As we have seen above, contingent and variable pay schemes have always caught
employers’ interest and attention in that genuinely seen and perceived as an attractive
and fascinating approach to reward management. Indeed, whether this type of pay
arrangements is not used by many employers is because what it is deemed to properly
work in theory has not always proved to be effective in practice. All too often, the
introduction of variable pay schemes has in fact just proved a failure.
The reasons why, contrary to all expectations, these programmes usually end in failure
are twofold: firstly, managers’ difficulty to agree with employees clear and realistic goals;
secondly and most importantly, the difficulty to objectively assess and measure these.
Goal–setting
Irrespective of the tools or processes an organization has recourse to in order to assess
and review performance (either performance appraisal, or performance management or
performance appraisal as an effective tool of performance management), setting and
agreeing objectives with individuals definitely represents one of the most difficult tasks
managers have to deal with as part of performance review. Even more so, when variable
pay arrangements are in place within the business and pay decisions are exclusively
made on the basis of the reviews outcome.
Albeit in many cases objective-setting is virtually perceived by management as a
formality or even as a nuisance, managers at all levels should take extra care with this
activity. Putting aside the objectively existing difficulties associated with the execution of
this undertaking in fact goal-setting definitely represents a very sensitive issue for
employees. Beyond the link which may or may not be formally established between pay
and performance, individuals usually associate a remarkable importance with the
attainment of their objectives and with the feedback received from their managers.
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Dessler (2005) and Williams (2002) suggest that goal-setting is indeed part of an
integrated performance management process whose components are identified in
objective-setting, performance appraisal and development. This integrated approach is
also intended to align individual goals with organizational objectives, linking together
other relevant aspects of HRM such as reward – although this type of linkage is
considered by many questionable – and development, and to achieve better and
increased levels of overall performance by means of enhanced individual and
organizational effectiveness (Lucas et al, 2006).
In order to properly and effectively contribute to enhance organizational performance,
individuals need to have crystal clear ideas of the mean and scope of their contribution
and of what their managers are actually expected them to deliver. Their efforts and
contributions should then be goal-directed and awareness-based. In order to be
successful, however, employees also need to have the knowledge and skills necessary to
achieve the results these have agreed with their managers (Longo, 2011a).
As we will discuss later, this is basically the reason why performance management has to
be intended and managed as a continue process by means of which managers and staff
have the possibility and the opportunity: on the one hand to constantly discuss the
objectives agreed and the best and most effective ways to achieve these and on the
other hand to make plans for the individuals professional development. Goal-setting
forms by extension a fundamental part of performance management, the starting point
of the process and the pillars on which it builds up (Longo 2011a).
According to Suutari and Tahvanainen (2002), the typical starting point of a performance
management cycle should be represented by performance planning. It is during this
stage that managers should plan and define the objectives they intend to set for, and
agree with, their direct reports. It is also of pivotal importance that these objectives are
firmly linked to, and aligned with, the organizational goals and strategy.
Targets can be agreed in the form of Key Results Areas or Accountabilities (KRA) and
have to be supported by performance standards and performance measures (Lukas et al,
2006).
Both goal-setting and expectancy theories suggest setting a small number of goals for
each individual. Nonetheless, this is not necessarily a method ensuring a successful
outcome of its own, both because individuals could find it difficult to understand how the
achievement of their personal objectives fits in with the organizational goals and because
of the likely diversity of the agreed goals, which may ultimately require a series of
qualitative different efforts and entail the knowledge of different fields.
Albeit defining individuals goals and objectives does not really represent an easy task, it
does not indeed represent the most difficult feat managers are called to perform when
dealing with performance review either. Goals in fact not only need to be defined and
agreed, but, what trickier, they also need to be assessed and measured which, in most
cases, may reveal to be a remarkable feat to achieve of its own.
