Question

SLDU INDUSTRIES SDN BHD: THE BLAME GAME IN THE PERFORMANCE MEASUREMENT SYSTEM

At CEO’s Office – 3 January 2014
“How is this possible? We are not able to achieve even 1 percent increment from last year, yet we are having 71 plantations nationwide. An increment of 0.2 percent is not good enough for this company to survive. The head of production department has to look into this matter immediately. I want to see an improvement next year,” Dato‟ Sanusi Ahmad retorted.
He was not satisfied with the company‟s current performance after reviewing the financial reports obtained from the accounting department. There was no significant improvement from year 2012 to 2013 based on the profit before tax. He believed that profitability, growth and shareholder‟s value were important in determining the company‟s performance and it should be consistent with employee performance. Although the company made profit, the amount was quite small and growth was very insignificant. Subsequently, it would adversely affect shareholders‟ value. The main challenge faced by SPI now was to maintain a 15% dividend from their investment set by SLDU.
On 20 January, 2014, Jalil, the head of human resource department was called up by the CEO. “I think we need to do something with our performance measurement system. I am perplexed why our financial performance is lower than expected but our employees scored high marks in their annual performance evaluation. Something is not right here. Please look into this matter immediately,” the CEO demanded.
SLDU’s Human Resources Department
The CEO‟s words rang in his ears loud and clear. Jalil did not waste any time and decided to examine the issue raised by the CEO. The first place he visited was the production site, where he observed the employees for three months. He found the employees to be complacent: they lacked the motivation to meet the set targets and were not bothered with the productivity levels targeted for each department. When he asked the employees, they replied that they were not aware of the urgency to meet the targets and they were merely doing what they needed to do. “What‟s the rush?” they replied. In addition, there was a high frequency of employees on leave. However, he found some of the reasons given to be unacceptable. Jalil wondered if the Heads of Departments were aware of what was actually taking place under their noses.
A week later, Jalil was back in his office. He thought it was a good idea to examine all the records of competencies from each department in order to identify any flaw in the performance evaluation system. For the past few years, SLDU used a new format for performance evaluation and most of the evaluation marks were at the satisfactory level. SLDU followed the concept of the normal distribution in determining the performance marks. The expected shape of the overall marks should be in accordance with the „bell curve‟6. Jalil discovered that the figures was skewed at the extreme values. Further investigation revealed that the evaluation marks given by the immediate supervisors in all departments were always high. Therefore, he decided to conduct a meeting with all Heads of the Departments.
Managing the Managers
In the meeting with all Heads of Departments, on 14 February 2014, Jalil stressed the importance of assessing, monitoring and reviewing employee performance within the stipulated time. He also underlined the significance of employee performance being in harmony with company performance. A company‟s performance was a crucial aspect in determining the company‟s progress within a specific period of time. It indicates the current condition of the company, the opportunities it was seeking, the overall contribution to ensure the company was moving forward and therefore it was important to deliver a company‟s performance target.
There was a lively discussion and exchange of ideas among the Heads of Departments. However, many did not see the need to re-evaluate their employees. “Mr. Jalil, what is the big issue here? We have done our evaluation according to the requirements stated in the assessment forms. We find our employees to be motivated; they understand their roles and responsibilities and deliver on time.” All the managers agreed with Mr. Aziz, who head heads the quality control department. “It is not our problem if the machine breaks down for weeks and we cannot perform the extraction process. I think that is the main reason why we cannot achieve the targeted yield according to the schedule,” said Mr. Ramli, the head of the production department. “Actually, we managed to solve the problem of machine breakdowns and achieved the target accordingly," added Mr. Krisha from the maintenance department.
“We have established a proper Performance Measurement System (PMS). It is a shared responsibility between the organization, employee, reporting managers and reviewing managers. I believe that all of you had attended the training and understand how it works,” Jalil explained. “If we work together to strengthen our performance system, our employees will become much more highly motivated and productive. I am counting on you to give them the necessary feedback,” added Jalil. With their in-depth knowledge and wealth of experience, and having attended a series of talks on performance appraisal, the Heads of Department were well verse on the PMS. The training had been on how to rate KPIs, targets and competencies, and how to derive overall performance ratings. As for Jalil, he knew that he had pressed the right button to make the managers realize their roles.
Jalil realized that some managers were not oriented with the company‟s goals and targets. He felt that these managers merely gave out tasks related to an employee‟s daily routine, and made sure everyone had tasks to do. “That should not be the case. As a manager, there are many other important things to handle, and that include coaching and employee evaluation,” he thought. From his earlier investigation, he found that some managers had not explained to their employees about PMS. To him, it was very important for all employees to be clear about the system, the relationship between the company‟s goals, department goals and the employees‟ responsibilities to achieve these goals, as well as issues related to the grading. Some managers were not following the measurable tools given to them in evaluating employee performance. As far as he was concern, all the managers had attended the performance evaluation training. He felt that the information had not been disseminated properly to every employee at every level of the organization. “I understand that everyone is doing his job here, but still we are not performing up to standard. We have targets to achieve, and we need to do our best to achieve them. We need to be aligned with our CEO‟s mission,” Jalil lamented. To him, the CEO was very ambitious and forward-looking. The CEO believed that in order for a company to succeed, it must have a strong internal control system and now, he had enforced the implementation of a proper evaluation system.
Jalil felt relieved after talking to the Heads of Departments and hoped that they understood the seriousness of the matter and the urgency to re-look at the current performance evaluation practice. Jalil spent hours thinking about how to get the employees geared towards achieving the organizational goals. He felt that the current performance measurement system placed too much emphasis on financial performance measures. Jalil wondered whether they should implement the balanced scorecard (BSC).
Production Department
As head of production department, one of Ramli‟s responsibilities was to ensure the welfare of his employees. He was both a manager and a friend to them, and he felt he needed to do as much as possible to help them. Ramli gave his employees high ratings because annual increments, bonuses and promotions were heavily tied to the performance results. In his opinion, he was doing them a favor and hoped that they would be motivated and continue to perform their best in the future.
“What is so wrong with that?” Ramli asked himself. He thought that by being an understanding manager, it would help to increase the motivation level of his employees. He wanted to make them feel like they were a part of a family and wanted them to enjoy working under him. As a token of appreciation, his employees always brought “presents” for him. To Ramli, it was a “normal practice,” but some of his colleagues frowned upon it and considered it as bribery.
Jalil‟s directive that employee reassessment be carried out caused a bit of worry for Ramli. After the meeting with Jalil, Ramli was seen busy filling up the evaluation forms. Jalil had reminded him to be fair, honest, and rate his employees based on their performance. Ramli felt that he had done what he needed to do, and believed that nothing was wrong with the way he previously evaluated his employees. He felt that Jalil was trying to make this a big issue.
“Of course the CEO has certain targets to achieve, yet we are all human beings who have limitations in doing our work. It is not that we are not trying. I have worked in the company for almost 30 years. Some employees have been working under my supervision for 10 years. I even know their family members and the difficulties they are facing.”
Ramli was puzzled why the productivity graph of his department was not that good despite the excellent individual performance. He strongly believed that his employees were hardworking and did their jobs rather well. He thought that it was normal if his employees took leave occasionally due to family matters or sickness. “After all, they are humans. Aren‟t they allowed to fall sick? They do have responsibilities to their family too,” he reflected.

