Effects of performance measurement

When utilizing performance measurement, some positive effects can be attained if the measurement has been conducted in a proper way. According to Bourne et al. (2003), performance measurement has an effect on the environment in which it operates. Starting to measure, deciding what to measure, how to measure, and what the targets will be are all acts that influence individuals and groups within the organization. Once performance measurement has started, the measurement will have consequences, as will the actions agreed

upon as a result of that measurement (Bourne et al., 2003). Based on prior research, the effects of performance measurement are very much dependent on the way it is designed, developed, and used, and how well it fits the context in which it operates (e.g., Otley, 1999;

Neely, 2005; Henri, 2006b; Pavlov and Bourne, 2011).

According to Pavlov and Bourne (2011), the effects of performance measurement depend on the way it is used. Performance measurement can affect an organization’s routines in three ways. Pavlov and Bourne (2011, p. 112) call them “the trigger effect of measurement, the guidance effect of measurement, and the intensification effect of measurement.” First, when performance measurement is used in its feedback-generating function, the measures communicate the results of the past execution of the routine and indicate whether its performance is adequate to the demands of the environment. Second, when performance measurement is used in its feed-forward function, it can affect the direction of the change in organizational processes. Third, measuring performance forces the search for a match between the existing idea and expression of the routine, and stimulates the process of adjusting them in order to respond to the new demands of the environment. Henri (2006b) has found that the way, either interactively or diagnostically, performance measurement is used also affects the effects of performance measurement. The use of performance measurement has also an effect on how performance measurement affects performance (Bourne et al., 2005).

The effects of performance measurement have been studied by many researchers.

Performance measurement can result in many advantages for organizations. De Waal and Kourtit (2013) identified four advantages of performance measurement: higher results orientation, better strategic clarity, high people quality, and high organizational quality.

Martinez (2005) presented eight positive effects of performance measurement. It focuses people’s attention on what is important to the firm, results in improvements in business, improves customer satisfaction, increases productivity, aligns operational performance with strategic objectives, improves people’s satisfaction, aligns people’s behaviors towards continuous improvement, and improves firm reputation. This stream of literature has suggested that performance measurement affects positively many organizational capabilities and processes. These positive effects are introduced next.

First, Franco-Santos et al. (2012) identified that many previous studies have found performance measurement has an effect on innovation and other organizational capabilities.

Performance measurement influences the strategic capabilities of organizations (specific abilities, processes, or competences that help the firm gain competitiveness) through the

routines they stimulate. For example, Cruz et al. (2011) studied the effect of performance measurement on innovation, and found that reorganizing performance measurement fostered innovation (meaning new ideas, products, and ways of working). Performance measurement, when used interactively, can also enhance the development of new ideas and initiatives within a firm, and in that way affects innovation (Marginson, 2002). Bisbe and Otley (2004) found that the interactive use of performance measurement favors innovation only in firms with low levels of innovation, while in firms with high levels of innovation it has the opposite effect.

Henri (2006b) showed that the interactive use of performance measurement fosters organizational capabilities in terms of innovation and organizational learning.

Second, performance measurement influences organizational routines and management practices by changing the way leaders behave (Franco-Santos et al., 2012). Performance measurement affects leadership and management by improving the quality and content of the conversations managers have with employees, bringing about new routines and enhancing information sharing (Ukko et al., 2007). According to studies by Bititci et al. (2006) and Henri (2006a), performance measurement is a powerful tool for bringing about change and new ways of managing people in organizations, but performance measurement is also subject to the effects that the organizational culture may have on them. A successfully implemented and used performance measurement through cultural change leads to a more participative and consultative management style. Similarly, the correct use of performance measurement can lead to an achievement culture (Bititci et al., 2004; Bititci et al., 2006).

Third, according to Tuomela (2005), performance measurement helps managers learn how to best improve their performance when appropriate feedback mechanisms are in place. It has been found that performance measurement influences managers’ cognition and motivation (Hall, 2008) by being useful for self-monitoring their own performance and for making decisions (Wiersma, 2009). Performance measurement is indirectly associated with managerial performance through dimensions of role clarity and psychological empowerment.

