Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji 2002 25

PERFORMANCE MANAGEMENT AND THE
PSYCHOLOGICAL CONTRACT IN THE
AUSTRALIAN FEDERAL PUBLIC SECTOR
MICHAEL O’DONNELL AND JOHN SHIELDS*

T

his study explores employee responses to individual performance management
practices in two culturally dissimilar agencies of the federal public sector, the
Department of Finance and Administration (DOFA) and the Australian Defence
Force (Army). In so doing, it invokes Rousseau’s distinction between ‘relational’ and
‘transactional’ psychological contracts and Guest’s model of the causes, content and
consequences of the psychological contract. In DOFA, neither system processes nor
outcomes have lived up to the high employee expectations built up by management
discourse about a new transactional culture of high rewards for performance excellence.
Conversely, in the Army, expectations are less inflated, the constraints on promotionbased rewards are well understood and the system of developmental appraisal provides
solid reinforcement for the prevailing hierarchical culture with its characteristic
emphasis on a relational psychological contract. These findings raise doubts about
whether individual performance pay is appropriate for public sector staff. They also
suggest that the achievement and maintenance of a positive psychological contract
requires close attention to the full range of causal factors, including human resource

practices used as well as the modes of organisational communication in use, the contours
of organisational culture, and employees’ prior experience and expectations.

INTRODUCTION
Since the early 1990s, there have been a series of attempts to transform employment relations across the various agencies of the Australian Public Service (APS)
in line with the tenets of strategic human resource management (HRM)
(O’Donnell 1998; O’Donnell & O’Brien 2000). Similar initiatives have also been
applied, albeit less rigorously, in other areas of Australian federal public sector
employment, including the Australian Defence Force (Army). In the APS
these initiatives have been informed by three broad objectives: (i) replace the
traditional culture of career service with a new culture of high performance;
(ii) ‘align’ employee competencies and contributions more closely with each
agency’s corporate mission and objectives; and (iii) individualise the employment
relationship itself (Management Advisory Committee 2001). While a range of
human resource enablers has been applied in pursuit of these ends, the most widely
* Michael O’Donnell, Senior Lecturer, School of Management & Policy, University of Canberra,
ACT 2601, Australia. Email: michaelo@management.canberra.edu.au John Shields, Senior
Lecturer, Work and Organisational Studies, The University of Sydney, NSW 2006, Australia.
Email: j.shields@econ.usyd.edu.au

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used practices have been behaviourally-based performance appraisal and individual
performance-related pay:
Performance management is an essential tool that is relevant at all levels in
all Australian Public Service (APS) agencies. It provides a means to improve
organisational performance by linking and aligning individual, team and organisational objectives and results. It also provides a means to recognise and reward good
performance and to manage under-performance (Management Advisory Committee
2001: 7).

As part of this process, responsibility for negotiating wages, determining staffing
levels and allocating expenditure has been devolved to agency heads and the
relevant Minister. As such, accountability for effective performance and reward
management now lies with individual agencies rather than with centralised
authorities.
The new paradigm represents a fundamental shift in management approach
to employee motivation in the federal public sector, particularly the APS. Invoking
private sector precepts of cost effectiveness and strategic integration of human
resources, this new paradigm aims to transform the image of the APS line
employee from that of public servant to one of strategic contributor (Management
Advisory Committee 2001). The motivational centrepiece of the APS performance management model is performance-related remuneration. Individual
performance management practices (performance-related pay in particular) are
represented as key devices for affecting cultural change. As the Management
Advisory Committee (2001: 24) has noted: ‘To view culture as absolute and
immutable can miss an opportunity to use performance management systems as
a lever for change’.
The paradigm has undoubtedly had a dramatic impact. The Public Service and
Merit Protection Commission has explored the extent to which a culture of
performance management, a key element of the APS values enshrined in the
Public Service Act 1999, was evident across the APS. The Commission’s State of

the Service Report for 2000–01 noted that its analysis of collective agreements
in the APS demonstrated that 94 per cent contained a system of performance
review that provided scope for performance feedback, 95 per cent identified links
to organisational objectives, 99 per cent contained provisions addressing poor
performance while 100 per cent identified links to a performance-related
payment (2001: 115).
Yet the application of these individual performance management practices
has aroused considerable controversy, and research to date indicates that the
application of such methods to the work of public service administrative and
professional employees is problematic. For example, the Public Service and
Merit Protection Commission noted that ‘. . . there appears to be a gap which
agencies need to address between the supportive rhetoric of senior management,
including the values espoused in corporate documents, and the reality of on-theground application and behaviours’ (Public Service and Merit Protection
Commission 2001: 119). Moreover, in mid-1999, the Australian Senate referred
concerns regarding the impact of performance-related pay arrangements on

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transparency and accountability in APS agencies to the Senate Finance and Public
Administration References Committee. After a lengthy inquiry, the Committee
recommended that performance bonuses be abandoned in the APS:
The committee does not believe that one-off individual performance bonuses have
any place in a public service, particularly when they are secret. It believes that in the
majority of public service activities individual performance cannot be assessed with
sufficient rigour and fairness to warrant linkage to an individual reward (Senate
Finance and Public Administration References Committee 2000: 56–7).