Current Practice of Performance Measurement System (PMS)
SPI adopted SLDU Group‟s policy and approach in assessing employee performance. SLDU Group‟s definition of performance in the measurement system included both KPIs and competencies. It is a concept of measuring results or output that reinforces the link between individual goals and business strategy. This approach to measuring competencies gives greater emphasis on employee development and enables them to achieve individual goals and align their behavior to the organization's values. The purpose is to enhance employee motivation and to improve business performance.
The two key elements of performance assessment and reward need to be balanced. The first key element was to achieve business results known as „the WHAT‟ and second, was how could the employees demonstrate the shared values and competencies to accomplish the results known as „the HOW.‟ Therefore, the key principles of PMS addressed both the “What” and “How” of individual employee performance in a balanced manner. SLDU‟s PMS stressed the importance of achieving both results and the demonstration of shared values and competencies by all categories of the employees concerned.
The PMS subscribed to the basic idea of “What Gets Measured Gets Done.” It also aligned SLDU Group‟s vision and strategies with individual employee‟s actions, allowing them to understand clearly how their performance directly contributes to the business goals and results. PMS was an integrated system, supported by other key areas of the human resource processes, such as employee compensation, promotion, career development and succession planning. It was a mechanism to differentiate high performers from the others, for the purpose of rewarding and recognition, and other human resource decisions. Performance management within the PMS followed an ongoing cycle of activities throughout the year, unlike traditional employee appraisal, which tend to be perceived as a once a year event. In this respect, SLDU Group‟s performance management cycle comprised of three phases that take place throughout the review period: Performance Planning, Performance Assessment and Performance Rewarding.
The Performance Planning phase can be described as the expectations setting stage, where the appraiser and appraisee work together to create a performance plan. Basically, it consisted of the “WHAT” results; for example objectives, KPIs and targets to be achieved; and the “HOW” for example shared values and competencies that employees need to develop, apply and demonstrate during the course of the PMS cycle. The end product of the planning phase was the mutual agreement on the performance plan and the creation of a development plan to build the required competencies to execute the results effectively.
In the Performance Assessment phase, quantitative targets were independently computed; the supervisor obtained inputs from peers, employees and clients. In short, the assessment was a formal appraisal of the actual results achieved as measured against the plan. It was a culmination of previous reviews (formal and informal) that were undertaken in tracking performance progress. There should not be any major surprises when comparing the actual results with the plan, if employee performance was consistently monitored and tracked, and corrective actions were taken accordingly to modify or improve the plan. The end-review also provided the opportunity for the parties concerned to decide what can be done to improve results, developed the desired competencies and relevant development plans in preparation for the next performance cycle.

