to broader HR management issues, and performance management in particular. Focus groups

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were conducted to identify how employees were being managed and how they viewed performance management. The average length of tenure for employees at that point was approximately eight years, with most individuals reporting no formal evaluation or feedback on their performance during their period of service. Based on the feedback from focus groups, a draft policy was established with an overriding philosophy of providing employees with timely and useful feedback on performance as well as giving employees an opportunity to identify their contribution to the organization’s goals and plan for their own development. Further consultation then occurred. The HR executive manager reported that this consultation was not without its challenges: “A lot of staff were really concerned; they thought a performance management system was only about managing poor performance, not necessarily recognizing good performance as well.” It was clear that this provides a challenge for those considering the use of performance management and needs to be addressed within the design and implementation of the system. The consultation process was conducted over twelve months, and then extensive training on the new system was undertaken over a three-month period prior to implementing the system. All employees received the training: those who would conduct the reviews and those being reviewed. The training explained the system and its goals and objectives, along with how to set appropriate goals and conduct these conversations in a constructive manner. Training was conducted internally by facilitators familiar with both the system and the organizational environment. Following training, an initial performance feedback session was conducted for individuals with no performance rating, and the first formal assessment was conducted six months later. CCQ began to use a twelve-month cyclical approach commencing with individual performance planning, conducting a half-year review, and then concluding with an end-of-year review. The halfyear review provides feedback, but without a formal rating or assessment. The end-of-year review appraises performance and requires the allocation of ratings against achievement of objectives and demonstration of core competencies. The appraisal tool, the Personal Planning and Development (PPD) Form, has five sections with an optional sixth: PPD Objectives, PPD Competencies, Professional and Skill Development, PPD Agreement, Approvals and Performance Review Comments, and an optional Career Development Plan.

Findings and Discussion This section provides a detailed analysis of the development and implementation of CCQ’s performance management system and evaluates the system against the elements of the performance management

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cycle set out in Figure 1 (Shields, 2007). Results of the system review after implementation and feedback from the questionnaire conducted after the first full cycle are also discussed and analyzed.

Development and Implementation

The organization . . . encountered some initial resistance to the system implementation.

The consultative approach to development resulted in a system with accompanying documentation that creates individual accountability aligned with the three key strategic priorities of CCQ: service, discovery, and enterprise. The HR executive manager emphasized the importance of these values in a 2008 interview: “We developed the system with our core values and mission as the starting point, and that was to underpin the entire system.” The policy developed outlines CCQ’s performance management philosophy and notes the key elements of goal setting in line with the organizational strategic plan and departmental plans, and the importance of not only an end-of-year evaluative review but also a midyear developmental review. Like many other performance management systems in the implementation phase, the skills of the appraiser in setting objectives and measuring achievement in a valid and reliable manner are important. Educating managers in conducting effective performance discussions and appraisals reduces this risk but does not eliminate it; therefore, training and developing managers in the use of the system was a key element of the implementation process. In the questionnaire administered to employees after the first full performance management cycle, 65 percent of employees strongly agreed that their overall experience with the PPD program was very positive. Although this result bodes well for the perceived value of the performance management system as a whole, the organization also encountered some initial resistance to the system implementation. The HR executive manager had this to say: We had a lot of staff who had been with the organization for a very long time with no formalized performance management system. We knew when we implemented the system that it would probably identify some gaps in terms of skills and performance. . . . Within the first six months of rolling this out, there were staff who left saying, “I don’t want my performance to be managed. . . .” Initially we had significant turnover: 15 percent over a six-month period. However, she also believes that based on staff input and feedback, the benefits of the system outweigh this cost: This system was built around the consultation with staff. . . . It was really about what they needed to meet their objectives and what would suit the organization. Certainly we would

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have preferred it if staff didn’t self-select out of the organization, but that’s inevitable when you’ve got a forty-year-old organization that’s never had a formal performance management system. The process used in designing and implementing the PPD process took a significant investment of time and resources. However, it appears that many staff see the benefit of the system and value the feedback they obtain as a result.

The Performance Management Cycle A twelve-month cyclical approach is common to many organizations. This approach of aligning the goals of the individual for the year with business planning strengthens the value proposition of performance management (Olsen and others, 2007). Because CCQ requires individuals to identify where their objectives fit with departmental goals, which themselves are drawn from the strategic plan, there is significant potential to create strong linkages between individual success and organizational success (Shields, 2007). These goals are set at the annual appraisal and then reviewed at the midyear developmental meeting. It is therefore important that although this review is not evaluative, employees see its benefits in helping them identify gaps or issues that can be addressed through development activity or corrective action. In the questionnaire, 69 percent of respondents strongly agreed that the half-year performance review discussion was “time well spent.” Although the CCQ appraisal tool is central to the system, the overall performance management cycle is systematic enough to ensure that performance management is not just about the performance appraisal event, but focuses on providing performance feedback to employees on an ongoing basis.

