Performance management systems and organizational effectiveness

Performance Evaluation

CEO

From: Non-CEO

Re: Internal Performance Evaluation System

Purpose of the Evaluation System

For the company Whole Foods, an internal performance evaluation system should be in place to ensure that the company maximizes its success and profitability. A performance evaluation system is necessary in order to implement internal control on the managers who work within the company. There are several reasons for this. It is important to remember that with a formal performance evaluation system the company insulates itself against the risks posed by wrongful termination or discrimination lawsuits, since the company can support all personnel decisions with empirical data. Landy (1978) notes that performance evaluation can also help the company to identify goals, eliminate weaknesses and provide supervisors with accurate measures of subordinate performance, not to mention improving the perception of procedural fairness in personnel decisions.

The industry is the grocery retail industry, and there are a number of measures already in place. With electronic scanning, Whole Foods already has access to a substantial amount of data that can be used to evaluate performance of managers and front-line employees alike. For established stores, there is also longitudinal data that can be used to track performance over time, during periods where the store has different managers, or just in relation to the performance of nearby stores.

Gjerde (2007) notes that the value of a performance evaluation system lies in its ability to generate information that managers can use. Thus, it is critical that this system is designed with specific objectives in mind. The improvements that the company derives as the result of this system should relate entirely to ability of the system to deliver results that help managers to save the company money on operations, or earn it more money. Managers in particular need to be motivated by these two outcomes, so the performance evaluation system will provide Whole Foods with the opportunity to measure such outputs, and make these measures a part of the way that managers are motivated and incentivized within the company.

The objectives of the system therefore are going to be to find ways to improve efficiency and other operating metrics such as sales per square foot, and in addition to find ways to deliver higher levels of customer satisfaction, since we have noted a correlation between customer satisfaction and customer loyalty. Increasing profits is a key measure, but managers will also be evaluated on sales per FTE (full-time equivalent employee), sales per square foot, contribution margin per square foot, sales per dollar spent on employees, inventory turnover, and asset turnover at their stores. These metrics will help to orient our front line managers to the financial objectives that we seek.

It is also worth considering that there should be other metrics as well. The balanced scorecard is a managerial concept that weighs the need of the company to deliver financial results with the need of the company to excel in other areas, in particular the internal learning and growth area, customer satisfaction and internal business processes (BSI, 2014). Implementing a balanced scorecard will ensure that managers are not seeking to improve financial performance or operating efficiency in the short run only, at the expense of staff or customers. For example, we know that we can increase sales per employee but cutting back on staff, but this is short-term in nature. The balanced scorecard will point out the flaw in such a strategy, because the staff and customer dimensions will suffer, and eventually that will lead to reduced sales as well.

Metrics

Mudde and Sopariwala (2008) note that many industries have their own specific metrics. In the airline industry, they note, available seat miles and revenue per seat mile are two critical metrics, relating revenue to capacity. In the retail grocery industry, same store sales and sales per square foot are two good metrics that are frequently used. Same store sales tracks the performance of the company overall, not counting new stores. Thus, growth is measured without accounting for revenue growth through capacity growth. The revenue generated per square foot is important, because square footage represents not only a large cost, but a fixed cost. With a revenue/square foot measure, the company can also gather a cost per square foot measure, and conduct a contribution margin analysis with this information.

In addition to customer satisfaction and financial measures, attention also needs to be paid to the interests of the employees. Whole Foods has the approach of building employee loyalty, the result of which is likely to be that the company should have lower turnover, a higher education level among employees and other positive workforce traits. Some metrics are worth including in the performance management, while others are more informational -- for example ensuring that the stores have linguistic representation of their communities so that in diverse areas the staff are capable of dealing with all customers. More critical metrics like employee turnover are important because they will be tied to efficiency metrics, which in turn are tied to both profits and to customer satisfaction. The balanced scorecard helps managers to understand these linkages. Once these links are established, the company's managers will be oriented towards a set of results that support all of the company's strategic objectives.

Benefits to Whole Foods

The performance evaluation system will benefit company by orienting managers' policies and behaviors towards the company's strategic objectives. In particular, the system will focus managers on the longer-term outcomes, rather than simply on short-term financial outcomes. If the company wants managers to work towards a wider range of organizational goals, those must be part of the performance evaluation system. Thus, Whole Foods needs to take the data that it gathers and apply it to meaningful and balanced measures of managerial performance.

Benefits to Managers

The managers themselves need to be oriented towards specific tasks. The performance valuation should create motivation towards behaviors that the company values. The performance evaluation is therefore an opportunity to guide the managers, and give them clarity about their roles. For the managers, this is beneficial because even the most creative manager needs to know clearly his or her expectations, and that is something a performance management system can achieve (Cornett, 2014).