What is a performance equation and why should you care?

What is a performance equation and why should you care?Paul Arnesen
May 1, 2020
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What is a performance equation and why you should care.

What performance does you as an employer expect from your employees?

What is performance?

Some performance is objective, e.g, the flight arrived on time, did not arrive on time. Others are subjective, e.g, behaviour and how to handle unmotivated employees.

To have optimal performance, what factors must be involved? A performance equation can help you understand it.

It is common in organizations that performance expectations won`t be explicitly stated by management. If they were, less misunderstandings would happen.

When they are stated they are often defined as job output (easy to define, ROI, production targets) or job behaviours (common in service roles, caring professions etc.) or a mix of the two.

A commonly used performance equation is viewing performance as a function of three elements, individual ability, motivation and the opportunity to perform in a specific context. Or AMO for short.

The performance equation is a helpful reminder for us to always aim to hire motivated capability: people with the can do (ability) and the will do (motivation) factors relevant to the job and providing them with the tools to do the job (opportunity).

An organizations performance management must be adjusted to handle different types of individuals effectively.

Different types:

  • Stars. Provides innovation
  • Solid citizen. Provides stability
  • Marginal performers. Will under-perform, but can change
  • Chronic under-achievers. You don’t want them

The idea of an ‘all star’ company is impractical because you need solid citizens who deliver. A high performing team involves a blend of stars and solid citizens.

Firms need to manage change and stability while reaping profits in a given context.  Remember; reality is always much more complex than this.

Individual ability

So how do we make sure we have people with the right abilities?

Ability naturally reflects the knowledge and skills acquired through education, work and life experience so it is important to attract the best capable people.

That is done through a ‘buy’ process, recruitment and selection. Failure to recruit workers with the right competencies can be fatal for a firm.

Firms need people that can help them stay productive. As mentioned earlier, a good blend of stars and solid citizens.

It is also important to remember that recruitment and selection are two different HR practices.

Training and development (make) is another important aspect of ability. However be aware, this is not an alternative to recruitment and selection.

It’s a complementary necessity,  but the opportunity to use training is better for firms that have built a labour pool with greater long-term potential through extensive recruitment.

It is an investment in your people. It should aim to build employee potential and the firm agility over the long run.

From the employees point-of-view, they are keen on having their knowledge, skills and abilities put to use in the firm. Their skills need to match the job-skill needed.

The key for an employee is finding a job that utilises the talents they already have. A good match between people’s skills and the demands of a job ensures long-term employment.

This, however, is dynamic as people’s knowledge and skill grow over time and after some time people would want new challenges.

People will always seek growth opportunities. It is important to offer development challenges in-house to retain high performers for a long period. But you might say, people, are resistant to change.

Research has shown that people often leave organizations that don’t offer them stimulating change. There is a different type of change that people resist which won’t be discussed here.

White cup on table


Firms need people who can carry out a firm’s mission and who want to do so. Ability is irrelevant without people’s willingness to use them.

When benefits in terms of an employees interest outweigh the cost the employee is motivated.

Both employer and employee invest in employment relationships. Stability and balance in this relationship will depend on how these are matched up.

The problem of mismatching comes when one party is contributing/investing more than the other. Moderate to major levels of misalignment is more likely to cause trouble.

When the effort an employee is not rewarded correctly it can cause stress and negative health outcomes.

It is also important to remember that this imbalance can work the other way around as employees might be taking advantage of an employers over-investment in them.

Another aspect is intrinsic and extrinsic motivators.

Intrinsic is related to the work itself. Work is intrinsically motivating when the individual finds it enjoyable, interesting and naturally wants to get involved with it. When they don’t, it is boring, distasteful and a ‘turn-off’.

How we feel about doing a job makes a huge impact on us.

Extrinsic factors cover materials and social rewards associated with the job, such as pay level, status and employment security. Both matter in terms of employee motivation.

The nature of the work is found to be very motivating, intrinsic enjoyment of a job is important and people will rule out jobs just because of this.

However, pay and job security are also very important.

The pay systems used at the workplace can make a huge impact on motivation. People need to earn money to live.

One critical factor is those that are underpaid relative to their skills or performance. The aim of a pay system should cover three aspects:

  1. External equity. Pay system must support the recruitment and retention of suitably qualified people.
  2. Internal equity. It must be fair within the firm.
  3. Performance equity. Performance related pay (PRP) is attractive to higher performing employees.

In terms of PRP, you must try to avoid ‘perverse incentives’ as seen on Wall Street after the financial crisis (2008).

To minimize the risk of that focus must be on very selective recruitment, external relativity in pay and rigorous use of performance planning and appraisal.

Performance appraisal (PA) systems are formal methods of planning and evaluating employee performance that involves employee interviewing to discuss work goals or behavioural standards and the individual’s achievement in terms of them.

PA systems can be used effectively when they are well led and well resources.

The theory of ‘psychological contracting’ represents an attempt to analyze the attitudinal variables that need careful management if a positive motivational climate is to be built, and sustained, in an organization over time.

This is not about ‘what’ is rewarded, but ‘how’ the reward system is managed.

There are some shared expectations so the organizational needs must be matched with individual needs.

Psychological contracts are often violated with the risk of undermining employee commitment and thus valuable employees leave early. The employer and the employee share some common understanding that goes beyond what is written in their employment agreement.

Concepts of the psychological contracting stem from expectancy theories of motivation.

Expectancy theories of motivation do not tell us about the content of human motivations (about pay, security and intrinsic job satisfaction, for example) but make the fundamental point that our ongoing motivation at work is affected by the expectations we form and our experience of whether these are met over time. It tells us three important things:

  1. Impossible goals will frustrate rather than motivate
  2. Employees are reward seekers
  3. Employees are reward critics

Faith in management must be built and maintained over time. Do as I say not as I do, reciprocity.

Employee trust and commitment tend to be based on their perceptions of fairness and trustworthiness in management decisions making.  

Organizational support = engagement.

The performance equation is a good guideline and provides us with insights into what needs to be covered to create a high-performance culture.

However, it involves many different aspects which means that the intention of creating such a high-performance work system will not always bring the expected outcome.

For a good book on the subject I recommend the book Drive by Dan Pink, or my book on HR Fundamentals for a Career in Human Resources.