Performance Appraisal Systems in Service and Manufacturing Industries: Evidence from Taiwan
In recent years, the service industry in Taiwan has achieved rapid growth, not only in terms of productivity but also in the percentage of the labor employed as compared with the manufacturing industry and has become Taiwan’s largest industry. Based on empirical data derived from 328 questionnaires, 125 from the service industry and 203 from the manufacturing industry, this study is aimed at exploring the differences in performance appraisal systems between these two industries. The results show that the service industry pays more attention to administration, while manufacturing industry emphasizes development more. The service industry is also more concerned about quantitative criteria, while the manufacturing industry emphasizes qualitative ones. These implications of these findings for mangers in these two kinds of industries are discussed.
Following rapid economic development, the service industry in Taiwan is now the largest industry in the country. Labour employed in the service industry has increased from 1.181 million in 1980 to 2.654 million in July 2002. During this same period, labour in the manufacturing industry saw only a slight increase, from 2.036 million to 2.382 million. As part of these changes, many companies in the service industry have ’emerged’ from being traditional small-scale businesses operations into large-scale, chain and enterprising organizations. In the face of an ever-increasing number of personnel, a more comprehensive human resource management policy is needed to address issues arising from these changes in business operations and management systems, both of which are becoming increasingly complicated. An accurate and realistic appraisal system is necessary for companies to control employee behavior and to provide high quality services and products. In this respect, with the growth of the service industry, developing an effective performance appraisal system, similar to those in the manufacturing industry, is very important.
Performance appraisal systems have always played a very important role in human resource management. The performance appraisal is a critical mechanism for organizational control, through which the employees can view see their past performances and take concrete action for improvement. On the other hand, the performance appraisal also provides substantial information for human resource management to make fair and correct decisions regarding promotions, transfers, compensations, incentives and training programs as well as career management. Specific enterprises typically demand different performance appraisal system tailored to the needs of its functions and processes.
Cleveland, Murphy, and Williams (1989) argued that that there is a relationship between organizational characteristics and the uses of a performance appraisal system. Stonich (1984) also argued that performance measurement in an organization should be in tune with its structure and culture. Since the nature of the enterprises in which each industry is engaged varies, its organizational type, business policy, internal and external environment are also usually different. The purpose of this study is to conduct a direct comparative analysis of performance appraisal systems in the service and manufacturing industries.
The remainder of this paper is organized as follows. Section 2 briefly reviews the related literature. Section 3 provides background to the service and manufacturing industries in Taiwan, which is the basis for our study. The research methodology and empirical analysis are presented in Section 4 and 5, respectively. The last section presents our conclusions.
The Essence and Functions of Performance Appraisal Systems
Performance appraisal systems aim to evaluate the job performance of employees, so that appropriate corrective action and management decisions can be taken. As performance appraisal is part of organizational control, the components of the control system are indispensable in the appraisal system. In general, a basic control system consists of control standards, measurement, and corrective actions (Newman, Warren & McGiIl, 1987). Among these three phases, control standards are based primarily on organizational missions or departmental goals, which reflects the role a performance appraisal plays in the organization. Measurement is concerned with the actual appraisal process, including the appraiser, appraisal criteria, appraisal methods, and appraisal timing. Corrective actions comprise the feedback processes after the performance appraisal is completed. If there is an evident gap between actual performance and performance standards, appropriate corrective actions should be taken to change the behaviours of the employees concerned.
Apart from organizational control, Ilgen, Barnes-Farrell, and McKellin (1993) concluded, from their extensive review of the literature since the 1 980s about performance appraisal, that there are four important aspects that need to be considered. They are as follows:
(1) Appraisal setting, the purpose of the performance appraisal;
(2) Characteristics of the ratees
(3) Characteristics of the raters; and
(4) Natures of the scales used for the appraisal.
In practice, performance appraisal systems cover a wide range of these aspects, and seldom have exactly the same nature and functions. In order to integrate findings in the area, Chu (2002) proposed a comprehensive framework including six categories, namely, appraisal purposes, appraisal personnel, appraisal criteria, appraisal methods, appraisal timing, and appraisal feedback. This study will adopt this framework to compare performance appraisal systems in the service and manufacturing industries.
