The Academy of Management Annals, 2014

Vol. 8, No. 1, 127– 179, http://dx.doi.org/10.1080/19416520.2014.873178

Performance Appraisal, Performance

Management, and Firm-Level Performance
A Review, a Proposed Model, and New Directions for Future
Research

∗
ANGELO DENISI
CAITLIN E. SMITH
Freeman School of Business, Tulane University

Abstract
There has been a long history in management and industrial/organizational
psychology of studying methods to improve performance at work. These
efforts have traditionally been concerned with individual-level performance
(with some attention paid to team performance as well); even when research
began to more broadly consider the topic of performance management
instead of just performance appraisal. However, the often unstated assumption
was that, if an organization could effectively improve the performance of indi-
vidual employees, this would accrue to improvements in firm-level perform-
ance as well. A review of the literature suggested that this link had never
really been established in a direct way. Instead, we found considerable
support for relating “bundles” of human resource (HR) practices to firm-
∗
Corresponding author. Email: [email protected]

# 2014 Academy of Management

127
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level performance, and several models for how these practices could create the
transformation from individual-level to firm-level performance. We drew
upon several of these models, from somewhat diverse literatures, to propose
a model whereby bundles of HR practices, when aligned with the strategic
goals of the organization, can be used to create a climate for performance
that could transform generic knowledges, skills, and abilities (KSAs) into
specific KSAs needed to improve firm-level performance.

Scholars, as well as practitioners, in areas such as human resource (HR) man-

agement, Organizational Behavior, and Industrial/Organizational Psychology
work to develop techniques and programs for managing human resources,
which include programs for the appraisal and management of performance.
The goal of these efforts, for the most part, is to develop techniques that will
help employees meet their personal goals (for growth, development and per-
sonal success), but which will also help the organization to function more effec-
tively. In the specific case of performance appraisal and performance
management, these dual goals should manifest themselves in increased per-
formance by the employee, which should help the employee obtain rewards
such as increased pay and promotion, and should ultimately help the organiz-
ation obtain increased performance at the firm level. A central thesis of the
present paper is that we have done a good job of finding ways to improve indi-
vidual performance, but we have not done as well in either demonstrating or
explaining how these HR techniques can also result in improved firm-level
performance.
Yet, it seems intuitively appealing to argue that improved individual perform-
ance should eventually translate into improved organizational performance. Fur-
thermore, it is difficult to imagine an organizational setting where firm-level
performance improved without any changes in the behavior or performance
of individual employees. For example, we would expect that if every salesperson
sold more goods at the right price, the firm would increase its profits. In fact,
there is any number of cases we could cite where the performance of the
larger entity (the team, the group, the department, or the firm) is nothing
more than the aggregate of the performance of the individual members. The sim-
plest case is that of the Ryder Cup in golf, where the team’s score is literally the
simple sum of the scores of the individual players. These are the cases we rely
upon when we think about tying individual performance to higher-level per-
formance, and these are the kinds of examples discussed when scholars focus
on levels of analysis—they discuss simple models of aggregation because team
performance is defined as little more than the aggregate of the performance of
individual members (cf. DeNisi, 2000).
When we move beyond these simple cases, the degree and type of aggrega-
tion from the individual to the team (or firm) level depend upon certain aspects
 Performance Appraisal, Performance Management † 129

of the work environment. As noted by Bell and Kozlowski (2002), there are
four dimensions of the work environment that are important for aggregation.
These are: temporal pacing, dynamism of the task environment, strength of
member linkages, and workflow structure. Temporal pacing refers to the
timing of when employees perform their individual tasks (Fleishman &
Zaccaro, 1992)—they can perform them independently or they can require
synchronization in order to be completed. Dynamism refers to extent to
which tasks are stable versus changing (Kozlowski, Gully, Nason, & Smith,
1999). The strength of member linkages refers to the extent to which
members must interact with each other and know what each other are doing
(Ancona & Chong, 1996). Finally, workflow structure refers to whether the
structure of tasks is pooled, sequential, reciprocal, or intensive, which, in
turn, require different levels of member linkages and temporal pacing (Van
de Ven, Delbecq, & Koenig, 1976). The degree and type of aggregation that
will be applicable depend on the nature of work environment. For example,
aggregation in the case of a basketball or football team is more straightforward
because of the synchronization that is required of the players. Aggregation for
baseball teams is less straightforward, however, because players can perform
well as individuals (in hitting more than fielding) without any level of synchro-
nization (see Kozlowski & Klein, 2000; Ployhart & Moliterno, 2011; for more
detailed discussion of these issues).
In fact, aggregation models have been successfully applied to settings where
we are interested in leveraging individual performance up to the level of a team,
and there are a number of papers describing how this could be done, and even
demonstrating desired effects of such aggregation and the role of processes
such as the development of team mental models (Klimoski & Mohammed,
1994; Mathieu, Heffner, Goodwin, Salas, & Cannon-Bowers, 2000;
Mohammed, Ferzandi, & Hamilton, 2010). But what happens when we try
to move up to the level of the firm or the organization? Ployhart and Moliterno
(2011) have proposed a multi-level model of how human resources at the indi-
vidual level are transformed into unit-level capabilities, but their discussion is
based mostly on research at the team level, with the assumption that, if we can
aggregate up the level of the team, we can aggregate to higher levels of analysis
as well. We will draw upon their model in our subsequent discussion, and in
the proposal of our own model of how we can leverage individual-level per-
formance to the level of the firm. As part of this discussion, we also discuss
some alternative views of what should constitute our measures of firm per-
formance. Should they be restricted to things such as profitability, higher
stock prices, or better returns on investment, or should this criterion space
be expanded? In any event, a major goal of this paper is to address the impor-
tant question of whether we have shown a relationship between individual-
level performance appraisal and performance management techniques and
improvements in firm-level performance in our research.
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We believe that the answers to these questions are not simple. Furthermore,
in our review of the literature in preparation for writing this paper, we could
find no empirical papers that directly related performance appraisal practices
to firm performance, nor any that demonstrated how improved individual per-
formance can be leveraged up to the level of the firm. There have been several
papers that have demonstrated some relationship between the two (Subra-
mony, 2009), and at least one paper discussing how one could apply utility con-
cepts to performance appraisal (Landy, Farr, & Jacobs, 1982). There have also
been a number of suggestions about how individual performance could be
leveraged up to the level of the firm, and there have also been examples
where this was done, but these are found in books aimed at practitioners,
which relied upon either anecdotal evidence or involved cases where many
things were changed, one of which was the appraisal system. In addition,
there are empirical studies that link aspects of performance management
systems (PMSs) to firm performance (see, for example, the meta-analysis
reported by Jiang, Lepak, Jia, & Baer, 2012), but these involve bundles of HR
practices rather than one specific practice. As we shall discuss, we believe
this bundling of practices is critical to linking changes in individual perform-
ance to changes in firm-level performance, and this requires expanding the way
we have traditionally thought about PMSs.
It is also worth noting that scholars in the more “macro” areas of manage-
ment such as strategic management and organizational theory have also begun
struggling with the relationships between variables measured at the macro-
level and variables measured at the micro-level (Devinney, 2013). What
makes this interest in “microfoundations” so interesting is that these macro
scholars approach the issue from the other direction. That is, rather than focus-
ing on how to leverage up from the individual level to the firm level, they are
more interested in looking at the ways in which individual-level phenomena
help them to understand and explain phenomena at the firm level (Foss & Lin-
denberg, 2013). To date, this research has been more philosophical than
empirical (cf. Van de Ven & Lifschitz, 2013) and so has not yielded much infor-
mation that would help us address the issues discussed in this paper, but this
line of microfoundation research certainly has the potential to do so in the long
run (see especially, Barney & Felin, 2013). It will be interesting to see how the
research discussed here and this new research on microfoundations converges
over time.
But, for now, rather than reviewing the literature and then concluding how
to link individual appraisals to firm performance, we must conclude that this
link (at least at that the simple level) does not exist. There may well be meth-
odological challenges that make it difficult to demonstrate this kind of link (see
discussion in Aguinis & Edwards, in press), but we believe that the approach
scholars in this area have traditionally taken may be an even more important
reason it has been so difficult to establish this link. Thus, we will review the
 Performance Appraisal, Performance Management † 131

literature that has demonstrated a relationship between HR practices and firm

performance, and discuss how this research led us to conclude that the
relationship between improving individual-level performance and improving
firm-level performance can only occur in the presence of other factors, and
that these factors must be included in any useful definition of performance
management. We begin by briefly tracing the historical development of
research on performance appraisal and, later, performance management (for
more thorough reviews, see DeNisi & Sonesh, 2011; Roberson, Galvin, &
Charles, 2007). We will then briefly review the literature, often referred to as
“strategic HR management” (for a more thorough review, see Jackson,
Shuler, & Jiang, 2014) which has demonstrated a relationship between
bundles of certain HR practices and various indices of firm performance.
We will also discuss different ways in which firm-level performance has
been, and can be, operationalized before drawing on several relevant theoretical
models to propose a model of how organizations might be able to leverage indi-
vidual performance improvements up the level of improvements in firm-level
performance.

Individual Performance Appraisal and Management: How We Got Here

Performance appraisal is the process by which we evaluate the individual per-
formance of an employee over some period of time. Formal appraisals are
infrequent events; some type of score is assigned; and there may or may not
be any formal developmental feedback. Performance management goes
beyond appraisal, and is typically defined as encompassing all the activities a
firm undertakes to improve an employee’s performance, beginning with the
evaluation of performance and subsequent feedback to the employee, and con-
tinuing through training and administration of rewards (such as pay increases
and promotions). Thus, performance management “is a continuing process of
identifying, measuring, and developing the performance of individuals and
teams and aligning performance with the strategic goals of the organization”
(Aguinis, 2013, p. 2). Scholarly interest in performance management is a rela-
tively recent phenomenon, while scholarly interest in performance appraisal
goes back almost 100 years. But, in any case, the idea of relating these activities
to firm-level performance is a very recent phenomenon.

First, Performance Appraisal

Traditionally, much of the research on performance appraisal has focused on
ways to eliminate rating errors and/or to improve accuracy (these are not the
same goals, although they are related). Much of the impetus for this focus has
come from Industrial/Organizational psychologists who were initially con-
cerned with appraisals primarily as the criterion variable in test validation.
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In this context, authors such as Dunnette (1963) were especially influential in

calling for research to improve the reliability, validity, and accuracy of per-
formance ratings, which would make them easier to predict (from a psycho-
metric perspective). But, even before the Dunnette paper, there were efforts
aimed at improving the accuracy of ratings by eliminating certain types of
rating errors such as halo error (Rudd, 1921; Thorndike, 1920).
Since most organizations relied upon some type of graphic rating scale,
much of the research that was conducted through the early 1960s was
devoted to finding better ways to construct or administer these scales
(Barrett, Taylor, Parker, & Martens, 1958; Johnson & Vidulich, 1956; Peters
& McCormick, 1966). During this time frame, there were also authors who
proposed alternatives to graphic rating scales such a critical incident tech-
niques (Flanagan, 1949, 1954), forced-choice rating scales (Sisson, 1948),
various forced distribution methods (Berkshire & Highland, 1953), Behavior-
ally Anchored Rating Scales (BARS; Smith & Kendall, 1963), and later, Behav-
ioral Observation Scales (Latham & Wexley, 1977), and Mixed Standard Rating
Scales (Blanz & Ghiselli, 1972). Also, through the 1970s and 1980s, some scho-
lars began examining how training programs could be designed that would
help raters eliminate errors (Latham, Wexley, & Pursell, 1975; Wexley,
Sanders, & Yukl, 1973) or provide more accurate ratings (Bernardin &
Buckley, 1981; Pulakos, 1984; Steiner, Dobbins, & Trahan, 1991). But, in all
these cases, the focus was on eliminating rating errors and/or improving
rating accuracy.
Performance appraisal research took a different direction following the
publication of a paper by Landy and Farr (1980). These authors reviewed
the literature on rating scale formats, and concluded that this research had
failed to demonstrate that any one format was superior to others. Instead,
they proposed that future research focus on rater cognitive processes, and so
led to a series of papers examining how such processes might influence
rating accuracy (rather than rating errors). Initially, this research took the
form of theoretical papers (Borman, 1978; DeCotiis & Petit, 1978; DeNisi,
Cafferty, & Meglino, 1984; Feldman, 1981; Ilgen & Feldman, 1983), but even-
tually there appeared empirical tests of these processes in both laboratory
studies (see review by DeNisi, 1996) and, later, field studies (DeNisi &
Peters, 1996; Varma, DeNisi, & Peters, 1996). The narrower focus on rating
accuracy stemmed from the publication of several papers (Bernardin &
Pence, 1980; Murphy & Balzer, 1989) demonstrating that eliminating rating
errors did not result in more accurate ratings, and might even result in less
accurate ratings. Not surprisingly, the emphasis on rating accuracy as an
outcome also led to more and more complex methods for assessing accuracy
(Sulsky & Balzer, 1988).
Studying effects on rating accuracy also led to research on bias in appraisals
(summarized rather well by Roberson et al., 2007), but soon the focus of
 Performance Appraisal, Performance Management † 133

research began to shift away from trying to improve rating accuracy. Murphy
(1991), Murphy and Balzer (1989), and Murphy, Garcia, Kerkar, and Balzer
(1982) made it clear how complex the concept of rating accuracy really was
(rather than how complex it was to measure accuracy), but Ilgen (1993) was
one of the first scholars to actually go so far as to suggest that rating accuracy
might be the wrong goal altogether. Furthermore, scholars began to study
intentional distortion of ratings and issues involving rater motivation (see dis-
cussion by Murphy & Cleveland, 1995). These ideas were subsequently
expanded upon by scholars who emphasized the importance of performance
improvement as the ultimate goal in the appraisal process (DeNisi & Gonzalez,
2004; DeNisi & Pritchard, 2006).