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In general, goals can be considered as “hard” or “soft” according to the circumstance
that these are associated with the “hard” or “soft” features typical of an individual and
the activity this perform. As a general rule, are deemed as “hard” those goals which,
depending on an individual technical knowledge and capability, are linked to actions
which can more promptly and relatively more easily be assessed by means of objective
measurement methods. By contrast, are defined as “soft” those objectives which being
exclusively linked to more intangible features, like individual traits or behaviour, cannot
be objectively measured. These remain hence subject to preconception and personal
appreciation and, as such, potentially biased. In practice, the vast majority of managers,
when setting individual objectives, have recourse to a blended approach taking into
consideration both “soft” and “hard” individual features (Lucas et al, 2006).
The influence of culture
A number of Authors have stressed the importance of the effects which may be produced
by the national and cultural contexts on goal-setting practices. Amongst these, it seems
particularly interesting what Nyaw (1995) and Shen (2004) have suggested in respect of
China: both of them argue that large state-owned businesses set goals taking into
account also moral and ideological behaviour.
The different geographical context actually comes to play also in the way goals are
agreed; the reference here is to the involvement or otherwise of the individuals
concerned in the process. Goal-setting as a joint activity where individuals and their
managers agree and discuss together objectives is, in particular, seen as a process
typically used in western countries and not promptly transferable to other types of
cultures, especially those characterised by a high level of power distance (Fenwick,
2004), (power distance relates to the extent less powerful members of society accepts
uneven distribution of power. Applied to businesses, power distance is associated with
the extent of authority centralisation and the exercise of autocratic leadership styles).
Studies carried out by Tahvanainen (2000) revealed that multinational corporations use
to vary their goal-setting procedures according to the different countries concerned. She
found out, for example, that the German and Swedish business units of a Finnish
multinational corporation were adopting a joint approach to goal-setting, whilst in the
American business unit of the same multinational corporation goals were assigned to
employees by managers.
In China, where national culture is extremely influenced by the principle of “hierarchy
respect” and by the fundamental requirement of never “loosing face”, businesses not
only do use to assign employees objectives, rather than agree these with individuals, but
also use to set goals, both in number and in nature, in order to facilitate their attainment
(Lindholm et al, 1999).
Indeed, also organizational culture can have a remarkable impact and has hence to be
considered when defining individual objectives. This aspect has to be duly and carefully
considered by managers in order to avert inconsistency and jeopardize integrity within
the business. Just to cite a fairly humdrum example, setting goals encouraging individual
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performance would certainly be perceived as in sharp contrast with a culture aiming at
promoting teamwork.
How to set goals
Objectives should be basically set in line with the results an organization is expected
individuals will yield, on the basis of their capabilities and within the end of a pre-set
period of time (a year, a semester, a quarter) or the conclusion of one or more
assignments. As suggested by Armstrong (2006), goal-setting represents thus a very
important stage of the overall performance management process in that it basically
represents the tool enabling employers to properly define and manage organizations’
expectations and to have clear and precise elements from which starting and developing
performance reviews.
Goal-setting also has a pivotal role in enabling employers and individuals to establish a
clearer psychological contract. Especially in those cases in which objectives are jointly
discussed by managers and staff, it represents a great opportunity for individuals to
clearly understand what their managers are expected from them. Nonetheless,
performance reviews could give the chance to achieve nearly the same result also in
those cases in which organizations use to unilaterally assign goals.
Objectives, depending on their specific characteristics, can be classified into four main
groups:
Work objectives – that is those objectives typically associated with and linked to a
particular job and which can be identified and expressed as key result goals in
role profiles;
Targets – which are all of those quantifiable goals which can be by extension
objectively measured in terms of, for instance: output, throughput, income, sales,
number of complaints, cost reduction, level of service, etc.;
Tasks – objectives that can be set according to the conclusion and achievement of
single or of a number of tasks or projects within a specific time frame or on the
basis of the attainment of the objectives identified for each stage of a project;
Behaviour – albeit behavioural expectations are usually referred to the entire
workforce, in that directly linked to an organization’s culture, core values and
shared beliefs, quite often, managers also use to individually set behavioural
objectives. Sometimes behavioural expectations could be expressed by specific
and well identified examples of desirable or undesirable behaviour. This approach
can turn to be particularly useful when setting performance level standards and
reviewing performance (Armstrong, 2006).
