QUESTION: Analyse this case study using the Wright and Nishii (2004) HRM - performance model.

Case study:

The company is an innovative IT service business, providing consulting and software applications to insurance companies. It has 700 employees, all of whom are employed on individual employment contracts. If its historical rate of growth continues, it expects to have 1000 staff fairly shortly. The firm has expanded very quickly in its specialist segment of theindustry and senior management realises its HR policies have not kept pace. Given the company's desire to professionalise all parts of the business, two years ago, Angus, the CEO, appointed an HR Director, Glenys. Since then, she has built a small HR department of 3 staff.

Glenys is a member of the senior management team, which also includes Angus and five other senior managers: three in charge of service divisions, one in charge of the company's own information systems and one the financial controller. All have lower level managers reporting to them, with the greatest number of middle managers and team leaders (first-line managers) in the operating divisions.

With Angus's full support, one of Glenys's first acts, 21 months ago, was to hire a firm of HR consultants to help the company develop a good performance appraisal (PA) system, one which would help managers to set performance objectives, formalise the process for making merit-based pay recommendations, and foster employee development. Senior management, led by Glenys, worked with the consultants on the design of the system. Angus felt he could leave it to the members of his senior management team tospeak up if they thought anything was unwise in the design and, besides, he thought, "I've now got a highly paid HR Director and an HR department and they're the experts on this stuff."

The new PA system is based on setting individual performance objectives on an annual basis (a management-by-objectives (‘MBO') system). It involves staff participation in setting these goals and requires managers to keep an eye on how goals are going every three months in case some goals need to change or employees need coaching. At the end of the financial year, the system requires managers to meet with each of their team members to discuss achievement against planned goals. It uses a five-point rating scale to assess overall achievement against these objectives, anchored as follows:

1 Unacceptable
2 Marginal
3 Competent
4 Commendable
5 Outstanding

The performance appraisal system is not simply about performance issues, however. Once the performance rating has been discussed, it then moves into a section on employee development in which the manager is supposed to discuss employee knowledge and skillsand agree a development plan, which may include training recommendations.

All the company's managers were put through 2 days of appraiser training. This was designed to help them deal with such issues as ‘raterbias' and how to handle difficult appraisal interviews. After the training was complete, the consultants declared the system ‘installed' and departed. The CEO, Angus, then told managers to go ahead and set objectives with each team member. This was done, not without some difficulty, but it happened. Then, after 12 months, appraisal interviews were carried out, with Glenys and a member of her staff helping to ensure this happened. Managers found the system's requirements somewhat laborious but at least the forms were on-line and the recommendations on pay and training could be sent directly to the company's HR department that way. Some four months ago, Glenys informed Angus that all the recommendations had arrived.

Unfortunately, no merit pay increases have emerged yet and disquiet is bubbling up among the staff. A round of post-installation focus groups, comprised of randomly selected team leaders and staff members, has just been conducted by the HR consultants who installed the system. They show that employees are losingconfidence that anything positive will come out of the new PA system. The sort of comments people have been making include the following:

The idea of rewarding our stars is good but HR makes it all too complicated!

Look, I'm prepared to give them the benefit of the doubt but the whole thing has taken too long. Why are they not making any decisions?

Well, in my view, things were better before there were any ‘high-powered' HR procedures in the company. My manager had more pull then and could get his boss to act quickly on a pay increase. There was no form filling and people were gung-ho and pretty loyal for this industry.

Several of the best performing staff have resigned in the last month, moving for better pay and conditions elsewhere. There is currently a very healthy labour market for talented programmers.

Part of the delay relates to a problem with the pattern of appraisal ratings across departments. Managers in Division X, the largest service department (where problematic employee turnover is occurring), have rated 60% of their staff as outstanding (five on the scale) while most other managers in the company have given an average rating of (close to) 4 with around 20% in the outstanding category. Glenys is not at all happy with Division X. Along with the pay recommendations, she has reviewed the training recommendations from

Division X: these actually suggest that a lot of fairly expensive training and development activity is needed for most staff there. This is hardly consistent with the view that 60% of the staff are at level 5 in terms of job performance. What are Division X's managers up to?
Just to make matters worse, the business environment in the insurance industry has deteriorated dramatically in the last 3 months (due to a string of adverse weather events) and this is expected to make insurance companies less likely to commission new software projects. There is now a board-driven directive to review costs in all departments. Angus, who has enjoyed running a high-growth company, now finds himself in the position of having to manage a different context altogether. He has to ask Glenys to meet with him and the rest of the senior management team to review all recommendations for salary increases.

Despite lower level managers having told staff that their performance is commendable or outstanding (and, in Division X, that 60% are outstanding), he makes it clear to her that any pay increases will now have to be very carefully handled and will not proceed without his personal approval.