Factors Affecting Performance Appraisal Systems
A company should take into consideration many factors when designing a performance appraisal system. The performance appraisal system, as an important part of the organizational management system, will be affected by the particular context within which the organization operates. As stated earlier, Cleveland, Murphy and Williams ( 1 989) found that there was a correlation between organizational characteristics and the uses of the performance appraisal . Stonich ( 1 984) argued that performance measurement must be consistent with the organization’s structure and culture. For instance, when an organization emphasizes decentralization, performance standards should be focused on results (like “return on equity”). On the other hand, if the organization is inclined toward centralization, the performance appraisal should emphasize the processes of each management function.
Adopting a cultural perspective, Ouchi (1981) compared American and Japanese enterprises and found that that American enterprises are more concerned about personal performance, while Japanese enterprises are more concerned about group performance. As far as the size of an organization concerned, Jobber, Hooley & Shipley (1993) confirmed that a large organization tends to adopt quantitative criteria, more formalized appraisal methods and pre-determined performance standards, while a small organization is apt to use qualitative and informal appraisal methods. Although these studies did not make direct comparisons between service and manufacturing industries, their results can explain accounts the fact that there is a link or relation between organizational characteristics and the functions of a performance appraisal system.
Service and Manufacturing Industries in Taiwan
Service and manufacturing industries in Taiwan and elsewhere consist of widely different kinds of businesses. Generally speaking, the manufacturing industry provides tangible products and their production and consumption can be carried out separately in different places. On the contrary, the service industry offers intangible merchandise. The things it produces are perishable and production and consumption are inseparable. The things that are provided also exhibit greater variability (Kotier, 1996). Because of these basic differences, enterprises in the two industries have to deal with different operating conditions. As the ‘products’ of the service industry are perishable and production and consumption processes inseparable, feedback or results from service processes can be immediate. Moreover, production and consumption in the service industry are almost simultaneous.
The service industry gives or provides quicker and more immediate rewards (or retributions) than does the manufacturing industry. As reflected in their typical performance appraisal system, service businesses are more likely to have appraisals based on performance over shorter periods of time (i.e. monthly, quarterly), to employ monetary incentives (i.e. commission, bonus, rewards), and to use quantitative criteria.
Manufacturing businesses are more likely, on the other hand, to utilize performance appraisals as a means toward long-term retention of personnel (i.e. educational training) and to employ qualitative criteria in appraisals.
The rapid growth of the service industry and the slower growth of the manufacturing industry in Taiwan are reflected in different kinds of development in these two industries. According to the official Directorate-General of Budget, Accounting, and Statistics (2002), in the service industry the number of employees rose from 1.181 million in 1980 to 2.654 million in July 2002. But during the same period, the number of labor employed in the manufacturing industry rose merely from 2.036 million to 2.382 million. As for compensation, the average wage in the service industry was NT$39,166 per month in 1997, higher than the average wage of NT$38,654 for all industries. In the same period the average wage was only NT$35,275 in the manufacturing industry, a difference of NT$3,891(equivalent to US$120) compared to the service industry. As for working hours, the average working hours in the service industry in 1997 was 187.7 hours per month while the manufacturing employees worked an average of 210.5 hours per month.
From this comparison, it is apparent that in Taiwan at least the service industry not only offers higher wages but also shorter working hours than the manufacturing industry. These differences can perhaps account for the fact that more people have been attracted to the service industry. In a span of 18 years, an increase of 124.7% in the workforce was recorded in the service industry. The manufacturing industry showed only a 17% growth for this same period. From the above statistics, Taiwan appears to be in a transitional stage during which the manufacturing industry is shrinking while the service industry is growing.
This study is based on a questionnaire survey. The sampling frame employed in this study was taken from “The Largest Corporations in Taiwan 2002”, edited and compiled by the China Credit Information Service, Ltd. 1, 000 of the ‘top companies’ from the service industry and the manufacturing industry served as the population of this study, so that the research results can be regarded as representative of what is happening in large enterprises throughout Taiwan. 60 companies from service and manufacturing industries were then selected at random from these 1, 000 companies for a survey questionnaire. Each company selected received ten questionnaires for their staff to complete. The questionnaires were followed by a succession of telephone contacts. 17 companies from the service sector and 24 twenty-four from the manufacturing sector responded by returning their questionnaires. A total of 328 valid questionnaires were received from the 41 companies that responded, 54.67% of the total number of questionnaires.
