Performance Appraisal Methods On Psychological Contract Management Essay

Performance Appraisal Methods On Psychological Contract Management Essay The purpose of this dissertation is to investigate the impact of performance appraisal methods on psychological contract between employer and employee in UK retail sector ( Iceland food ltd. ). The author will attempt to achieve this by focusing on importance of performance appraisal methods in improving motivation and performance of the employees and by ascertaining whether there is clear understanding of the term of psychological contract involved in performance appraisal meeting. The UK retail market is set to increase in size by 15% over the next five years, taking its value to just over  £312bn (UK Retail Futures 2011: Sector Summary, Data monitor). However this represents a slowing down of annual growth and with operating costs and the cost of credit set to rise, the retail sector faces challenging times. The retail culture is commercially driven and as such there is pressure to perform. Working in retail is hard work and the dynamic nature of the business requires a flexible attitude. Working in a shop is very likely to involve working weekends and late nights. Work-life balance could be a very significant issue for an industry that traditionally has an image of long or antisocial working hours. The retail industry employs over 3 million people (data collected March 08). This equates to 11% of the total UK workforce (UK Retail Futures 2011: Sector Summary, Data monitor). Almost 8% of the Gross Domestic Product (GDP) of the UK is generated by the retail sector. UK retail sales were approximately  £265 billion in 2007, which is larger than the combined economies of Denmark and Portugal (UK Retail Futures 2011: Sector Summary, Data monitor). The retail industry and the jobs within it are susceptible to economic and consumer trends. Today, most organisations on the major basis have some kind of performance appraisal system in place. A study conducted by Hirsh (2006) found that only a third of the HR professionals felt that the established appraisal methods have achieved theirs objectives and that most appraised exercises could not really had helped organisations to improve their performance (Hirsh, 2006 as quoted within Fletcher, 2008 p.1). Indeed, appraisal has become an emotive word because it is either done poorly or partly as the organisations keep on ignoring the values of the performance appraisal, thereby affecting the psychological contract of the individual. There are many indicators of a traumatized psychological contract; this can later be attributed to poor performance appraisal methods. Such indicators include; high turnover, low motivation, low job satisfaction (Hiltrop, 1995). According to Fletcher (2008), The unpopularity of using performance appraisal methods can be clearly seen as most organisations use the same process with different titles such as Performance Reviews, Work Planning and Review and many others. Iceland food ltd. follow this rule as the appraisal methods in place are described. Statement of Purpose The purpose of this dissertation is to investigate the impact of performance appraisal methods used on psychological contract between the employer and employee. With an aim of examining the efficiency of the techniques used to perform the appraisal system in place. The importance of the appraisal system within Iceland food ltd. will also be established. This will be initially achieved by investigating the importance of performance appraisal methods in improving the motivation and performance of the employees, and by ascertaining whether there is clear understanding of the terms of psychological contract involved in the performance appraisal meetings. It will be important to understand how these performance appraisal methods are being evaluated. The secondary research conducted on this topic, made use of a number of academic journals, articles and books related to the subject to monitor performance of appraisal techniques. The data collection procedure involves a quantitative questionnaire issued to the employees of Icelands, and a series of semi structured qualitative interviews. 1.2 The Importance of the Study The importance of the study is to understand the effect of performance appraisal on the psychological contract of the individual employee working in the retail food super stores. The method and the aim of the appraisal process is vital in giving training, motivation, confidence and job satisfaction to the employee as well as the rewards they get out of pay review. The author endeavours to find out what are the elements of the psychological contract of employee working in the retail food industry and whether or not it is affected by good or bad appraisal system used by the organisation. The primary research is conducted on the employees of the retail store to get the exact scenario of their present working conditions and their psychological contract with a focus on the performance review policy of the organisation. 