Description
Businesses are facing up to high competitive pressure, especially banking industry. After 1997 crisis, banking industry meet more challenges from new financial landscape. Aiming to improve organizational performance, they have been adopting management tools, namely performance management.
Journal of International Business and Cultural Studies
Performance management, Page 1
Performance management effectiveness in Thai banking industry:
a look from performers and a role of interactional justice
Pachsiry Chompukum
Chulalongkorn University
Abstract
Businesses are facing up to high competitive pressure, especially banking industry.
After 1997 crisis, banking industry meet more challenges from new financial landscape.
Aiming to improve organizational performance, they have been adopting management tools,
namely performance management. To enhance impacts of performance management, it is
important to understand employees’ perceived performance management effective since the
process requires high involvement and commitment from employees. Data were collected
from 476 employees in the four largest banks in Thailand. Results from structural equations
analyses support hypothesized model that attitudes towards performance evaluation directly
relate to perceived performance management effectiveness and interactional justice mediates
the coaching- perceived performance management effectiveness. Discussion, limitation and
future research are included.
Keywords: Banking industry in Thailand, Banking industry and performance
management, Effectiveness and performance management, Interactional justice,
Performance Management.
.
This research was supported by Chulalongkorn University Centenary Academic
Development Project.
Journal of International Business and Cultural Studies
Performance management, Page 2
INTRODUCTION
The increasingly competitive environment of the 1980s, which continued throughout
the recessionary 1990s still remains a dominant factor today. Up until now, the increasing
competition is even higher than one could imagine. Business faces challenging of increasing
intensity and scope of globalization, a drive to comply with international standards, a
continued move toward automation of production processes, a reliance on more sophisticated
information technologies, and unrelenting increase of oil price.
Banking industry in Thailand is one of the industries that are facing up to high
competitive pressure, especially after 1997 crisis. As showed in the Figure 1, as indicated in
Figure 1 (Appendix B) net profits and return on assets sunk during the crisis. It was not until
2001 that the net profit of the banks became slightly positive gain.
Although the economic situation in Thailand is recovering, banking industry meets
more challenges from new financial landscape such as Basel II implementation and Financial
Sector Master Plan. As a result, it has introduced additional competitive pressure to the
industry. Thailand now welcome foreign investors to hold major shares in Thai banks, i.e.
ABN Amro, DBS Bank, United Overseas Bank, and Standard Chartered Bank. Therefore, to
survive in the midst of high competition, all banks have to reform their revenues and cost
structures (Sookpradist, 2003). For income enhancement, it can offer services that other
banks have not yet provided and increase non-interest income such as fee income from debt
instrument transactions and foreign exchange transactions. However, for cost reduction, all
bank seem to have the same cost for capital because of regulations from Bank of Thailand
and market mechanism. Thus, it looks like the only way for bank to reduce cost is to operate
at a relatively lower cost than competitors. By banking nature, operating expenses, including
salaries consumes about half of total revenue (Payant, 2006). Managing these operational
activities and their associated costs wisely can improve profitability.
To thrive or survive, banks need to continuously improve qualities, attract more
customers, and are more cost- conscious. In other words, banks need to better manage their
performance. Over the years, there are many practices, tools, techniques, systems,
philosophies that aim to help organizations to gain competitive advantage. Some of them are
proved to be effective and remain in the business management while some of them may be
just a business fad. Among the effective one, performance management is a prominent
practice that help organizations to create business value. For instance, in a survey of 437 U.S.
companies, McDonald, Shield, and Smith (Rheem, 1995), found that companies that used
performance management programs had greater profits, better cash flow, stronger stock
market performance, and greater stock value than companies that did not. In addition,
companies with such programs had higher sales per employee or productivity- than those that
did not; also, productivity and financial performance in companies with performance
management program were higher relative to other companies in their industries. In the same
study, they also compared companies before-and- after implementing the program. They
found that after implementing performance management, total shareholder return increased
by 24.8% and productivity increased by 94.2%.
Not surprisingly, many banks in Thailand are vigorously implementing performance
management system to help them better manage their employee’s performance and in turn,
it affects organizational performance. Since it is the key process through which work is
accomplished, it is considered the “Achilles Heel” of managing human capital
(Pulakos, 2009). Therefore, it is very important to manage it effectively.
Having performance management system in banks does not guarantee desired
outcomes, namely its effectiveness. For example, when executives were asked to comment
on their own performance management programs, they rated the programs as only “slightly
Journal of International Business and Cultural Studies
Performance management, Page 3
effective” to “somewhat effective” (2 and 3 on a scale of 1 to 4) (Rheem, 1995). In another
study conducted by WorldatWork and Sibson Consulting, it is found that only 5% of
respondents gave an A to their performance management effectiveness and 46% rated their
companies performance effectiveness as B (Anonymous, 2007). Employees’ perception
toward the program can shape how they react to and act in accordance with the performance
management system. Since performance management is the process that requires high
involvement and commitment from people in the organization, perceptions of the employees
can highly affect organization outcome. Therefore, the purpose of this paper is to explore
how employees in commercial banks perceive effectiveness of performance management and
factors affecting levels of perceived performance management effectiveness.
THAI BANKING INDUSTRY
Bank of Thailand classifies commercial banks in Thailand into two groups, commercial
banks registered in Thailand and foreign banks (full branch). Due to their assets size and
market share, commercial banks registered in Thailand are considered as the most important
and influenced business of the country. Since commercial banks mobilize the savings also
being the largest source of loans. Furthermore, banking industry has roles to support
monetary policy such as to increase or decrease money in the market. The government also
uses the commercial banks as the key instrument in order to drive monetary policy and
balancing the economy appropriately. According to the statistics from Bank of Thailand as
of August 2011, there are 17 commercial banks registered in Thailand as shown in Table 1, as
indicated in Table 1 (Appendix A).
According to Chunhachinda and Li (2010), Since the 1997 crisis, there are a couple of
major changes; the ownership structure has changed dramatically due to the lift of foreign
limit control by the Bank of Thailand and the banking industry began taking higher market
risks after the crisis causing the percentage of non-interest income to interest income to
increase substantially. Competition in the industry is very high. It drives banks to find ways
to increase their income and profit. The Bank of Thailand warned them that high competition
in corporate lending could eventually cause a deterioration of credit quality (2011). There is
also depressed margin. As shown in Figure 2, as indicated in Figure 2 (Appendix B).
margins have fallen from 3.6% in the beginning of 2008 to 3.1% by the end-2010 (2011).