The Performance Rewarding phase addressed the outcome and consequences of the business or organizational results achieved and the demonstration of the desired level of competencies to accomplish by the respective employees. Performance results would ultimately determine financial and non-financial rewards, or whatever options deemed necessary.
An MNC, with operations across the globe and employs hundreds of employees, required an effective system to measure its performance to remain competitive in the market. As practiced in other companies, top management together with all Heads of Departments, would have a series of KPI planning sessions. The main purpose was to ensure that the employees‟ KPIs were aligned with the company‟s targets, since their progress would be reflected in the company‟s performance. Undoubtedly, if the employees‟ scores were low, the company score would also be affected.

Two major questions lingered on his mind: Should SLDU relook at how strategic objectives of the company are cascaded down to the departments and eventually to individual employees? Should SLDU implement a balanced scorecard as balanced scorecard focuses on both financial and non-financial measures?

He only had one month from now before the next management meeting.

Answer 1

Facts given in the case:

• The organisation underwent a negligible growth rate at 0.2% annually.
• The challenge for the organisation was to maintain a dividend rate of 15%
• Although the financial performance was lower than expected but the employees scored high marks in the annual performance evaluation.
• Organisation’s Human Resource Department Head's observations:

1. At the production site

· Employees lacked motivation.

· Employees were complacent towards their tasks.

· High absenteeism.

· Upon plotting of the performance marks on a bell curve, they were skewed to the extreme values.

2. Meeting with the Head of Departments

· Some managers were not oriented with the company’s goals.

· Some managers had not explained to their employees about Performance Management System(PMS).

· Some managers were not following the measurable tools given to them in evaluating employee performance.

· The current PMS placed too much emphasis on the financial performance measures.

3. About the production department:

· The Head of Production Department gave very high ratings to the employees to keep them motivated.

· The productivity graph of his department was not that good despite the excellent individual performance.

Current PMS being adhered to in the organisation

· Definition of performance in the measurement system included both KPIs and competencies.

· The organisation’s PMS stressed the importance of achieving both results and the demonstration of shared values and competencies by all categories of the employees concerned.

· PMS subscribed to the basic idea of “What Gets Measured Gets Done”.

· The performance management cycle comprised of three phases that take place throughout the review period: Performance Planning, Performance Assessment and Performance Rewarding.