In addition, the References Committee believed there was a need for greater
transparency and accountability in allocating performance payments, including
the amounts paid to staff at different levels and the aggregate amount spent on
performance payments by agencies (Senate Finance and Public Administration
References Committee 2000: 69).
Even so, the Australian federal public sector is an extremely heterogeneous
entity. The APS alone comprises approximately 100 agencies, both departments

of state and statutory bodies, with total number of 118 644 employees in June
2001 (Public Service and Merit Protection Commission 2001: 31). Our understanding of how the new performance management practices are received and
responded to by employees in different federal agencies remains limited.
Moreover, given the wider scope for such agencies to tailor performance and
reward practices to suit their own particular requirements and priorities, there
is a need for organisation-specific investigation of attitudinal and behavioural
outcomes according to practice type, mode of implementation, employee
expectations and organisational context.
The present study explores employee responses to performance management
practices in two culturally dissimilar agencies of the federal public sector: one
civilian, the other military. The agencies are the Department of Finance and
Administration (DOFA) and the Army. Evidence of employee responses was
drawn from the 2001 biennial Defence Force Attitude Survey (see Appendix A),
a 1999 survey of union members’ responses to performance management
conducted by the Community and Public Sector Union (CPSU) and interviews
conducted with managers and employees in both organisations. In the case of
DOFA, interviews were conducted with two union officials on three occasions
between 1998 and 1999. In addition, interviews were conducted with five
employees between November 1998 and October 2001, while comments
relating to DOFA contained in the CPSU survey on performance management

were also utilised. The views of DOFA management regarding performance
management were gleaned from evidence provided to the Senate inquiry into
Australian Public Service employment matters and from the Department’s annual
reports. In relation to the Army, data relating to performance management issues
were drawn from the 2001 Defence Attitude Survey that received 3314 usable
responses from army personnel – a 50.7 per cent response rate. Interviews were
also held with a Defence Department psychologist responsible for performance
management matters, a senior Army personnel manager and two Army officers
in October 2001. The interviews were semi-structured in format and ranged in

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length from one to two hours. Where possible, the interviews were taped.
In assessing these responses, the present study draws on the concept of the
‘psychological contract’ and theories of ‘organisational justice’ as a means of
understanding how employees perceive, receive, and respond to HRM practices
in particular contexts.

INDIVIDUAL

PERFORMANCE MANAGEMENT IN PUBLIC SECTOR
EMPLOYMENT

The available international research evidence on outcomes from individual performance management practices in public sector employment sounds a note of
caution, particularly in relation to the use of individual performance pay. Marsden
and Richardson’s (1994) survey of the performance-related pay scheme in
operation in the British Inland Revenue Service (IRS) found that it had, at
best, limited motivational effect because of widespread employee concerns
regarding the procedural fairness of the system (1994: 253–4). For example, many
employees believed that a quota applied to the number of top rating scores and
that there was favouritism in the allocation of ratings (Marsden & Richardson
1994: 257–8). O’Donnell’s study of the attempt to apply performance bonuses

to senior officers in the APS (O’Donnell 1998) found that, far from contributing
to improved overall performance, the initiative proved dysfunctional and disruptive. It rewarded favourites, undermined teamwork, was perceived as inherently
subjective and substantially increased managerial prerogatives at workplace
level. The problems of quantifying and measuring individual contributions
were particularly evident in the case of those working in policy areas. Further
research by O’Donnell and O’Brien on employee perceptions of performancerelated pay in the APS found considerable disquiet among many employees
regarding the allocation of performance ratings, the process of moderation, or
standardisation, of ratings across an agency, limited knowledge of appeals
procedures and further evidence that performance bonuses can prove divisive
(2000: 31). Budget limitations in public sector performance pay schemes may
further undermine employee morale in as much as achieving a performance
rating that equates to a bonus payment may amount to a nil-sum game in which
securing a bonus necessarily comes at the expense of other employees (Perry 1995:
110). The Organisation for Economic Cooperation and Development (OECD)
has also questioned whether pay increments and bonuses represent a key form
of motivation for public sector staff, particularly at more senior levels (OECD
1993). Moreover, recent research by Guest and Conway indicates that while
British central government workers have a high exposure to performance appraisal
and pay, they are also among the least satisfied of all British workers (Guest 2002).
Yet, the story is not wholly negative. Gaertner and Gaertner (1985: 18) found

that performance appraisals that emphasise the developmental needs of public
service managerial employees had considerable potential to increase employee
performance. There is also evidence that goal-setting approaches to individual
performance management in public sector employment may be more effective
in achieving positive outcomes than approaches driven by behaviourally-based
performance appraisal. With goal setting, employees are directly involved in