Currently big banks such as Bangkok Bank and Kasikorn Bank, are trying to search
for better opportunities by investing in foreign countries. Besides expanding to overseas,
banks are trying to seeking for ways to increase their efficiency, including managing
employee performance.
THEORECTICAL BACKGROUND AND HYPOTHESE
Performance Management
Managing performance has been a very important issue for a long time. It has gained
more attention recently due to high competitive business environment. Especially when the
popularity of Balanced Score Card calls for mechanism to cascade and instill the corporate
strategy down through the organization and to ensure that strategy plan is actually
implemented, performance management is one of practices that assist organization to link
organizational goals to individual goals. That is, operational goals take the organization’s
strategies and translate them into specific goals. Therefore, it facilities management
alignment and buy-in by bringing all levels of management into operational planning process
Journal of International Business and Cultural Studies
Performance management, Page 4
and giving employees a chance to help shape the plan (Aguilar, 2003). It focuses on ways to
motivate employees to improve their performance (DeNisi and Pritchard, 2006).
Furthermore, it can help organizations to improve financial performance. A study
conducted by McDonald and Shield of Hewitt Associates found that companies that used
performance management programs had greater profits, better cash flow, stronger stock
market performance and greater stock value than companies that did not. Not only
performance management improved financial performance, but it also improved productivity;
companies with such programs had higher sales per employees (Rheem, 1995).
Nonetheless, performance management has been mistaken as performance evaluation.
As a matter of fact, both performance management and performance evaluation are related
but they are not exactly the same concept. Performance management is a systematic process
for improving organizational performance by developing the performance of individuals and
teams; it is a mean of getting better results from the organization, teams, and individuals by
understanding and managing performance within an agreed framework of planned goals,
standards, and competence requirement (Armstrong, 2006). While performance evaluation is
a process of assess and rate past performance of individuals or groups (Oct 2004).
Performance evaluation is just a part of performance management. Table 2 compares
performance evaluation with performance management, as indicated in Table 2 (Appendix A).
Not only performance management is mistaken as performance evaluation, it is also
misunderstood especially by human resource practitioner and managers. It can results in
misperception of employees and affect performance management effectiveness. In a review
of literature on this topic, London, Mone, and Scott (2004 ), propose that there are several
problems regarding using performance management which are (1) the misuse of methods,
poor program development, and lack of program evaluation, (2) the mismatch between
performance management system and organizational context, (3) failure of choosing the right
method for the right purpose i.e. using multisource rating for administration instead of
development (4) wrong criteria to evaluate performance management and (5) careless
implementation with little attention to interpersonal dynamics and psychometric testing.
All in all, performance management reflects a paradigm shift from thinking of
performance evaluation as a discrete event to a continuous process (Latham and Mann, 2006).
Specifically, performance management encompasses the entire range of enhancing
performance. It includes an approach to creating a shared vision of the organizational goals
and objectives, aiding employees to understand and know their part in contributing to them
and implementing linkage between performance and reward (Fletcher, 1996).
Overall, performance management aims to (Armstrong, 2006):
• Empower, motivate and reward employees to do their best
• Focus employees’ tasks on the right things and doing them right; align
everyone’s individual goals to the goals of the organization
• Proactively manage and resource performance against agreed accountabilities
and objectives
• Align personal/individual objectives with team, department and corporate plan.
• Make individuals clear about what they need to achieve and expected
standards, and how that contributes to overall success of the organization
• Provide regular, fair, accurate feedback and coaching to stretch and motivate
employees to achieve their best
• Maximize the potential of individuals and teams to benefit themselves and
organizations.
Performance management should not be viewed as a mechanistic system based on
periodical formal evaluations and detailed documentation. It is ongoing communication
between manager and employees. Effective performance management entails a process where
Journal of International Business and Cultural Studies
Performance management, Page 5
employees are fully aware of their roles in the organization, the type of output expected, and
how the output will be measured (Ramlall, 2003). The processes of performance management
consist of:
Performance planning/Goal setting
It involves cascading organizational goals to individual goals, agreeing objectives,
competency requirements, and personal development plans.Performance management is a
mechanism to join together individuals’ performance with an organizational performance
through aligning organizational goals with individual goals. It is used to create a shared
vision and goals of the organization, and to help each individual employee to understand and
recognize their part in contributing to organizational performance (Fletcher,1993). Once
organizational goals have been set, they are cascaded down through the organization.
Goal setting theory (Locke and Latham, 2002) states that a goal drives performance.
It affects direction, effort and persistence of employees. Specifically, a goal directs an
employee’s attention toward actions which bring goal accomplishment, leads an employee to
adjust and persists their effort, and stimulates the development of task strategies to attain it.
However, to enhance effectiveness, goals should be specific and difficult (Seijts and Latham
2005). In the other words, a specific and challenging goal leads to higher performance than
general goals such as “do your best”. In fact, it has much stronger effect on performance than
any other factors, including participation. It may be presumed that participating in goal
setting enhance its effectiveness; goal setting is likely to be more effective when people
participate in setting goals than when goals are assigned to them. However, Locke and
Latham (2002) state that when goal difficult is held constant, the performance of those who
participate in setting goals does not differ significantly from those who were assigned goals.
Moreover, both a participatively set goal and an assigned goal result in higher performance
than a general goal asking employees to do their best (Latham, Steele, and Saari, 1982).
Clearly, goal setting has motivational effect on employees. But this does not mean that it
affects employees’ attitude toward performance management system since having goals does
not directly affect employees’ gain and loss. In fact, in their exploratory research, Taylor and
Pierce (Taylor and Pierce, 1999) found that it did not matter employees had goals or not;
all employees who received a lower-than-expected performance evaluation blamed either
their supervisor, the organization, or performance management system.