Performance Criteria The CCQ system is based around a mix of competency, behavioral, and output measures. The main section of the planning and review document provides individuals an opportunity to develop their goals (outputs) in consultation with their manager. The second section identifies four key elements identified as critical to all roles within the organization. The system labels these elements—job knowledge, teamwork, communication skills, and planning and organizing—as competencies, although they are described in more behavioral than competency terms, which may lead to confusion. Behaviors can be defined as the way in which something (a job, task, or activity) is done, and competencies are the inputs, knowledge skills, and abilities that enable performance (Shields, 2007). CCQ is relying on a discussion between the employee

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and manager about his or her behaviors on the job and the extent to which these fit with the mission and culture of the organization, a process more aligned with evaluation of behavioral criteria than competencies. Nonetheless, the criteria used in this performance management system reflect more than quantitative outputs; they also encourage dialogue about how individual behaviors contribute to furthering the organizational mission and values.

Monitoring and Informal Feedback

Employees’ responses reflect positively on the implementation of the system.

A key element of an effective performance management system is the extent to which ongoing monitoring and informal feedback is built into the process. One of the critical issues in effective performance management is that it is not a single annual event but a cycle of ongoing performance discussion and feedback. By including a midyear review with a focus on the reviewing progress to date and identifying any developmental actions, the CCQ system has built in a performance discussion in addition to the evaluation at the end of the cycle. Ongoing management development will be necessary in order to ensure that performance management and feedback become part of the culture rather than an event or administrative task. As one of the respondents to the questionnaire remarked, “I think the system is excellent as a tool, but the success depends on the manager evaluating and how well they utilize the process. They need to put the effort in so it works.”

Formal Assessment and Review Formal feedback and review processes are often the key focus of a performance management system. CCQ’s documentation is comprehensive, and the strong consultation process used to develop the system has resulted in a tool that most employees and managers feel comfortable using. Ongoing reviews of the system continue to identify possible changes in line with shifting organizational requirements and priorities. The questionnaire, conducted after the first full cycle of the PPD program, provides some useful insights into the perceived value of the system and potential areas for improvement. Respondents were asked to reflect on their end-of-year performance discussion. Overall, responses were extremely positive. For example, 78 percent believed that the discussion was time well spent, and 74 percent believed the discussion was well prepared and thought out. Similarly, 83 percent felt that the review provided a fair and accurate reflection of their performance and competencies, and 74 percent believed the review provided a fair and accurate assessment of their areas for improvement. Importantly for an organization such as CCQ, 79 percent of respondents believed that the PPD was an opportunity to recognize their contribution to the organization. Employees’ responses reflect positively on the implementation of the system and demonstrate that employees overwhelmingly find value in it.

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One of the most contentious issues of the formal assessment phase is whether to use rating scales and, if so, how to use them (Judge and Ferris, 1993; Murphy, 2008). CCQ required its managers to rate the achievement of employee objectives and competencies on a three-point nominal scale: good performance, satisfactory performance, or improvement required. There was no overall rating for each employee. The feedback received from the questionnaire following implementation indicated that staff would prefer a more comprehensive rating scale: “The form could be more relevant if the scale was increased from three to five points for assessment.” “I do feel the categories could be more spread out. There is a BIG difference between SP [satisfactory performance] and GP [good performance] with many shades of gray. Could these be extended?” In addition, a number of respondents indicated that they would find an overall rating of performance useful: “There is a need for more than three ratings. ‘Good’ is not very motivating. Need an overall performance rating.” “Ratings should be changed to better reflect higher performers. Overall rating would be useful.” Acting on this feedback, CCQ has subsequently changed the rating to a five-point nominal scale: outstanding performance, good performance, satisfactory performance, improvement required, or unsatisfactory performance. The organization has decided not to provide employees with an overall rating in order to remove the risk of focusing on one summary rating to the detriment of understanding the breadth of feedback being presented.

Action Planning Emphasis is placed on being methodical in the setting of objectives within the PPD program through using the SMART approach. Using specific, measurable, achievable results and time-bound goals is a common approach to goal setting (Shields, 2007). Limiting these objectives to no more than six is aimed at ensuring that the employee has sufficient focus without being overwhelmed by too many expectations. Linking individual goals to the business plan from the outset also ensures that goals set are relevant to the strategic direction of the organization. Individuals were provided with the goals of their department and then, in joint discussion with their manager, agreed how their particular role could assist in achieving these objectives. Goals were then established on this basis.

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In relation to the setting of objectives, the questionnaire asked respondents to rate the statement, “I have found my objectives very worthwhile in helping me to achieve my work and team goals,” with 74 percent of respondents strongly agreeing. In addition, comments relating to the setting of goals included, “I constantly refer to my PPD in my everyday work as a tool to assist in planning and implementing my programs, and find it reassuring that these goals are agreed to by my manager to be used as an indicator of my performance.” Previous research has found that individual planning and the use of personal development plans in particular provide employees with a sense of direction and control over their work (Higson and Wilson, 1995; Tamkin, 1996; Taylor and Edge, 1997). Comments such as these from CCQ employees provide evidence that the PPD system gives staff effective direction and focus for their work by linking their individual goals to the broader departmental and organizational goals.

