2010 International Conference on E-Business and E-Government

Analysis of Bank Performance Appraisal Based on

the Contingency Theory
Yang Hongbo

Liu Fangfang

School of Economics and Management

Daqing Petroleum Institute
Daqing, 163318, China
dqyanghongbo@163.com

School of Economics and Management

Daqing Petroleum Institute
Daqing, 163318, China
dingdai1@163.com
known and applicable, the contingency thought has concluded
and organized the contingent relations between environment
and management theories which are functional relations
between two or more variables. Contingency management is
the most effective management mode then and there based on
the functional relationship among environment variables, selfmanagement philosophy and management techniques. This
idea has bridged the gap between theory and practice. On one
hand, business environment, can be said of management
practices, on the other hand, management thinking, methods
and techniques are management theories among them there is a
series of "if ... ..., it is necessary ... ... . " relationships.

AbstractPresently, performance appraisal is one of the most

active areas under discussion in theory and practice of bank
management, from which various methods and theories have
been put forward one after another. Face the complicated
internal and external bank environment, how to make
performance appraisal fair and impartial, meanwhile to avoid
the unilateral pursuits for indexes and ignorance of total benefit,
become a key to succeed in competition. In this paper,
contingency theory is adopted in analyzing the performance
appraisal system, and bank performance appraisal process is
proposed based on environment analysis and thinks that only in
this way could structural differences in competitiveness be
constructed accordingly.

As a rather special industry, banks operating performance

will face the impacts from the internal and external bank
environment, such as changes of the element quality, changes
in banking customer as well as in external competitive
environment. Those factors have a great impact on
performance appraisal and the two constitute a contingent
relationship between each other. Therefore, how to establish a
set of bank performance appraisal system comply with the
environmental requirements not only affects the bank's
sustainable development, but also directly affects the vital
interests of employees and business practices of employees[1].

Keywords-Performance appraisal; the system Performance

appraisal; The Contingency Theory

I.

INTRODUCTION

The Contingency Theory which was born in the United

States in 1970s and popular in Europe and the United States
has brought new management ideas to the management sector.
The basic idea is that the design of effective organization is
determined by environmental characteristics and that managers
should weigh and consider the internal and external
environmental factors of economic organizations in diversified
ways of thinking, using open and systematic concepts and
applying the management principles, methods and skills to the
management practices with an adaptation to time, person, place
and matter. The theory suggests that in reality there is no
unchanged internal and external enterprise environment, and
therefore there are also no unchanged and universal, applicable
principles and modes of management, thereby enterprise
management should change in accordance with the
environmental conditions. As a famous remark goes, "wisdom
of management starts from the very moment you realize that
the optimal management system does not exist." The research
finds that management principles are not applicable to
everywhere as natural scientific rules do. When an exception
rises, there will be inexplicable contradictions. We may say
safely that the key word for contingency thought is change with
which no management principles could be omnipotent no
matter how scientific, how comprehensive they are. To make
these changes known and available, the theory summarized the
contingency relationship environment between management
theory and circumstances. In order to make these changes
978-0-7695-3997-3/10 $26.00 2010 IEEE
DOI 10.1109/ICEE.2010.236

II.

THE KEY ELEMENTS FOR BANK PERFORMANCE

APPRAISAL SYSTEM

A complete performance appraisal system should consist of

the following elements: environment, objectives, indicators and
standards. The contingent relations among each element and
the following tips are to be considered in establishing an higheffective bank performance appraisal system on contingency
basis.
1) To identify the most crucial element that affects the bank
performance appraisal. In essence the so-called appraisal and
incentives are centered on those most important and crucial
elements influenced the final results to achieve the goal of
controlling and encouraging. The premise to effective appraisal
is to find every element related to the final performance
appraisal, identify these elements and to control, appraise and
encourage them to meet the requirement of final control, which
is the possible way to realize effective performance appraisal
management.

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politics and so on. The legal environment mainly refers to the

national laws, regulations, verdicts and law-enforcement
authorities and so forth. Bank management performance often
is constraint by the two conditions: low self-control led by
government control and policy-related losses made by
ignorance of economic benefits when implementing nations'
financial policies. The latter mainly influences the choice of
appraisal indicators. In response to this situation it is not
adequate simply to adopt financial indicators but some
indicators capable of measuring the state's policy
implementation.