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establishing performance criteria and targets, which may give rise to stronger
feelings of ownership and self-efficacy (Locke & Latham 1991). In a study of a
merit pay scheme for managers in the British National Health Service (NHS),
Dowling and Richardson (1997: 348) reported that, unlike many other public
sector schemes, the NHS scheme appeared to be ‘modestly successful’. Using

the results of an attitude survey of the managers affected, they suggested that the
NHS scheme, on balance, had a positive motivational effect. Like the dysfunctional scheme applied in the Inland Revenue Service, the NHS scheme combined
performance appraisal and goal-setting to determine performance pay outcomes.
The NHS managers were particularly positive about the way in which
their scheme delivered role and goal clarity, good feedback and support from
superiors – everything the IRS scheme failed to do. They were also less positive
about the performance-related rewards, which most saw as either inadequate or
inappropriate. A parallel study of managers’ and professionals’ perceptions of an
individual performance management system in a NHS hospital (Redman et al.
2000) identified considerable organisational and individual benefits accruing from
its use. Two-thirds of employees felt that the system contributed positively
to their personal motivation and job satisfaction, with many remarking that the
performance interview represented a meaningful opportunity for a one-on-one
with their manager. By the same token, views about the performance-related pay
component of the system were largely negative. A particularly strong theme to
emerge from the study was the tension arising from performance pay being
individually based, even though performance itself was highly dependent on
team effort. Overall, Redman et al. (2000) concluded that while the system had
its problems, they were not insurmountable.
The extant research evidence, then, provides no clear endorsement for either
the case in support of, or the case against, the use of individual performance
management practices in public sector employment. The clearest message discernible in the available research evidence is that a combination of behaviourally
based appraisal and individual merit pay may be incompatible with the values
and attitudes of public sector employees. Overall, the available evidence indicates the need for a more sensitive and subtle investigation of the determinants
of employee reactions to particular practices in specific public sector contexts.
In the ensuing section we consider a conceptual framework for achieving this.

THE

PSYCHOLOGICAL CONTRACT AND ORGANISATIONAL JUSTICE

The ‘psychological contract’ has been defined by Rousseau as the individual
employee’s subjective perceptions of the mutual obligations between employer and
employee (1998: 665–6). It is characterised by bounded rationality in that it reflects
the employee’s incomplete, selective and possibly distorted view of the relationship (Rousseau & Ho 2000: 277–9). As such, it may overlap with, but also differ
from, and extend beyond, matters codified in written contracts of employment.
So the psychological contract both fills the perceptual gaps in the employment
relationship and shapes day-to-day employee behaviour in ways that cannot
necessarily be discerned from a written contract. A violation of the psychological
contract may elicit negative attitudinal consequences, including feelings of

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dissatisfaction, resentment, anger, mistrust, and betrayal. In turn, these emotions
may produce a range of negative work behaviours ranging from lower commitment and reduced effort to higher absenteeism, sabotage, and exit. A violation occurs when the employee experiences a discrepancy between the actual
fulfilment of obligations by the organisation and what it has previously promised
to do (Anderson & Schalk 1998: 643–4). Change heightens the possibility
of incongruity between promise and fulfilment and, hence, the potential for
perceived violation. In stable contexts, an existing psychological contract is
likely to be reaffirmed by custom, practice, and norms of contribution, with
substantial convergence between employer and employee understandings of
the basis of the exchange. However, as contexts change, so too will employer
expectations, employment practices, and employee perceptions of mutual
obligation.
In terms of Rousseau’s taxonomy of contractual types, the trend since the late
1980s has been a shift along the ‘contract continuum’ from ‘relational’ contracts
to contracts of a ‘transactional’ nature. Relational contracts are long-term,
entailing considerable investment by both parties in training and development
and a high degree of mutual interdependence, and involve rewards that are not
explicitly performance contingent. Transactional contracts, by contrast, focus
on short-term and monetised exchange, where rewards are explicitly tied to
individual performance and low membership commitment by the employee
(Rousseau & Ho 2000, 297–304). In general terms, the changes experienced by
employees in the federal public sector since the early 1990s can be said to have
involved a shift from a relational to a transactional contract regime. According
to Rousseau and others, where change of this type is associated with a perceived
breach of the relational contract, it is likely to have a range of negative consequences, including reduced levels of trust and commitment (Styles et al. 1997:
64). At the same time, relational contracts are far from being anachronistic.
Rousseau suggests that there are many examples of highly successful organisations
that maintain relational contracts with employees (Rousseau & Ho 2000: 300).
Rousseau’s relational–transactional taxonomy represents a meaningful way of
fixing and comparing the content of management-espoused forms of the
psychological contract.
Likewise, we believe that Guest’s extended model of the psychological contract
(from the employee perspective) represents a particularly useful way of understanding the attitudinal and behavioural impact of employment practices at
the level of the individual employee (Guest 1998: 659–60). Rather than
representing the phenomenon as a homogeneous state of mind, Guest identifies
three factor categories linked in a linear fashion: causes, content, and consequences. Causes, or inputs to the contract, include organisational culture, human
resource practices, prior experience, expectations, and work/life alternatives.
Content, or the state of the contract, has three main affective components: trust,
felt-fairness, and sense of ‘delivery on the deal’. Consequences include key
attitudes, such as job satisfaction/dissatisfaction, job security/insecurity, organisational commitment, and motivation, as well as the full range of work behaviour,
from interpersonal and work relations and prescribed task performance to

