Eng Mgt 6113

Advanced Personnel Management

(Strategic Human Resource Management & Measurement)

The Economic Value of Job

Performance
David G. Spurlock, Ph.D., Instructor
 The Economic Value of Job Performance
Background on job performance (Not in text)
Case of Pivotal Talent at Disney Theme Parks
Why does Performance Vary Across Jobs?
The Role of SDy in Utility Analysis
Estimating the Monetary Value of Variations in Job
Performance (SDy)
The Estimate of SDy (5 techniques)
The Accuracy of SDy Estimates and Its Importance

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 Background on job performance
In slides 4 through 16 I present some background
information on performance appraisal; all the
subsequent slides are my comments on text material
Your text assumes its audience would have some
coursework or professional training in appraisal so I
am presenting a sketch of some of the key ideas
sufficient for our purposes here
I may post on Canvas a few supplemental files
that give examples illustrating the concepts

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Background on job performance
Strategically Oriented Performance
Measurement Systems
Provide feedback about congruence of
individual behaviors & organizational
strategies/goals
Provide information for evaluation of the
worth of employee contributions &
appropriate rewards
Guide plans for future training &
development efforts
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Background on job performance
Performance Measurement Approaches
Management by objectives (MBO)
Subordinates & superiors collaboratively generate
goals & the means to measure goal achievement
& then subsequently evaluate progress &
accomplishment
Widely used & about 50 years old
Consistent with accepted principles of goal-setting
theory (specific, difficult goals are most
conducive to high performance)
Excellent example of something that is very sound in
principle but that often fails because of poor
implementation
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Background on job performance
How can it fail?
Goals/measures are unrealistic or measures arent
good indicators of whether goals are being met
Subordinate & supervisor have significant
disagreement about goals/measures or interpret
them differently
Goals/measures are overtaken by events making
them obsolete (They should be revised in those
cases but often this doesnt happen)

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Background on job performance

For some jobs, it is difficult to formulate specific,

meaningful goals/measures
Outcomes are often influenced by outside factors
beyond employees control (sometimes beyond
managements control)
Inadequate support is given to the employee to
achieve goals

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Background on job performance
Graphic rating scales
Numerical scales with descriptive anchors at endpoints
Almost everyone uses these to some degree
Advantages: Simple, easy to use, quantitative, familiar
Disadvantages:
Raters often arent trained well
Rater biases (e.g., halo, leniency, central tendency)
Anchors may be traits & not behaviors
Relative vs. absolute ratings: each type has pros & cons
Think of grades why is it prudent to consider both relative &
absolute performance?

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Background on job performance
Narratives
Just a verbal description in sentence form of
employees performance
Useful for capturing elements of performance
that wouldnt translate easily to simple
scales and for incorporating subtle or
complex thoughts of evaluator
Drawbacks are variability, skill required, &
additional time/effort required to do these well

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Background on job performance
Behaviorally anchored rating scales
Each number on scale has a specific behavior
associated with it
Advantages:
More specific than scale with only endpoints
Excellent for providing feedback to employees
Disadvantages:
Unique to each job so practical only with jobs with many
incumbents
Research indicates BARS no more effective at improving
reliability or validity
Behavior observation scales
Like BARS except rating indicates a frequency of a
critical incident behavior occurring (or not)
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Background on job performance
Checklists
Checklists sometimes used to form the basis of a
numerical scale such as a weighted critical incident
scale & then checklist is used in conjunction with the
derived scale
Checklists alone are sometimes used if behaviors are
simple (done/not done) and several different such
behaviors need to be routinely performed
Checklists are very easy to use but may be
uninformative with higher level work

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Background on job performance
Direct comparisons (rank order, paired
comparison, forced distribution)
Direct comparisons are often necessary for
apportioning raises from a fixed budget or for
deciding on promotions or layoffs
Can you think of at least one drawback of each
of the following?
Rank order
Paired comparison
Forced distribution

