The Development of a Pay-for-Performance Appraisal System for Municipal Agencies: A Case Study

By Mulvaney, Michael A.; McKinney, William R. et al. | Public Personnel Management, Fall 2012 | Go to article overview

The Development of a Pay-for-Performance Appraisal System for Municipal Agencies: A Case Study


Mulvaney, Michael A., McKinney, William R., Grodsky, Richard, Public Personnel Management


Introduction

Performance appraisal has become a general heading for a variety of activities through which organizations seek to provide feedback to their employees, develop their competencies, enhance performance, and distribute rewards. (3) An agency's performance appraisal system impacts individual and organizational operations by prompting decisions regarding compensation and merit salary increases, training and development opportunities, performance improvement, promotion, termination, organizational climate, and financial management. Despite expected benefits, poor design often leads both administration and staff to resist the process as a painful annual exercise.

Recognizing that one of the major difficulties with performance appraisal stems from various competing objectives (i.e., development, promotion, termination, staff training, etc.), but that salary decisions account for nearly 80% of its use, (4) this study provides a case study of the collaborative steps involved in creating a performance appraisal system used for merit salary increase decisions. It then assesses the staff's attitude toward the new vs. the old appraisal system.

Review of Related Research

In describing the cognitive and affective value of employee participation in the development of appraisal systems, research has identified five benefits: (1) employee participation is an effective tool for enhancing job-related autonomy, a necessary precondition for employee growth; (2) appraisal participation provides employees with a voice into the appraisal process. If employees are confident in the fairness of the appraisal process, they are more likely to accept performance ratings, even adverse ones; (3) employees possess valid, unique, and relevant performance information that is unavailable or unobservable by the rater, therefore the quality, quantity, accuracy and validity of performance appraisal information increases; (4) employee ownership in the process provides a personal stake in the success of the system, enhancing employee acceptance; (5) employee participation generates an atmosphere of cooperation and employee support. (5)

This study is situated within a Strategic Human Resource Management (SHRM) framework that places great importance on the employees and managers in the success of agency operations. (6) SHRM is cognizant of the value of an agency's material resources (i.e, financial and physical), but asserts that it is equally, if not more, important to give attention to an agency's human resources. This approach is particularly appropriate within the service fields of municipal government where human resources convert material resources into services and programs, and where labor typically accounts for more than 60% of municipal agencies operational budgets. (7)

A SHRM framework suggests that managers tailor their pay systems to support their agency's strategic objectives. This approach is based on contingency notions, suggesting that differences in an agency's strategy should be supported by corresponding differences in the agency's human resource strategies, including compensation. (8) The underlying premise of SHRM, as it relates to compensation, is that the greater the alignment, or fit, between the agency's objectives and the compensation system, the more effective the agency. (9)

Pay-for-performance systems have been described as one of the most effective methods of motivating and increasing employee performance. (10) These plans theoretically forge a link between pay expenditures and individual productivity. (11) A well-developed pay-for-performance appraisal instrument also addresses the norm of distributive justice, or the commonly held belief that individuals should be rewarded in proportion to their contributions. An adequately developed appraisal instrument potentially diffuses employee concerns about equity and fairness while motivating employees to increase performance. …

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