School of Business and Economics

Anja AnsénAlexandre BankowskiLuca Castellanza

Employee Performance Assessment

School of Business and Economics

1984, Austin, Texas

125,000 employees

$56 billion revenue in

2013

Fastest growing and

large integrated IT

company

School of Business and Economics

Principal-agent problem

Pay-for-Performance (“PFP“)o Discussion

Other methodso Discussion

Conclusion

School of Business and Economics

Companies need to achieve competitiveadvantage

Three ways to achieve competitiveadvantage:

Cost leadership Benefit leadership Focus

Bases of competitive advantage

Introduction PFP Other methods Conclusion

Superior ressources + organizational capabilities

School of Business and Economics

Introduction PFP Other methods Conclusion

• Strategy of a firm decided by the management (principal) is implemented by the employees (agent)

• Principal-agent relationship can lead to “Agency Problems“ whentwo conditions are met:• Objectives of principal and agent are different• Actions/informations of the agent are difficult to observe

Necessary to mitigate the “Agency Problems“: monitoring and/or performance-based incentives

School of Business and Economics

Customer value innovation (customization and quick responsiveness)

Carefully developed supply chain processes (efficiency and quick delivery)

“Listen. Learn. Deliver. That‘s what we‘re about.“

Introduction PFP Other methods Conclusion

School of Business and Economics

Introduction PFP Other methods Conclusion

What mechanisms allowed Dell to assure that its employees (agent) implement the specific ambitious strategies desired by the responsible managers (principal)?

School of Business and Economics

1

School of Business and Economics

Theory: PFP Incentives

Alignment of interests of principaland agent

Different forms: – bonus– commission– stock options – “employee of the month“ parking

Introduction PFP Other methods Conclusion

School of Business and Economics

Commission providing mutual benefits

Introduction PFP Other methods Conclusion

Theory: PFP Incentives

Logic of a cost of effort function: Employees put high effort in their work without extra compensation to a certain degree, but demand extra compensation for additional high effort beyond

Effort e

$

$ 900 + 10% (100e)$1,000 + 10% (100e)

40 50

C(e)

School of Business and Economics

Before 2001, Dell provided only PFP incentives to align employee and firm interests

Employees were unhappy and Dell was facing its first major crisis

Introduction PFP Other methods Conclusion

Discussion question:

Why do you think that PFP incentives alone could not be sustained as a way of aligning interests at Dell?

School of Business and Economics

Potential Drawbacks of PFP

Noise, affection by randomness (higher risk)

Risk aversion of employees

Certainty equivalent of risk: indifference between risky and certain payment

Risk premium = expected value of a risk – its certainty equivalent

Multitasking (mere focus on measured criterion)

Rewarding activities the firm does not want to be performed

Introduction PFP Other methods Conclusion

School of Business and Economics

2

School of Business and Economics

Team Incentives and 360° Peer-review are added to PFP

Subjective measures (inputs and processes) are added to objective measures (outcomes)

Implicit contracts: workers are evaluated on the basis of their effort rather than performance

Introduction PFP Other methods Conclusion

Changes adopted by Dell

School of Business and Economics

• Specific Objectives are tailored for every team:

– Teams are rewarded on the basis on the team objectives and are always aware of their progress

Introduction PFP Other methods Conclusion

Team Incentives

Risks include: free-riding + conflicts among teams

• The overall strategy, known by every employee, is broken down in micro-objectives assigned on a per-team basis

School of Business and Economics

• Every employee, including Dell and the CEO, is subject to a 360° peer-review twice per year

• When deciding who will be assigned the incentive bonus, HR takes into account opinions of colleagues, team leader and subordinates

Introduction PFP Other methods Conclusion

360° Peer-Review

Risks include: influence activities + rating compression

School of Business and Economics

Introduction PFP Other methods Conclusion

Discussion question:

In what ways did the combination of 360° peer review and team incentives reduce the risks of both methods taken singularly?

School of Business and Economics

Introduction PFP Other methods Conclusion

Advantages of Dell‘s formula

Conflicts among teams

Rating Compression

Free-riding

Influence Activities

• Multi-level peer review allows power and interest sharing

• Introduction of a third-party evaluator (HR Department)

• Peers evaluate the person and his or her way to contribute

• Likelihood is reduced due to a more collaborative culture

School of Business and Economics

Drawbacks of the PFP method: Randomness Multitasking Counter-productive activities

Resulted in employee discontent and poor performances

Introduction PFP Other methods Conclusion

Discussion question:

In what ways did the introduction of the two new measures decrease the drawbacks of PFP only?

School of Business and Economics

Introduction PFP Other methods Conclusion

Dell‘s solution to PFP drawbacks

Randomness

Multitasking

Counter-productive activities

Poor performance

• Poor-performance risk is shared in the team and reduced

• Peer reviews with supervisors and third party evaluate in depth

• Peer reviews evaluate also personal and relational factors

• Knowledge sharing, problem solving, new ideas due to improved communication

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Introduction PFP Other methods Conclusion

Strong culture: shared objectives and attention to individual needs

Power-sharing: commitment and reduced employee turnover

Small teams: efficiency, effectiveness and innovativeness despite huge size

School of Business and Economics

3

School of Business and Economics

Introduction PFP Other methods Conclusion

What mechanisms allowed Dell to assure that its employees (agent) implement the specific ambitious strategies desired by the responsible managers (principal)?

PFP Team incentives

360° peer-review

School of Business and Economics

Introduction PFP Other methods Conclusion

Impact of the new approach

Dell’s net revenue from 1996 to 2013

+72%

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Questions and Comments

School of Business and Economics

School of Business and Economics

References

http://www.dell.com/http://www.statista.com/statistics/264911/dells-net-revenue-since-1996/http://www.bloomberg.com/bw/stories/2004-11-21/michael-dell-thinking-out-of-the-boxhttp://www.achievement.org/autodoc/page/del0bio-1

BAGGA, Teena y GEETANJALI, Khanna . "Dell's technical-support staff have the power to do more: Recruitment and training ensure quality customer service". Human Resource Management International Digest. 2014, vol 22, num. 6, p. 7-9. SINGH, Jasmeet. "Performance assessment is a two-way street at Dell: Employees feed back high-quality information on their managers". Human Resource Management International Digest. 2014, vol 22, num. 5, p. 11-13.

"There's something about Dell: How to look good and stay healthy in middle age". Strategic Direction. 2005, vol 21, num. 9, p. 8-11.

"Double act performs well for Dell: Top jobs change but team' the same". Strategic Direction. 2004, vol 20, num. 10, p. 5-7.

Besanko, D., Dranove, D., Shanley, M., Schaefer, S., Economics of Strategy, International Student Version, 6th edition