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attendance/absence and ‘organisational citizenship behaviour’; that is, behaviour
of an non-prescribed, extra-task nature (Guest 1998: 660–1).
Fairness perceptions, and how they are managed, are arguably central to the
state of the psychological contract. Employee perceptions about the fairness or
unfairness of any HRM practice will have a major influence on how they respond
to that practice and also how they relate to the organisation overall. Also known
as organisational justice perceptions, these feelings of fairness/unfairness can be
thought of as having two distinct but overlapping dimensions: distributive
justice and procedural justice (Beugre 1998). Procedural justice relates to the
perceived fairness of employment decision-making procedures and processes,
including those associated with determining reward outcomes. Procedural
justice considerations have particular salience in relation to performance
management practices such as individual performance appraisal and goal-setting.
Here, procedural fairness is said to require the use of role-valid and comprehensive
performance criteria, the accurate and consistent evaluation of performance, the
provision of feedback in a timely and constructive manner, and opportunity for
employees to voice their own views about their performance (Folger et al. 1992;
Gilliland & Langdon 1998). Distributive justice relates to perceptions of reward
equity in both absolute and comparative terms. The stronger the perception that
the rewards offered are inequitable in either absolute or relative terms, the greater
the potential for violation of the psychological contact. While procedural and
distributive justice perceptions are linked, organisational justice researchers
contend that procedural justice perceptions have a stronger influence on overall
perceptions of fairness, a positive psychological contract, job satisfaction,
organisational commitment and the demonstration of ‘organisational citizenship
behaviour’ (Cropanzano & Folger 1991; Greenberg 1996: 327–41).
By combining the insights offered by Rousseau’s relational-transactional
taxonomy, Guest’s extended model of the psychological contract, and the
organisational justice literature, we suggest that it is possible to arrive at a
more subtle understanding of worker responses to HRM concepts and practices,
including the individual performance management initiatives that have been
applied widely throughout the Australian public sector in recent years.

AGENCIES APART: CORPORATE CULTURE AND
THE ARMY

HRM

IN

DOFA

AND

One of the most powerful agencies in the APS, DOFA was established in October
1997 from the amalgamation of the former Departments of Finance and
Administrative Services. DOFA is responsible for financial management and
accountability across the federal public sector. It employs approximately 750 staff,
most of whom are based in Canberra. The corporate culture in DOFA resonates
with the values of the high performance paradigm while the espoused psychological contract closely resembles Rousseau’s ‘transactional’ archetype. Through
its performance management framework, DOFA aims to instil its workforce with
a ‘high performance’ work culture (DOFA 1997). DOFA’s approach to employment relations places a strong emphasis on individualism and senior management
remain reluctant to foster a more collective relationship with employees which