Acting: Coaching
Coaching will help employees to maximize their full contribution and potential. It is
process through which supervisors may communicate clear expectations to employees,
provide feedback and give suggestions to employees. It also prepare employees to be ready
for challenging works (Heslin, VandeWalle and Latham, 2006). It is an important mechanism
that helps supervisors enhance employees’ performance. For example, Liu and Batt (2010)
found that amount of coaching that an employee received each month predicted objective
performance improvement over time. In a study of effects of managers’ coaching intensity on
the performance of those they supervise, at multiple levels of an organizational hierarchy, it is
found that managers’ coaching intensity influences the performance of their subordinates
after controlling for job satisfaction (Agarwal, Angst, and Magni, 2009).
To increase its effectiveness, coaching should be done on an ongoing basis; this may
include regular coaching meeting in formal performance review session where supervisors
review recent performance, evaluate it, and provide guidance, suggestions, and
recommendations for improvement; additionally, it may include less formal discussions
Journal of International Business and Cultural Studies
Performance management, Page 6
between supervisors and employees concerning performance (Lindbom, 2007). In fact, truly
effective managers and managerial leaders are those who embed effective coaching into the
heart of their managerial practice (Hamlin, Ellinger, and Beattie, 2006). However, coaching
is not only performed by managers. It can be performed by peers (Armstrong, 2006). Peers
can support one another’s learning and development by providing emotional and technical
support. Parker, Hall, and Kram (2008) propose that peer coaching will be very effective if it
happens through a 3-step process of (1) building the development relationships, (2) creating
success in development, and (3) internalizing the learning tactic by applying the peer-
coaching process in future relationships.
REVIEWING: Performance Evaluation and Linkage Performance to Rewards.
Performance evaluation usually takes place in a yearly or semi-yearly session. An
effective performance evaluation should accurately outline employees’ responsibilities and
contributions to organizations (Clausen, Jones, and Rich, 2008) and be free from errors such
as leniency, halo effect, and range restriction. Not surprisingly, research on the topics of rater
accuracy and measurement are in the mainstream of organizational psychology. However,
DeNisi and Pritchard (2006) believe that performance evaluation research were too interested
in measurement issues and not interested enough in ways to improve performance. To so do,
research on employee reactions is very important because what employees perceive can affect
their behavior and performance.
There are two main purposes of performance evaluation, namely for human resource
management and for human resource development. For human resource management,
performance evaluation can serve as a valuable input to make administrative decisions
relating to promotions, firing, and merit pay increases (Byars and Rue, 2004). In the other
words, results of performance evaluation will link to reward of individual to motivate and
stimulate employees to perform better and show how much employers recognize their
performance. In addition, information from performance evaluation can provide needed
input for employee development, including coaching. Therefore, both linkage between and
performance and reward and coaching are associated with performance evaluation. This leads
to:
Hypothesis1: Performers’ attitude towards performance evaluation is positively related to
linkage between consequences and targeted performance.
Hypothesis 2: Coaching is positively related to performers’ attitude toward performance
evaluation.
Moreover, most employees expect coaching to be facilitative, supportive, and aimed
at their own goals and needs (Peterson, 2009). Information that is given in the coaching
process not only includes discussions of performance expectation, but also providing
feedback and motivating employees by stating desired consequences if their goals achieved.
Thus, it is proposed:
Hypothesis3: Coaching is positively related to linkage between consequences and targeted
performance.
Effectiveness of Performance management
Performance management does not necessarily deliver good results. Some ineffective
performance management can be a drain on employee morale and affect both employees’
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Performance management, Page 7
behavior and a company’s ability to achieve its strategic objective. According to Lawson
(Lawson, 1995), effective performance management means:
• It articulates organization’s vision.
• It establishes key results, objectives and measures at key business unit level.
• It identifies business process objectives and the key indicators of performance for
those processes.
• It identifies and installs effective departmental measures.
• It monitors and control four key performance measures namely quality, delivery,
cycle time, and waste.
• It manages the continuous improvement of performance in those key area.
• It prepares to aim for breakthrough improvements in performance when this is
required by a significant shortfall in performance measured against the performance
of major competitors.
Performers’ Perception
Performance management is traditionally seen as management’s systematic
application of processes aimed at fully utilizing human resources and it carries somewhat
negative connotation when considered from the performer’s perspective (Buchner, 2007).
Hence, factors causing effectiveness can be different in the eyes of management and
employees. Due to the conflicting results of performance management benefits, organizations
should pay more attention to the internal effects (Martinez and Kennerley, 2006). In the
other words, it is important to consider how employees react to performance management
system. One factor that may affect employees’ perceived performance management
effectiveness is their attitude towards performance evaluation. In review of performance
evaluation studies, Levy and Williams (2004) stated that appraisal reaction was important:
employees were more likely to ignore information they received from their performance
evaluation when they perceived that the performance evaluation system is not fair and source
of those information were not credible. Since performance evaluation is a source of input for
performance management process (DeNisi and Pritchard, 2006), attitudes toward
performance evaluation tend to affect attitudes towards performance management
effectiveness. In addition, performance evaluation is one major elements of performance
management that directly have consequences on employees in many ways including their
advancement and rewards. In fact, based on the survey results, it is suggested that the quality
of performance evaluation should be measured if organizations want to increase performance
management effectiveness (Oakes, 2007). Moreover, from another survey of performance
management, out of nine factors that are key practices that can lead to perceived performance
effectiveness, there are five factors that is related to performance evaluation, i.e., plans for
helping employees develop in the work period after the evaluation, training for managers on
how to conduct a performance evaluation meeting, metrics of the quality of performance
evaluation, performance evaluation that is not limited to the judgment of supervisors, and
consistency of performance evaluation across the whole organization (2007). It leads to:
Hypothesis4: Performers’ attitude toward performance evaluation is positively related to
perceived performance management effectiveness.
Mediating Role of Interactional Justice
Bies and his colleagues introduced one form of justice, interactional justice. It focuses
on the quality of interactions among peoples in the organizations. According to Greenberg
(Greenberg, 1993) there are two main components of interactional justice which are quality
Journal of International Business and Cultural Studies
Performance management, Page 8
of the treatment that the target receives and procedural explanations for why something
happened. More specially, the first component reflects the degree to which people are treated
with politeness, dignity, and respect by authorities and the second component focuses on the
explanations provided to individuals that convey information about why procedures were
used in a certain way and why they received those outcomes. According to Fassina and
Colleagues (2008) people use the information they have a about the fairness of interpersonal
treatment to form impressions of fairness and these impressions have a causal effect on their
responses. It is also found that interactional justice related to employee attitudes, namely
satisfaction and commitment (Cohen-Charash and Spector, 2001).