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Background on job performance
360 degree feedback
Feedback is provided from direct supervisor but also
from other managers, peers, & subordinates
Widely used but (again) what seems good in principle is
not without problems in practice:
Most appropriate for developmental purposes (i.e.,
helping you to get better) but sometimes used for appraisal
(i.e., as basis for raises & promotions)
Privacy issues arise from informal discussion among
raters
Not in self-interest of some raters to provide positive
feedback especially if anonymous
Issues of retaliation
Poor training of evaluators
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Background on job performance
Performance Evaluation of Executives
Execs usually not subjected to routine formal evaluation
(partial exception: elected public officials who do get poll
results of voters opinions)
6 myths that contribute to less evaluation of execs
(Longenecker & Gioia, The Executive Appraisal
Paradox)
(1) not needed or desired by the execs
(2) not dignified
(3) too time consuming for superiors
(4) detrimental to creativity and autonomy
(5) irrelevant (execs judged on bottom-line)
(6) performance is too intangible

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Background on job performance
Effectiveness of Performance Measurement
Keys to effectiveness:
Employees agree with evaluators on the work aspects
evaluated
Employees know they are actually evaluated on those
aspects
Employees view the evaluation process as valid and fair
AND see that rewards are distributed consistent with
the (valid, fair) evaluation process
Plethora of ways for management to abuse such systems
for their own reasons any system can be exploited by a
sufficiently determined manager but some are easier to
manipulate than others

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 Background on job performance
This ends the background material but
please review any associated
supplemental files posted on Canvas that
pertain to this topic

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 The Economic Value of Job Performance
Performance appraisal background info (Not in text)
Case of Pivotal Talent at Disney Theme Parks
Why Does Performance Vary Across Jobs?
The Role of SDy in Utility Analysis
Estimating the Monetary Value of Variations in Job
Performance (SDy)
The Estimate of SDy (5 Techniques)
Accuracy of SDy Estimates and Its Importance

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 Pivotal Talent at Disney Theme Parks
Key idea is contrasting important jobs with pivotal jobs
Both pivotal jobs and non-pivotal jobs can be important but
non-pivotal jobs are engineered in such a way that there
is little variation in strategic value as a result of
performance variation because the variation in
performance is low once required (high) standards are met
Figure 9-1 is a bit misleading in this detail as the performance
variability in real units (whatever those would be) isnt necessarily on
the same scale
The figure is somewhat metaphorical and doesnt represent actual
data but the KEY idea is that the same change (delta in standardized
units) in performance has a different impact on strategic value for
the two jobs
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 Pivotal Talent at Disney Theme Parks
The street sweepers are actually in the pivotal roles
though because they are front line customer service reps
who have a big impact on customer experiences so variation
in their performance is both more likely and more pivotal
Street sweepers and store clerks are also guides and
trouble advisors who must react & improvise to help park
guests (not as tightly engineered jobs as the characters)
Processes that improve performance of pivotal workers
have bigger impact on strategic value (in this case
keeping a Disney park the Happiest Place on Earth)

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 Pivotal Talent at Disney Theme Parks
NOTE: The authors use a bit of terminology from
Management Science that I wanted to emphasize
They relate pivot points in business processes (here pivotal
jobs) to constraints and point out how processes can be
improved if ways can be found to relax some constraints
They also talk about how Disney wants to maximize the
constraint of the number of delightful minutes guests
spend in the park
Here you could think of delightful minutes as an objective to be
maximized subject to other constraints but in the bigger picture it is a
constraint on the true global objective of maximizing profit from the
operation of the park
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 Why Does Performance Vary Across Jobs?
Two key reasons why performance varies
(1) Nature of the job:
More complex jobs require more autonomy
& discretion than do highly automated, rigidly
specified jobs AND differences in ability &
motivation are more important
determinants in the variability of job
performance in those jobs