Next, Individual Performance Management

Once the focus shifted to performance improvement, more attention had to be
paid to the process through which an individual employee might be motivated
to improve his or her performance (or at least, to try). This has been the major
focus of performance management: the improvement in the performance of
the individual employee. In the context of performance management, rating
accuracy is only important as it might affect employee motivation, mainly
through employees’ perceptions of fairness of the process. Specifically, a
number of scholars argued that regardless of the accuracy of ratings, if the pro-
cedures for generating those ratings were not clear, not understandable, or not
seen as fair, then the ratings themselves would not be viewed as fair. In this
case, employees would be less motivated to change their behavior following
feedback based on these “unfair” ratings (see review by Folger, Konovsky, &
Cropanzano, 1992; Greenberg, 2011; Taylor, Tracy, Renard, Harrison, &
Carroll, 1995). Note that the implication here is that, even if raters intended
to be fair and accurate in their ratings, these ratings would not have the
desired effect unless they were perceived as being fair by the employees. Other-
wise, a major goal of the appraisal process (if not the major goal) would be
defeated, as employee performance would not improve. Research also revealed
that there are ratee biases that play a role as well, such as ratees’ perceiving
more favorable ratings to be more accurate (Brett & Atwater, 2001). This
can be problematic as the employees who need to improve the most may dis-
count appraisals of their performance as inaccurate, resulting in little, if any,
performance improvement.
The new interest in performance management led to the publication of new
models of how to manage and improve performance (Aguinis, 2009, 2013;
Aguinis & Pierce, 2008; DeNisi & Pritchard, 2006; Levy & Williams, 2004;
Murphy & DeNisi, 2008; Pulakos, 2009). All of these models emphasized the
importance of employee reactions in the appraisal process, and all cast per-
formance management interventions in a central role in the attempts to
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improve performance. Some of these are more interested in motivational pro-

cesses at the level of the individual (DeNisi & Pritchard, 2006); while others
spend time discussing how corporate strategy must be a part of the process
(Aguinis, 2009, 2013; Levy & Williams, 2004). Several consider various contex-
tual factors that might play an important role (Levy & Williams, 2004; Murphy
& DeNisi, 2008), and two of these provide a fair amount of detail on how the
performance management process can be carried out (Aguinis, 2009, 2013;
Pulakos, 2009). But all of these models focus upon changing individual or
team performance to better align it with corporate goals, with the assumption
that, once these are aligned, corporate performance will be improved. Gener-
ally speaking, these models, and much of the related research, do not explicitly
consider firm-level performance as the dependent variable, although Aguinis
(2013) and Pulakos (2009) both acknowledge that improving firm-level per-
formance is the ultimate goal in the process, and the microfoundations
research in the strategy area, discussed earlier, also helps move research in
this direction.
Also, while the accuracy of ratings may not be as important as the perceived
fairness of ratings at the level of the individual, from a strategic perspective, “all
organizational-level decision making and planning relies on accurate measure-
ment of performance at the individual, team, and organizational level”
(Wildman, Bedwell, Salas, & Smith-Jentsch, 2011, p. 307). Thus, performance
management is complicated by expressly trying to create links between or trace
the effects of performance across different levels, and this requires a much
broader view of what constitutes performance management than what has tra-
ditionally been the case.

Changing Levels: Team Performance Appraisal and Management

Therefore, even if we know something about improving performance at the
individual level, this is clearly not enough, since we must be able to improve
firm-level performance. One possible way to move up to firm-level perform-
ance is to work through improving team-level performance. Work is ever
more team-oriented, and team performance is more complicated than individ-
ual performance. Teams are groups of employees working together, typically
defined by interdependence of action, shared responsibility, and meaningful
goals (Cannon-Bowers & Bowers, 2011). The nature of the task and type of
interdependence may impact what types of performance management will
be beneficial for the team. Because team members must work together more
closely than co-workers who are not on a team, managing team performance
often involves not just focusing on the team task and outcomes, but on team
processes, including detrimental (usually relational) conflict and other dys-
functional behavior that may affect task outcomes. Measuring team perform-
ance may require assessing teamwork, taskwork, and team-level action as
 Performance Appraisal, Performance Management † 135

both outcomes and processes and at both the team- and the individual-level
(Wildman et al., 2011). The goal of team performance management is to
“make all team members accountable and to motivate them to have a stake
in team performance” (Aguinis, 2009, p. 272). As we shall discuss later in
the paper, these are goals and processes that may be related to firm-level per-
formance as well.
But, performance appraisal in team settings can be challenging, depending
upon the nature of the task, because it may be difficult to assess individual
contributions to the team outcome. This can lead to social loafing (Latane,
Williams, & Harkins, 1979; Price, Harrison, & Gavin, 2006), which occurs
when some team members do not put forth as much effort in the group as
they would if they were working alone, resulting in team performance being
lower than it should be. Team performance appraisal can also be subject to
rating errors, like team halo, where certain individuals are assumed to be the
source of failure rather than the team as a whole (Naquin & Tynan, 2003).
The difficulty of balancing the appraisal and management of team and individ-
ual performance has led to several proposed theoretical approaches
(Brumback, 2003; McIntyre & Salas, 1995).
Even when both team- and individual-level performance can be assessed, it
may be difficult to establish effective goals and to compensate team members,
suggesting that managing the performance of teams may also be quite challen-
ging. Recent meta-analytic evidence shows that group goals help team per-
formance, but individual goals are only beneficial for group performance
when they are specifically directed at maximizing individual contribution to
the team’s performance, not just at increasing individual performance
(Kleingeld, van Mierlo, & Arends, 2011). In terms of compensation, mixed
individual and group incentives may produce faster, but less accurate, perform-
ance and undermine backing-up behavior, when compared to group-based
incentives only (Barnes, Hollenbeck, Jundt, DeRue, & Harmon, 2011). Differ-
ent justice norms may exist in teams as compared to individual performance
situations (Drexler, Beehr, & Stetz, 2001), causing different reactions to per-
formance appraisal and management practices when they are applied to a
team setting. Also, because teams tend to go through stages of development
that affect performance (Chang, Bordia, & Duck, 2003; Gersick, 1988;
Wheelan, 1994), performance management may need to adapt to the different
stages of team development over the course of a task or over the life of a team.
Furthermore, training may be more complicated for employees embedded
in teams, as they may require more interpersonal skills training and may
benefit from self-correction training, which encourages team members to
correct each other and provide performance feedback to each other on an
ongoing basis (Cannon-Bowers & Bowers, 2011). For such training to be suc-
cessful, however, there probably needs to be a high level of psychological safety
in the team and low relational conflict, as relational conflict can interact with
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task conflict to create negative team outcomes (Shaw et al., 2011; de Wit, Greer,
& Jehn, 2012). Whether intact teams should take part in training or whether
training should be on the individual level may depend on whether team per-
formance results from composition (isomorphic across levels, generally rep-
resented by the mean or sum of individual performance) or compilation
(discontinuous; results from the combination of related but different lower-
level processes) processes (Kozlowski, Brown, Weissbein, Cannon-Bowers, &
Salas, 2000). Thus, there may enough problems in assessing and managing
the performance of teams that this may not be a fruitful route to take to try
to improve firm-level performance.
Yet, despite these issues and difficulties, there has been progress in under-
standing how to leverage individual performance up to the level of the team. As
noted earlier, a great deal depends upon the nature the work environment, but
there have been efforts to explain and predict relationships between individual
and team-level performance (Bell & Kozlowski, 2002; Kozlowski et al., 1999;
Ployhart & Moliterno, 2011). However, even if we understand how to leverage
performance to the level of the team, this does not mean that team perform-
ance can easily be leveraged to the level of the firm. Nonetheless, as will be dis-
cussed, some of the processes and ideas from models of team performance are
part of our proposed model for managing firm-level performance.

Where We Are Today

It is clear that scholarship in our field has moved from a concern primarily with
performance appraisal and improving rating accuracy, to a greater concern
with performance management. Several recent (and some not-so-recent)
papers have explicitly discussed designing systems aimed at changing behavior
(DeNisi, 2012; Komaki, 1998), and we will discuss some aspects of those works
below. We noted above that some books by and for practitioners (Pulakos,
2009; Smither & London, 2009) have also followed this trend. In other cases,
books focusing on issues for practice have discussed performance management
more in terms of talent management (Effron & Ort, 2010), but they still talk
about techniques and practices related to performance appraisal and perform-
ance management. Even authors calling for an end of performance appraisal
systems advocate replacing them with some type of PMSs (Coens & Jenkins,
2000). In fact, a recent study (Kinicki, Jacobson, Peterson, & Prussia, 2013)
reported on the development of an instrument to assess the effectiveness of
performance management activities. These authors argued that this is
needed in order to better integrate research on performance management
with other areas of research such as effects on firm performance. It will be
interesting to see how this develops.
Thus, after decades of research on performance appraisal and performance
management, we have learned a lot about appraising and even improving
 Performance Appraisal, Performance Management † 137

individual performance at work, and we even have some knowledge of how to

improve team performance. But, after all this time and effort, it is clear that we
know almost nothing about how to leverage changes in individual performance
up to the level of the firm. Although there have been suggestions about how to
go about this (DeNisi, 2000; Goodman, Lerch, & Mukhopadhyay, 1994;
Schneider & Klein, 1994), there is almost no empirical evidence that it can
be done successfully. A recent report published by Pulakos, Mueller-Hanson,
O’Leary, and Meyrowitz (2012) summarizes the current state of affairs quite
well by providing an interesting view of how we got to where we are today.
They suggest that we have moved from concerns over what is rated, to con-
cerns over the nature of the rating scales, to concerns over who provides
ratings, to concerns over the nature of the goals involved in performance man-
agement (Pulakos et al., 2012, p. 2). But now, these authors suggest, we need
new ideas on how to better manage performance so that we can help
improve the bottom line and increase employee engagement and retention.
Although the empirical evidence for link between performance appraisal/
management and firm performance is, at best, scant, there is a body of litera-
ture that has argued for (Pfeffer, 1998) or demonstrated a relationship between
a set of HR practices and firm performance (e.g. Delery & Doty, 1996; Huselid,
1995; or see meta-analysis reported in Combs, Liu, Hall, & Ketchen, 2006).
Although these studies have examined bundles of practices rather than specific
practices, we believe this literature is relevant to the present discussion, and
may hold the key to improving firm performance, and so we move to a discus-
sion of what has been called the “strategic HR management” literature.

