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The Intended Uses of Performance Measurement in Organizations

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Figuring out what makes measurement work as intended and what makes it fail or cause serious problems begins with a close look at the two categories of measurement: motivational measurement and informational measurement.

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Because dysfunction is defined with respect to organizational intentions, any study of it must pay careful heed to exactly what is intended by measurement system architects. Intended uses of measurement can be partitioned into two categories:

  • Motivational measurements are explicitly intended to affect the people who are being measured, to provoke greater expenditure of effort in pursuit of organizational goals.
  • Informational measurements are valued primarily for the logistical, status, and research information they convey, which provides insights and allows better short-term management and long-term improvement of organizational processes.

The distinction between the two categories is sharpened by the observation that motivational measurement is, by definition, intended to cause reactions in the people being measured, while informational measurement should be careful not to change the actions of the people being measured. Informational measurement must be careful not to affect behavior, because the information conveyed by measures is likely to be most representative of actual events when people being measured behave as if the measurement system did not exist (Roesthlisberger and Dickson, 1939).

Whether measurement is intended to motivate or to provide information, or both, turns out to be very important. In some situations, the two categories of measurement become incompatible. Attempts to force compatibility cause dysfunction. Figuring out what makes measurement work as intended and what makes it fail or cause serious problems begins with a close look at the two categories of measurement.

Motivational Measurement

The motivational use of measurement is familiar to most people in its most overt forms, such as sales bonuses, incentive pay, merit pay, pay-for-performance, or any other attempt to reward strong performance monetarily as determined by an established measurement system. Systems that associate less tangible rewards, such as increased probability of promotion, with measured strong performance, operate on the same principle. Under these systems, people who produce measured outcomes in desirable ranges are rewarded; people who fail to perform according to measurements may be punished (for example, dismissed).

The recent trend is toward more explicit links between measured performance and reward. A 1988 report on executive compensation in financial institutions (Peat Marwick, 1988) revealed that 87 percent of the banks, thrifts, insurance companies, and diversified financial firms surveyed had incentive plans for their executives, compared with 82 percent in 1987. Fully 98 percent of banks used incentive plans. A more recent report by Hewitt Associates, a compensation consulting firm, showed that the number of U.S. companies offering variable pay to all salaried employees increased from 47 percent in 1988 to 68 percent in 1993 (Tully, 1993). Companies now pay more in incentive compensation than in salary increases. In 1993, bonuses and other incentive payments averaged 5.9 percent of base salary, compared with 3.9 percent five years earlier. By comparison, the average raise in 1993 was just 4.3 percent.

Viewed theoretically, motivational measurement is a means of encouraging compliance with prescribed plans of action. An organization establishes relationships with other organizations and with individuals to obtain resources and capabilities needed to execute its plans. These other organizations and individuals do not usually have an inherent interest in the successful execution of the first organization’s plan, but they take an interest in exchange for help in meeting some of their own needs or to avoid a worsening of their condition that might be brought about by the first organization. In this way, a group composed of organizations and individuals is bound together by a network of contracts, commonly understood formal or informal agreements that specify what is to be done (or not done) or to be provided by each member of the group.1 Through creation of the network of contracts, the goals of the group’s founder are extended to the group as a whole. The contractual arrangements that bind them together can then be said to be functional, if they tend to produce results consistent with expressed goals, or dysfunctional, if they tend to produce results inconsistent with those goals.

Economists have traditionally regarded the contractual relationships that bind such groups together as simple exchanges. Terms of the agreement are specified initially; when both sides have met their terms, the contract is complete. Contracts may be entered into repeatedly; their specifications may be contingent on outcomes determined by nature (for example, “If it rains more than ten days in April, construction shall be completed by the end of May; otherwise, by May 15”); or they may extend over long periods of time. In each of these cases, functioning of the contract as a prespecified exchange is similar in principle to and little different from any other transaction in which goods are exchanged or purchased. However, as organizational theorists (see, for example, March and Simon, 1958; Pfeffer, 1990) and institutional economists (see Coase, 1937; Alchian and Demsetz, 1972; Williamson, 1975) have pointed out, some arrangements between cooperating parties pose challenges to the notion of a contract as a simple exchange.

The employment contract, for example, seems at odds with economists’ idealizations. Chester Barnard’s (1938) inducements and contributions framework, widely cited in explanations of the employment relationship, does have an economic flavor. Barnard argues that inducements given to each employee must exceed what the employee is asked to contribute or else cooperation will cease. The framework is clearly based on the notion of exchange but, in a departure from the usual economic portrayal of exchange, this transaction is not clearly defined or prespecified. The employee agrees not to specific terms, but rather to act in a general way on the employer’s behalf, within the “zone of acceptance”2 of the employee (March and Simon, 1958), in exchange for payment. Contract terms are not fully specified because neither employee nor employer knows in advance what will be required in pursuit of the employer’s goal; the employee is expected to exercise discretion. In performing the job, the employee gains job-specific knowledge that the employer does not possess. The ambiguity of contract terms and the private job-knowledge of the employee make it hard for the employer to determine whether the employee is fulfilling his or her part of the contract. Therefore, the possibility of employee opportunism arises. The exchange between employee and employer becomes complicated as terms are ambiguous and verification of contract performance is difficult.

Contracts involved in cooperative work, whether formal employment contracts or another sort, often have verification of performance difficulties. Concerns that the opportunism of one member might undermine achievement of the group goal are common and legitimate. There is a need for the group’s leader or leaders to exert influence over group members in a way that causes them to adhere to the spirit of their respective contracts; that is, there is a need for control of the group action. Motivational measurements and their associated incentive plans are a response to the need for control. By measuring a group member’s performance and explicitly associating rewards with favorable measurements, the group member’s incentives are, in theory, brought into alignment with those of the group’s leader. The member works harder and in the way desired by the leader. Recall that previously described instances of dysfunction occurred when measurements were faulty, in that the alignment of interests produced was imperfect. Imperfect alignment may result in more effort being expended by employees but in the wrong way. Both the amount of effort expended and how the effort is allocated across task activities are important determinants of the eventual value of the work. In the Blau example, nothing of value can come of employment-agent activities if prospective employers are never contacted, regardless of how earnestly agents devote effort to interviewing prospective employees.

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