It was argued that interactional justice more likely to affect individuals’ cognitive,
affective, and behavioral reactions toward their supervisors than their reactions toward
organizations because supervisors were the direct source of justice (Cohen-Charash and
Spector, 2001). A meta-analysis of justice found that interactional justice highly affected
agent-referenced outcomes, namely job satisfaction, organizational commitment, agent-
referenced evaluation of authority, organizational citizenship behavior, and performance
(Colquitt et al. 2001). As for performance management system, although it is one of an
organizational systems, employees are trained to believe that it is owned by their supervisors,
not human resource department nor the organization. In addition, the essence of performance
management is communications between employees and their supervisors. Therefore, their
reactions toward perceived performance management effectiveness tend to be parallel their
reactions toward their supervisors. More specifically, interactional justice tends to lead to
perceived performance management. Since interactional justice involves interpersonal and
informational components, it is likely to occur in the in coaching process. In the other words,
when a supervisor engage in coaching processes, it leads to interactional justice and in turn, it
leads to perceived performance management effectiveness. This leads to:
Hypothesis 5: Interactional justice mediates the coaching – perceived performance
management effectiveness relationship. Specially, coaching is associated positively with
interactional justice. Interactional justice, in turn, is related to perceived performance
management effectiveness.
The hypothesized model is depicted in Figure 3, as indicated in Figure 3 (Appendix B).
METHOD
Sample
Bank of Thailand categorizes banks into 2 types, commercial banks registered in
Thailand and foreign bank branches. Since the size of each foreign bank branches is small,
the study focuses only on the commercial banks registered in Thailand. Sample of the study
included employees in commercial banks registered in Thailand from various functions in the
four biggest banks. One reason of focusing on the biggest four big banks is that not all banks
are formally implementing performance management. Only big banks that have solid human
resource department and resources to implement the system. Of the 600 questionnaires
distributed, 492 employees responded, yielding a response rate of 82%. 16 questionnaires
were not usable. The final response rate for the usable questionnaires was 79.3%. As shown
in Table 3, as indicated in Table 3 (Appendix A), of the total 476 subjects, 58.4 % were
female. The age of respondents ranged from 22 to 59 years, average age was 38.85. More
than a half of respondents were single (59.9%). Most of respondents had a bachelor’s degree
(44.7%) and a master’s degree (51.9%). In terms of tenure, 10.9% were less than 1 year,
18.9% were between 1 to 3 years, 17.4% were between 3 to 6 years, 7.4% were between 6 to
10 years, 13% were between 10 to 15 years, 16.4% were between 15 to 20 years, 9.5% were
Journal of International Business and Cultural Studies
Performance management, Page 9
between 20 to 25 years, and 6.3% were more than 25 years. Furthermore, most respondents
(43.6%) have been working with current supervisors between 1 to 3 years.
Procedure
Questionnaires were sent out to employees by the organizations themselves, and the
(anonymously) completed forms were returned to the researcher. Each subject was assured
of the confidentiality of his or her response. To encourage employees to participate in the
study, it was also stated in the covered letter that for each questionnaire return, ten bahts will
be donated to Thai Red Cross Society.
Measures
Questionnaires incorporated items from related research and applied a Likert 5-point
scale (1 ‘strongly disagree’ to 5 ‘strongly agree’) to explore levels of perceived performance
management effectiveness and mediating effects of procedural and informational justice. The
items were first prepared in English, and then translated into Thai by a native speaker. The
conventional method of back-translation was used to translate the measures and discrepancies
were resolved by discussion (Brislin, Lonner, and Thorndike, 1973). Finally, the measures
were refined through in-depth interviews with HR senior managers/ directors in four banks to
ensure their relevance to a Thai context.
Attitudes toward performance evaluation. Attitudes toward performance evaluation was
measured by the average of five items (? = 0.886).
Linkage between consequences and targeted performance. Three-item 5-point scale were
employed to measure linkage between consequences and targeted performance (? = 0.854).
Coaching. Task support was measured in terms of coaching from their supervisor and peers
by using 3 items measured on a 5-point scale (? = 0.856).
Interactional justice. The scale developed by Mooreman (Moorman 1991) was used to
measure informational justice. There were six items (? = 0.943).
Perceived performance management effectiveness. The measure was developed based on
Aguinis (Aguinis 2009), the measure was developed which included 7 items (? = 0.962).
Sample items included: ‘PM in my organization is thoroughness’ and ‘PM in my organization
provides information that allows for identification of effective and ineffective performance’.
RESULTS
Correlations and descriptive statistics among study variables are listed in Table 3, as
indicated in table 3 (Appendix A). Given the proposed model, it would be expected that
attitude towards performance evaluation would correlate with linkage between consequences
and targeted performance, coaching and perceived performance management effectiveness.
In addition, the model proposed mediating effect of interactional justice and in keeping with
Baron and Kenny (Baron and Kenny 1986), it would be expected that coaching would
correlate with interactional justice and perceived performance management effectiveness. As
shown in Table 4, as indicated in Table 4 (Appendix A). all variables were significantly
related to each other (p Linkage ---> APE ---> PM 0.410688
2. Coach ---> APE ---> PM 0.4416
3. Coach ---> IJ ---> PM 0.1275
Total Indirect Effect
0.979788
Total Effect
0.979788
Path Direct Path Direct Effect
IJ ---> PM IJ ---> PM 0.151
Indirect Path Indirect Effect
- -
Total Effect
0.151
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Performance management, Page 20
APPENDIX B: Figures
Figure 1 Financial performance of Thai Banks from 1989-2004
Source: Kubo, K. The Degree of Competition in the Thai Banking Industry before and after
the East Asian Crisis. ASEAN Economic Bulletin, December, 2006.