HR Practices and Firm Performance

The need to relate various HR practices to firm performance dates back as least
as far the 1930s. Initially, the major interest had been in demonstrating how
using valid selection techniques could improve the performance of members
of a work group. The Taylor – Russell tables (Taylor & Russell, 1939) and
later the Naylor – Shine tables (Naylor & Shine, 1965) were developed to
quickly show how using a more valid selection instrument could improve
work group performance when considering factors such as where a cut-off
score was established and the variance in performance among work group
members, among others. A significant step in establishing the “utility” of selec-
tion techniques came with Brogden and Taylor (1950), who discussed the need
to apply a dollar criterion to assess the effectiveness of any HR intervention.
They began with answering the question of what the criterion should
measure, stating that “the criterion should measure the contribution of the
individual to the overall efficiency of the organization” (p. 139), and argued
that, since the goal of business is to make money, firms should operate as
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efficiently as possible and work to save money. Once a dollar criterion was
established, it would enable employers to compare contributions on all jobs
directly.
Some years later, Schmidt (a student of Brogden’s) and his associates
(Schmidt, Hunter, McKenzie, & Muldrow, 1979) proposed ways of estimating
the standard deviation of performance, which could be expressed in dollar
terms, and would serve as the missing piece needed to assess utility in dollar
terms. These procedures, as well as the formulae used, have been refined and
are discussed by others such as Cascio (2000), and Cascio and Boudreau
(2011a, 2011b), but they are primarily interested in showing the effectiveness
of a single HR practice for saving money or improving financial performance.
Thus, these procedures could be used to show the value of a new appraisal
system, but although these values are expressed in terms of actual dollars
saved, they are not directly linked with firm performance, which has been oper-
ationalized in many different ways as we will discuss below.
In the early 1990s, a number of papers appeared where the authors argued
that HR practices should form a basis for competitive advantage, as long as
those practices were aligned with firm strategy (Butler, Ferris, & Napier,
1991; Cappelli & Singh, 1992; Jones & Wright, 1992; Schuler, 1992; Wright
& McMahan, 1992). Soon, there was some empirical work establishing
relationships between HR practices and firm performance (MacDuffie,
1995), and the strategic HR management literature was born (see Jackson,
et al., 2014; for a thorough review of this literature). It was primarily Huselid’s
(1995) paper, though, that signaled a major change in the way scholars (and
practitioners) looked at this issue.
Specifically, Huselid (1995) demonstrated a significant relationship between
the application of a series of HR “best practices” (termed high performance
work systems, HPWSs) and several measures of firm performance, such as
turnover, productivity (log of sales per employee), and several measures of cor-
porate financial performance. These HPWSs were aimed at either improving
the levels of employee skills (e.g. proportion of workers administrated an
employment test prior to hiring), at improving the organizational structures
(e.g. proportion of workers included in formal information sharing programs),
or aimed at improving worker motivation (e.g. proportion of workers whose
performance appraisals are used to determine their compensation). Huselid
(1995) also found that the HPWSs influenced performance primarily by redu-
cing turnover.
A number of similar studies followed, but all found that the presence of
certain HR practices was related to various measures of firm performance.
In fact, two dominant views emerged from this line of research. The first
(and perhaps “more” dominant) is the HPWS approach, which argues that
there are “best practices” which, when implemented, will improve firm per-
formance (Arthur, 1992; Huselid, 1995; Huselid & Becker 1996; Huselid,
 Performance Appraisal, Performance Management † 139

Jackson, & Schuler, 1997). There was disagreement, however, about exactly
which practices make up a HPWS (Becker & Gerhart, 1996), leading to
some confusing recommendations, but recent work (Posthuma, Campion,
Masimova, & Campion, 2013) has attempted to clean up the HPWS definition.
After reviewing 20 years of the literature on the topic and examining 181
articles, Posthuma and colleagues created nine categories of high performance
work practices: compensation and benefits; job and work design; training and
development; recruiting and selection; employee relations; communication;
performance appraisal and management; promotions; and turnover, retention,
and exit management. Within the performance appraisal and management cat-
egory, these best practices included appraisals based on objective results or
behaviors, appraisals for development, and frequent performance appraisal
meetings. This new taxonomy has not been explored outside of this article,
but at least the results provide some guidance about exactly what types of prac-
tices are really “best”.
A second approach is concerned with the “fit” between HR practices and
strategy (i.e. a contingent approach, see Delery & Doty, 1996; Ostroff &
Bowen, 2000). That is, a firm must align its HR practices with each other
AND with its strategic goals in order for there to be an effect on firm perform-
ance (Schuler & Jackson, 1987a, 1987b; Wright, McMahan, & McWilliams,
1994; Wright & Snell, 1991). A related view suggests that a firm’s human
resources represent a unique source of competitive advantage (following the
resource-based view of the firm; Barney, 1991). In this view, when HR practices
ensure that employees have the right skills, and the right attitudes, and direct
discretionary effort in the right direction to produce the right behaviors, the
firm will prosper (Becker & Gerhart, 1996; Lado & Wilson, 1994; Wright
et al., 1994). It is worth noting that the strategic management literature has
experienced similar debates over the importance of contingency models,
with the current trend favoring the contingency approach (cf. Boyd, Haynes,
Hitt, Bergh, & Ketchen, 2012).
In a related vein, Hansen and Wernerfelt (1989) attempted to decompose
firm profitability into factors due to economic forces and those due to organ-
izational forces. Economic factors focused on things such as characteristics of
the industry in which a firm competes, its relative position in that industry, and
firm size. Organizational factors focused on organizational climate. These were
regressed on a five-year average return on assets, and the results indicated that,
although both sets of variables predicted performance, the organizational
factors predicted about twice as much variance as the economic ones, and
together, they accounted for almost half the variance in firm performance.
Although there are some questions about the measure used to assess the organ-
izational factors, the results do seem to further support the importance of HR
management practices for firm performance.
140 † The Academy of Management Annals

This point was further reinforced in a meta-analysis (Combs et al., 2006)

relating HR practices to various measures of firm performance. However,
these authors also noted that the real effects on firm performance could only
be obtained when the HR practices were bundled. Combs et al. (2006)
argued that this bundling was necessary because in that way the firm could
ensure that employees had the knowledges, skills, and abilities (KSAs)
needed to perform their jobs, that the employees were empowered to leverage
these KSAs for organizational benefit, and that they were motivated to do just
that. It should also be noted that Combs et al. (2006) also reported independent
effects for several individual work practices, but no significant effects were
found for practices related to performance appraisal.
Also, a recent meta-analysis (Subramony, 2009) is one of the few that
attempted to assess both the effect of bundles of practices and the individual
practices themselves on firm performance. Subramony decomposed effects
for HPWSs across studies in order to create (among others) a “motivation
enhancements bundle” which included many of the aspects of a PMS (i.e. per-
formance appraisals, pay linked to performance, promotion, incentive plans,
and benefits). The presence of these bundles was positively linked to retention,
operating performance, financial performance, and overall performance. In
addition, Subramony (2009) did report that the presence of performance
appraisal alone was related to overall organizational outcomes, but all con-
clusions were based on effects for practices that were decomposed from
various studies rather than measured directly.
Finally, two very recent papers have taken a slightly different approach to
studying HR systems. Patel, Messersmith, and Lepak (2013) reported that
the implementation of a HPWS was linked to “organizational ambidexterity”,
defined as the ability of the organization to align its resources with present
demands in order to create value, and yet be flexible enough to adapt to chan-
ging conditions. These authors also reported that ambidexterity partially
mediated the relationship between HPWS and firm growth in a sample of
small high technology manufacturing enterprises. Chang, Gong, Way, and
Jia (2013) discussed the implementation of what they termed as a “flexi-
bility-oriented HRM system. They defined this flexible system using practices
similar to those usually associated with HPWS, but also emphasizing coordi-
nation and resource flexibility. These authors reported that the use of such
systems increased potential and realized absorptive capacity, and was related
to a firm’s ability to respond to the market and be more innovative. These
two studies suggest that there may be other directions for strategic HR manage-
ment research to take, and that it is important to consider other outcomes of
HPWs beyond just firm profits.
There have also been some other studies that have related some HR prac-
tices to firm performance outside of this line of research. For example, Terpstra
and Rozell (1993) related five staffing practices to four measures of firm
 Performance Appraisal, Performance Management † 141

performance (e.g. profit and sales growth), and found a significant relationship
between an index of how many were used and all four measures of perform-
ance, but none of these practices were related to performance appraisals.
Also, Koys (2001) found that organizational citizenship behaviors (OCBs), as
well as satisfaction and turnover, were related to the long-term financial per-
formance of units in a chain of restaurants. In a similar vein, Podsakoff,
Whiting, Podsakoff, and Blume (2009) found that OCBs were related to indi-
vidual-level outcomes (ratings, rewards, and turnover) as well as firm-level out-
comes such as productivity and efficiency. Furthermore, a more recent study
(MacKenzie, Podsakoff, & Podsakoff, 2011), found that challenge-oriented
OCBs were related to workgroup task performance (although the relationship
took the form of an inverted-U) and that workgroup performance completely
mediated the relationship between these OCBs and firm-level performance.
OCB has been defined as “individual behavior that is discretionary, not
directly or explicitly recognized by the formal reward system, and that in the
aggregate, promotes the effective functioning of the organization” (Organ,
1988, p. 4). Borman and Motowidlo (1993) introduced a related concept, con-
textual performance, which was defined as behavior that enhances or sustains
the social, psychological or organizational context of the system. In either case,
the behaviors being discussed go above and beyond the job requirements (i.e.
they are not part of task performance), and they have the goal of enhancing
effectiveness at some level. A full discussion of the literature on OCBs and
their importance is beyond the scope of the present paper (see Organ, Podsak-
off, & Podsakoff, 2011, for a more complete review), but the results of these
various studies allow for the possibility that, if a firm could encourage OCBs
through a PMS, it might also increase firm performance. This possibility is
also supported by Reilly and Aronson’s (2009) work outlining the ways an
organization might manage contextual performance, and why this might be
important for firm-level performance.
There is, however, another model of performance management that has
been able to produce improvements at higher levels of analysis than the indi-
vidual, but which relies less upon traditional models of performance appraisal.
The Productivity Measurement and Enhancement System (ProMES) is an
intervention based on an extended version of VIE Theory (Vroom, 1964), pro-
posed by Naylor, Pritchard, and Ilgen (1980). There are a number of reports of
the effectiveness of ProMES, including a recent meta-analysis (Pritchard,
Harrell, DiazGrandos, & Guzman, 2008), as well as books describing
ProMES-based programs around the world (Pritchard, Holling, Lammers, &
Clark, 2002). All of these suggest that ProMES interventions can improve
organizational effectiveness. But ProMES is not an intervention concerned
with performance appraisal (although a model of performance management
based on ProMES and Naylor et al., 1980 was proposed by DeNisi & Pritchard,
2006). Instead, ProMES is about motivation and how to focus the efforts of
142 † The Academy of Management Annals

work group members to exert effort on tasks that will increase effectiveness.
Thus, ProMES is also not really an intervention that focuses on individual per-
formance, but instead focuses directly upon the workgroup. In any case, it does
represent one of the few systems of performance management that has been
empirically shown to produce changes in performance at higher levels of
analysis.
It would seem, therefore, that there is considerable evidence that HR prac-
tices are related to firm performance, but only when they are bundled (cf.
Schneider & Klein, 1994; see also arguments for sources of competitive advan-
tage in Aguinis & Boyle, in press). The evidence directly linking performance
appraisal, or even performance management practices, to firm performance, on
the other hand, is quite limited (at best). Thus, it seems likely that, despite the
logic of moving from individual- to firm-level performance, such a direct link
simply does not exist. Thus, what may be required is an expanded view of
“PMSs” which include other HR practices beyond those typically associated
with such systems, and this is the direction our recommendations will take.
Of course, the studies using bundles of HR practices include only very crude
measures of appraisal systems, such as whether the firm conducts appraisals,
or what percentage of employees are covered by formal appraisals. Perhaps,
if studies would look at specific appraisal techniques they would uncover
relationships with firm performance, but we do not believe this to be the
case. Instead, we believe that the fine points of the appraisal and PMSs will
make a difference in terms of aligning individual performance with strategic
goals of the organization, but that, no matter how good a system is developed,
performance appraisal, or traditional PMSs alone, cannot produce improve-
ments in firm-level performance. Rather than state this as a null hypothesis,
however, we would simply state that proper bundle of HR practices will
have a much greater effect on firm performance than any single practice—
including those related to traditional performance management. We will
discuss what constitutes the “proper” bundle later, when we propose a
model of the relationship between performance management and firm
performance.