1.3 Background of the company Investigated. à ¢Ã¢â€š ¬Ã‚ ¦Ãƒ ¢Ã¢â€š ¬Ã‚ ¦ so thats why mums go to Iceland! Iceland began business in 1970, when Malcolm Walker opened the first store in Oswestry, Shropshire with his business partners Peter Hinchcliffe, Colin Harris, Thomas Duffin and John Apthorp investing  £30 each. This was for only one months rent at their Shropshire store. They were all still employees of Woolworths at the time, and their employment was terminated once their employer discovered their job on the side. Iceland initially specialized in loose frozen food. By 1975, there were 15+ Iceland outlets in North Wales, with the first supermarket-style outlet opening in Manchester a couple of years later. The firms head office moved to Deeside, Flintshire in 1979. Iceland was floated on the London Stock Exchange in 1984, by which stage it had 81 outlets. In 1989 Iceland bought its competitor Bejam which was some three times larger in terms of business. By January 2004, the combined chain had 760 stores throughout the United Kingdom. Finding the retail market more hostile in the late 1990s, Iceland pursued avenues for differentiation. In 1998, the firm began to focus on providing organic food and genetically modified-free food. This policy saw the company convert its entire frozen vegetable range to organic in 2000. In 1999, Iceland launched what it claimed to be the first nationwide, free, online grocery shopping service. This tied in with the rebranding of all outlets under the Iceland.co.uk. However, the rebranding exercise appears to have been quietly abandoned in the early 2000s, as the unadorned Iceland name is now used more widely, although some stores still have the Iceland.co.uk name on display. Iceland was renamed the Big Food Group in Feb 2002, and attempted a refocus on the convenience sector with a bid for Londis. Grimsey remained until the takeover and demerger of the Big Food Group by a consortium led by the Icelandic company, Baugur Group in February 2005. Since Malcolm Walkers return to the company, Iceland has reduced the workforce by 500 jobs at the Deeside Head Office, with approximately 300 jobs moved in September as a result of a relocation of a distribution warehouse from Deeside to Warrington. During July 2006, 300 workers took industrial action with the support of their union, blocking several Lorries from entering the depot. Despite this, the transfer to Warrington took place and the new warehouse was later outsourced to DHL in April 2007. In January 2009, Iceland announced that it would buy 51 stores in the UK from the failed Woolworths Group chain; three days after the final 200 Woolworths stores closed their doors for the last time. In April 2009, Iceland announced plans to close its appliance showrooms by September 2009 to concentrate on food retailing. Icelands sales for the year ended 27 March 2009 were  £2.08 billion, a 16% increase on the previous year, with net profits of  £113.7 million. Iceland is a successful and growing business, and to maintain our momentum we want to help all our people to fulfil their ambitions and realise their potential.   We take pride in our training and development, and our 2009 staff survey showed that 87% of our employees considered that they had all the training they needed to do their job well.   In addition to paying close attention to the results of these regular surveys, we conduct individual performance reviews designed to identify strengths, ambition and potential, and are strongly committed to providing opportunities for those who wish to develop their careers within Iceland.   Over 60% of our store managers have attained their positions through internal promotion. Currently Iceland is having over 750 stores through out the UK. And more than 18000 employees work within Iceland food ltd. Iceland have employees hand book that is handed over to the employees during the induction. This employees handbook is basically designed for the frontline staffs, which includes the entire details of the induction procedure, probationary period, performance appraisal, disciplinary, dress policy, dignity at work and grievance procedures and other important elements of the contract. The entire information on the Icelands was known to the author with the help of store manager of the Iceland food ltd. And from the Iceland food ltd website and staff hand book. AIM The aim of the research is to investigate the effectiveness of appraisal method on the psychological contract between the employer and employee. Objectives To examine the concept and theories related to psychological contract. To examine the concept and theories related to performance appraisal. To describe and compare performance appraisal methods used by Iceland food ltd. To critically analyse the effect of performance appraisal method on psychological contract. 