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 Why Does Performance Vary Across Jobs?
Two key reasons why performance varies
(1) Nature of the job (contd) :
P = f(KSAs, effort, situational factors) where effort is itself a
function of current motivation and KSAs are partially a
function of past motivation
The performance function for complex jobs usually has greater
variability because KSAs & effort contribute more and interact
more with situational factors
Obviously there are much more accurate and complicated models
of job performance than the above but the above is sufficient for
us here now

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 Why Does Performance Vary Across Jobs?
Two key reasons why performance varies
(2) Relative value to the organization of variations in
job performance
Pivotalness (and thus SDy) is affected by the
position of a job in the value chain of an organization
Software development project leaders vs. billing clerks
NOTE: Average strategic value of a jobs
performance and impact on strategic value of the
variability of job performance are NOT the same: a
job can be vitally important but not pivotal

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 Why Does Performance Vary Across Jobs?
Two key reasons why performance varies
(2) Relative value to the organization of variations in
job performance (contd)
Examples in text of front-line associates at Starbucks
and McDonalds illustrate how variability in job
performance has different implications when
businesses have different strategies & processes
A related example (though not quite as vivid and not in
the text) is the comparison of flight attendants on
Southwest Airlines & those on legacy carriers like
American, Delta, United, US Air
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 Why Does Performance Vary Across Jobs?
Two key reasons why performance varies
(2) Relative value to the organization of variations in
job performance (contd)
Performance-yield curves are shown in Figure 9-2
(similar to Figure 9-1 in concept)
Basic idea is the same as Kano analysis in product
design: the importance of tolerance specification in
components of manufactured items varies depending
upon criticality to overall system function
A performance improvement of X% is NOT equally
valuable everywhere in the system
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 The Role of SDy in Utility Analysis
As you recall from Ch. 8 SDy is the $ value of one
std. dev. change in the performance criterion
In Ch. 8 we used this to characterize the improvement in
the workforce quality as a result of the use of a (more)
valid selection procedure
In Ch. 11 well see how to use this to assess the value of
training & development programs
SDy is actually difficult to estimate and 6 different
approaches have been developed to do it, one
based upon cost-accounting and five based upon
judgments of subject matter experts or SMEs
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 Estimating the Monetary Value of Variations in
Job Performance (SDy)
Table 9-1 summarizes the 6 approaches and well
briefly examine each of them
Cost-accounting
Judgment: 40 percent rule
Judgment: Global estimation
Judgment: CREPID (Cascio-Ramos Estimate of Performance in
Dollars)

Judgment: System effectiveness technique

Judgment: Superior equivalents technique

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 Estimating the Monetary Value of Variations in
Job Performance (SDy)
Cost-accounting
Works well for sales jobs because simple to calculate:
Estimate (1) overall sales achieved by salesperson
(broker, dealer, etc.) and (2) the cost of those sales
(infrastructure expenses aka overhead plus actual
compensation in salary, commissions, benefits etc.)
Subtract (2) from (1) & voila you have the economic
value of that persons performance
Repeat for all sales staff then compute the
standard deviations to use for comparisons
emgt6113Ch9 28
 Estimating the Monetary Value of Variations in
Job Performance (SDy)
Cost-accounting
Too complicated for most other jobs though
Text takes you through the details of example sales job
that illustrates the 8 step calculation process incorporating
the considerations of a number of subordinate cost
elements
Despite the apparent objectivity of this approach, there
are a number of judgment calls involved at various
points and since the overall process is somewhat
cumbersome, other methods have been developed
emgt6113Ch9 29
 Estimating the Monetary Value of Variations in
Job Performance (SDy)
Cost-accounting
The results of the example calculation showed an
average value of job performance of $93,522 with an SDy
of $32,982
Important to note that the difference between high performers
and average performers was $29,370 while the difference
between average and low performers was only $12,742
indicating a skewed distribution with a longer upper tail
This distribution makes sense because most performers were
experienced and thus very low performers who couldnt keep
their jobs would have been eliminated already and wouldnt be in
the analysis
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 The Estimate of SDy (5 Techniques)
40 Percent Rule
Idea is that since wages & salaries average about 57% of
US GDP, 40% of average salary is conceptually equivalent
to 22.8% of the value of production which rounds off to 20%
So if 20% is a reasonable estimate for the std dev of the
value of production or SDp, 40% of salary can be used as
the estimate for SDy if the SDp was actually 20% and you
knew the average value of the output production associated
with the job
(You can see a lot of assumptions being concatenated
here)
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 The Estimate of SDy (5 Techniques)
40 Percent Rule
So is SDp actually 20%?
Actually it varies quite a bit with complexity of the
job averaging 46% for high complexity jobs
(managerial, professional, sales), 15% for low
complexity jobs & 25% for medium complexity jobs
Interestingly, even within a category it can vary
considerably: 39% for most sales jobs but 97%for life-
insurance sales jobs