2) To differentiate the influencing elements efficiently. It is

valuable and effective only through the appraisal and
incentives of those controllable elements when we have no idea
what can be controlled by bank officers and what not. When it
is beyond control, according to theory of expectation value, the
incentive power is from little to none because of low potency
(operational staff can not control it and the results could not be
predicted whether they try their efforts or not) even if the
expectation is high. Thus it is beneficial to encourage the
controllable elements.
3) To identify the contribution rate of influencing elements
given to the final performance. As it is indispensable to track
and feedback every time when a bank clerk performs an
influencing element, and he or she may not perform always the
same, different weighting should be put on different element on
how to give an objective appraisal to him or her and a
comprehensive appraisal should be made through weighting
average when there are uneven performance conditions.
Obviously, to guarantee the reasonability, objectivity, fair and
effectiveness of the appraisal, the premise is that the weight put
on every influencing element is reasonable, and which is based
on the contribution rate of individual element given to the final
performance appraisal.
III.

B. Internal environment.
1) Quality of financial elements. It mainly refers to material
and technological foundation and staff quality. Material
technology includes information technology, innovation and
promotion of new financial products, computer and
communication technology. Their application in practical bank
procedures has greatly improved the work efficiency, perfected
the work flow, bettered the service quality and made
performance appraisal more accurate and scientific. The
influence of staff quality on performance appraisal mainly is
shown in the area of understanding and acceptance of the
performance management. High-quality staff will help in the
propaganda and implementation of the performance appraisal
but vice versa they will add complexity to the performance
appraisal indicators, for they are expected to take part in, to
have a democratic lead and are inclined to take the tasks of
weak-structures, thus sometimes they will make it difficult to
quantize the performance appraisal.

THE ENVIRONMENT OF BANK PERFORMANCE APPRAISAL

A. The external environment.

1) Market structure. Market structure is closely related to
enterprise performance. As the theoretical and analytical
scheme of market structure-enterprise behavior-management
performance proposed by Mason and Benn, the behavioral
characteristics of enterprise under certain market structure will
influence its final management performance [2]. The market
structure of bank industry is also shown in this process, which
is market structure-bank management performance-bank
strategic objectives-bank performance appraisal. The major
influences are listed as follows: to affect bank performance
appraisal by influencing bank management achievement
through market share. But some empirical researches prove
that it functions little in that aspect, probably decided by
choices of some variables. Sometimes market shares got by
staff's own efforts influence their performance appraisal a lot.
In fact market share is the basis of performance appraisal and
the premise of performance incentives, thus it is one of the
manifestations of bank competitions to compete for potential
customers. influence bank performance appraisal though
market efficiency. Market efficiency is manifested by certain
competitions. It is beneficial for banks to improve staff
management level through appropriate competitions, to raise
the market operational efficiency and the innovation ability of
financial products, and to improve management performance
accordingly. The empirical study shows that the improvement
of market efficiency avails to the betterment of bank
performance appraisal. The legal environment mainly refers to
the national laws, regulations, verdicts and law-enforcement
authorities [3].

2) Financial products and status. With the development of

diversified management of banks, a wide range of products are
involved and different product groups are formed, which have
a significant expression in cross-border banks. Different
products have different positions in bank product groups,
which naturally will draw different degrees of attention. Even
in the case of the same product, due to the various life phases it
is in, the weight of the performance appraisal indicators put on
it would not be the same. Boston Consultative method could be
used to judge the position of certain products in bank product
groups [4]. In addition, the influence of different features and
different life phases of bank products also is varied on bank
financial state, which can mainly be seen from the indicators
chosen at different stages. For example, the indicators for
products in running period are basically the size of the market
share and the cash flow of the projects, for those in increasing
period, are marginal profits and cash flow, for those in mature
period are marginal profits and cost reduction and for those in
declining period is the cash flow only.
3) Business strategy. Performance appraisal is business
strategy-oriented. Different strategic direction will cause
changes in performance appraisal; especially will have a
significant impact on the choice of assess indicators. When
bank strategies need to speed up the marketing of new
products, new product market share should gain greater weight
in the annual incentive plan. Banks implementing innovationoriented strategy will put an emphasis on those which greatly
influence the new product development and have an important
impact on the key factors of future profitability. Service-

2) politics-law. The political environment influencing bank

performance appraisal mainly is nation's political system,
authorities, policies and political organizations and forms of

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V.

oriented banks implementing a quality-oriented strategy will

stress those quality indicators which are closely related to the
quality development, such as quality improvement targets.
Customer satisfaction-oriented banks would give greater
weight to the indicators of customer satisfaction. Therefore,
different business strategies lead to different composition of
indicators and the different distribution of weighting, which
will lead to changes in bank performance appraisal.