Analysis of Results
The comparison of the performance appraisal systems employed in the service and the manufacturing industries was made in terms of six categories: appraisal purpose, appraisal personnel, appraisal criteria, appraisal methods, appraisal timing, and appraisal feedback. The statistical analysis tools used to the differences found were the t-test and cross tabulation. The results are stated below.
Typically, performance appraisals are either directed primarily at administrative or developmental goals. The former means that the managers will use the information as a guideline in making decisions related to promotions, transfers, salaries and fringe benefits. A correct decision depends on the information derived from the performance appraisal. The performance appraisal also ‘informs’ employees how their performance is regarded by their managers, as a result of which they can modify or change their performance. Results showed that the service industry is more concerned about “administrative purposes” averaging 4.2236, higher than the manufacturing industry’s 3.8954, a difference that is significant at the 0.001 level. Also the manufacturing industry places greater emphasis on “developmental purposes” averaging 2.5880, higher than service industry’s 2.2703 with a difference that is significant at the .010 level (see Table 1 ).
This study also revealed that the service industry scored 6.4553 and 2.2520 with regard to “salary administration” and “decision on layoff respectively. These scores were higher than the manufacturing industry, which scored 5.8214 and 1.7347 respectively. This result can help explain why the service industry tends to more use the performance appraisal more directly for salary and employment decisions than the manufacturing industry. The manufacturing industry scored 2.9439 in “assistance in goal identification”, higher than service industry which scored 2.3984, suggesting that manufacturing industry is more concerned about setting up working goals for its staff. From these results it seems that firms in the service industry find performance appraisals more useful for “administrative purposes” while forms in the manufacturing industry find them more helpful for “developmental purpose”.
The personnel who did the performance appraisals in this study included supervisors, employees themselves, peers, subordinates and customers. Our analysis indicated that there is no noticeable difference between service and manufacturing industries in terms of the different types of personnel involved in the appraisal process. Supervisor appraisals were employed more often than appraisals by other kinds of personnel, 96% of the time in the service industry and 98.5% in the manufacturing industry. The proportion of self-appraisals used in the service industry was 28%, while in the manufacturing industry it was 37.4%, ranked second among all the appraisals methods. The proportion of peer-appraisals used in the service and manufacturing industry were 7.2% and 4.9%, respectively. Peer-appraisal occupied the third position among all the appraisal systems.
The proportion of subordinate-appraisals used in the service industry was 4%. In the manufacturing industry subordinate-appraisals were only 1% of the total. The proportion of customer appraisals in the service industry was 5.6%. In the manufacturing industry the proportion was 3.9%. Customer-appraisals ranked in the 4th position for all appraisals. From these results, it is clear that supervisor and self-appraisals are the most popular methods adopted in the service and manufacturing industries. However, there is no noticeable difference between these methods in terms of how often they are used by firms in the two kinds of industries (as seen in Table 2).
Performance appraisal criteria are usually divided into two dimensions: “quantitative vs. qualitative” and “process vs. outcome” They have also been further classified as “quantitative outcome criterion”, “qualitative outcome criterion”, “quantitative process criterion”, and “qualitative process criterion”. In the present study quantitative outcome criteria were preferred more in the service industry, with an average score of 2.0462, higher than the manufacturing industry, which scored 1.7948. The difference was significant at the 0.040 level. Qualitative outcome criteria were is preferred more in the manufacturing industry, which had an average score of 3.5348, higher than service industry, whose average score was 3.2374. The difference is significant at the 0.034 level (Table 3).
With regard to the other appraisal criteria, the service industry scored 3.6050 for “goal-accomplishment rate” and 2.5546 for “attendance”. These scores were higher than the manufacturing industry’s scores of 2.9900 and 1 .9254. These findings suggest that the service industry is more concerned about goal-accomplishment rate and attendance record. The score for the manufacturing industry for “judgment” was 2.9453, higher than the service industry score, suggesting that the manufacturing industry is more concerned about its staff’s judgment-making ability.