1.6 Overview of the Study The dissertation will be presented in a series of the following chapters. Brief description of each chapter is written below with a diagrammatic representation (Figure 1.0 and Table 1.0 Overview of the study). Chapter 1 Introduction Chapter 2 Literature Review Chapter 3 Methodology Chapter 4 Results Chapter 6 Conclusion and Recommendation Introduction: This chapter gives the introduction to the study, covering the aim and objectives of the study. It includes the statement of purpose and the background of the company investigated. Literature Review: This chapter provides the critical analysis of all the secondary research conducted by the author on the performance appraisal, psychological contract followed by the discussion of the effects of former on latter. Methodology: This chapter explains the research aim and the research process undertaken by the author to fulfil the research questions outlined in previous chapter. It also includes the primary method conducted by the author to gather the research data. Results: This chapter includes the findings of the primary research conducted by the author. It also includes the charts and graphs that explain the findings of the research. Discussion and Analyses: This chapter includes analyses of the finding of the primary research. It also includes the comments of the interviews as well as analyse the outcome of the survey conducted by the author. Conclusion and Recommendation: This is the final chapter of the study which will give a synopsis of all the findings and cross refer it with the objectives stated in the initial chapter. It will also offer the recommendations for further research. Chapter 5 Discussion and Analyses CHAPTER 2 LITERATURE REVIEW 2.0 Introduction A literature review as defined by Fink (2005:3) is a systematic, explicit and reproducible method for identifying, evaluating and synthesising the existing body of completed and recorded work produced by researchers, scholars and practitioners (Fink 2005, p.3) AIM The aim of the research is to investigate the effectiveness of appraisal method on the psychological contract between the employer and employee. Objectives To examine the concept and theories related to psychological contract. To examine the concept and theories related to performance appraisal. To describe and compare performance appraisal methods used by Iceland food ltd. To critically analyse the effect of performance appraisal method on psychological contract. To draw conclusion and make recommendation about the effectiveness performance appraisal method on the employees of Iceland food ltd. This section therefore, attempts to review some related literature relevant to this study. Moreover this literature review seeks to justify the uniqueness of this study in the light of the works of other known scholars in the field of performance assessment strategies on the psychological contract, focusing on the performance appraisal method used by Iceland food ltd, U.K. This section is arranged into themes in line with the research objectives and questions outlined in the preceding chapter. The review will begin with the purpose of the psychological contract and the appraisal method, followed by the different types of the appraisal methods. Then the performance appraisal method used by the Iceland food ltd U.K. will be critically reviewed and how the performance appraisal affect the psychological contract between the employer and employee will be discussed. Lastly the advantages and limitations of this factor and the importance of this study will be presented. In addition, a recent view is of Conway and Briner where they define : What Psychological Contract is ? To examine the concept of the psychological contract, a review of existing definitions and research needs to be assessed. Origins of the term psychological contract derived from Argyris in the 1960s who referred to it as the implicit understanding between a group of employees and their foreman, while Schein in 1965 further developed the concept focussing on the high level relationship between the employee and the organisation (Wellin 2007). Furthermore, Kotter in 1973 (as quoted within Roehling 1997) described the psychological contract as, an implicit contract between an individual and his organisation which specifies what each expects to give and receive from each other in their relationship. (Kotter as quoted within Roehling 1997 p.210) psychological contract as, the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other (Conway and Briner (2005) as quoted within CIPD 2009) However, Rousseau (1995) (as quoted in Guerrero and Herrbach 2007) believes that the psychological contract is formulated in the minds of the employees, individual beliefs, shaped by the organisation, regarding terms of an exchange agreement between individuals and their organisation. (Rousseau (1995) as quoted within Guerrero and Herrbach 2007 p.4) Taking all that into consideration, the nature of the psychological contract can be seen as the implicit unwritten expectations and beliefs that one holds in relation to their employment relationship. These contracts can be highly subjective and what makes them binding is what they are perceived to be (Hughes and Palmer 2007). Conway and Briner (2002) state that the beliefs refer to employee perceptions of the explicit and implicit promises regarding the exchange of the employee contributions such as effort, ability and