Learning and Development

Comments . . . from CCQ employees provide evidence that the PPD system gives staff effective direction and focus for their work.

The final element of the Shields (2007) model of performance management is the link to learning and development. The PPD program has identified two levels of employee development: professional and skill development, and career development, with the latter being an optional element of the system. The professional and skills development area asks managers, in consultation with the employee, to identify relevant training or development for the individual, including potential dates and estimated expenses for inclusion in wider planning processes. In relation to the training and development element of the discussion, the questionnaire administered after system implementation indicated that 73 percent of respondents felt positive about being given the opportunity to identify and agree on training and development needs with their manager. The final section of the review, an optional element relating to career development, was included to provide employees with an opportunity to explore their longer-term career aspirations with their manager. This is not always a part of performance management systems, and as the HR executive manager explained: We use this [career development section] to encourage people to not only talk about their career at CCQ but their ongoing career and where they want to be and what we can do as an organization to help them achieve their goals whether they are with the organization or not. At times managers can find that a little bit confronting—talking to their staff about what they want to do when they leave the organization, not just when they’re with the organization.

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Table 1. Key Elements of the Performance Management System Element

Key Issues

System development and implementation

Performance criteria

Monitoring and informal feedback

Formal assessment and review

Action planning

Learning and development

Alignment with organizational strategic values, goals, and priorities Consultation with staff Policy development and feedback from stakeholders Decisions regarding system focus and elements Development of appropriate tools and forms Skills development in appropriate system use for all those involved in the process Decision regarding system focus on competency, behavior, or output or a combination of these Appropriateness of chosen criteria for organizational focus and values Ensuring ongoing feedback and review for staff throughout the performance management cycle Identification of specific review points within the cycle and ensuring these occur Use of a transparent and easily applied rating system Tools and forms applied in an appropriate manner Provision of opportunity for genuine exchange about performance, outcomes, and plans Opportunity to set goals that link individual outcomes to team and organizational goals Allow planning for personal and professional development Implementation of plans for employee development Providing scope for professional and skills development for current role and future-focused personal development

By providing employees with the opportunity to consider both their short-term and longer-term development needs with their manager, the organization is ensuring the ongoing development of the capability of their staff.

Conclusion CCQ’s performance management system provides an excellent example of how a generic model of performance management such as that proposed by Shields (2007) can be successfully applied in a nonprofit context. Table 1 summarizes the key elements identified by this research as being important at each stage of the Shields model. The system gives individual employees an opportunity to discuss their performance, plan for the coming year, and identify development opportunities. Not only has the system proved to be successful, but of particular note is the organization’s process of development and implementation. The support of senior management, coupled with the genuinely consultative nature of development and implementation, and commitment to ongoing refinement

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The design and implementation of the system in this case organization was not without its challenges.

based on feedback, facilitates a higher level of ownership, commitment, and, ultimately, accountability for all employees. This case shows that the extensive consultation process prior to development and implementation avoided the potential issues Cheverton (2007) warns of when adopting practices from the for-profit sector without concern for industry context. The design and implementation of the system in this case organization was not without its challenges. The initial concern of employees about the purpose and objective of the system took time and planning to address, including extensive consultation and training. CCQ also faced the challenge of long-term employees who had never before been subject to a performance management system, and in fact the organization encountered an initial spike in turnover as a result. However, the HR executive manager now reports that with the growth of the organization has come many employees from external organizations where performance management is accepted as part of the business. Finally, supervisors and employees who were already time-poor were apprehensive about the time that would be required to implement and use such a system, a concern that was not without foundation. However, since the implementation, there has also been a recognition of the benefits of improved direction for and input of staff and the development of the ability of managers to discuss subordinates’ performance in a constructive manner that benefits both the employee and the organization. This case raises a number of areas for potential future research. First, the performance management system was applied only to its paid employees. In nonprofit organizations, volunteer workers comprise a large part of the labor force, and how to manage their performance is an obvious area for future research. In addition, the link between performance management and the organization’s reward systems, both formal and informal, is worthy of further investigation. Finally, this case provides an overview of one organization that has successfully developed and implemented a performance management system. However, identifying cases where performance management systems were not successful and researching organizations with varying funding and ownership structures would provide the opportunity to compare and contrast systems and impacts. There is no doubt, however, that the CCQ experience provides other nonprofit organizations with an indication of how performance management theory and processes can be put into practice in the nonprofit sector with positive results. KAREN BECKER is a senior lecturer in the Faculty of Business at Queensland University of Technology, Australia. NICHOLAS ANTUAR is executive manager of organizational development at the Royal Automobile Association of Queensland, Australia.

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CHERIE EVERETT is executive manager of human resources at the Cancer Council Queensland, Australia.

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