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might involve trade unions. Since the 1997 DOFA certified agreement expired
in 1999, the Department has refused to negotiate a second agreement. The old
agreement was negotiated directly with employees under section 170 LK of the
Workplace Relations Act 1996, though the Community and Pubic Sector Union
agreed to be a signatory to the agreement. DOFA believed that there were
further flexibilities that it could extract from the certified agreement while ‘DOFA
employees have not expressed any significant interest in a new certified agreement’ (DOFA Submission, 2000). As at June 2001, the DOFA certified agreement covered just 38 per cent of the Department’s employees, whereas 62 per
cent were employed on Australian Workplace Agreements, the individual
non-union agreement stream introduced under the Workplace Relations Act 1996
(DOFA 2001: 71). DOFA management has been unwilling to concede the need
for a new collective arrangement ‘as [industrial] issues raised may be of an
individual nature and more appropriately resolved at the individual level’
(Morawska-Ahearn 2000a).
The chief architect of the DOFA approach, Dr Peter Boxall, has now moved
on from his position as Secretary of DOFA, a post that he assumed in 1997. In
January 2002, following a reshuffle of secretarial positions across the APS, Boxall
took up a new position as head of another ‘leading edge’ Department, that of
Employment and Workplace Relations (Burgess 2002). As such, a review of the
performance management regime that Boxall championed during his four years
as Secretary of DOFA is both opportune and appropriate. The DOFA performance management system used a behaviourally anchored rating scale which
required each employee to be evaluated against five ‘DOFA leadership behaviours’ (expertise in the field, creativity, will to win, ability to learn and people
management) on a scale that ranged across four levels from ‘unsatisfactory’ to
‘superior’. At the lowest level (unsatisfactory) employees were judged to have
either ‘failed to deliver’ or delivered ‘poor results’ against their responsibilities.
At the next level (borderline) staff were judged to have ‘barely met’ their required
job tasks. For a ‘competent’ rating, staff were required to demonstrate ‘good
dependable performance’ with consistent work effort. They were also expected
to make ‘a solid contribution to organisational objectives’. For the highest
rating (superior) employees were expected to perform to a level that ‘significantly
exceeds expectations . . .’ and to generate ‘excellent to outstanding results’ (DOFA
1997: 6). The performance management framework in DOFA commenced
with employees negotiating a performance agreement with their supervisor
at the beginning of the annual appraisal cycle. The agreement incorporated
the above behavioural indicators, which were used to assess employee work
performance at the end of the cycle. Aggregate ratings were linked to an annual
cycle of formal performance planning and individual performance bonuses.
DOFA management claimed that its approach has been extremely successful
and provided the exemplar for other APS agencies:
DOFA’s employment framework was unique when it was introduced three years
ago but other agencies are now starting to copy elements of it. Our focus is on
performance at both the organisation and the individual level and we have evidence
to show that our system is working well at both levels. At the organisational level,

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the average rating under our performance management framework has steadily
increased over the three years that it has been in place and the percentage of staff
who are assessed as borderline or unsatisfactory under the program has dropped as
well. At the individual level, almost everyone in the organisation has received some
level of performance pay as a result of their individual performance (Sullivan 2000:
200).

The DOFA Annual Report for 2000–01 notes that during that year, 64 per cent
of staff were rated as competent, 35 per cent as superior and only one per cent
as borderline, while, for the first time in the system’s four years of operation,
there were no ratings of unsatisfactory. According to senior management, these
data signify that the overall performance of the organisation continues to improve
(DOFA 2001a: 70), although this apparent improvement may owe more to
rating score inflation than to any underlying improvement in performance. For
2000–01, more than $4 million was paid to 664 employees to recognise their ‘extra
contribution’ to the Department (DOFA 2001a: 72), or an average of just over
$6000 per recipient. For staff covered by the Department’s certified agreement,
performance-related payments equate to between 2 and 15 per cent of their annual
salary. In contrast, for employees on Australian Workplace Agreements: ‘There
is no minimum level and there is not an upper level’ (Sullivan 2000: 214).
Nevertheless, the Department maintains that a remuneration committee chaired
by the Secretary monitors the level of performance payments across the
Department and this guarantees that there are no ‘extreme examples’ (MorawskaAhern 2000b: 214). It is also noteworthy that, unlike many other agencies, DOFA
can afford to make such additional payments. In 2000–01, the Department had
an operating surplus of $188 million and returned $390 million to government
coffers (DOFA 2001b).
In the ADF, by contrast, the corporate culture remains hierarchical and still
largely seniority-based, performance is individually appraised but there is no direct
link to pay, and the espoused psychological contract closely resembles Rousseau’s
‘relational’ archetype. In 2002, the ADF, which covers the Army, Navy and Air
Force, had combined membership of some 50 000 full-time personnel, of which
Army personnel numbered 5015 permanent officers and 19 394 permanent
members engaged in other ranks (Nunn Review 2001: 5). In recent years, personnel levels have declined significantly in the ADF, from 68 123 in 1990 to 50 785
in 2000, a 25 per cent decline over the decade. This reduction has occurred
in response to policies such as the Commercial Support program, increased
commercialisation under the Defence Reform Plan, particularly in relation to
outsourcing activities, and an increased focus on improving labour productivity
(Department of Defence 2001a).
The distinctive features of military service mean that ADF members
experience significantly different employment arrangements to persons engaged
in other areas of paid employment. Military service involves a requirement
to undertake combat duties where necessary, as well as strict adherence to a
military code of discipline. This disciplinary code does not permit ADF
members to join trade unions or to engage in industrial action to improve their

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wages and conditions. Instead, the Defence Force Remuneration Tribunal was
established to set pay rates and allowances. In addition, military service requires
ADF members to undertake both long and non-standard hours at short notice,
to be separated from their families for long periods of time and to accept
regular postings to different locations. Military service also requires ADF
members to maintain a high level of physical fitness, while members experience
compulsory retirement at ages far lower than in other areas of paid employment.
For example, retirement for some officer ranks occurs between the ages of
45 and 50, though most ADF members can continue to serve until age 55 (Nunn
Review 2001: 36–7). Furthermore, ADF members do not have the same employment relationship as other employees. They are not covered by the Workplace
Relations Act 1996 and under the Defence Act 1903 they are not permitted to enter
into contracts of employment. According to the Nunn Review:
. . . they hold their engagement at the pleasure of the Crown or the Commonwealth.
That is, there is no contractual relationship between military personnel and the
Commonwealth and they are not, therefore, defined as employees at law . . . The basis
of military service is statutory, not contractual, and ADF personnel have no right
under the statute to negotiate their terms and conditions or insist they not be posted
or deployed, irrespective of their personal or family circumstances (Nunn Review
2001: 38).

