Is your performance management system supporting or undermining an ethical culture?

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The sale of PPI is an example of how target setting can create perverse incentives so that staff focus only on achieving results and don’t stop to think whether what they are doing is right. According to the Financial Conduct Authority, sales staff at Lloyds Banking Group were put under pressure to hit targets in order to get bonuses or avoid being demoted. This led to PPI policies being sold inappropriately. ‘Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation’, the FCA commented. The ‘ends’ did not justify the ‘means’. So far, banks have earmarked over £22bn to compensate the people wrongly sold PPI. Many companies suffer from cultures that put so much emphasis on profit that employees feel obligated to put short-term gain ahead of other considerations, such as ethical behaviour. The result can be catastrophic, both in terms of reputation and financial risk. 

It is critical for employees to be assessed and rewarded based on how they achieve their goals; not just on what they achieve. While there is nothing new in measuring ‘what’ employees achieve, measuring how they achieve it is more complex. Does your performance management process ask whether they reach their goals with integrity and by following the company’s core values? Compliance with the law is a necessary but insufficient yardstick by which employees should be measured.

The way that people are assessed, compensated and rewarded has ramifications for both what an organisation achieves and how it achieves it. When it comes to wanting to encourage an ethical culture, performance management can be part of the solution – but too often it is part of the problem. 

Why is this so? Aligning performance management with corporate values and ethical commitments does pose some unique challenges. It is important that the ethical dimension is integrated into overall performance management and is not an additional or separate process. In addition to the usual issues confronting any performance management process - such as defining SMART goals, training managers to give effective feedback, creating a simple but effective process - the measurement of ethical behaviour encounters resistance due to the apparently subjective nature of what is being measured. Managers may feel unable to judge behaviour that cannot be quantified. 

These concerns must be addressed if the performance management process is going to sustain an ethical culture and promote values-driven behaviours. Adequate training must be given to all managers so that they know what they are looking for and why.

This implies the need for HR professionals who are committed to developing and implementing well functioning tools and materials to support the process, and providing training. It also requires a good relationship between the ethics and compliance function and HR in order to create meaningful descriptions of behaviours and competencies. When embedding ethical values into organisational culture, the roles of the company ethics and HR functions frequently overlap. Co-operation is paramount. Adequate support from senior management is the key to making this happen. 

While there has been significant improvement in online systems available to companies to track performance, their usability is worth attention because busy managers faced with overly complex and/or bureaucratic forms will resent the time and complexity and will be unlikely to have a positive attitude towards the entire process if this is the case. 


Any performance management process requires a degree of employee training. Good practice would involve the addition of some specific guidance and training to help engage employees understand the ethical aspects of performance, and managing or leading so as to support ethical objectives. 

Training is especially important when incorporating the evaluation of ethical performance into the review process, as it requires a combination of objective measures and subjective judgements. While it is relatively easy to measure performance against quantifiable goals such as sales targets, it is more complex to establish agreed ways of judging performance against subjective behavioural goals or different ideas about what an ethical value or commitment means in practice. Managers may be reluctant to stray from quantifiable measures. Training in the skill of gathering and delivering constructive feedback and helping managers to learn to recognise and attempt to neutralise their own cognitive biases that can get in the way of an honest appraisal will assist in ensuring that performance management is fair. This includes:

  • setting appropriate goals
  • identifying relevant behaviours that reflect the company’s values within specific job roles
  • agreeing what will be monitored and how, and
  • defining relevant KPIs and SMART goals if required 

Findings from the CIPD’s spring 2014 Employee Outlook Survey show almost a third of employees believe that their current performance management systems are ‘unfair’. Real or perceived unfairness in the performance appraisal process can lead to an increase in unethical behaviour, as employees rationalise their actions by not having been fairly treated by their supervisor. For example, if a salesman rated as underperforming by his manager believes that he has been unfairly judged and thereby unfairly deprived of his bonus, he may rationalise cheating on his expense report because he feels he deserves the money. 

Manager bias can influence performance ratings for individuals in a variety of ways.. Research has shown that employees who were successful in terms of outcomes (e.g. financial performance) benefitted from positive bias and the tendency of assessors to ignore, discount or reinterpret unethical behaviours to fit their positive categorisation of the person. Alternatively, if a person was attributed by their manager with a negative trait (e.g. laziness) but were still performing well, they were given lower evaluation scores than those that were perceived as hard working yet incompetent.

Managers often judge more harshly poor performance deemed to be due to internal rather than external factors. For example, the individual who initiated unethical conduct (internal) might be judged more harshly than the bookkeeper that, fearing for their job, aided and abetted it (external). The manager who could have shipped the products on time but failed to and consequently made a facilitation payment to clear customs before they spoiled (internal) might be judged more harshly than someone who had no control over a production schedule (external). 

A liked employee will tend to be judged as more ethical, whereas a disliked employee will be judged as less so, regardless of circumstance. Often subjective judgements are not acknowledged in performance appraisal dialogues and unconscious biases are operating. Making it clear and explicit how employees are being appraised is an important aspect of transparency. Where the aim is separately to judge ‘ends’ and ‘means’, biases like these must be identified through awareness training and neutralised to the greatest extent possible.

Another important tool in appraising behaviour of any type, including ethical behaviour, is a properly conducted 360-degree feedback process that collects information from a wide range of people. This may help to eliminate the effect of bias.

Including ethics in your appraisal process

The IBE’s 2013 survey exploring corporate ethics policies and programmes found that less than 60% of FTSE 350 companies include ethics in employee performance appraisals. Yet performance management has a major influence on how employees perceive the company they work for and therefore on how they behave. It can be an important part of the process of weaving ethical behaviour into the fabric of corporate culture. Although performance management by itself cannot guarantee behavioural change, it is one of the levers that can be used to support and reinforce efforts to change organisational culture.

Although Peter Drucker never actually said, ‘If you can’t measure it, you can’t manage it’, he did believe that measuring results and performance was key to organisational effectiveness. Ignoring ethics when measuring overall performance not only risks serious ethical violations – it can lead to a toxic internal culture with low employee engagement.

Performance management plays important role in embedding ethical values and behaviour in the culture of the organisation. Performance conversations are an excellent way to reinforce desired behaviour year after year. Knowing that they will be appraised on how they achieve their results as well as what they achieve will increase employees’ focus on the ethical questions they may confront in their day-to-day business.

Ruth Steinholtz is an internationally experienced legal professional, executive coach and former general counsel with many years of practical corporate experience as a senior manager and leader in the fields of ethics and compliance in various industry sectors. She is co-author, with Nicole Dando, of Performance Management for an Ethical Culture, one of the good practice guides from the Institute of Business Ethics.



# oviya 2015-12-17 11:35
Thanks for sharing and it was very informative..I need more tips from your side..I am working in Erp Development Company In India

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