Moving From “What” to “How”

In order to effectively build upon the research on HPWS, it is not enough to
show that certain bundles of HR practices impact firm performance—we
must also understand how these practices affect firm performance. Several
recent papers have attempted to explain the underlying processes. For
example, Aryee, Walumbwa, Seidu, and Otaye (2012) found that HPWS
(which included performance appraisal) were related to empowerment
climate and employee psychological empowerment, which related to perform-
ance. They reported that all of the factors were related to service quality (using
 Performance Appraisal, Performance Management † 143

data from a sample of banks), but the analysis did not explicate which com-
ponents of the HPWS were more important, and although there were eight
components, they were all combined together and showed high reliability as
one measure.
Also, a recent meta-analysis by Jiang et al. (2012) attempted to explicate
how HR practices affect firm outcomes. Consistent with the suggestion of
Lepak, Liao, Chung, and Harden (2006), and consistent with earlier models
by Blumberg and Pringle (1982) and Gutteridge (1983), they divided HR prac-
tices into skill-enhancing, motivation-enhancing, and opportunity-enhancing
practices. Most of the motivation-enhancing practices (performance appraisal,
compensation, incentives, benefits, promotion and career development, and
job security) could be considered aspects of a PMS. The outcomes considered
included employee motivation (under which they categorized numerous vari-
ables, including OCBs, organizational climate, job satisfaction, organizational
commitment, and perceived organizational support), financial outcomes, and
operational outcomes (including quality, innovation, productivity, and
service). Jiang et al. (2012) found that the motivation-enhancing practices
had direct effects on human capital, employee motivation, and financial per-
formance, as well as indirect positive effects on financial performance and
operational outcomes. Thus, the results of this study would seem to suggest
that HR practices may affect firm performance primarily by improving
various aspects of employee motivation.
These results also seem consistent with the suggestions of Ostroff and
Bowen (2000), who suggested that the specific HR practices employed
should be related to the organizational context and strategy (which should
be based on environmental context). These practices, when bundled and
implemented, should then affect organizational climate as well as individual
psychological climate—creating a “climate for performance” or “performance
climate”. Organizational climate can be defined as employees’ shared percep-
tions of and the meaning attached to practices, policies, and procedures in
the workplace and the behaviors they observe being supported, expected,
and rewarded (Schneider, Ehrhart, & Macey, 2013), and the existence of a per-
formance climate would mean that employees share the perception that firm-
level performance is important and that the organization’s policies are devoted
to achieving that goal.
But while climate refers to shared perceptions of practices and policies, cor-
porate culture refers to actual shared values, traditions, philosophy, and pol-
icies of a corporation that influence the level of loyalty and the general
behavior of its employees (Collins English dictionary, 2009). Many manage-
ment scholars tend to focus primarily upon values and value congruence
when studying corporate culture (Meglino, Ravlin, & Adkins, 1989; O’Reilly,
Chatman, & Caldwell, 1991), but as O’Reilly (1989) points out, unless there
is strong convergence among employees in terms of how they view the
144 † The Academy of Management Annals

values, policies, etc., of the organization, there really is no culture. Thus, the
concept of corporate climate, as used here, is very closely related to the
concept of corporate culture. Therefore, whether we call it a performance
culture or a climate for performance, the idea is that when employees share
a view of the organization as valuing firm-level performance, and as having
policies and procedures in place to enable employees to influence firm-level
performance, and reward them for doing so, they will be more likely to
work together towards improving performance at the level of the firm.
These changes in climate or culture, then, should cause changes in individ-
ual attitudes, behaviors, skills, and abilities, as well as collective attitudes and
human capital, and it would be these changes that would affect both individ-
ual-level and organization-level performance (see also an example in DeHaas
& Kleingeld, 1999). In this view, then, effective performance management
cannot be concerned with improving the performance of individual employees
alone. Instead, it must include the entire HR system, so that it can influence
organizational climate, and can help diffuse organizational strategy throughout
all levels of the organization. This will only occur, however, if several con-
ditions are met.
First, as we have now mentioned several times, it seems reasonable that no
single HR practice, such as performance appraisal, will affect firm performance
on its own. Except for the simplest of cases, improving the performance of indi-
viduals will not necessarily result in improvements in the performance of the
firm. Even the most sophisticated performance appraisal system, which
focuses employees to engage in the “right” behaviors, will have little impact
upon firm-level outcomes unless it is accompanied by selection, placement,
and training systems which ensure that employees have the capabilities
needed to perform those behaviors; reward and compensation systems which
ensure that employees are motivated to do what is needed to further corporate
goals; and job design systems which allow employees the opportunity to engage
in behaviors that impact firm-level outcomes. Thus, PMSs should be defined as
all the HR practices employed by an organization to ensure that employees
have the means, the motivation, and the opportunity to improve firm-level per-
formance. The work of Lepak et al. (2006) and Jiang et al. (2012) suggest ways
to classify HR practices in terms of these three goals, and this would provide a
basis for measuring whether or not all three forces were operating.
Next, it is important that every aspect of this broader PMS be directly
aligned with the firm’s strategic goals—this is related to defining what perform-
ance means to the firm. For example, when investigating contingency
approaches to HR, Youndt, Snell, Dean, and Lepak (1996) found that different
types of HR systems worked best in companies pursuing different manufactur-
ing strategies. They found that firms pursuing a low-cost strategy achieved
better operational outcomes when utilizing a bundle of practices that included
results-based performance appraisal, while firms pursuing a high-quality
 Performance Appraisal, Performance Management † 145

strategy benefitted from a bundle, including development and behavior-based

performance appraisal. These authors also found that firms did not necessarily
align their HR systems optimally for their strategy, however. Thus, in order to
have the desired effect on firm performance, all HR practices must be inte-
grated to produce a set of desired behaviors that support strategic goals. It is
only when all the various HR practices are integrated and employed together,
as a broader system of performance management that they can serve as the
“enabling” factor discussed by Ployhart and Moliterno (2011). Of course, inte-
grating HR practices and tying these systems to strategic goals will not necess-
arily be positively related to financial performance—firms can still choose the
wrong strategies and environmental contingencies still play a role, but systems
that are not informed by the firm’s strategic focus are less likely to be successful.
The extent of alignment present in a firm could be assessed using the tech-
niques from the contingency and configural approaches to HR systems
(Delery & Doty, 1996; Doty & Glick, 1994; Youndt et al., 1996).
This relates to the third requirement, which concerns issues of “line of
sight” (Boswell & Boudreau, 2001). This refers to the ability of an employee
to see how changing his or her behavior will have an impact on firm perform-
ance or the achievement of strategic goals, and this is not always the case. For
example, a bank teller defines his or her job according to the kind of behaviors
tellers are rewarded for—customer service, accuracy, and selling services. This
teller may be told that he or she is the “best” teller, but the bank is still in
trouble because the loan department took on “bad” mortgages. In this case,
the teller may just not see how improving his or her behavior will help the
bank be more successful. Komaki (1998) and Komaki, Collins, and Temlock
(1987) emphasized a similar issue relative to improving individual perform-
ance. She argued that we need “targets” (the dependent variable and its oper-
ational definition; Underwood, 1957) that are under the control of the workers,
responsive to their efforts, and minimally affected by extraneous factors.
Therefore, if we want to reward the bank teller for customer service, we
must be able to show the teller how that customer service translates into
part of the overall performance of the bank. The teller cannot make better
loan decisions, but the teller can make sure that the bank does not lose custo-
mers and this must be shown to be important as well. Thus, all employees must
be shown how whatever they do on their jobs does have some effect on firm
performance, regardless of how big the effect might be. Assessing the extent
to which this is present could rely upon the methods and measures used in
the behavior management literature (Komaki, 1998).
Therefore, we argue that PMSs will be related to firm performance if they
are: integrated with other HR practices so that we have a broader conception
of what is meant by PMSs; consistent with the firm’s strategic goals; focused
on behaviors which are under the control of the employees; focused on beha-
viors that the employee can see are related to achieving strategic goals.
146 † The Academy of Management Annals

Finally, in addition to the requirements discussed above, we believe that

concept termed the “strength” of the HR system (Bowen & Ostroff, 2004;
Ostroff & Bowen, 2000) is also important. HR system strength seems closely
related what is discussed by Ployhart and Moliterno (2011) as the processes
which enable context-generic KSAs to be transformed into context-specific
KSAs needed to improve firm performance. In both cases, the issue seems to
be less concern over the specific HR practices involved and more concern
over the ability of these systems to signal employees as to what the desired
and appropriate responses at work are—it tells them what is expected.
Bowen and Ostroff (2004) also refer to this process as establishing a strong
climate for performance (cf. Schneider, Salvaggio, & Subirats, 2002). Thus,
the stronger the system, the clearer this message and the more likely is that
we will get the behaviors needed for the firm to improve its performance.
Ostroff and Bowen (2000) and Bowen and Ostroff (2004) define the
strength of an HR system in terms borrowed from attribution theory
(Kelley, 1973). In fact, HR systems are seen to be strongest when employees
can attribute their behavior to the systems, which they define as settings
where the HR system is high on distinctiveness, consensus, and consistency.
Operationally, given our proposed broader view of PMSs, this means that
these systems are strongest when they are: visible and salient; associated with
legitimate authority; relevant to employees; stated and administered clearly;
instrumental for (employee) goal achievement; valid; fair; and, agreed upon
by HR decision-makers. Table 1 summarizes the suggested requirements for
PMS which will increase the likelihood that they will influence firm
performance.
As can be seen from Table 1, the requirements for an effective PMS are
quite consistent with those for having a strong system. Thus, PMS meeting
these criteria should provide for stronger climates or cultures in the work-
place, which should have greater impact on outcomes. As noted earlier, the
concepts of climate and culture as they are used here are closely related,
and a strong culture should foster a strong climate—i.e. convergence in
perceptions about what is important and valued in the organization (see
Schneider, Ehrhart, & Macey, 2011, 2013, for more complete reviews of all
the issues related to organizational climate). In fact, organizations can have
culture that consists of multiple climates. For example, a strong process
climate (e.g. climate for justice) may impact the effectiveness of strategic cli-
mates (e.g. service climate; Schneider et al., 2011, 2013) and strong PMSs
should impact both (e.g. by being fair and by evaluating and rewarding
good customer service).
We believe that, by designing PMSs which include these components,
organizations will be able to leverage improvements in individual performance
up to the level of firm performance. Of course, this requires a clear notion of
what is meant by firm performance, and we turn to a brief discussion of
 Performance Appraisal, Performance Management † 147

Table 1 Suggested Requirements for Effective PMS

Performance management systems are more likely to influence firm performance when
they are:
1. Integrated with other HR practices so that, together, they to form a broader view of
what constitutes a PMS
2. Consistently aligned with the achievement of the firm’s strategic goals
3. Focused on behaviors that under the control of employees
4. Focused on behaviors that employees can see are related to achieve strategic goals
5. Work together to form a “strong” PMS

Such systems are strongest when they are:

1. Visible to all employees and salient to everyone (i.e. practices and policies are posted
and reinforced frequently)
2. Associated with legitimate authority (i.e. practices and policies come down from the
highest levels in the organization and persons at those levels are seen as legitimate)
3. Relevant (i.e. employees see how they can achieve personal goals that are aligned with
strategic goals)
4. Stated and administered consistently (i.e. policy statements and related decisions
made do not vary by the person involved)
5. Instrumental for goal attainment (i.e. employees can see how these policies can help
them achieve personal and strategic goals)
6. Valid (i.e. the policies and practices reflect best practices)
7. Fair (i.e. the policies and practices are applied equally to all employees and do not
have any type of adverse impact against any group of employees)
8. Agreed upon by HR decision-makers (i.e. all HR decision-makers endorse and
support all policies and decisions)

various approaches to defining firm-level performance before proposing a

model of an enhanced performance management process.