Even so, there are parallels between this mode of service and the human resource
practices and issues typical of civilian employment. This is particularly so of
staff recruitment, retention and career development. A major concern for the
ADF is the recruitment and retention of skilled personnel. The ADF recruits
on the external labour market solely for entry-level personnel who receive
extensive training and career development. The ADF is reliant on a proportion
of these initial recruits committing themselves to a long-term career in order to
develop future leaders with the necessary knowledge, skills and experience. The
2000 Defence White paper recognised that the recruitment and retention of
skilled personnel represented a significant challenge for the ADF in coming years
(Defence 2000: Our Future Defence Force 2000). The rate of separations in 2001
stood at approximately 14 per cent and was being fuelled by the pressures placed
on the services to respond to numerous operational demands under circumstances
of skill shortages and inadequate levels of equipment (Nunn Review 2001: 10).
The Glenn Review (1995) also noted that separation rates were being maintained
by an uncompetitive pay structure. Retention problems have meant that actual
ADF personnel levels have fallen significantly behind the levels desired by the
government. For example, the desired level for 2000–01 stood at 53 555 though
actual personnel levels stood at 50 858 (Department of Defence 2001a).
The ADF conducts biennial attitude surveys of its members and the 2001
Defence Attitude Survey highlighted a skewing of perceptions on the part of
uniformed personnel, including those in the Army (see Appendix A). On one hand,
Army personnel were particularly positive about job satisfaction, their immediate supervisors and personal career development to date. Similarly, 63.2 per cent
believed that the Defence Service’s values were similar to their own, while
the overwhelming majority believed that morale in their unit was either good

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(40.6 per cent) or fair (33.8 per cent) (Department of Defence 2001c). As we
shall see, survey responses indicate that attitudes towards the Army performance
management system were generally neutral or positive. Conversely, Army respondents were far less positive about senior leadership performance, the impact of
military service on members’ family lives, the level of resourcing in their jobs,
and their career prospects in the Service. Just under one-third of Army
members who responded to the survey stated that they were actively looking to
leave the ADF.
As in DOFA, the centre-piece of the Defence performance management
system was individual performance appraisal. To illustrate the operation and
outcomes of performance management in the ADF, we have focused on the
performance appraisal system applied to Army officers up to and including the
rank of Lieutenant Colonel. The Army officer appraisal scheme involved a
combination of quantitative rating by means of a behaviourally anchored scale
and qualitative appraisal in the form of a short essay-style assessment. The
fourteen key behavioural criteria were: job competence; self-development;
productivity; Army ethos; human relations; judgement and commonsense; oral
communication; written communication; analysis; foresight; responsibility;
adaptability; decisiveness; and leadership. Each army officer was assessed by their
commanding officer in terms of their performance over the previous year and
their future potential. The scores documented in the appraisal report were used
to differentiate between officers for promotion and posting decisions. The Army
officer appraisal scheme placed a strong emphasis on regular performance
feedback. Officers received an interim report after six months from their commanding officer that provided feedback regarding their performance against the
duties outlined for them at the beginning of the year. As is the case throughout
the ADF, however, the Army scheme was primarily developmental and there was
no link to performance-contingent pay. This approach was mirrored by the strong
philosophical aversion demonstrated by the Secretary of the Department of
Defence to performance pay:
I believe that ‘performance appraisal’ linked to pay can lead to distorted results and
raise issues of equity, ratings moderation and forced distributions . . . studies have
found that performance-based pay has little positive effect on motivation or organisational performance, is divisive and undermines relationships between staff.
Accordingly, my approach is based on building performance through feedback and
a developmental focus – without scores and ratings (Allan Hawke, Secretary,
Department of Defence, 8 May 2000).