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 The Estimate of SDy (5 Techniques)
40 Percent Rule
What if we customized the number based upon the
complexity of the job?
A good idea but the SDp is still expressed as a
percentage of average output and must be converted
to monetary values by multiplying by the average
monetary value of the output of the job
Unfortunately, this leads to the same cost accounting
complexities as with the cost accounting approach itself

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 The Estimate of SDy (5 Techniques)
40 Percent Rule
So should you use the 40% rule?
If you have data to justify it, perhaps. If you dont, you
might want to use it as a place to start, but realize that,
except for low complexity jobs, it is likely to
underestimate SDy (in some cases by quite a lot)
It could be justified if you also do a sensitivity analysis
to see how large an error you can tolerate for specific
decisions you are making about selection, training, or
other processes
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 The Estimate of SDy (5 Techniques)
Global Estimation (basic version)
Collect multiple SMEs estimates of the monetary value of an
employee performing at the 85th percentile (1 std. dev. above the
mean) and the monetary value of mean performance
Subtract the 50% values from the 85% values to obtain SDy
Average the estimates for the SDy and compute std errors of the
estimates as well
An example for computer programmers including the
instructions to the supervisors (the SMEs) making the
estimates is given in the text
NOTE that in the example, they did estimates for the 15th
percentile also to verify the data fit a normal distribution
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 The Estimate of SDy (5 Techniques)
Global Estimation (modified version)
Estimate Y-bar (the average value of employee
output) and SDp separately; then multiply them
to obtain SDy
SDp = SDy/Y-bar = coefficient of variation of job
performance
The justification is purely empirical:
Estimates of the coefficient of variation of job performance
calculated from the SME estimates of the 15th, 50th, and 85th %
values were very accurate
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 The Estimate of SDy (5 Techniques)
Global Estimation (modified version)
SDp estimates can be done two ways:
(1) use objective estimates from jobs of similar
complexity
(2) divide SME estimates of SDy by SME estimates of
Y-bar
Estimates of Y-bar can be done from estimates
of the value of a particular job divided by how
many employees perform that job
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 The Estimate of SDy (5 Techniques)
Global Estimation (modified version)
Some cautions: if dollar-valued job performance
isnt normally distributed for a particular job (it
often isnt), global estimation wont work well
Basis for supervisor (SME) estimates of the
economic value of job performance varies with
the expert and is often not clear
Estimates themselves are quite variable
across SMEs and unreliable over time within
the same SME emgt6113Ch9 38
 The Estimate of SDy (5 Techniques)
Global Estimation (modified version)
Problems with estimation can be overcome
somewhat by providing anchors to SMEs for
50th % values and by using consensus
judgments
(These could be obtained informally or by using more
formal procedures like the Nominal Group Technique
or the Delphi Method)