Defining Firm Performance

One of the important requirements of an effective HR system is that it be
aligned with the strategic goals of the firm. A discussion of specific strategies
is beyond the scope of this paper, but it is clear that, in order to improve
firm performance, we must first be able to define firm performance, and so,
success. Yet, as noted by Wildman et al. (2011), although accurate measure-
ment is key to planning and controlling performance, firms often choose
measures because they are the most accessible or easiest to measure, rather
than because they are the most relevant. This surely raises questions about cor-
porate strategy which, again, are beyond the scope of this discussion, except to
note that Kerr’s (1975) concerns over the folly of measuring and rewarding the
“wrong” thing may transcend levels of analysis. It is clear, however, that there is
little consensus on the best way to define and measure firm performance.
148 † The Academy of Management Annals

For example, Venkatraman and Ramanujam (1986) discuss 10 different

approaches to studying firm performance that are found in the strategic man-
agement literature. Their paper is quite useful as they classify the various
measures that have been used. They begin with “measures of financial perform-
ance”, which are used quite frequently, and which are also the narrowest
measures, focusing on simple outcome-based financial measures assumed to
reflect the firm’s economic goals. These include sales growth, profitability
(usually measured by return on investment, return on sales, or return on
equity), earnings per share, and Tobin’s Q (the ratio of the market value of a
firm to the replacement cost of its assets; Lindberg & Ross, 1981). The
authors argue that all of these measures, while reflecting market or value-
based measurement, rely upon a narrow definition of what it means for a
firm to be successful.
The authors then move to consider measures that reflect “operational per-
formance” in addition to financial performance indicators. These measures rely
upon a broader definition of organizational success, and consider non-financial
indicators such as market share, new product introductions, and product
quality, which largely get at efficiency within the domain of business perform-
ance. Finally, they discuss what they view as the broadest conceptualization of
success, which is the domain of “organizational effectiveness”. Here, in
addition to operational and financial data, they would include measures that
consider multiple organizational goals and multiple stakeholders’ interests.
Although the authors note that this measure has been used more within the
realm of theory development, with actual research tending to focus on the
first two dimensions only, we will discuss two models of firm performance
that do consider non-financial returns below. But, to support their position,
it is interesting to note that a recent article by Hamann, Schiemann, Bellora,
and Guenther (2013) reported a construct validity study for organizational per-
formance, concluding that there were four dimensions of organizational per-
formance: growth, stock market performance, profitability, and liquidity.
Although the authors provided evidence of viable indicators for each dimen-
sion, they ignored any measures or components of performance that were
non-financial.
Before turning to non-financial performance, however, we note that Venka-
traman and Ramanujam (1986) also call for the use of data from multiple
sources, along with an assessment of how these data converge. This is very
similar to the logic for establishing the construct validity of any measure
using the multitrait multimethod approach first suggested by Campbell and
Fiske (1959). Interestingly, the Venkatraman and Ramanujam (1986) classifi-
cation of performance measures also corresponds well to earlier work by
Thorndike (1949) dealing with criterion issues for individual assessment in
general. In that book, Thorndike argued that the “ultimate criterion” consisted
of all the contributions an employee might make to an organization (in any
 Performance Appraisal, Performance Management † 149

form) throughout his or her life with the organization. But he also noted that it
was not really feasible to collect these kinds of data, so the “ultimate criterion”
had to remain in the realm of theory only. Instead, we must rely upon any
number of other criterion measures (e.g. rated performance, units produced,
etc.), which would serve as the “actual criterion”. But Thorndike also noted
that whatever actual criterion we used would measure some things that were
not part of the ultimate criterion (termed as “criterion contamination”) and,
at the same time, the actual criterion would fail to measure some aspects of
the ultimate criterion (termed as “criterion deficiency”). The practical goal,
then, was to find criterion measures that overlapped as much as possible
with the ultimate criterion so as to minimize both contamination and
deficiency. Thorndike (1949) did note, though, that using multiple criteria
did improve overlap and thus reduce criterion deficiency, but that each
measure also had its own source of contamination and that contamination
would increase with the use of multiple measures.

Non-Financial Measures of Firm Performance

Although, as noted, most research has focused on financial aspects of firm per-
formance only, the world outside of academia is changing, and there is actually
some recent research reflecting these changes, and even some suggestion from
the accounting literature that the inclusion of non-financial performance
measures can enhance firm performance under certain conditions (Said, Has-
sabElnaby, & Wier, 2003). While many traditional firms still emphasize returns
and profits exclusively, in recent years, there have been calls for a shift toward
conscious capitalism, both in academia and the popular press (Mackey &
Sisodia, 2013; O’Toole & Vogel, 2011). Corrupt business practices have
caused outrage in the general populace, and stakeholders are often demanding
more than just financial performance. Conscious capitalist companies see
profits as means to some higher goal; aim to meet the needs of diverse stake-
holders, not just shareholders; integrate sustainability and/or corporate respon-
sibility into the core of the business; and often have values-based leadership
(O’Toole & Vogel, 2011).
This is also related to the “triple-bottom-line” approach (Elkington, 1994).
The triple-bottom-line concerns economic prosperity, environmental quality,
and social justice (Elkington, 1999). Elkington (1999) proposes that consumer
pressures, shifting values, technological change, and growing transparency,
among other pressures, are pushing organizations to pay attention to more
than just financial performance. Although some companies have found that
“greenwashing” (Laufer, 2003) and espousing at least a minimal commitment
to sustainability helps their bottom line by accruing the business of semi-eco-
conscious consumers, other companies take the triple-bottom-line to heart. For
those firms, failure on sustainability or failure to take care of their employees
150 † The Academy of Management Annals

and customers means a performance failure, even if financial performance is

succeeding. At the same time, these companies are not non-profits, so a
failure at financial performance is also a performance failure. Managing
employees to support and achieve these varied performance goals is another
difficulty in performance management today. Furthermore, the issue here is
not how we define the triple-bottom-line, the issue, instead, is how we
measure it (cf. Slaper & Hall, 2011).
The economic measures do not present much of a problem because we
could use traditional financial indicators as discussed above. Measures of
social impact could conceivably use things such as turnover as advocated
above, but could also be expanded to consider quality of life and even house-
hold income. Environmental measures could include air and water quality,
energy consumption, natural resources used, levels of waste produced and
changes in land cover. The problem is that the choice is subjective and so is
the weighting. However, this is still a significant expansion upon traditional
models of firm performance.
Indeed, how to measure this expanded view of performance (and/or how to
report results) has already been addressed by some scholars, including propo-
sals of a sustainability accounting system (Perrini & Tencati, 2006) and a sus-
tainable version of the Balanced Scorecard approach (Hubbard, 2009).
Measuring these new aspects of performance is key to the PMS, of course,
but is not the only consideration. When good performance is defined as satis-
fying myriad stakeholders, companies need to consider how policies and prac-
tices are going to affect shareholders, employees, customers, and others, but
they also must most likely prioritize some stakeholders over others, as
equally satisfying all is a virtual impossibility. Which stakeholders are priori-
tized will likely affect what is measured during performance appraisal at
various levels (including, potentially, the satisfaction and well-being of employ-
ees to see how well the organization is meeting their needs), how compensation
and benefits are structured (including, possibly, the spread of compensation
levels in the organization, a topic that has been garnering more interest as of
late, and potential policy changes; e.g. Stevenson, 2013), and what kind of
training and development opportunities are available (for further insight on
the complexity of considering multiple stakeholders in HR systems, see
Jackson et al., 2014). The PMS becomes more complex as organizations look
beyond the financial bottom line to more diverse performance indicators
and then must determine how to structure the system to affect these indicators
at all levels of the organization. For example, a focus on environmental sustain-
ability may require changes in manufacturing systems but may also extend to
requiring salespeople to turn off computers and lights when they leave the
office and setting up recycling in the lunchroom, and measuring and poten-
tially tying rewards to even those seemingly small changes.
 Performance Appraisal, Performance Management † 151

Culture and Performance

Thus, different organizations may well emphasize different aspects of perform-
ance and so define success in different ways. One factor that plays an important
role in how a firm defines performance and success will be the overall corporate
culture. As noted earlier, organizational culture refers to the shared values,
beliefs, assumptions, and ideologies that characterize the organization, gener-
ally transmitted through myths or narratives, symbols, and socialization pro-
cesses (Schneider et al., 2011, 2013). Also as noted earlier, organizational
climate refers to the shared perceptions of and the meaning attached to prac-
tices, policies, and procedures in the workplace and the behaviors they observe
being supported, expected, and rewarded (Schneider et al., 2013), Thus, a
strong climate is the result of a strong culture, and both should reflect what
the company truly values (although one could just as easily argue that this
relationship is actually reciprocal). This, then, should inform (if not determine)
what aspects of performance are deemed important in the organization, which
should inform performance appraisal and management. Indeed, Henri (2006)
demonstrated that corporate culture was related to the diversity of measures in
and the uses of the PMS. Therefore, a strong organizational culture should
produce a consensus as to what is important and what should be measured
as part of organizational performance. In addition, though, an organizational
culture is also shaped by the culture of the country or region where the organ-
ization exists, though there is certainly still cultural variability on the organiz-
ational level within nations (House, Hanges, Javidan, Dorfman, & Gupta,
2004). Differing national cultural values may inform which aspects of perform-
ance are emphasized and, again, how performance appraisal and management
are structured. There is some evidence that paying attention to national culture
can be beneficial when designing performance appraisal systems, as Peretz and
Fried (2012) found some support for the idea that when performance appraisal
practices are aligned with dimensions of national culture, absenteeism, and
turnover decrease, and this is likely the case for other HR practices as well.
Posthuma et al. (2013) also noted evidence that HPWSs (or “best practices”
in HR systems) vary across cultures. Past cultural research shows that
culture varies across countries, but also that organizational cultures vary
within countries, resulting in organizations demonstrating or espousing differ-
ing values and beliefs both within and across countries. As a result, these
organizations may approach the problem of improving firm performance
differently.
Therefore, the specific aspects of the PMS will likely vary as function of how
performance is defined, which may depend, in part, upon corporate and
national culture. For example, one firm might select employees using tests,
while another firm may prefer using interviews; one firm may rely upon indi-
vidual rewards, while another may use group rewards; and one firm may
152 † The Academy of Management Annals

appraise performance using outcomes, while another may focus on behaviors.

But, in any case, the path from individual performance improvement to firm
performance improvement seems to depend upon implementing changes in
a number of HR systems which should be considered as part of the larger
PMS, and which, together, can influence the culture or climate for improved
performance. We will therefore propose a model for how this might work.

