Human resources

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

What is a performance equation and why you should care

What performance do you, as an employer, expect from your employees? How can you potentially measure it and make efforts to improve performance?

Key Takeaways

A performance equation is a way to understand what makes employees perform or not in the workplace. Performance is Ability + Motivation + Opportunity, also called AMO. Understanding this is important if you want to optimise workplace performance.

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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 organisations that management won't explicitly state performance expectations.

If they were, fewer misunderstandings would happen.

When stated, they are often defined as job output (easy to define, ROI, production targets), job behaviours (common in service roles, caring professions), 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 always to aim to hire motivated capability. The people with the can do (ability), and they will do (motivation) factors relevant to the job and provide them with the tools to do the job (opportunity).

An organisation's performance management must be adapted to handle different 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, the reality is always much more complex than this.

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Individual ability

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 vital to attract the best capable people.

We can achieve this 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 essential aspect of ability.

However, this is not an alternative to recruitment and selection.

It is a complementary necessity.

The opportunity to use training is better for firms that have built a labour pool with more significant long-term potential through extensive recruitment.

It is an investment in your people. Therefore, 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 required job skill.

The key for an employee is finding a job that utilises the talents they already have.

A good match between people's skills and job demands ensures long-term employment.

However, this is dynamic as people's knowledge and skills grow over time. So after some time, people would want new challenges.

People will always seek growth opportunities. Therefore, it is essential to offer development challenges in-house to retain high performers for an extended period.

But you might say people are resistant to change.

Research has shown that people often leave organisations that don't offer them stimulating change. However, that is not the topic of this article.

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

When an employee's interest benefits 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 significant levels of misalignment is more likely to cause trouble.

When an employee's effort is not rewarded correctly, it can cause stress and adverse 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 employer's over-investment.

Intrinsic and extrinsic motivators.

Intrinsic is related to the work itself. Work is intrinsically motivating when the individual finds it enjoyable and exciting and naturally wants to get involved with it. Conversely, it is tedious, distasteful, and a 'turn-off' when they don't.

How we feel about doing a job makes a significant 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 very motivating, intrinsic enjoyment of a job is essential, and people will rule out jobs just because of this.

However, pay and job security are also significant.

The pay systems used at the workplace can significantly impact motivation.

Because people need to earn money to live!

One critical factor is those 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 avoid ‘perverse incentives’ as seen on Wall Street after the financial crisis (2008).

To lower risk, the focus must be on 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.

PA systems can be effective when they are well-managed and well-resourced.

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

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

There are some shared expectations, so the organisational needs must match individual needs.

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

Concepts of 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.

Organisational 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.