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 The Estimate of SDy (5 Techniques)
CREPID (Cascio-Ramos Estimate of Performance in Dollars)
Does NOT require normally distributed monetary values
of job performance
Assumes current compensation program is consistent
with market compensation
Assumes annual compensation is best estimate of
economic value of performance (actually compensation
must underestimate value of course)
Requires partition of job into principal activities,
allocation of salary among those activities, and
supervisory ratings of job performance on those
activities emgt6113Ch9 40
 The Estimate of SDy (5 Techniques)
CREPID (Cascio-Ramos Estimate of Performance in Dollars)
Extended example provided in text
Interesting discussion of elements of job of ride design
engineers at Disney theme parks versus at traditional
thrill-ride parks (e.g., Cedar Point, Ohio): highlights that
even very similar jobs can have quite different weights
of importance for certain elements and subsequently quite
different skill sets distinguishing high performers from
average performers

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 The Estimate of SDy (5 Techniques)
CREPID (Cascio-Ramos Estimate of Performance in Dollars)
NOTE: VERY IMPORTANT!
CREPID should NOT be used in pay systems based upon
rank, tenure, or hourly pay rates because in those
systems economic value is often NOT closely related to
pay (e.g., academia, union shops, civil service)
Economic value could be much more than objective pay or, in
some cases, much less)
In many of these situations, it may be particularly difficult to
estimate the economic value of the job due to the nature of the
services provided or complex dependencies of some workers jobs
on others workers jobs
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 The Estimate of SDy (5 Techniques)
System Effectiveness Technique
Developed specifically for situations where
individuals compensation is only a small part of
the value of the performance to the organization
(e.g., military officers, petroleum engineers)
SD of performance (in $) = Cu (SD of performance in output
units/Y1) where Cu is the overall operating cost of the unit in the
system over a specified time period (e.g., an Army tanks costs for a
year including proportional share of purchase cost) and Y1 is the
mean performance in output units
Example in text for actual US Army tank commanders
emgt6113Ch9 43
 The Estimate of SDy (5 Techniques)
Superior Equivalents Technique
Similar in purpose to previous System Effectiveness
technique & related to Global estimation procedure
Based upon estimates of how many superior (85th
%) performers would be necessary to replace a
fixed number of average performers
Basic formula is SDy = V50 [(N50/N85)-1] where V50 is
the value (estimated or known) of average performance
and the Ns are the number of performers at that %
Example with Army tank commanders again in
text emgt6113Ch9 44
 The Estimate of SDy (5 Techniques)
Some problems with both the Superior
Equivalents & System Effectiveness
techniques
Estimates of performance can be quite unreliable
Quality of performance may not easily translate to a
simple unidimensional numerical scale (and may not be
linear)
Can be useful if estimates are good or at least consistent
but garbage in, garbage out

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 Accuracy of SDy Estimates and Its Importance
Which of these methods is best?
Obviously it depends
Fortunately, even widely varying estimates of SDy can be
useful, for instance if all or most of them are above the
break-even value calculated for justifying a program
Different methods may often produce estimates for SDy
that vary by less than 50% so may not matter so much
Some methods are viewed as slightly more credible
than others by managers but, regardless, most managers
prefer to get information about the financial impact of
programs rather than just anecdotes
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 Accuracy of SDy Estimates and Its Importance
Which of these methods is best?
Context and, again, sensitivity analyses and break-
even analyses show impact of variations in the estimates
Most importantly, use of these methods (whichever is
employed) helps managers differentiate among
(1) the jobs where variations in performance matter most
(pivotal jobs) as distinct from those where performance above a
minimum satisfactory standard isnt that valuable or
(2) those jobs where reducing risk (variability) is more
important than increasing performance (airline pilots for
instance) as distinct from those where greater risk (variability)
is accepted as the price for innovation & creativity

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 Accuracy of SDy Estimates and Its Importance
Which of these methods is best?
Chapter concludes with example of the use of a heat
map from the IBM Institute that emphasizes the
distinctions among core, competitive, and
differentiating parts of a business and the focal
jobs that make a clear and positive difference in a
companys ability to succeed in the market place

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END OF SLIDE SET

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