A Proposed Model
Our review of the literature suggests that changes to performance appraisal and
PMSs alone will not result in improved firm performance. Instead, we need to
improve a variety of HR practices that are more properly considered as part of
the performance management process. Rather than specify individual prac-
tices, we will refer to these simply as skill-enhancing practices, motivation-
enhancing practices, and opportunity-enhancing practices, following the sug-
gestion by Jiang et al. (2012). Skill-enhancing practices would include recruit-
ment, selection, and training; motivation-enhancing practices would include
traditional performance management, compensation and benefits, career
development, and job security; while opportunity-enhancing practices would
include job flexibility, work teams’ design, employee involvement, and infor-
mation sharing. However, as noted earlier, research on such HR systems
usually involves a fairly crude level of measurement. That is, often, the mere
presence of some form of selection or PMS is seen as constituting a HPWS.
We believe that this level of argument is fine, as far as it goes, but that the
specific content of these HR systems will depend upon the corporate culture,
the firm-level strategy, and the definition of performance that is used. We
also believe that, regardless of the specific content, performance appraisal
systems will be most effective when they are integrated with other HR prac-
tices, consistent with the firm’s strategic goals, focused on behaviors which
are under the control of the employees, and focused on behaviors that the
employee can see are related to achieving strategic goals. Thus, the specifics
of any PMS should be determined by the firm’s strategic goals which will
also help determine how firm performance is operationalized. Therefore, an
organization having a PMS or performance appraisal process (which most
do) may not be directly related to performance—it is the way the system is
structured and integrated with other HR practices that likely has an impact
on performance.
The effective PMS will then bundle these specific practices in what can be
termed a “strong” system (cf. Ostroff & Bowen, 2000). Strong HR systems
are those where employees can easily attribute their success on the job to the
HR system, and this requires a system that is visible and salient to employees;
valid (i.e. there is research to support the practices); associated with legitimate
authority; relevant to individual employees; stated and administered
 Performance Appraisal, Performance Management † 153

consistently; instrumental for employee goal achievement; agreed upon by HR

decision-makers, and perceived as fair by employees. Such strong systems
clearly signal employees as to what is required of them.
As such, we begin with a framework used in a model of strategic HRM from
Jackson and Schuler (1995) and Jackson, et al. (2014). This model also shares a
number of points with the performance management model proposed by Den
Hartog, Boselie, and Paauwe (2004). We add to this basic framework, the
characteristics specified as necessary to have a “strong” system from Ostroff
and Bowen (2000), and Bowen and Ostroff (2004). Such systems result in a
climate for performance that enables context-generic KSAs to be transformed
into context-specific KSAs needed to improve firm performance, as per the
model suggested by Ployhart and Moliterno (2011). This approach also
seems similar to Reilly and Aronson’s (2009) proposals for designing
systems to manage contextual performance so that employees will take the
initiative to do what is needed in order for the organization to success.
Finally, the stronger this climate becomes, the greater the impact of HR
systems upon firm performance, which would seem to be consistent with the
ideas discussed in Pulakos, Mueller-Hanson, O’Leary, and Meyrowitz (2012).
The resulting model is presented in Figure 1.
What, then, would a successful PMS look like? Our proposed model begins
with a consideration of the factors listed on the left-hand side of Figure 1.
National culture and corporate culture must be considered before any type
of management control system can be designed, but these are largely contextual
factors. That is, regardless of the specifics, if we are working in a culture with
strict hierarchies and strong status differences among employees at different
levels in the organization, it would be advisable not to include any type of

Figure 1 A Proposed Model of the Effects of Performance Management on Firm Performance.

154 † The Academy of Management Annals

peer ratings or upward evaluations. Firms that have corporate cultures domi-
nated by engineers might prefer systems where performance levels are scored
and scores are taken quite seriously. These cultural forces will also likely influ-
ence the way firm performance is defined, which determines how we will know
if a firm is successful or not. These are all relatively distal factors that should
influence macro-level factors in the PMS (cf. Murphy & DeNisi, 2008).
But the definition of firm performance along with the strategy employed by
the firm will determine the strategic goals of the firm, and this is a critical
source of input for the design of a PMS. Both Aguinis (2013), and Pulakos
(2009; Pulakos et al., 2012) discuss the importance of strategic goals or the
organization’s mission in the design of a PMS, and both discuss how these stra-
tegic considerations must translate into specific goals that should be set for
individuals. In both cases, the individual goals are stated to be consistent
with the overall strategic goals of the firm. We would agree with both of
these models, but would also go a bit further. We believe that it is the firm’s
strategic goals that will determine exactly which HR practices the firm
should use.
Of course, in our proposed model there are two components to the PMS.
The first relates to the content of the system. The content is about ensuring
that employees have the ability, motivation, and opportunity to affect firm per-
formance. In our view, this includes all HR activities as part of performance
management. Neither Aguinis nor Pulakos would seem to disagree with that
view, but they focus more on the activities related more directly to performance
appraisal and performance management. Our reading of the relevant literature
suggests that PMSs cannot be successful (relative to improving form perform-
ance) unless they encompass the whole range of HR activities, and we argue
that the strategic goals of the organization, along with the culture of the organ-
ization, should determine the specific form each of those HR activities should
take.
Thus, the strategic goals and corporate culture should determine how jobs
are described and organized within the firm. In fact, there might be cases where
there are no jobs per se, but simply tasks and outcomes which must be
achieved, and these can be achieved by individuals or teams. In any event,
goals and culture should determine the exact nature of performance expec-
tations which will then impact the specifics of the performance appraisal
system. Firms that compete primarily on the basis of high quality should
emphasize quality in all the aspects of the job that are evaluated, while firms
competing primarily on the basis of price should emphasize cost savings wher-
ever possible. In some firms, it might be desirable to have evaluations from
peers or even co-workers, but in other firms, based on their culture, it might
not be desirable to have anyone but a superior perform evaluations. Some strat-
egies would be more consistent with appraisal systems based on goals, whereas
others might be more consistent with trait-based appraisals. The nature of the
 Performance Appraisal, Performance Management † 155

strategy employed will also help determine the specific KSAs required for
success on the job, and the culture of the firm will help determine how these
are best assessed for selection (e.g. interviews, tests, personality measures,
etc.). The strategic goals and the culture will also help determine how impor-
tant it is for new hires to fit into the organizational culture. As we shall discuss
below, fit is always important for building a strong HR system, but it could be
part of the decision-making model or it could be the only criterion depending
on culture and strategy.
Most of this is concerned with ensuring employees have the ability to affect
firm performance, although the appraisal system is part of what would motiv-
ate employees to work toward improving firm performance. The reward
systems in place (i.e. the compensation model as well as how rewards are dis-
tributed and on what basis awards are made) are also part of the motivation
process. Finally, our model (and the work of Jiang et al., 2012) suggests that
employees must also have the opportunity to affect firm performance. This
relates to the “line of sight” discussion earlier, but also means that there
must be open discussion of goals and how they can be accomplished. In
addition, employees must feel empowered to make changes in the organization,
and there must be open communications throughout the organization at all
levels, so that employees understand what the firm is trying to accomplish
and where they fit into the process, which will surely depend, in art, upon
the firm’s culture. Programs such as job rotation should also improve an
employee’s ability to affect firm performance because, under such programs,
the employee will have more impact and will also gain a better understanding
of how the firm operates. Furthermore, practices such as job rotation allow
employees to learn from each other and draw upon each other to create the
performance culture we describe below in more detail.
Note that, in this component, we are really suggesting that firms adopt
“HPWS” practices, but we argue that those practices have typically been
defined quite broadly. What we are suggesting is that the specifics of those
practices should be determined by the firm’s strategy and culture. Thus,
doing systematic appraisals are always a good idea (cf. Huselid, 1995), but
what is appraised, by whom, and how those appraisals are used are probably
more critical decisions to be made, and the choices made should be a function
of strategy and culture.
The second component of our PMS is related to the goal of having a strong
HR system—one that is capable of influencing and changing employee beha-
viors in the desired way (Bowen & Ostroff, 2004; Ostroff and Bowen, 2000).
Thus, regardless of the specific practices involved, it is critical that they all
be consistent with each other. They should all be mutually reinforcing so
that they work together to increase the likelihood that behavior will move in
the desired direction. It is also important that these practices are clearly
stated to all employees, that they are supported by all levels of management,
156 † The Academy of Management Annals

and that this support, and the practices and policies themselves are reinforced
consistently in the minds of the employees (i.e. they are visible, salient, and
legitimate). In addition, it is important that the practices are considered
valid (i.e. designed in a way to produce effective performance and help employ-
ees be successful, as well as following what are considered best practices), and
relevant as well as instrumental (i.e. designed so that employees can see how
they can achieve organizational goals and personal goals). Finally, it is impor-
tant for these practices to be fair. Perhaps as important as being fair, it is impor-
tant that the practices are perceived as being fair. More specifically, it is
probably most important that employees perceive that the practices are proce-
durally fair, so that, even if they are not happy with the outcomes, they can see
that fair procedures were followed to make decisions (cf. Folger et al., 1992;
Taylor et al., 1995).
These suggestions are all consistent with Aguinis (2013) and Pulakos et al.
(2012), although our proposed model incorporates other lines of research and
is more inclusive than either of those models. Nonetheless, both publications
include specific suggestions for the design of HR systems that are quite
useful. Pulakos et al. (2012) provide a number of especially useful recommen-
dations for implementing successful PMSs, including the need to keep things
simple, the need to make discussions about feedback and development a
part of everyday interactions, and the importance of building trust among all
the participants.
In any case, our proposed model goes on to suggest that this enhanced PMS,
including both components as described above, and so including a wide variety
of HR practices, leads to the creation of a “climate for performance”. We use
this term in way that is similar to what Ployhart and Moliterno (2011) refer
to as the “emergent enabling process” which is based on Kozlowski and
Klein’s (2000) discussion of emergent multi-level models, as well as Ostroff
and Bowen’s (2000) discussion of climate. In all cases, including our own,
the authors are referring to a climate where the skills and abilities of the indi-
vidual employees are amplified by their interactions, to produce something that
operates at a higher level of analysis. The strength of this climate will be
impacted by the strength of the HR system (i.e. strong systems should
produce greater agreement among employees about what the organizational
climate is like). We believe that a PMS which includes skill-enhancing, motiv-
ation-enhancing, and opportunity-enhancing practices, all designed specifi-
cally to be consistent with a firm’s culture and strategy, and bundled
together in a way that is visible, salient, legitimate, relevant, consistent, instru-
mental, and fair will enable and motivate employees to transform their generic
KSAs that are relevant to the performance of the specific firm.
That is, employees will know they can influence firm performance, and will
be motivated to do so. Through their interactions with other employees who
presumably feel the same way, they will come together to develop ways to
 Performance Appraisal, Performance Management † 157

transform their individual KSAs and work toward increasing firm-level per-
formance. Therefore, if HR systems are designed in ways that are internally
consistent and supportive of a firm’s strategy and culture, and, if the HR
systems have ensured that the employees have the needed skills (through com-
binations of selection and training), understand what they need to do and are
motivated to do it (through effective performance appraisal and reward
systems), and truly have the opportunity to affect firm performance, the firm
should be more successful over time.

Directions for Future Research

The proposed model and the underlying assumptions suggest a new approach
to research on performance management. One of the first suggested directions,
however, involves the measurement of the constructs proposed in our model.
Measurement issues have plagued scholars interested in this kind of multi-level
research (cf. Aguinis & Edwards, in press), and the proposed model certainly
poses challenges for measurement. Nonetheless, we begin with a number of
suggestions for how one could go about measuring the constructs proposed.
We began our discussion with the constructs of national and corporate
culture. These constructs would be measured with scales typically used in
this area. For example, the Global Leadership and Organizational Effectiveness
project (GLOBE) measures of national culture (House et al., 2004) are more
concerned with management issues and are probably more appropriate here
than the measures developed by Hofstede (2001). In many cases, it would be
possible to deduce the national culture from the results of the GLOBE study
that have been published. Corporate culture would be measured here as a
general construct, asking employees about their views of the mission, vision,
values, and customs in the organization. Corporate culture has been measured
in the past both qualitatively and quantitatively (Schneider et al., 2011). For our
model, we would recommend a quantitative approach, and would suggest that
out of the 100+ culture inventories available (see Taras, 2006, for a review),
researchers might want to consider the scale developed by Denison (1990)
and Denison, Janovics, Young, and Cho (2006) or the Organizational
Culture Profile (O’Reilly et al., 1991) as recommended by Schneider et al.
(2011). It could also be useful to ask upper level managers and consult archival
records for statements about culture. In the end, though, culture would be
operationalized on the basis of perceptions, after ensuring that there is some
convergence on those perceptions (using an index of inter-rater agreement,
such as rwg; see Le Breton & Sentor, 2008, for a discussion of inter-rater agree-
ment). Convergence (or culture strength) would then be a moderating variable
of the effects of culture on the system, with lack of convergence indicating a
weak (and therefore, not very influential) culture. Measuring organizational
culture would not be very different than a measure of organizational climate,
158 † The Academy of Management Annals