Performance Appraisal Methods
This research also investigated performance appraisal methods, by asking the chosen companies five questions in the questionnaire. (1) Does the supervisor inform the staff in advance of the standards in the performance appraisal? (2) Are appraisal methods directed at rankings (person vs. person) or ratings (person vs. scale)? (3) Is the performance appraisal based on an itemized appraisal or a whole appraisal? (4) Does the grading depend upon a forced distribution? (5) Does the appraisal report contain an essay or a critical incident report?
Based upon the above questions, an analysis of the results reveals that there is not much difference between service and manufacturing industries. In the first place, as to whether staff are informed in advance of the standards, the percentage of occasions when this was done in the service and manufacturing industries were 42.7% and 42.8% respectively, which are similar to each other, and are both below half of the possible times. Second, with regard to whether the appraisals are directed at rankings or ratings, the rates (how often appraisals are directed at one or the other) are 59.7% and 55.1% for rankings, and 40.3% and 44.9% for ratings, in the service and manufacturing industries respectively. Third, whether appraisals are based on items or the whole scale, the service industry and manufacturing industry had respective scores of 64.8% and 63.3% for items, and 35.2% and 36.7% for the whole scale. Fourth, the rates for whether the grading depended on a forced distribution or not, were 71.2% in the service industry and 75.3% in manufacturing industry. Fifth, the rates regarding whether or not the appraisal contained an essay rather than a critical incident report were, 58.6% for the service industry and 68.1% for manufacturing industry (Table 4).
This research found revealed no significant difference in respect of the timings of appraisals between service and manufacturing industries. Both industries are inclined to a annual appraisal, the proportion of appraisals made on this basis being 45.2% and 41.8% in service industry and manufacturing industry respectively. As for half-yearly appraisals, the rates were 33.1% in the service industry and 36.7% in the manufacturing industry. The proportion of appraisals based on performance over the particular period (rates) were all relatively low or small for monthly, quarterly and anytime periods, less than 10% in both the service and manufacturing industries. In service industry, only 7.3% of the appraisals were based on performances over a month, 5.6% over a quarter and 8.9% for anytime. In the manufacturing industry, the respective rates were 8.2%, 8.7% and 4.6% for (Table 5).
For performance appraisal feedback, the interviewed companies were asked two questions. First, is an appraisal interview conducted after the performance appraisal? Second, is there a complaint channel for employees who are dissatisfied with the appraisal process or result? The results indicate that there was no significant is no difference in the proportions of companies conducting appraisal interviews (after performance appraisals) and having a complaint channel for dissatisfied employees between service and manufacturing industries. The rates for ‘appraisal interviews’ were low, 30.6% in the service industry and 35.5% in manufacturing industry. Only 28% of the companies in the service industry set up a complaint channel for employees dissatisfied with results and 30% of companies in manufacturing industry. These findings suggest that in neither the service nor manufacturing industries attach much importance to performance appraisal feedback (Table 6).
According to the results of this study, significant noticeable differences do exist in purposes of appraisals and the criteria used in appraisals between firms in the service industries and those in manufacturing industries. However, there is little difference in appraisal personnel, appraisal tools, appraisal timing, and appraisal feedback between firms in these two industries. The following tentative conclusions can be drawn from the results of this study: The service industry pays more attention to the administrative purposes of appraisals, while manufacturing industry emphasizes developmental purposes. In addition, there are a number of differences between service and manufacturing industries in other aspects of performance appraisals. For instance, the service industry tends to make use of the information derived from the performance appraisal more often for administrative purpose, especially for “salary administration” and “decision on layoff. The manufacturing industry tends to use performance appraisal information more often for developmental purposes, particularly for “assistance in goal identification”. In addition, the service industry is more concerned about quantitative outcome criteria, while the manufacturing industry emphasizes qualitative process criteria more often. Quantitative outcome criteria are adopted more frequently in the service industry than in the manufacturing industry, particularly in the assessment of “goal-accomplishment rates”. At the same time, qualitative process criteria, particularly with respect to the “judgment ability” of employees, are used more often in the manufacturing industry. Finally, it was found that the service industry attaches greater importance to the “attendance records” of employees than the manufacturing industry.
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National Taipei University, Taiwan
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