In terms of reward outcomes, then, ‘promotion is everything’ (Senior officer,
Army, 4 October 2001). While appraisal results carry significant weight in
determining officer career development, promotion and posting decisions, they
were not the only criteria used for differentiating between officers in the Defence
services. The process of collating performance appraisal reports and using this
information to determine career development opportunities was undertaken by
career management agencies within each service: one for officers and another
for non-commissioned members. The career management agencies formed
Personnel Advisory Committees (PACs), to consider the promotion prospects of

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eligible officers in a particular cohort, the year that an officer graduated from
the Australian Defence Force Academy or the year they were promoted
(Defence Instructions (Army) 1998: 3). For example, there was a Lieutenant to
Captain PAC and a Captain to Major PAC.
In the first instance, the PAC relied on a Weighted Index Rating Measurement
system (WIRM) to rank all officers eligible for promotion or for attendance at
Command and Staff College. The WIRM represented a decision support tool
and did not determine who would be promoted or the order in which officers
were ranked (Defence Instructions (Army) 1998: 5). In reaching decisions on the
ranking of officers for promotion, the PACs referred to the dossiers developed
by career advisors in the Directorate of Officer Career Management-Army
(DOCM-A). These dossiers detailed the officer’s appraisal scores over the last
six to seven years. They were determined by compiling numerical scores from
annual performance appraisal reports. Career advisors in DOCM-A also provided
the PAC with a copy of the essay assessments from the three most recent appraisal
reports (Defence Instructions (Army 1998: 4–5). In addition, the dossier contained a history of postings, reports from Command and Staff College and any
honours or awards achieved by the officer. There might also be some details of
family circumstances and preferences for future postings. For more senior promotions (e.g. Colonel and above), the weight given to performance appraisals
decreased and the personal recommendation of the people sitting on the PAC
became much more significant. Once it had completed its deliberations, PAC
members voted on the hierarchical ranking of officers. This resulted in officers
being placed into a number of bands of approximately equal size. To be certain
of a promotion, officers needed to be ranked in the first band. The second band
was also likely to be promoted as there were generally sufficient vacancies. Officers
in the third band, however, required a high level of vacancies to ensure promotion.
Once considered by a PAC, an officer entered a three year window, whereby they
were considered for promotion on three consecutive occasions. If unsuccessful
after three attempts, the officer was unlikely to be reconsidered for promotion.
This message was communicated to the officer by the band number they were
assigned to.
Having surveyed the distinct approaches to performance management in each
of the two agencies, we now turn to consider the evidence on employee responses
to each system and, in particular, what this reveals about the state of the psychological contract in each case. Analysis focuses on employee perceptions of the
four key elements of performance management: (i) setting of performance
criteria; (ii) assessment of individual performance against these criteria and
associate appeal procedures; (iii) provision of performance feedback; and (iv)
linkage of evaluated performance to reward outcomes (pay and promotion).

VERDICT

ON THE

DOFA

SYSTEM

Performance criteria
Employees of DOFA expressed particular dissatisfaction with the wide behavioural
criteria applied. Several interviewees believed that the behavioural criteria were
too ambiguous and allowed undue discretion to supervisors to make arbitrary

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judgements regarding their work performance (Interviews with employees of
DOFA, 1998; 1999). Employees are expected to demonstrate these behaviours
in all areas of work:
Everyone was outwardly gung-ho, with this ‘will to win’, all these leadership
behaviours you’re supposed to demonstrate. You know, talking up the Department
. . . I think the ‘will to win’ got a bit lost in translation. I think a lot of people took
that to mean win at all costs (Interview with DOFA employee, 2001).

A key objective of the DOFA performance management framework was to
maximise compliance with DOFA’s leadership behaviours. While employees
could also include a range of more tangible indicators in their performance agreements, a key element of the assessment of performance was the extent to which
employees behaved in a manner analogous to those in the SES. These SES
behaviours involved employees demonstrating behaviour that was:
. . . macho, win–win, very much loud, extrovert, [and this left] no room for sensitive
people, no room for people who perhaps thought a little bit differently, or had a
different sort of personality. Those people were ridiculed in the organisation
(Interview with DOFA employee, 2001).

The same employee remarked that impression management was central to how
employees responded to DOFA’s leadership behaviours. He believed that: ‘People
strive for visibility. They’re looking for opportunities in which they can achieve
things, tangible results, quickly’ (Interview with DOFA employee, 2001).
Assessment and appeal
Some informants believed that assessment itself was procedurally unfair, pointing
to the possibility of error and bias in the rating process. This was especially
the case where employees believed that performance management was used to
target alleged under-performers. For example, ‘[Ratings represent] a mechanism
to retrench staff and force them to leave the organisation. In my case my private
sector supervisor was told to reduce the rating as we were being outsourced’
(CPSU survey response, DOFA employee, 1999).
The emphasis on high performance was also a source of dissatisfaction and
demotivation, with staff members who received merely a ‘competent’ rather than
a ‘superior’ rating experiencing a loss of self-esteem. As one employee pointed
out: ‘that tag competent got a lot of people’s backs up because people often
have a view [that] they’re highly competent. Just to be told they’re competent is
demotivating’ (Interview with DOFA employee, 2001).
Although the performance management system introduced by DOFA incorporates an appeal process for staff who were unhappy with the assessment given by
their supervisor, some employees believed that more senior managers were
unlikely to alter the initial rating decision (Interview with DOFA employees, 1998;
1999; 2001).
The so-called appeal process in DOFA is a complete joke and not one worth
pursuing. Senior management in this organisation are completely indifferent to

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staff and the whole process has demotivated people – not the idea of a performance
management system! . . . The appeal process was a complete waste of time as the
pressure to downgrade the marks came directly from those who would be involved
in hearing the appeal. Their lack of interest and complete contempt for equity and
fairness was very obvious (CPSU survey response, DOFA employee, 1999).