except for the focus of the items used, and care would need to be taken about
how the measures, obtained from individuals, could be aggregated to develop a
firm-level construct. Definitions of firm performance and strategy could be
obtained from top management, using scales for defining strategy that are
found in the HR literature (Schuler & Jackson, 1987a, 1987b; Wright et al.,
1994; Wright & Snell, 1991). The definition of firm performance would
require the development of some questions about how success is defined and
therefore how performance is defined, but could be adapted from existing
measures (cf. Venkatraman & Ramanujam, 1986).
The specific content of the PMS could be measured using the kinds of scales
typically used in the strategic HR management literature (Huselid, 1995;
Youndt et al., 1996), and would be given to HR managers. The measure of
system strength would be obtained primarily from the employees, although
perceptions of the HR managers would also be useful. A scale could be devel-
oped using the construct definitions from Bowen and Ostroff (2004), and exist-
ing justice scales could probably be adapted to make up some of the items. The
climate for performance would be measured as focal climates have in the past,
focusing on employees’ perceptions of the organization’s policies, procedures,
and rewards, with items either relating generically to performance or achieve-
ment, or specifically to the aspects of performance the organization values (see
Schneider et al., 2011, for sample climate scale items). For example, a company
focused on the triple-bottom-line might measure the climate for sustainability,
among other things. As noted earlier, climate measures are not very different
from a measure of organizational culture but, in this case, we would be inter-
ested in shared perceptions of the specific aspects of the HR system outlined in
our model. The level of convergence on the measure of climate (again,
measured by an index of inter-rater agreement) would indicate climate
strength. We would expect that greater HR system strength would relate to
stronger climates. As conceptualized in past climate research, climate strength
is expected to moderate the relationship between performance climate and out-
comes, with stronger climates having a greater impact.
The process by which generic KSAs are converted into context-specific
KSAs poses the greatest challenge for measurement. This process is described
in more detail in Ployhart and Moliterno (2011), where it is referred to as the
unit-specific emergence-enabling process, but they do not provide many spe-
cifics on how this process could be measured. In fact, they note that “ . . . it
may not always be possible to measure the entirety of the emergence enabling
process” (p. 144). Furthermore, as noted by Lepak et al. (2006), different HR
systems can result in different forms of emergence. Kozlowski and Klein
(2000) also discuss different types of emergence processes, distinguishing
between a composition process (where the higher-level phenomenon is
simply the aggregate of the lower-level phenomenon) versus a compilation
process (where the higher-level phenomenon is a function of the array or
 Performance Appraisal, Performance Management † 159

pattern of the lower-level phenomenon). In either case, the emergence is oper-

ationalized as some aggregate of the individual KSAs, and these are similar to
what has been defined as dynamic capabilities (Helfat et al., 2007).
Despite these complexities, it would seem that it is easier to determine
whether the emergent states have occurred than to describe the actual
process. Based on the work of Kozlowski and Ilgen (2006) and Marks,
Mathieu, and Zaccaro (2001), Ployhart and Moliterno (2011) suggest that
there are three broad classes of emergence-enabling states: behavioral, cogni-
tive and affective. Ployhart and Moliterno (2011) describe each of these and
the interested reader is referred there for more detail, but basically, it would
be possible to measure the level of coordination, communication, and behav-
ioral regulation among employees (behavioral processes; cf. Kozlowski &
Ilgen, 2006), the employees’ shared memory and metal models (cognitive pro-
cesses, cf. Hinsz, Tinsdale, & Vollrath, 1997; Klimoski & Mohammed, 1994), as
well their ability to acquire, absorb, and transfer knowledge (i.e. their absorp-
tive capability, cf. Zahra & George, 2002), and their cohesion, trust, and affect
(affective processes, cf. Hackman, 1987). An enabling-emergence state, one
which allows generic KSAs to be transformed into context-specific KSAs,
then, would be one where the behavioral, cognitive, and affective processes
have all been initiated. It is important that all be present because, as noted
by Ployhart and Moliterno (2011), they are actually interdependent, and
they need to all be present for the required transformation to occur. There
are measures available for all of these process variables, and they would all
need to be aggregated to the unit or firm level in order to be used in the pro-
posed model.
But there are also important implications for future research that go beyond
testing a model such as the one we have proposed. As we move to consider per-
formance issues at a higher level of analysis, research needs to include discus-
sions of performance models that might vary by the industry or other
organizational characteristics. For example, it might be easier to leverage indi-
vidual-level performance into firm-level performance in organizations that
already have a strong identity, and a study conducted a number of years ago
by Hall, Schneider, and Nygren (1970), involving the effects of organizational
identification among forestry workers may provide some insight into this issue.
They found that a strong service orientation was important for retention as
well as commitment and satisfaction. Perhaps, in industries where a strong
service orientation is important, employees at all levels can more easily see
the relationship between their own performance and firm performance and
would be more likely to work toward improving firm-level outcomes. On the
other hand, in some types of manufacturing firms, simply improving individ-
ual-level performance might well result in significant changes in firm perform-
ance without the intermediary processes described in our model, while,
in other, machine-driven industries, it might be quite difficult to improve
160 † The Academy of Management Annals

firm-level performance by changing HR practices. It seems quite likely that

improving firm-level performance (however, it is defined) might involve
much different processes in a hospital than in a financial services firm, and
the presence of a union could make matters even more complicated. While
there certainly has been some research looking at industry differences and
HR practices (e.g. Datta, Guthrie, & Wright, 2006; also, see review by
Combs et al., 2006), there needs to be more of this type of research in the
future.
Perhaps, one of the most critical is the suggestion that we abandon future
research on PMSs where individual-level performance is the major dependent
variable. As noted, we have done a reasonably good job of describing the
requirements for improving individual-level performance, and there is little
to learn by continuing research along these lines. Individual-level performance
may be an important mediating process in achieving the goal of improving
firm-level performance, just as other individual-level outcomes (such as com-
mitment or satisfaction) might prove to be important mediators, but these
should not be the main focus of any further research in this area. Instead,
future research should focus on intermediary processes such as adaptability
(Wei & Lau, 2010) and OCB (Reilly & Aronson, 2009), and determine how
these can be related to firm-level performance. In any event, the criterion
space needs to be expanded, beyond contextual performance or OCBs, to
include a variety of firm-level outcomes. As we noted earlier, although most
research on firm-level outcomes focuses upon financial performance, there
may well be other goals and other means of assessing firm performance that
would involve a completely different set of criterion variables. These might
include variables relating to other potential stakeholders (see Jackson et al.,
2014; for a fuller discussion of all possible stakeholders involved in firm-level
outcomes), as well as variables related to the environment and sustainability
(Jackson, Ones, & Dilchert, 2012), or organizational adaptability or ambidex-
terity (Chang et al., 2013; Patel et al., 2013). At the very least, it will be impor-
tant to demonstrate how any HR program can produce effects beyond those at
the individual level.
Also, as mentioned above, differing national cultures can impact how effec-
tive PMSs are, with certain practices or system structures producing better
results in certain cultural environments. In addition, there is evidence that
culture may impact both managers’ perceptions of employee motivation and
how those perceptions impact performance appraisals (DeVoe & Iyengar,
2004), and the perception of goals, rewards, feedback, and organizational or
job characteristics (perhaps, including the PMS) are affected by culture (see
Gelfand, Erez, & Aycan, 2007, for a review). Much of the performance manage-
ment and HPWS research has been done in Western contexts and from a
Western (often, American) viewpoint. There are a couple implications we
can draw from this information: (1) findings about specific performance
 Performance Appraisal, Performance Management † 161

management practices or systems may not generalize across cultural bound-

aries and (2) multinational corporations should be careful in blindly imple-
menting the same PMS across subsidiaries in different cultural contexts.
The difficulty of transferring practices across national borders has been dis-
cussed theoretically in the past (Kostova, 1999), but we would argue that even if
practices can be implemented in units across national or cultural borders, that
does not mean that the practices will produce the same results in each unit. For
example, in some cultures, employee participation in the development and
implementation of the system can facilitate “buy in”, trust, and smoother func-
tioning. In other cultures, such as those high on power distance, heavy involve-
ment of lower-level employees could produce much more negative reactions.
Indeed, Fletcher and Perry (2001) have theorized that power distance and indi-
vidualism/collectivism should affect the performance appraisal process;
however, empirical testing is needed, as well as investigations of other cultural
dimensions (e.g. uncertainty avoidance, power distance, and egalitarianism).
Of course, the situation may be even more complex when an organization
has a multicultural workforce within a single unit. In this case, some employees
may respond favorably to a PMS that other employees are dissatisfied with. In
addition, managers from one culture may incorrectly appraise employees from
another due to a lack of understanding of cultural norms affecting behavior
(Triandis & Brislin, 1984). A strong organizational culture may help to
smooth these challenges, but further research is needed.
We believe that our model will still hold in a broad sense across cultures,
however, the specific practices—and perhaps even the necessary climates—
for optimal firm performance may differ, even for organizations with the
same strategic goals. This is why both national and organizational cultures
are featured in the model. Still, it should be noted that our model is grounded
in research that has been primarily conducted in a Western context. Thus, we
advocate for further cross-cultural research in the performance management
domain in general, and in the links between performance management and
firm performance specifically. But researchers looking to further the body of
knowledge of cross-cultural effects should keep some things in mind: (1) as
noted by others (Fletcher & Perry, 2001), scholars should include not just indi-
vidual cultural dimensions, but combinations of dimensions in considering
effects, (2) individualism/collectivism and power distance are the most-
studied cultural values (Erez, 2011), but other cultural dimensions deserve
consideration as well, (3) studying multicultural environments may require
different methodologies than cross-cultural research (see cautions in Erez,
2011), and (4) as noted by others (Lachman, Nedd, & Hinings, 1994; Harrison
& McKinnon, 1999), the importance of cultural values may vary across con-
texts (e.g. two countries may both be low on individualism and high on
power distance, but in one, behavior may be driven primarily by power-
162 † The Academy of Management Annals

distance related norm, whereas the other is much more affected by individual-
ism) and that should be recognized in research.
There is also a need for future research on other contextual variables that
may potentially limit the applicability of our model and approach. One such
variable is the industry type. Although much of the original strategic HRM
research utilized databases which included a wide range of industry types
and sizes, there has been little research on the effects of the industry type
might have on the effectiveness of any HRM system. Several studies have
focused specifically on professional services firms (Hitt, Bierman, Uhlenbruck,
& Shimuzu, 2006) where human capital is especially critical as a source of com-
petitive advantage, but, since there is no research we could find that directly
compares different types of firms, we cannot be certain if HRM practices
such as performance management will have a stronger effect on firm perform-
ance in a professional services firm as compared with a manufacturing firm,
where many other studies have been focused (e.g. MacDuffie, 1995).
In addition, given the prevalence of small business operations in the U.S.A.,
it is somewhat surprising how little research has been devoted to HRM issues in
small businesses, but there have been a few such studies. In general, these
studies have found that smaller firms rely less upon formal and bureaucratic
practices, and more upon informal and ad hoc HRM procedures in areas
such as recruiting, selection, and performance management (cf. Barber,
Wesson, Roberson, & Taylor, 1999; Deshpande & Goldhar, 1994; Pritchard
& Fidler, 1993). Can these, more informal procedures also be translated into
higher levels of firm performance? It seems unlikely that all the processes
described in our model could be addressed by informal HRM practices, but,
in fact, we do not know how effective performance management practices in
small business have been for improving either individual-level of form-level
performance.
Also, it should be noted that most of the research cited and, in fact, most of
the research in HRM deal with employees at middle to lower levels in the
organization. It is important to note that measuring and managing the per-
formance of lower to middle level employees (or even managers) has been
the domain of HRM scholars, while measuring and (perhaps) managing the
performance of top level management has been the domain of strategic man-
agement scholars. Unfortunately, there has not been a great deal of communi-
cation between these two groups of scholars, although we hope that papers
such as this one will help both parties to recognize that here is something to
learn from the other. Thus, there is clearly a need for future research to deter-
mine if contextual factors, such as culture, the industry, firm size, as well as the
level within the organization, have any appreciable effect on the ways to
manage performance in order to improve firm performance.
Finally, future research needs to examine any adverse outcomes of a suc-
cessful PMS. Any HR system designed to direct employee behavior in a
 Performance Appraisal, Performance Management † 163