Figure 2 Net Interest Margin for Commercial Banks
Journal of International Business and Cultural Studies
Performance management, Page 21
Figure 3 Conceptual Model
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Performance management, Page 22
Figure 4. Hypothesized Model and Standardized Paths
doc_341961591.pdf
Businesses are facing up to high competitive pressure, especially banking industry. After 1997 crisis, banking industry meet more challenges from new financial landscape. Aiming to improve organizational performance, they have been adopting management tools, namely performance management.
Journal of International Business and Cultural Studies
Performance management, Page 1
Performance management effectiveness in Thai banking industry:
a look from performers and a role of interactional justice
Pachsiry Chompukum
Chulalongkorn University
Abstract
Businesses are facing up to high competitive pressure, especially banking industry.
After 1997 crisis, banking industry meet more challenges from new financial landscape.
Aiming to improve organizational performance, they have been adopting management tools,
namely performance management. To enhance impacts of performance management, it is
important to understand employees’ perceived performance management effective since the
process requires high involvement and commitment from employees. Data were collected
from 476 employees in the four largest banks in Thailand. Results from structural equations
analyses support hypothesized model that attitudes towards performance evaluation directly
relate to perceived performance management effectiveness and interactional justice mediates
the coaching- perceived performance management effectiveness. Discussion, limitation and
future research are included.
Keywords: Banking industry in Thailand, Banking industry and performance
management, Effectiveness and performance management, Interactional justice,
Performance Management.
.
This research was supported by Chulalongkorn University Centenary Academic
Development Project.
Journal of International Business and Cultural Studies
Performance management, Page 2
INTRODUCTION
The increasingly competitive environment of the 1980s, which continued throughout
the recessionary 1990s still remains a dominant factor today. Up until now, the increasing
competition is even higher than one could imagine. Business faces challenging of increasing
intensity and scope of globalization, a drive to comply with international standards, a
continued move toward automation of production processes, a reliance on more sophisticated
information technologies, and unrelenting increase of oil price.
Banking industry in Thailand is one of the industries that are facing up to high
competitive pressure, especially after 1997 crisis. As showed in the Figure 1, as indicated in
Figure 1 (Appendix B) net profits and return on assets sunk during the crisis. It was not until
2001 that the net profit of the banks became slightly positive gain.
Although the economic situation in Thailand is recovering, banking industry meets
more challenges from new financial landscape such as Basel II implementation and Financial
Sector Master Plan. As a result, it has introduced additional competitive pressure to the
industry. Thailand now welcome foreign investors to hold major shares in Thai banks, i.e.
ABN Amro, DBS Bank, United Overseas Bank, and Standard Chartered Bank. Therefore, to
survive in the midst of high competition, all banks have to reform their revenues and cost
structures (Sookpradist, 2003). For income enhancement, it can offer services that other
banks have not yet provided and increase non-interest income such as fee income from debt
instrument transactions and foreign exchange transactions. However, for cost reduction, all
bank seem to have the same cost for capital because of regulations from Bank of Thailand
and market mechanism. Thus, it looks like the only way for bank to reduce cost is to operate
at a relatively lower cost than competitors. By banking nature, operating expenses, including
salaries consumes about half of total revenue (Payant, 2006). Managing these operational
activities and their associated costs wisely can improve profitability.
To thrive or survive, banks need to continuously improve qualities, attract more
customers, and are more cost- conscious. In other words, banks need to better manage their
performance. Over the years, there are many practices, tools, techniques, systems,
philosophies that aim to help organizations to gain competitive advantage. Some of them are
proved to be effective and remain in the business management while some of them may be
just a business fad. Among the effective one, performance management is a prominent
practice that help organizations to create business value. For instance, in a survey of 437 U.S.
companies, McDonald, Shield, and Smith (Rheem, 1995), found that companies that used
performance management programs had greater profits, better cash flow, stronger stock
market performance, and greater stock value than companies that did not. In addition,
companies with such programs had higher sales per employee or productivity- than those that
did not; also, productivity and financial performance in companies with performance
management program were higher relative to other companies in their industries. In the same
study, they also compared companies before-and- after implementing the program. They
found that after implementing performance management, total shareholder return increased
by 24.8% and productivity increased by 94.2%.
Not surprisingly, many banks in Thailand are vigorously implementing performance
management system to help them better manage their employee’s performance and in turn,
it affects organizational performance. Since it is the key process through which work is
accomplished, it is considered the “Achilles Heel” of managing human capital
(Pulakos, 2009). Therefore, it is very important to manage it effectively.
Having performance management system in banks does not guarantee desired
outcomes, namely its effectiveness. For example, when executives were asked to comment
on their own performance management programs, they rated the programs as only “slightly
Journal of International Business and Cultural Studies
Performance management, Page 3
effective” to “somewhat effective” (2 and 3 on a scale of 1 to 4) (Rheem, 1995). In another
study conducted by WorldatWork and Sibson Consulting, it is found that only 5% of
respondents gave an A to their performance management effectiveness and 46% rated their
companies performance effectiveness as B (Anonymous, 2007). Employees’ perception
toward the program can shape how they react to and act in accordance with the performance
management system. Since performance management is the process that requires high
involvement and commitment from people in the organization, perceptions of the employees
can highly affect organization outcome. Therefore, the purpose of this paper is to explore
how employees in commercial banks perceive effectiveness of performance management and
factors affecting levels of perceived performance management effectiveness.
THAI BANKING INDUSTRY
Bank of Thailand classifies commercial banks in Thailand into two groups, commercial
banks registered in Thailand and foreign banks (full branch). Due to their assets size and
market share, commercial banks registered in Thailand are considered as the most important
and influenced business of the country. Since commercial banks mobilize the savings also
being the largest source of loans. Furthermore, banking industry has roles to support
monetary policy such as to increase or decrease money in the market. The government also
uses the commercial banks as the key instrument in order to drive monetary policy and
balancing the economy appropriately. According to the statistics from Bank of Thailand as
of August 2011, there are 17 commercial banks registered in Thailand as shown in Table 1, as
indicated in Table 1 (Appendix A).