The most relevant and important theory about goal-setting, which managers cannot
really afford to overlook, at least for the enlightening tenets it introduced at the time of
its formulation, is the goal-setting theory developed in 1968 by Edwin A. Locke (Locke,
1968) and later further enriched by the same psychologist in collaboration with Latham
(Locke and Latham, 1990 and 2002).
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This theory is based on four main pillars actually trying to provide solutions to the
practical difficulties usually encountered by managers when setting or agreeing
objectives with their staff. The tenets underpinning Locke’s theory can be summarized as
follows:
Goals intensity – to stimulate higher levels of performance and push individuals
to do their outmost, managers should invariably set challenging goals. However,
goals need to remain within individual capabilities; differently individuals would
be deterred from making efforts and from trying and attaining the pre-set
objectives, and would inexorably give up;
Goals specificity – whether individuals do not have a clear understanding of what
they have to achieve, these cannot practically be successful. Goals need hence to
be clearly communicated and understood by employees; individuals cannot be in
search on the unknown. Only whether employees have crystal clear ideas of what
it is expected from them these will be able to concentrate, make the necessary
efforts and attain valuable results;
Goal-setting participation – whether goals are decided and agreed between
managers and employees it is much more likely that these will strive for their
attainment. Individual involvement is also paramount for employees full
understanding of what it is expected from them, so that there will be no need for
managers giving further explanations and clarifications. It clearly sounds different
for an individual thinking about the objectives s/he has agreed with his/her
manager, that is, our objectives, rather than to the objectives unilaterally
assigned by his/her manager, that is, his/her objectives;
Feedback of past performance – receiving feedback on past activities and actions
is paramount for individuals. This effectively helps them to find out whether their
actions and activities are considered appropriate and the results produced
successful by their managers. Feedback will also help individuals to determine
whether these have to eventually change their behaviour in order to achieve
better levels of future performance.
An additional, important aspect managers should consider when setting objectives is
actually time; insofar as Fried and Slowik (2004) averred that Locke’s goal-setting
theory could work better and prove to be hugely successful by introducing this additional
component. More specifically, the Authors claimed that in order managers to be able to
deem whether the pre-agreed objectives have been fully attained or otherwise by
individuals, managers also have to take into consideration the length of time required by
these to attain those objectives. A set of pre-identified goals could be considered
challenging whether achieved in a, for instance, one-year period time, whereas the same
set of objectives could be deemed as extremely straightforward or even meaningless
whether attained in, for example, a three-year period time. Objectives can thus be
judged challenging and valuable depending on the time used to attain them. A clear
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identification of managers’ expectations in terms of the time necessary to achieve a goal
or a set of goals is hence important.
When setting or agreeing objectives with their direct reports, managers should care
about another variable very likely to influence individual performance, namely self-
efficacy. This trait of individual behaviour could actually be directly associated with the
first pillar of the goal-setting theory, that is, goals intensity. Self-efficacy essentially
depends on an individual confidence and trust to be able to attain objectives and achieve
results. In general, individuals with a high level of self-efficacy not only try hard to
achieve their objectives, but also react positively to negative feedback making additional
efforts to attain their goals; by contrast, individuals with low level of self-efficacy are
prone to give up as soon as difficulties arise (Boddy, 2008).