certain way or direction can result in problems, especially when there are mul-
tiple ways to achieve a stated strategic goal. In fact, any reward system or set of
rules can produce unwanted effects by directing behavior toward the accom-
plishment of a goal without concern about methods (cf. Kerr, 1975). In the
realm of scholarship, there is an increase in research misconduct such as
authors who manufacture data in response to increase pressures to publish
or to please a sponsor (cf. Smith, 2006). Also, Wilhite and Fong (2012) reported
on the disturbing number of cases where journal editors coerced a potential
author into citing papers from the editor’s journal as a condition of accepting
the paper, in order to increase the impact statistics for the journal. Further-
more, Bedeian, Taylor, and Miller (2010) reported a disturbingly high
number of self-admitted infractions of research ethics, including selective
reporting of results and even fabricating data or results. These and related pro-
blems that stem from our academic PMSs are discussed much more fully by
Tsui (2013).
But these problems are not unique to the academic world. There are also
many stories from the industry of how setting the “wrong” goals motivate
employees to exhibit the wrong behaviors. One of the authors recalls an
even in the Dominican Republic where a U.S. phone company took over the
local phone service and set repair goals for the repair crews. It soon became
clear that the repair personnel were sabotaging phones of friends and associates
so that they could visit them and “repair” their phones and meet their goals.
A recent case study of Parmalet (Gabbioneta, Greenwood, Mazzola, &
Minoja, in press) discussed how assumptions and expectations, created by
the institutional environment, could actually serve to amplify illegal actions
by encouraging these actions and by making it easier to conceal them once
committed. This research builds upon earlier work by Greve, Palmer, and
Pozner (2010), discussing how and why organizational misconduct takes
place. Interestingly, those authors also suggest a very concise definition of
organizational misconduct as:
behavior that a social-control agent [which may include anyone who
represents some collective that can impose sanctions on a body]
judges to transgress a line separating right from wrong; where such a
line can separate legal, ethical, and socially responsible behavior from
its antithesis. (p. 56)
These articles suggest that HR systems and PMSs can, in fact, help cause
misconduct such as illegal behavior, and this possibility should be included
in any future research as well.
An extreme example of this problem occurred in Enron, where tough per-
formance goals led senior employees to set up disastrous deals and for manage-
ment to falsify records in order to show profits. But the problem at Enron went
deeper and included the performance review program established there by Jeff
164 † The Academy of Management Annals

Skilling. Relying upon a forced distribution type of system (termed “rank and
yank”), used by general electric and copied by many, Enron instituted a policy
where, every six months, every employee’s performance was reviewed by a
committee of managers (the Performance Review Committee (PRC)), and
rated on a scale of 1– 5, where “5” was the worst score. The system then
required that 15% of the entire workforce be rated a 5 in each period, and
these employees were “redeployed” to a separate area of the company, given
a desk, phone, and computer and granted several weeks to find another job
within Enron, or they were fired within six months. However, because man-
agers on the PRC frequently would not know the employees they were review-
ing, other employees submitted written feedback to “help” the process. In fact,
each employee could ask five associates to submit letters commenting on his or
her performance, but anyone else could submit unsolicited comments as well.
The process became extremely political, as employees could undermine each
other by submitting negative comments (recall that the bottom 15% would
be redeployed). Or, alternatively, employees could enter into deals with one
another to submit good reviews. In the end, most managers used the process
to reward friends, and all employees were under pressure to enlist a senior
manager as a protector (cf. Li, 2010).
Furthermore, associates at Enron came to view this system as rewarding
profit generation only, which instantly motivated every employee at Enron
“do deals” and post earnings, even if they were short-term. As a result, fierce
internal competition prevailed and immediate gratification was prized above
long-term potential. Paranoia flourished and trading contracts began to
contain highly restrictive confidentiality clauses. Secrecy became the order of
the day for many of the company’s trading contracts, as well as its disclosures,
and it compromised the way business was conducted. Since complex deals and
mark-to-model valuations had to be approved by risk management, risk man-
agers knew that they would suffer in their performance reviews if they blocked
deals or did not support favorable mark-to-model valuations. Risk manage-
ment became little more than a rubber stamp and a stepping stone for employ-
ees moving around the company. Everyone knows how the story ended, but it
is not widely recognized how the PMS contributed to the downfall of Enron (cf.
Thomas, 2002). Surely it is important for future research to be aware of, and
study such unforeseen consequences of a PMS such as the type proposed here.

Conclusions
An assumption, not always verbalized, is that efforts to improve individual per-
formance will eventually lead to improvements in firm-level performance.
Based on a review of the literature from several streams of research, we con-
cluded that there is no simple relationship between individual-level perform-
ance and firm-level performance. We believe we have effectively reviewed
 Performance Appraisal, Performance Management † 165

the journals, books, and monographs, and we have followed up on works refer-
enced by others in this field in coming to this conclusion. We therefore looked
to several promising streams of research that might help us to understand the
relationship between improvements in performance at the individual and firm
levels. We found that each had some things to offer, but that each was incom-
plete, and so we attempted to integrate several of these models into one single
view of the performance management process. We believe this integration rep-
resents the major contribution of our paper as it allows us to see how these
research streams and models are actually related; it allows us to draw upon
one model to address some shortcoming in another model; it leads us to a
broader definition of PMSs; and it allows us to point the field toward a different
way of thinking about research on performance management.
Specifically, we found a very large body of literature showing how traditional
PMSs could influence individual-level performance, and we also found a con-
siderable body of research evidence to support the notion that bundles of HR
practices are related to firm-level performance. We also found a number of
models describing the nature of that relationship (Jackson, et al., 2014), and
others suggesting how such bundles could produce a climate for performance
that would allow context-generic KSAs to be converted into the specific KSAs
needed to improve firm performance. Considering this literature led us to
suggest that our working definition of PMSs should be expanded to include a
wider variety of HR practices that, collectively, are designed to ensure that
firms have a workforce capable of the required performance, motivated to
exhibit that behavior, and given the opportunity to exhibit that behavior.
Such expanded PMS programs could then transform generic KSAs to more
specific KSAs, by producing a climate for performance strong enough for
employees to understand what is required and motivated to carry out those
requirements. Only then could improvements in firm performance be obtained.
We believe that a discussion of our thought processes as we prepared this
manuscript can help provide some insight into the state of the literature that
led us to our conclusions. When this project began, the authors, like many
HR scholars, believed that there must be a link between individual-level per-
formance management and firm-level performance. In fact, one of the
authors actually wrote about ways in which this could occur. But, in our
review, we were struck by the absence of empirical data to support this pos-
ition. The only paper we could find that came close to establishing such a
link was the meta-analysis published by Subramony (2009). But that author
actually decomposed data sets from other studies to reach the conclusions
stated. That is, this meta-analysis did not directly assess the presence of any
type of the PMS, but simply constructed indices to suggest their presence
from other data. Instead, we found several papers that failed to establish the
relationship we were interested in, and many other papers which suggested
how this link might occur, but providing no data.
166 † The Academy of Management Annals

We were, therefore, forced to turn to the “Strategic HR” literature (Delery &
Doty, 1996; Huselid, 1995; Youndt et al., 1996), where authors consistently
found relationships between bundles of HR practices and various indices of
firm performance. But there were two limitations to this literature in terms
of serving our needs. The first was the general nature of the HR practices
that were typically included in these studies. Instead of comparing appraisal
techniques such as BARS versus graphic rating scales (as had been done in
the bias in appraisal literature), these studies simply indicated whether or
not there was an appraisal system, how frequently appraisals were done, and
how many employees were involved (among some other things). In fact, as
noted by Becker and Gerhart (1996), there was not even a consensus concern-
ing which HR practices should be considered as part of a “HPWS”. This
seemed to be a problem, but it turned out to be a minor issue only.
The second limitation was that most of the original authors of this work had
not fully explicated how these HR practices result in higher levels of firm per-
formance. Although several had proposed some potential mechanisms, it was
not clear that anyone had a good handle on how these practices operated. For-
tunately, we also identified a handful of papers that seemed to resolve both
issues. The work of Ostroff and Bowen (2000) and Bowen and Ostroff
(2004) proposed a model that explained not only how the HR practices
might influence firm performance, but also why it was necessary to consider
them as a bundle rather than as individual practices. The notion of using
bundles of HR practices to build a climate for performance seemed especially
attractive. More recently, a paper by Ployhart and Moliterno (2011) proposed a
more elaborated version of this same approach, drawing upon the research on
team performance (e.g. Bell & Kozlowski, 2002), to suggest a general mechan-
ism for how individual-level human capital could be transformed into context-
specific KSAs needed to improve firm-level performance. These suggestions all
seemed consistent with Reilly and Aronson’s (2009) suggestions for managing
contextual performance as well as task performance for maximum effective-
ness. Also, in all these cases as well as in the more traditional literature on per-
formance management (Aguinis, 2009, 2013) the role of corporate strategy was
made quite explicit.
We also saw corporate strategy as an important piece of the process. One of
the most important conclusions of the landmark review of the appraisal litera-
ture by Landy and Farr (1980) was that no single approach to performance
appraisal had been consistently shown to be superior to any other. Perhaps,
the reason for this was that a firm’s overall strategic goals really determined
what type of the appraisal system would work best. We also suggested that
these goals helped define the measure of firm performance that the organiz-
ation would use. This also meant that it was not important to specify the
fine points of the appraisal system (or the selection system, or any other
HR practice). All that was needed was those practices to be aligned with the
 Performance Appraisal, Performance Management † 167

strategic goals of the firm, and provide the skills, motivation, and opportunity
to perform effectively. If these practices were also consistent and salient (using
Ostroff & Bowen’s, 2000, definition of a “strong system”), they could actually
create a climate for performance where employees would understand what
was required of them, and see the opportunity to act in ways that would
affect firm-level performance. As noted above, we believe it was the inte-
gration of these various streams of research into a single model with associated
directions for future research, which represents the major contribution of our
paper.
It is also important to note that this does not represent a condemnation of
HR practices such as performance management. Research and practices in HR
have clearly demonstrated that effective HR practices are effective in changing
individual behavior. Selection systems can result in a more skilled workforce,
and effective training can enhance those skills. Effective assessment and incen-
tive systems can motivate individual employees, at every level of the organiz-
ation, to work harder to reach goals. Effective systems of job design and
decision-making can insure that employees have the opportunity to influence
important organizational outcomes. Thus, with few exceptions, it is difficult to
imagine a firm improving its performance without an improvement in the per-
formance of some employees in the firm (see Becker, Huselid, & Beatty, 2009;
for a discussion about “core” employees who can truly affect firm perform-
ance). It is clearly important to understand how we change the behavior of
individuals, but it is clear that this is no longer enough. It seems that the
assumption that individual performance improvement will eventually translate
into form-level performance improvement is unfounded. We need to move
beyond individual outcomes and examine how practices influence firm-level
outcomes.
Thus, this project represented an intellectual journey for the authors. The
journey began with the basic literature on performance appraisal and perform-
ance management, and ended with a model relying upon an expanded view of
PMSs, and recognizing the importance of both strategy and climate in deter-
mining firm-level performance. We hope that our journey and this paper
can help others to recognize that as well.
It is interesting to note, in closing, that our review of the literature suggests
that we have a tradition of HR research, based largely upon models and the-
ories from Industrial and Organizational Psychology, which has focused on
how very specific HR practices are related to individual performance. More
recently, we have a tradition of strategic HR management research which
has focused on how bundles of very non-specific HR practices are related to
firm performance. What we hope to encourage, with this paper, is a new
model of research where specific practices and bundles of specific practices
can be related to various measures of firm performance. This is clearly the
path if future research on performance management is going to have an
168 † The Academy of Management Annals

impact on organizational performance, and several recent discussion of per-

formance management (Aguinis, 2013; Pulakos et al., 2012) have pointed in
this general direction as well. Hopefully, the present paper will actually help
encourage the research that is needed to move us in that direction.

Acknowledgements
We would like to acknowledge the helpful comments on an earlier draft of this
paper from Herman Aguinis, Kevin Murphy, and Wayne Cascio, as well as
suggestion by Royston Greenwood, which helped us develop a much-improved
manuscript.

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