According to Chunhachinda and Li (2010), Since the 1997 crisis, there are a couple of
major changes; the ownership structure has changed dramatically due to the lift of foreign
limit control by the Bank of Thailand and the banking industry began taking higher market
risks after the crisis causing the percentage of non-interest income to interest income to
increase substantially. Competition in the industry is very high. It drives banks to find ways
to increase their income and profit. The Bank of Thailand warned them that high competition
in corporate lending could eventually cause a deterioration of credit quality (2011). There is
also depressed margin. As shown in Figure 2, as indicated in Figure 2 (Appendix B).
margins have fallen from 3.6% in the beginning of 2008 to 3.1% by the end-2010 (2011).
Currently big banks such as Bangkok Bank and Kasikorn Bank, are trying to search
for better opportunities by investing in foreign countries. Besides expanding to overseas,
banks are trying to seeking for ways to increase their efficiency, including managing
employee performance.
THEORECTICAL BACKGROUND AND HYPOTHESE
Performance Management
Managing performance has been a very important issue for a long time. It has gained
more attention recently due to high competitive business environment. Especially when the
popularity of Balanced Score Card calls for mechanism to cascade and instill the corporate
strategy down through the organization and to ensure that strategy plan is actually
implemented, performance management is one of practices that assist organization to link
organizational goals to individual goals. That is, operational goals take the organization’s
strategies and translate them into specific goals. Therefore, it facilities management
alignment and buy-in by bringing all levels of management into operational planning process
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Performance management, Page 4
and giving employees a chance to help shape the plan (Aguilar, 2003). It focuses on ways to
motivate employees to improve their performance (DeNisi and Pritchard, 2006).
Furthermore, it can help organizations to improve financial performance. A study
conducted by McDonald and Shield of Hewitt Associates found that companies that used
performance management programs had greater profits, better cash flow, stronger stock
market performance and greater stock value than companies that did not. Not only
performance management improved financial performance, but it also improved productivity;
companies with such programs had higher sales per employees (Rheem, 1995).
Nonetheless, performance management has been mistaken as performance evaluation.
As a matter of fact, both performance management and performance evaluation are related
but they are not exactly the same concept. Performance management is a systematic process
for improving organizational performance by developing the performance of individuals and
teams; it is a mean of getting better results from the organization, teams, and individuals by
understanding and managing performance within an agreed framework of planned goals,
standards, and competence requirement (Armstrong, 2006). While performance evaluation is
a process of assess and rate past performance of individuals or groups (Oct 2004).
Performance evaluation is just a part of performance management. Table 2 compares
performance evaluation with performance management, as indicated in Table 2 (Appendix A).
Not only performance management is mistaken as performance evaluation, it is also
misunderstood especially by human resource practitioner and managers. It can results in
misperception of employees and affect performance management effectiveness. In a review
of literature on this topic, London, Mone, and Scott (2004 ), propose that there are several
problems regarding using performance management which are (1) the misuse of methods,
poor program development, and lack of program evaluation, (2) the mismatch between
performance management system and organizational context, (3) failure of choosing the right
method for the right purpose i.e. using multisource rating for administration instead of
development (4) wrong criteria to evaluate performance management and (5) careless
implementation with little attention to interpersonal dynamics and psychometric testing.
All in all, performance management reflects a paradigm shift from thinking of
performance evaluation as a discrete event to a continuous process (Latham and Mann, 2006).
Specifically, performance management encompasses the entire range of enhancing
performance. It includes an approach to creating a shared vision of the organizational goals
and objectives, aiding employees to understand and know their part in contributing to them
and implementing linkage between performance and reward (Fletcher, 1996).
Overall, performance management aims to (Armstrong, 2006):
• Empower, motivate and reward employees to do their best
• Focus employees’ tasks on the right things and doing them right; align
everyone’s individual goals to the goals of the organization
• Proactively manage and resource performance against agreed accountabilities
and objectives
• Align personal/individual objectives with team, department and corporate plan.
• Make individuals clear about what they need to achieve and expected
standards, and how that contributes to overall success of the organization
• Provide regular, fair, accurate feedback and coaching to stretch and motivate
employees to achieve their best
• Maximize the potential of individuals and teams to benefit themselves and
organizations.
Performance management should not be viewed as a mechanistic system based on
periodical formal evaluations and detailed documentation. It is ongoing communication
between manager and employees. Effective performance management entails a process where
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Performance management, Page 5
employees are fully aware of their roles in the organization, the type of output expected, and
how the output will be measured (Ramlall, 2003). The processes of performance management
consist of:
Performance planning/Goal setting
It involves cascading organizational goals to individual goals, agreeing objectives,
competency requirements, and personal development plans.Performance management is a
mechanism to join together individuals’ performance with an organizational performance
through aligning organizational goals with individual goals. It is used to create a shared
vision and goals of the organization, and to help each individual employee to understand and
recognize their part in contributing to organizational performance (Fletcher,1993). Once
organizational goals have been set, they are cascaded down through the organization.
Goal setting theory (Locke and Latham, 2002) states that a goal drives performance.
It affects direction, effort and persistence of employees. Specifically, a goal directs an
employee’s attention toward actions which bring goal accomplishment, leads an employee to
adjust and persists their effort, and stimulates the development of task strategies to attain it.
However, to enhance effectiveness, goals should be specific and difficult (Seijts and Latham
2005). In the other words, a specific and challenging goal leads to higher performance than
general goals such as “do your best”. In fact, it has much stronger effect on performance than
any other factors, including participation. It may be presumed that participating in goal
setting enhance its effectiveness; goal setting is likely to be more effective when people
participate in setting goals than when goals are assigned to them. However, Locke and
Latham (2002) state that when goal difficult is held constant, the performance of those who
participate in setting goals does not differ significantly from those who were assigned goals.
Moreover, both a participatively set goal and an assigned goal result in higher performance
than a general goal asking employees to do their best (Latham, Steele, and Saari, 1982).
Clearly, goal setting has motivational effect on employees. But this does not mean that it
affects employees’ attitude toward performance management system since having goals does
not directly affect employees’ gain and loss. In fact, in their exploratory research, Taylor and
Pierce (Taylor and Pierce, 1999) found that it did not matter employees had goals or not;
all employees who received a lower-than-expected performance evaluation blamed either
their supervisor, the organization, or performance management system.