loyalty for organisational inducements such as pay, promotion and security. Moreover, Bloisi, Cook and Hunsaker (2003) supports this statement by stipulating that workers are expected to input their skills, time, effort, commitment and loyalty to the organisation in return of wages, benefits, job security, opportunity to progress their achievement, power, status and affiliations. Witte et al. (2008) clarifies further that the idea of balance is key to these mutual exchanges within this dynamic and informal contract so that the employee feels that what is offered by the organisation balances what the individual brings to the relationship. Perceived imbalance could consequently result in the perception of contract violation. The CIPD (2005) highlighted a simplified Guest model (1996) of the p sychological contract as illustrated in Figure 2.1. The influencing factors that feed into the contract include the human resource practices, organisational content and the individual characteristics of the employee. The psychological contract content can be measured in terms of fairness of treatment, trust, and the amount of which the implicit deal or contract is perceived as being delivered in reflection of a set of obligations or some sort of exchange (Guest 1996). The outcomes as a result of the content of the contract are the employee attitudes and behaviours. The CIPD (2005) found that employees attitudes of trust, fairness and delivery of the deal are major determents to gaining a psychological contract which creates employee commitment and satisfaction. Robinson (1996) (as quoted within Bosch-Sjtsema 2007) claimed that expectations are often shaped by past experience, social norms and observations that are influencing factors to the contract. It was also asserted by Rousseau (2001) that these promise based psychological contracts take the form of a mental model or schema over time. She found that an employees pre-employment experiences, recruiting practices within the company and on the job socialisation as influencing factors to the formation of these schemas which may differ the content or form that an individuals psychological contract takes. 2.1 The Purpose of Psychological Contract According to Bloisi et al., (2003; p.123) the psychological contract is considered as workers implicit expectations about what they are expected to contribute to an organisation and what they will receive in return (Bloisi et al., 2003 p. 123) In a similar way Schein (1965) defined that The notion of a psychological contract implies that there is an unwritten set of expectations operating at all times between every member of an organisation and the various managers and others in that organisation (Schein 1965 as quoted within Armstrong 2003, p 297). According to Hiltrop (1995), it has been noticed there is a significant rate of change of the economic environment in which the organisations work during the last twenty years. Increasing competition, globalisation of markets has demanded greater flexibility and productivity of organisations, as well as new strategies focused on innovation and speed. In the psychological contract the perceived responsibility of an organization influenced by employees expectation ( Cheong Kim 2009). As a result, the terms of old psychological contract has changed radically which earlier gave security, stability and predictability to the relationship between employer and employee (Hiltrop, 1995 p. 286 287). Moreover, the above definition stated by Schein (1965) was amplified by Rousseau and Wade-Benzoni (1994) who stated that Psychological contracts refer to beliefs that individuals hold regarding promises made, accepted and relied upon themselves and another. (In case of organisations, these parties include an employee, client, manager, and/or organisation as a whole.) Because psychological contracts represent how people interpret promises and commitments, both parties in the same employment relationship (employer and employee) can have different views regarding specific terms. (Rousseau and Wade-Benzoni, 1994 p. 463-89) Guest and Conway (1998) summarise stating that since the psychological contract is not written down formally it lacks the characteristics of the formal contract due to which it has no beginning and no end and which is why it cannot be enforced in a court or a tribunal. Guest and Conway (1998) also believe that: The psychological contract is best seen as a metaphor; a word or a phrase borrowed from another context which help us make sense of our experience. The psychological contract is a way of interpreting the state of the employment relationship and helping to plot significant changes (Guest and Conway, 1998 as quoted in Armstrong, 2003 p. 298). 