Performance Management System + Performance Based ESOP in SHRM

 

Performance Management

Performance Management can be defined as a strategic and integrated approach to delivering sustained success to organizations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors (Armstrong, 1988).

Performance Management is one of the key processes that, helps employees know that their contributions are recognized and acknowledged. Further, it is an ongoing process of communication between a supervisor and an employee that occurs throughout the year, in support of accomplishing the strategic objectives of the organization. The communication process includes clarifying expectations, setting objectives, providing feedback, and evaluating results. Moreover, performance management is a process that is designed to improve organizational, team, and individual performance and is owned and driven by line managers.

Performance management systems vary enormously in their complexity-from an occasional informal chat with the employee about how their work is going, to systems with multi-page appraisal forms for different levels of staff, with performance ratings that are linked to compensation and promotion decisions.

Performance Appraisals

In a broader sense, performance appraisal can be defined as a structured formal interaction between a subordinate and supervisor, that usually takes the form of a periodic interview (annual or semi-annual), in which the work performance of the subordinate is examined and discussed, with a view to identifying weaknesses and strengths as well as opportunities for improvement and skills development (Wijewardena, 2005).

It is a flexible process that focuses on values and behaviors as well as objectives and it focuses on quantified objectives and is often linked to pay whereas performance management is less likely to be a direct link to pay. Performance appraisal provides an opportunity to communicate to employees what the company wants them to do. Performance evaluation, therefore, personalizes organizational strategy and performance expectations. Employees’ performance appraisal is an important aspect of their careers because it answers their basic questions as to how they are doing.  Therefore, feedback is an important process in performance appraisal.

Performance Pay

A larger continuous performance management program uses the pay-for-performance compensation model as part of its compensation scheme.

The basic idea is that you pay employees based on how well they perform their duties. You do this by setting performance goals for each employee and paying them a bonus when they reach or exceed their objectives. This might be in the form of merit pay, or one of a variety of variable pay programs.

One of the big questions about performance pay is whether it increases or decreases commitment. The answer could be ‘neither’ or ‘both’ since a reward system can pursue a range of objectives at the same time, some of which may be achieved while others are not. 

Further Armstrong et al. (2005) stated that researchers’ final points underlined the fact that there is no such thing as a perfect pay system, and that procedural justice – whereby pay arrangements are seen as fair and transparent – seems to be viewed by employees as more important than actual pay.

Performance-based ESOP

An employee share ownership Plan (ESOP) is a mechanism used to allocate shares of the company for its employees through trust. Perceptions of employee share ownership are found in different ways such as Finance, Financial Economics, Labor Economics, Corporate Finance, Human Resource Management (HRM), and Industrial Relations. This study attended to view ESOP from the point of HRM.

The aim of this study was to identify the applicability of a performance-based ESOP plan and, the empirical evidence proved that the banking & IT sector has identified the significance of the ESOP as an effective tool than conventional and it has given great courage for their business succession by motivating employees. Although there is a problem with the existing procedure no doubt has been identified that Sri Lankan banking & IT organizations have implemented ESOP as an effective motivational tool that helps to enhance organizational performance.

The results indicated that there are a number of benefits to both employees and employers from ESOP. It can be arranged as the low price that purchases shares, long time financial benefits, and encourage ownership of employees to the company from the employees’ part and, to improve productivity, to retain recruited employees, to purchase stock from a loyalty party, to raise capital for the company, and for tax advantages from the employer side.

I have done a small investigation regarding the ESOP module to check why this approach is not popular among organizations. I'm able to overlook only the banking and IT industries for this small research.

Problem Statement

According to the findings number of service years and salary levels are the criteria that are considered in offering ESOPs for employees and the performance of employees is not given any consideration. Any senior employee whether he has performed well or not he will be eligible for the plan as well as any junior member who has performed well than the senior person will not be entitled to the plan. 

Recommendation

According to the results although existing criteria are very transparent and the administration procedures are easy these criteria should be changed in order to adopt ESOP as a motivational tool. Therefore, the plan should be implemented based on employee performance so that the junior management level staff also can gain benefits from ESOP like senior and middle management level employees.

Any employee has lower service experience and if he has performed well then he is eligible for higher benefits. Also although any employee has more service experience and if he has underperformed he is eligible for fewer benefits. In the current business world, only consider the target-oriented persons but not the person’s history or past contribution. So same can apply to the ESOP too.

Moreover, junior management-level employees can gain few benefits from these kinds of executive-based employee benefits plans, and therefore broad-based employee benefits plans should be considered in order to enhance the benefits that can be gained through ESOP to the particular employee category. Because the job role of junior management-level staff is significant when achieving organizational objectives.

However according to the results, by establishing a comprehensive performance management system, an organization can easily commence a performance-based ESOP. For that, first a comprehensive performance management system should be developed and employees should be informed about the importance of having a performance-based ESOP.

Conclusion

Recommending to have a comprehensive performance management system in place in the organization and as a motivational tool apply the performance-based ESOP model to retain the experienced or significant employees in the organization.

References

Armstrong, M., 1988. Performance management key strategies and practical guidelines. 3rd ed. India: Replika press pvt ltd.

Armstrong, M., Thompson, P., Brown, D. and Cotton, C., 2005. Reward management. In: Kessler. I., e-reward, Chartered Institute of Personnel and Development (CIPD).

Wijewardena, D., 2005. Motivating junior management level employees of the ABC bank through an effective performance management system. Thesis (NDHRM). Institute of Personnel Management Sri Lanka.