Acting: Coaching
Coaching will help employees to maximize their full contribution and potential. It is
process through which supervisors may communicate clear expectations to employees,
provide feedback and give suggestions to employees. It also prepare employees to be ready
for challenging works (Heslin, VandeWalle and Latham, 2006). It is an important mechanism
that helps supervisors enhance employees’ performance. For example, Liu and Batt (2010)
found that amount of coaching that an employee received each month predicted objective
performance improvement over time. In a study of effects of managers’ coaching intensity on
the performance of those they supervise, at multiple levels of an organizational hierarchy, it is
found that managers’ coaching intensity influences the performance of their subordinates
after controlling for job satisfaction (Agarwal, Angst, and Magni, 2009).
To increase its effectiveness, coaching should be done on an ongoing basis; this may
include regular coaching meeting in formal performance review session where supervisors
review recent performance, evaluate it, and provide guidance, suggestions, and
recommendations for improvement; additionally, it may include less formal discussions
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Performance management, Page 6
between supervisors and employees concerning performance (Lindbom, 2007). In fact, truly
effective managers and managerial leaders are those who embed effective coaching into the
heart of their managerial practice (Hamlin, Ellinger, and Beattie, 2006). However, coaching
is not only performed by managers. It can be performed by peers (Armstrong, 2006). Peers
can support one another’s learning and development by providing emotional and technical
support. Parker, Hall, and Kram (2008) propose that peer coaching will be very effective if it
happens through a 3-step process of (1) building the development relationships, (2) creating
success in development, and (3) internalizing the learning tactic by applying the peer-
coaching process in future relationships.
REVIEWING: Performance Evaluation and Linkage Performance to Rewards.
Performance evaluation usually takes place in a yearly or semi-yearly session. An
effective performance evaluation should accurately outline employees’ responsibilities and
contributions to organizations (Clausen, Jones, and Rich, 2008) and be free from errors such
as leniency, halo effect, and range restriction. Not surprisingly, research on the topics of rater
accuracy and measurement are in the mainstream of organizational psychology. However,
DeNisi and Pritchard (2006) believe that performance evaluation research were too interested
in measurement issues and not interested enough in ways to improve performance. To so do,
research on employee reactions is very important because what employees perceive can affect
their behavior and performance.
There are two main purposes of performance evaluation, namely for human resource
management and for human resource development. For human resource management,
performance evaluation can serve as a valuable input to make administrative decisions
relating to promotions, firing, and merit pay increases (Byars and Rue, 2004). In the other
words, results of performance evaluation will link to reward of individual to motivate and
stimulate employees to perform better and show how much employers recognize their
performance. In addition, information from performance evaluation can provide needed
input for employee development, including coaching. Therefore, both linkage between and
performance and reward and coaching are associated with performance evaluation. This leads
to:
Hypothesis1: Performers’ attitude towards performance evaluation is positively related to
linkage between consequences and targeted performance.
Hypothesis 2: Coaching is positively related to performers’ attitude toward performance
evaluation.
Moreover, most employees expect coaching to be facilitative, supportive, and aimed
at their own goals and needs (Peterson, 2009). Information that is given in the coaching
process not only includes discussions of performance expectation, but also providing
feedback and motivating employees by stating desired consequences if their goals achieved.
Thus, it is proposed:
Hypothesis3: Coaching is positively related to linkage between consequences and targeted
performance.
Effectiveness of Performance management
Performance management does not necessarily deliver good results. Some ineffective
performance management can be a drain on employee morale and affect both employees’
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Performance management, Page 7
behavior and a company’s ability to achieve its strategic objective. According to Lawson
(Lawson, 1995), effective performance management means:
• It articulates organization’s vision.
• It establishes key results, objectives and measures at key business unit level.
• It identifies business process objectives and the key indicators of performance for
those processes.
• It identifies and installs effective departmental measures.
• It monitors and control four key performance measures namely quality, delivery,
cycle time, and waste.
• It manages the continuous improvement of performance in those key area.
• It prepares to aim for breakthrough improvements in performance when this is
required by a significant shortfall in performance measured against the performance
of major competitors.
Performers’ Perception
Performance management is traditionally seen as management’s systematic
application of processes aimed at fully utilizing human resources and it carries somewhat
negative connotation when considered from the performer’s perspective (Buchner, 2007).
Hence, factors causing effectiveness can be different in the eyes of management and
employees. Due to the conflicting results of performance management benefits, organizations
should pay more attention to the internal effects (Martinez and Kennerley, 2006). In the
other words, it is important to consider how employees react to performance management
system. One factor that may affect employees’ perceived performance management
effectiveness is their attitude towards performance evaluation. In review of performance
evaluation studies, Levy and Williams (2004) stated that appraisal reaction was important:
employees were more likely to ignore information they received from their performance
evaluation when they perceived that the performance evaluation system is not fair and source
of those information were not credible. Since performance evaluation is a source of input for
performance management process (DeNisi and Pritchard, 2006), attitudes toward
performance evaluation tend to affect attitudes towards performance management
effectiveness. In addition, performance evaluation is one major elements of performance
management that directly have consequences on employees in many ways including their
advancement and rewards. In fact, based on the survey results, it is suggested that the quality
of performance evaluation should be measured if organizations want to increase performance
management effectiveness (Oakes, 2007). Moreover, from another survey of performance
management, out of nine factors that are key practices that can lead to perceived performance
effectiveness, there are five factors that is related to performance evaluation, i.e., plans for
helping employees develop in the work period after the evaluation, training for managers on
how to conduct a performance evaluation meeting, metrics of the quality of performance
evaluation, performance evaluation that is not limited to the judgment of supervisors, and
consistency of performance evaluation across the whole organization (2007). It leads to:
Hypothesis4: Performers’ attitude toward performance evaluation is positively related to
perceived performance management effectiveness.
Mediating Role of Interactional Justice
Bies and his colleagues introduced one form of justice, interactional justice. It focuses
on the quality of interactions among peoples in the organizations. According to Greenberg
(Greenberg, 1993) there are two main components of interactional justice which are quality
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Performance management, Page 8
of the treatment that the target receives and procedural explanations for why something
happened. More specially, the first component reflects the degree to which people are treated
with politeness, dignity, and respect by authorities and the second component focuses on the
explanations provided to individuals that convey information about why procedures were
used in a certain way and why they received those outcomes. According to Fassina and
Colleagues (2008) people use the information they have a about the fairness of interpersonal
treatment to form impressions of fairness and these impressions have a causal effect on their
responses. It is also found that interactional justice related to employee attitudes, namely
satisfaction and commitment (Cohen-Charash and Spector, 2001).