2.1.1 The importance of Psychological Contract The importance of the psychological contract was emphasized by Schein (1965) suggests that the extent to which people work effectively and are committed to the organisation depends on the degree to which their own expectation of what the organisation will provide them and in return what the organisation expects of them; and the nature of what actually is exchanged for example, money in exchange for time at work, security in exchange for hard work and loyalty, and various combinations of other things (Schein, 1965 as quoted within Armstrong, 2003, p 299). The HR profession will have significant role to play in the management and balancing of the general or specific psychological contracts of employees. The HR function can act as a focal point for helping to discover employees expectations through collective channels or individual mechanisms, while seeking to provide for the meeting of employees expectations (e.g. Sims, 1994) (Holden and Breadwell, 2001 p. 546). The HR professionals must make sure that different facets of human resource management and the different managers shape and support the psychological contracts in consistent, integrated and balanced manner, (Rousseau and Greller, 1994 p. 385-401). If employees feel that their psychological contract has been disrupted or breached, and then they may withhold or withdraw from the relationships, consciously or unconsciously, (Spindler, 1994: 326- 327). 2.1.2 The Guest model of Psychological Contract This model was formulated by Guest et al, 1996 suggests that the contract should be measured in terms of fairness of treatment, trust, and the extent to which the explicit deal or contract is perceived to be delivered. Figure 2.1: A Model of the psychological contract Causes Organisational culture HRM policy and practice Experience Expectations Alternatives Consequences Fairness Trust The delivery of the deal Content Organisational citizenship Organisational commitment Motivation Satisfaction and well-being Source: Guest et al, 1996 The simplified Guest model of the psychological contract as illustrated above in Figure 2.1 (as quoted in CIPD 2006) defines it in terms of linkage between the inputs, being the HR practices; the employee features and the companys characteristics together with the content, being the fairness and trust and finally the outputs being the employees behaviour; work performance and delivery. ODonnell and Shields (2002) believes that Guests extended model of the psychological contract (from employee perspective) represents a particularly useful way of understanding the attitudinal and behavioural impact of employment practices at the level of the individual employee (Guest 1998: 659-60) Hiltrop (1995) states that this psychological contract has two important aims, the first for providing a gauge for employers of the type of outputs they are going to obtain from employees and secondly by employees contributing their time and effort for the level of rewards they will receive. 2.1.3 The changing nature of the Psychological Contract According to Hiltrop (1995), there is considerable evidence that shows the changing of the psychological contract in the past decades. Now the employers want to know in advance the outcome of the employees efforts and employees want to know what reward he will get in exchange of the hard work and time spend in the organisation. De Meuse and Tornow (1990) stated that since the 1970s, however, the force that connect employers and employees has become severely stressed organisations deal with the need to cut costs and enhance efficiency, have ever more compacted their workforce and eradicated some of the elements (job security, regular promotions up the corporate ladder, annual wage increases, cheap mortgages, etc.) offered as a rule to employees in the earlier decades (De Meuse and Tornow 1990 p. 203-13). Moreover, people fill in the blanks along the way, and they sometimes do so inconsistently (Rousseau, 1994 as quoted in Hiltrop, 1995 p. 287). In addition to the above context, Kolb et al., (1991) have pointed out that a company staffed by cheated individuals who expect far more than they get is headed for trouble (Kolb et al., 1991 as stated in Hiltrop, 1995 p.287). Conversely, optimistically, some organisations are trying to develop steps that can increase mutuality and to endow with scale for tangential career development and enhance knowledge and skills through opportunities for learning. It has been recognised that the organisations can no longer provide a guaranteed long term job to the employees; they have to take responsibilities to build their skills and give a path for career development. In other words they take steps to improve employability (Armstrong, 2003 p. 302). Two diagrammatic representations are given below which shows the differences between the old and new employment contract by Kissler (1994) and the changing nature of the psychological contract by Hiltrop (1995). Figure 2.2: Difference between the old and new contract. OLD Relationship is predetermined and imposed You are who you work for and what you do Loyalty is defined by performance Employees who do what they are told will work till retirement NEW Relationship is mutual and negotiated You are defined by multiple roles, many external to the organisation Loyalty is defined by output and quality People and skills only needed when required Long-term employment is unlikely; expect and prepare for multiple relationships Source: Kissler, 1994, p. 335-52 Figure 2.3: Changing Psychological Contract . FROM Imposed relationship (compliance, command and control) Permanent employment relationship Focus on promotion Finite job duties Meet job requirements Emphasise on job security and loyalty to the company Training provided by organisation TO Mutual relationship (commitment, participation and involvement) Variable employment relationship people and skills only obtained or retained when required Focus on lateral career development Multiple roles Add value Emphasis on employability and loyalty to own career and skills Opportunities for self-managed learning Source: Hiltrop 1995, p 286-294. Hiltrop (1995) also suggests that a new psychological contract is emerging which is more situational and short term that assumes that each party is less dependent on the other for survival and growth. This new contract was described by Hiltrop (1995) as a worker being employed as long as they provide added value to the company and in return they expect the right to demand interesting and important work with the freedom and resources to perform it well along with performance related pay and training and development. However Armstrong (2006) argued that this could hardly be classified as a balanced contract because employers still dictate their workers employment terms and conditions apart from cases where workers are in demand and there is little supply of skills. Mant (1996) (as quoted within Armstrong 2006) classified workers as resources that are acquired or divested according to shortterm economic circumstances, therefore having little influence over the terms of the contract that their employer offers them. Additionally Taylor (2008) claims that the new relationship is less emotional and is simply an economic exchange, thus moving from relational to transactional. Organisations that are now adopting the rationale behind the use of the flexible firm model (Atkinson 1984) will have developed diverse types of psychological contracts among their workforce. Rousseau and Wade-Benzoni (1995) (as quoted within McDonald and Making 2000) found that temporary staff usually have a transactional contract with significance given to the economic elements of the contract, whilst permanent staff are more likely to have a relational contract involving commitment to the organisation. Additionally Guest (2004) found that the content of temporary workers psychological contract is narrower, transactional and easier to manage on both the employers and employees behalf which temporary workers preferred. An investigation into the company Flexco (Saunders and Thornhill 2005) found that forced change within the company structure through downsizing changed the psychological contract of those on permanent and temporary employment contracts. After the changes it was reported that the temporary workers contained mostly transactional expectations and most permanent employees were found to have relational expectations. However, there were a few exceptions regarding permanent employees, who felt that the changes had violated their contract in terms of interpersonal treatment. These employees felt insecure, and worried that they may face a temporary contract in the future, which emphasises that they no longer felt as though their job was secure. 2.2 The purpose of the performance appraisal. Performance assessment is one of the many people management techniques that classify and order individual hierarchically (Townley, 1994, p.33). A performance appraisal is the process by which a manager evaluates an employees work performance by measurement and comparison with previously established standards (Palmer, 1991 p. 1). According to Palmer (1991), there are two major purpose of conducting performance appraisals. One purpose is to provide the information for the administrative decision making such as the increment of salary, bonuses, promotion and the administrative actions that can be brought by the work performance of the employee. This also helps the organisation to decide whether to introduce for instance, a new incentive system or to improve the present pay and promotion methods. In other words, it is a vehicle to validate and refine organisational actions. For example, it has been noticed in the appraisal data that one of the employee has constant conflicts with the fellow colleague or with the supervisor or manager. Some options can be concluded from the above case, which is, showing more importance to the interpersonal skill while recruiting the new staff or encouraging the present employee to attend the sessions on the conflict management offered by various colleges or providing the employee with one-to-one counselling (Billikopf, 2003 p. 60). The other major purpose is to provide feedback to the employees on their work performance based on the standards established on the job description and analysis. Feedback provided by the supervisor or the manager give the employees an opportunity to develop their career path within the organisation. Feedback can be positive or constructive. Positive appraisal has many benefits and beneficiar