Performance measurement increases managers’ perceptions of role clarity, because it provides managers with performance information that increases their knowledge of the organization’s strategic goals and helps them to better understand the potential effects of their actions on the organization’s value chain. Performance measurement influences managers’ cognition and motivation, which, in turn, influence managerial performance (Hall, 2008).

Fourth, Franco-Santos et al. (2012) concluded that the information included in performance measurement is likely to increase the understanding of individuals regarding what is expected from them at work since performance measurement increases the employee’s understanding

of the strategy, by translating this strategy in tangible performance measures at all organizational levels. This creates more insight into the goals to be achieved and their role in this (de Waal and Kourtit, 2013).

Fifth, performance measurement has been found to improve internal processes such as communication (c.f. Tuomela, 2005; de Waal and Kourtit, 2013), because it influences how people think, act, and interact (Franco-Santos et al., 2012). This can result in employees being more satisfied, the quality of the products and services provided by the organization increasing, and further contributing to a strengthened reputation of the firm as a quality organization (de Waal and Kourtit, 2013). Franco-Santos et al. (2012) emphasized the importance of generating a system supported by two-way communications to encourage knowledge sharing, generate trust, and avoid resistance. According to Franco-Santos et al.

(2012), evidence from the literature shows that managers find performance measurement useful for coordinating activities within and among departments. Besides performance measurement being useful for improving cooperation and coordination among people within the organization, it also does do outside the organization with its partners (Franco-Santos et al., 2012).

Sixth, performance measurement can also have an effect on the regeneration of an organization as it has been found to have an effect on the ability to exploit existing strategic capabilities and the capacity to identify and develop new strategic capabilities (Grafton et al., 2010). It can also increase employees’ understanding of how to apply the firm’s strategy, leads to greater knowledge exchange among employees, and enables them to create new knowledge (Groen et al., 2012).

Seventh, performance measurement and firm culture have been found to be connected to each other. Through performance measurement, people in the organization become more proactive, more committed to the organization, and more oriented to processes that help achieve organizational results (de Waal and Kourtit, 2013). The findings of Burney et al. (2009) and Lau and Sholihin (2005) indicate that organizations with well-defined and specified performance measures, either financial or non-financial, result in higher levels of procedural justice and trust in supervisors, which subsequently generates higher levels of employee job satisfaction. If employees perceive fairness in the way performance is evaluated, it increases job satisfaction (Lau and Sholihin, 2005). Similarly, Lawson et al. (2003) found that the performance measurement system resulted in a significant improvement in employee satisfaction.

Eight, performance measurement may also have a positive effect on an individual’s performance and motivation towards the achievement of strategic objectives (Dumond, 1994;

Hall, 2008). The findings of Dumond (1994) suggest that performance measurement has a positive effect on an individual’s performance, decision-making, and job satisfaction. If organizational members have a higher orientation to achieve organizational results by using performance measurement, it can help attain those results. The strengthened focus on what is important for the organization, coupled with the improvement in the decision-making, facilitates the achievement of organizational goals (de Waal and Kourtit, 2013). When studying the effect of performance measurement on motivation, Decoene and Bruggeman (2006) found that to create positive motivation for higher levels of performance, the objectives must be strategically aligned. Burney et al. (2009) found that the adoption of performance measurement, linked to monetary rewards, positively affects employees’

citizenship behavior through the positive effect the use of this system has on procedural justice.

However, another stream of literature suggests that performance measurement is not essential for running a well-performing organization (e.g., Johnson and Broms, 2000). Reviewing the current literature, Franco-Santos et al. (2012) found that performance measurement in some cases may be a time-consuming exercise that can increase costs and workloads and generate internal tensions. It can also bring about judgment biases and perceptions of unfairness or subjectivity when used for performance evaluation and compensation purposes. Organizations that have clear policies and actions with genuine beliefs may not benefit from formal monitoring of individual performance (Sobótka and Platts, 2010). Henri (2006b) also found that the diagnostic use of performance measurement weakens organizational capabilities in terms of innovation and organizational learning. Increased control does not lead anywhere by itself: organizations need to learn to perform, with or without performance measures (Bititci et al., 2011).