It was argued that interactional justice more likely to affect individuals’ cognitive,
affective, and behavioral reactions toward their supervisors than their reactions toward
organizations because supervisors were the direct source of justice (Cohen-Charash and
Spector, 2001). A meta-analysis of justice found that interactional justice highly affected
agent-referenced outcomes, namely job satisfaction, organizational commitment, agent-
referenced evaluation of authority, organizational citizenship behavior, and performance
(Colquitt et al. 2001). As for performance management system, although it is one of an
organizational systems, employees are trained to believe that it is owned by their supervisors,
not human resource department nor the organization. In addition, the essence of performance
management is communications between employees and their supervisors. Therefore, their
reactions toward perceived performance management effectiveness tend to be parallel their
reactions toward their supervisors. More specifically, interactional justice tends to lead to
perceived performance management. Since interactional justice involves interpersonal and
informational components, it is likely to occur in the in coaching process. In the other words,
when a supervisor engage in coaching processes, it leads to interactional justice and in turn, it
leads to perceived performance management effectiveness. This leads to:
Hypothesis 5: Interactional justice mediates the coaching – perceived performance
management effectiveness relationship. Specially, coaching is associated positively with
interactional justice. Interactional justice, in turn, is related to perceived performance
management effectiveness.
The hypothesized model is depicted in Figure 3, as indicated in Figure 3 (Appendix B).
METHOD
Sample
Bank of Thailand categorizes banks into 2 types, commercial banks registered in
Thailand and foreign bank branches. Since the size of each foreign bank branches is small,
the study focuses only on the commercial banks registered in Thailand. Sample of the study
included employees in commercial banks registered in Thailand from various functions in the
four biggest banks. One reason of focusing on the biggest four big banks is that not all banks
are formally implementing performance management. Only big banks that have solid human
resource department and resources to implement the system. Of the 600 questionnaires
distributed, 492 employees responded, yielding a response rate of 82%. 16 questionnaires
were not usable. The final response rate for the usable questionnaires was 79.3%. As shown
in Table 3, as indicated in Table 3 (Appendix A), of the total 476 subjects, 58.4 % were
female. The age of respondents ranged from 22 to 59 years, average age was 38.85. More
than a half of respondents were single (59.9%). Most of respondents had a bachelor’s degree
(44.7%) and a master’s degree (51.9%). In terms of tenure, 10.9% were less than 1 year,
18.9% were between 1 to 3 years, 17.4% were between 3 to 6 years, 7.4% were between 6 to
10 years, 13% were between 10 to 15 years, 16.4% were between 15 to 20 years, 9.5% were
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Performance management, Page 9
between 20 to 25 years, and 6.3% were more than 25 years. Furthermore, most respondents
(43.6%) have been working with current supervisors between 1 to 3 years.
Procedure
Questionnaires were sent out to employees by the organizations themselves, and the
(anonymously) completed forms were returned to the researcher. Each subject was assured
of the confidentiality of his or her response. To encourage employees to participate in the
study, it was also stated in the covered letter that for each questionnaire return, ten bahts will
be donated to Thai Red Cross Society.
Measures
Questionnaires incorporated items from related research and applied a Likert 5-point
scale (1 ‘strongly disagree’ to 5 ‘strongly agree’) to explore levels of perceived performance
management effectiveness and mediating effects of procedural and informational justice. The
items were first prepared in English, and then translated into Thai by a native speaker. The
conventional method of back-translation was used to translate the measures and discrepancies
were resolved by discussion (Brislin, Lonner, and Thorndike, 1973). Finally, the measures
were refined through in-depth interviews with HR senior managers/ directors in four banks to
ensure their relevance to a Thai context.
Attitudes toward performance evaluation. Attitudes toward performance evaluation was
measured by the average of five items (? = 0.886).
Linkage between consequences and targeted performance. Three-item 5-point scale were
employed to measure linkage between consequences and targeted performance (? = 0.854).
Coaching. Task support was measured in terms of coaching from their supervisor and peers
by using 3 items measured on a 5-point scale (? = 0.856).
Interactional justice. The scale developed by Mooreman (Moorman 1991) was used to
measure informational justice. There were six items (? = 0.943).
Perceived performance management effectiveness. The measure was developed based on
Aguinis (Aguinis 2009), the measure was developed which included 7 items (? = 0.962).
Sample items included: ‘PM in my organization is thoroughness’ and ‘PM in my organization
provides information that allows for identification of effective and ineffective performance’.
RESULTS
Correlations and descriptive statistics among study variables are listed in Table 3, as
indicated in table 3 (Appendix A). Given the proposed model, it would be expected that
attitude towards performance evaluation would correlate with linkage between consequences
and targeted performance, coaching and perceived performance management effectiveness.
In addition, the model proposed mediating effect of interactional justice and in keeping with
Baron and Kenny (Baron and Kenny 1986), it would be expected that coaching would
correlate with interactional justice and perceived performance management effectiveness. As
shown in Table 4, as indicated in Table 4 (Appendix A). all variables were significantly
related to each other (p Linkage ---> APE ---> PM 0.410688
2. Coach ---> APE ---> PM 0.4416
3. Coach ---> IJ ---> PM 0.1275
Total Indirect Effect
0.979788
Total Effect
0.979788
Path Direct Path Direct Effect
IJ ---> PM IJ ---> PM 0.151
Indirect Path Indirect Effect
- -
Total Effect
0.151
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Performance management, Page 20
APPENDIX B: Figures
Figure 1 Financial performance of Thai Banks from 1989-2004
Source: Kubo, K. The Degree of Competition in the Thai Banking Industry before and after
the East Asian Crisis. ASEAN Economic Bulletin, December, 2006.
Figure 2 Net Interest Margin for Commercial Banks
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Figure 3 Conceptual Model
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Figure 4. Hypothesized Model and Standardized Paths
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