Issues that need to be addressed in the case

· Should the organisation(SLDU) relook at how strategic objectives of the company are cascaded down to the departments and eventually to individual employees?

· Should SLDU implement a balanced scorecard as balanced scorecard focuses on both financial and non-financial measures?

Issue 1: Should the organisation(SLDU) relook at how strategic objectives of the company are cascaded down to the departments and eventually to individual employees?

There has to be a unity of direction between the organisation and the employees. This principle of management was also suggested by Henry Fayol. In the instant case it was evident that the strategic objectives of the organisation have not reached many employees. The performance management system caters to this objective wherein, the goals and objectives of the organisation are explained to the employees and the employees are motivated to channelize their efforts towards achievement of the same. If there lies a disconnect between the goals of the organisation and the direction of the efforts taken by the employee, the synergy available might be completely lost.

The Head of Human Resource Department(HRD) observed that even though the Heads of Departments(HOD) have attended the training still they have not been able to communicate the objectives of the organisation to the workforce. An obvious reason for the same was lack of motivation among the HODs to go beyond meeting the production targets. The complacency among them after the achievement of the production targets, did not let them pay heed to coaching and employee evaluation. However, there is also another aspect which has contributed towards this lack of alignment between the organisation and individual goals- The training. As it can be seen that the Head of HRD was considering his job done after imparting the training about PMS. However, the training is supposed to be followed by frequent follow ups, sensitization, feedbacks etc. Just by provided the training once and not following it up regularly pulls the gravity out of the subject. So the HRD also needs to regularly keep the HODs motivated and updated after the training. Any new development needs to be communicated to the respective stakeholders, which in the instant case has not occurred.

Thus keeping the above points in mind, the organisation needs to relook at how strategic objectives of the company are cascaded down to the departments and eventually to individual employees, and devise new ways to confirm and evaluate that the objectives of the organisation are communicated and aligned with the individual objectives of even the employees of the lowest ranks.

Issue 2: Should SLDU implement a balanced scorecard as balanced scorecard focuses on both financial and non-financial measures?

In the given case the organisation is following the traditional approach to PMS. In the current dynamic environment, this approach is inadequate and not relevant majorly due to the following reasons:

· Relying solely on financial metrics can motivate managers to make decisions that sacrifice long-term value creation for the benefit of short term performance. E.g. cost reduction by reducing the quality can increase profits in the short term but it is detrimental to the organisation’s image in the long run

· Traditional performance systems focus on short-term financial performance, resulting in a disconnect between organizations' long-term strategy and its short-term actions. Organizations must measure performance in ways that not only replicate past positive performance, but also encourage positive future results. Modern organization must invest in intangible assets that create future value such as customer relationship, employee development and intellectual capital. These intangible assets drive value creation, are linked to the long term growth of the company and have become a major source of competitive advantage.

The Balanced Scorecard (BSC) is a performance measurement system that addresses the weaknesses of the traditional performance measurement systems. It has added strategic non-financial performance metrics to traditional financial metrics, thus, providing a ‘balanced’ view of an organizational performance (Anthony & Govindarajan, 2007; Kaplan and Norton 1992;1996).

BSC analyses the company performance from the above four perspectives where performance metrics are designed, collected and analysed relative to each of the following four perspectives:

· Financial Perspective

· Customer Perspective

· Learning and Growth Perspective

· Internal Business Environment Perspective

Thus, the BSC measures organization performance by balancing between financial and non-financial measures. Progress is measured with traditional financial measures, such as profit and loss, along with contemporary non-financial measures such as customer satisfaction, employee retention, brand equity, intellectual capital and market share.

Thus, there is an immediate requirement for the organisation to adapt itself towards the need of the hour and adopt a more comprehensive and holistic approach like the Balanced Scorecard towards performance management. The PMS currently being followed is not in line with the competitive business environment, and clearly the results of sticking to this approach of PMS are reflected in the marginal growth of 0.2% of the business. The adoption of BCS will give SLDU industries a competitive edge by linking strategy to operational activities and thus creating a strategy focused organization