Performance Management Theory informing practice

The main theory informing individual performance management is Locke & Latham's (2002) goal-setting theory, one of the most effective motivational theories. It was formulated inductively based on empirical research conducted over nearly four decades. Its roots are based on the premise that conscious goals affect action (where goals are considered the object or aim or an action) (Locke & Latham, 2002).


While goal setting theory is generally analysed at individual level, its principles are considered relevant at organisational level, too. Locke (2004) further argues that goal-setting is effective for any task where people have control over their performance. Research in this field currently explores goal setting theory at both individual and organisational level.In organisational context, personal empirical observations highlight that the goals of individuals, teams and the entity as a whole can be in conflict. Goal conflict can motivate incompatible actions and this has the potential to impact performance. Thus, alignment between individual goals and group goals is important for maximising performance. This links goals setting theory to principal agent theory, also called agency theory.


Agency theory (Eisenhardt, 1985) explains how to best organize relationships in which one party (the principal) determines the work, which another party (the agent) undertakes. The agency problem is to determine the optimal contract for the agent's service. The principal-agent relationships should reflect efficient organisation of information and risk-bearing costs.


The human assumptions to be considered are self interest, bounded rationality and risk aversion, while at organisational level the assumptions to be analysed are the goal conflict among participants and the information asymmetry. This links the agency theory to organisational theory, studying whole organisations, how they adapt, and the strategies and structures that guide them. Eisenhardt (1985) further considers both agency and organisational theory to be rational, information based, efficiency oriented, concerned with determinants of control strategy and distinguish between two types of performance evaluation control: behaviour based and outcome based.


 The differences between them, as adapted from Eisenhardt (1985) are illustrated in the table below:


Element of analysis

Agency theory

Organisational theory


Compares costs of behaviour control and outcome control

Compares ability to measure behaviours and outcomes


Control is a measurement, evaluation, and reward process (explicit)

Control is a measurement and evaluation process. Reward is implicit.

Social or "People" control

Assume divergent performances for effort of workforce

Possible to reduce divergent preferences through social control

Role of Information

Task characteristics determine the information available

Information is a purchasable commodity


Control determined by measurement issues

Control determined by measurement issues


Agency theory compared to organisational theory (Brudan, 2010)


  • Brudan, A. (2010), Rediscovering performance management: systems, learning and integration, Measuring Business Excellence, VOL. 14 NO. 1, pp. 109-123.
  • Eisenhardt, K.M. (1985), Control: Organizational and economic approaches, Management Science (Pre-1986), Vol. 31, Nr. 2, 134.
  • Locke, E.A. & Latham G.P. (2002), Building a Practically Useful Theory of Goal Setting and Task Motivation, American Psychologist, Vol. 57, No. 9, 705–717.
  • Locke, E. A. (2004), Goal setting theory and its applications to the world of business, Academy of Management Executive, Vol. 18, No. 4, pp. 124-125.



Individual : Theory informing practice


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