Feedback
Concerns were also expressed about the level and quality of feedback provided
to employees about their work performance. The quality and frequency of
performance feedback provided to staff by supervisors is central to the success
of the appraisal process. Nevertheless, supervisors are often reluctant to provide
employees with critical feedback on their work performance because of a desire
to avoid conflict during appraisal interviews. The potential for conflict is
heightened where appraisal and feedback are linked to a pay increase rather than
the training and developmental needs of employees (Gomez-Mejia 1990: 21–2).
Feedback within DOFA was also susceptible to these criticisms:
They were good at saying ‘Good work, well done’, but if they harboured concerns
they weren’t raised with you. You’d hear about them at the performance interview.
They might be brought up in the weeks leading up to the performance round. In
the cases where people received negative feedback more often than not I would say
it was done towards the latter end of the performance cycle rather than immediately
when you could do something about it, lessons could be learned, and people could
move forward (Interview with DOFA employee, 2001).

Other DOFA employees felt they had to be proactive in obtaining adequate
feedback from supervisors to ensure that supervisors maintained a detailed and
accurate record of their achievements. These employees requested performance
feedback after the completion of any substantial work tasks. They also documented any written feedback they received from customers regarding their
performance (Interviews with DOFA employees, 1998; 1999).
Link to rewards (performance pay)
The DOFA evidence discloses a deep-seated distrust among employees about
the link between appraisal and pay. While the initial rating scores provided by
supervisors were moderated by senior management ostensibly to ensure consistency across the organisation, in many cases both employees and union
officials believed that these initial ratings were being moderated downwards
for budgetary reasons to limit the overall cost of the performance management
scheme (Interview with DOFA employees and union officials, 1998; 1999). Such
possibilities merely enhanced employee perceptions that performance-based pay
was procedurally unfair:
The idea of performance pay is good as long as decent management exists to
manage the scheme. Unfortunately in DOFA’s case the management are weak or
afraid of being honest with staff. The fact is that moderation is widespread and is
done for the wrong reasons; to save money, not to standardise results. If you don’t

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work directly for the Secretary then you don’t have a chance. Luckily I’m now
leaving the APS to escape the whole mess (CPSU survey response, DOFA
employee, 1999).

Performance ratings linked to pay may also make the workplace more competitive
and result in employees being less willing to share information. As one DOFA
informant remarked:
. . . it was an inequitable place to work. A place that actively discriminated . . . I think
the fact that you knew that there were these people that were being favoured
created a tension, it created competitiveness among people. [It is] a very very
competitive environment (Interview with DOFA employee, 2001).

Such competition for visibility and performance ratings can also lead to a form
of dysfunctional individualism where employees refuse to share valuable information. In the case of DOFA, there were concerns that some employees were
hoarding their knowledge:
Of course they were. Particularly if it was knowledge that would enable them to do
their job better. There were people who weren’t prepared to share their areas of
competitive advantage . . . It means you get caught with your pants down because
you’re unprepared (Interview with DOFA employee, 2001).

DOFA’s performance management system, then, place a strong emphasis on
demonstrating the organisation’s leadership behaviour within the workplace.
However, the assessment of performance against these behaviours was perceived
by employees interviewed to be prone to rater bias and error. The moderation
of ratings by more senior management was also perceived by many employees
to be procedurally unfair and undertaken for budgetary reasons. In addition,
linking appraisal to pay generated increased competitive tensions among
employees while some employees believed the Department’s appeal processes were
procedurally unfair (Interview with DOFA employees, 1998; 1999). Overall, the
evidence points to strong employee dissatisfaction with both performance
processes and reward outcomes, with perceived procedural injustice intensifying
a sense of distributive unfairness and undermining employee acceptance of
management’s espoused transactional psychological contract.

VERDICT

ON THE ARMY OFFICER SYSTEM

Performance criteria
Army personnel expressed high satisfaction with the behavioural criteria against
which they are assessed. In the 2001 Defence Attitude Survey, 53.7 per cent of
Army personnel agreed that their supervisor measured performance against
appropriate performance standards, while only 17.8 per cent explicitly disagreed
(Appendix A).
Assessment and appeal
Informants expressed concern at the tendency for appraisal scores to be inflated