The most widely used method to set goals, essentially fruit of a combination of the goal-
setting theory and Fried and Slowik subsequent enrichment, is that known under the
acronym of SMART, where:
S = specific and stretching: objectives have to be clear and promptly understandable by
individuals. These also have to be challenging and demanding insofar as enabling
individuals to stretch, exploit and resort to their full potential. Specific goals enable
individuals to gain a better understanding of the barriers they have to overcome, the
efforts involved and ultimately to gain conscience of the goals feasibility;
M = measurable: despite this requirement is everything but straightforward to achieve,
objectives need to be measurable according to a pre-identified rating scale. Even though
it may reveal impossible having recourse to a clear assessment method, providing
feedback will enable individuals to understand the value and size of their actions and
identify an indirect, unofficial way of measuring their performance;
A = achievable and appropriate: inasmuch as goals have to be challenging they also
have to be realistic, otherwise individuals will never seriously try to achieve them, to the
detriment of their and of their organization’s performance;
R = relevant: aligned to the business’ goals and, also thanks to this circumstance,
perceived as meaningful by staff;
T = timed or time framed: meaning by that that objectives need to be achieved within a
clear and pre-identified deadline.
As anticipated above, it is clearly easier to set objectives in those cases in which results
can be promptly, quantitatively assessed. In many other occasions, however, setting
objectively measurable goals can reveal to be a very difficult task.
Below some examples of objectives applicable to the HR function’ staff:
HR Managers in charge of payroll – goals could include:
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The introduction of a maximum rate or number of mistakes in staff payroll
per month or year,
Respect of deadlines for salary payments,
Response time delays reduction to employees’ queries;
HR Advisors - objective-setting could be linked to the length of time these need
to provide answers and sort issues out and to their capability of actually settle
problems with no need for external advice and/or counselling;
Line Managers – objectives could be linked to:
Their capability to avoid disputes to arise,
Their capability to resolve disputes internally, once these should arise, in
order to avoid these to be brought before a Judge of the Employment
Tribunal,
Performance reviews completion meeting a pre-set deadline,
Their contribution to reduce sickness rate;
Recruitment and selection staff – goals could be determined with reference to:
the number of resignations received by new recruits within a certain
period of time from their employment,
the capabilities of newcomers to adapt to organizational culture or be
already in line with this;
the assessment of how successful and fitting for purpose have new
recruits showed to be;
Training staff - objectives could be set with reference to these professionals’
capabilities to relatively quickly identify and assess individual training needs and
find appropriate and quality providers within budget constraints.
Determining and identifying staff goals is easier whether managers have clear ideas of
what the role of each of their direct reports consists in. For glaringly obvious it might
appear to be, when agreeing and setting objectives managers should mostly focus on
what they are actually expected from their staff. Carefully consideration should also be
paid to the behaviour the employer is expected from each individual.
Once objectives have been agreed between managers and employees, or have been set
by the former for the latter, managers and employees should regularly meet in order to:
Determine which objectives have been and have not been actually met,
Discuss the difficulties eventually encountered and faced by individuals to meet
their goals,
Agree whether any amendment has to be made to the previously agreed set of
goals,
Discuss and assess whether the individual has the competencies and skills
necessary to accomplish the future tasks and assignments,
Identify training needs accordingly.
As for the way objectives have to be expressed and communicated to staff, it would be
definitely better to express them in the “what” form, rather than in the “how”. More
specifically, managers should discuss with employees what they are expected them to
achieve, rather than how and in which way these are supposed to attain their goals. The
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“what” form reveals to be more powerful in practice because enables individuals to
better express their potential, by designing and developing of their own the approaches
they consider most suitable and appropriate to achieve the agreed objectives. Explaining
targets exclusively resorting to the “what” approach, however, might give raise to
problems; individuals, in fact, could deliberately or inadvertently resort to inappropriate
ways to attain them. Notwithstanding, individuals’ objectives should invariably aim at
defining the final outcome expected by the employer, rather than the actions necessary
to attain them or the way they have to be attained: “objectives are outcome/results
oriented rather than task oriented” (Torrington et al, 2008).
Considered the motivating effect a “what” objective-setting approach can produce, to
avert to fall into the pitfalls typical of this approach, managers could consider resorting
to this method whilst eventually providing individuals just partial, limited indications on