A. Preconditions for indicators setting of bank performance

appraisal.
Bank management practice shows that the work analysis is
the premise for performance evaluation indicators, laying the
scientific foundation for the decision-making and also
promoting bank employees to a deeper understanding of the
work they are engaged in. Job analysis is to determine job
content, assign persons responsible, designate positions and
working hours, analyze methods and procedures, and explains
why. Through job analysis, to work out every employee's job
specification is the basis for staff performance appraisal. Job
specification describes the nature of the work of employees and
tasks, including the post content; job qualification
requirements; post nature, authority and responsibility; post
vertical and horizontal relationships; post strength and job
environment. Almost every manager and every employee cant
have unitary job nature and tasks. Generally there are always
the main work and the secondary work. Therefore, the job
analysis should be based on contingency thinking and clearly
specify the different requirements for the main work and the
secondary work in order to assess the performance of bank
employees to complete their major tasks. Through job analysis,
to clearly define the contents of each post can have a fully
understanding of specific work, and set performance evaluation
indicators based on the important work which can be more
reasonable and fair, so as to create the conditions for scientific
examination of staff.

4) The structure of property rights. The impact on

ownership structure of bank performance appraisal may result
in differences in performance target setup. When property
rights are highly concentrated in the hands of the government it
is very easily to lead to " absence of agents " and "insider"
control issues, not only there will be no one really responsible
for the development of banks, but also there may be a number
of "insiders" to pursue their own maximum interests and
neglect the actual owner's equity. For only according to rigid
regulations laid down by the higher authorities and ignore the
actual situation of its own to decide the goals of performance
appraisal caused it lost its strategic objectives to guide the
completion of role of banks and make bank in a lack of market
competitiveness and long-term ability to innovate. Finally,
complete content and organizational editing before formatting.
Please take note of the following items when proofreading
spelling and grammar:
IV.

INDICATORS OF BANK PERFORMANCE APPRAISAL

SYSTEM

THE TARGET OF BANK PERFORMANCE APPRAISAL

SYSTEM

Setting performance goals is the most important part of

bank performance management process. The reasonable goal
will not only guarantee banks full control of the process and
results of the objective realization but also make sure that all
strategic objectives are closely linked with the banks and have
considerable incentives to performers. Performance goal is a
key part to guarantee the consistence of banks strategic
objectives and personal goals, so it must be scientific and
rational in setting. It should be based on characteristics of past
effective performance goals and should meet the "SMART"
criteria. Methods of setting performance goals are primarily
modeled on the principles of contingency thought and every
bank should adopt different method according to different
circumstances. The commonly used ones are: factor review,
description, proportion control assessment, forced choice,
paired comparison, objective management, core incident
method, rating method and performance assessment [5].
In the new economic environment, the bank's performance
evaluation is a comprehensive assessment process. Banks only
concerned with assessing financial indicators are easy to create
short-term behavior and affect long-term development; while
those have over-emphases on non-financial indicators for
assessment, may also lack of financial flexibility and lead to
financial failures. Only through the combination of the
financial and non-financial indicators, a full range of strategic
performance appraisal system can be established and become
the basic ideas and direction of the bank performance appraisal
system reform.

B. Bank financial indicators of performance appraisal.

Bank to consider strategic planning and the current focus of
the work include: profitability indicators, such as return on
assets, return on equity ratio, earnings per share and capital
margins, etc.; safety indicators, such as debt equity ratio, loan
quality ratios (sub-prime loans ratio ;doubtful loans ratio, loan
loss ratio); flow indicators, such as current ratio and quick
ratio, etc.; efficiency indicators, such as the net turnover rate,
benefit-cost ratio, the per capita operating income, etc.; growth
indicators, such as per capita new deposits, the middle the
proportion of business income, operating income (profit)
growth and net growth rate, etc. [6].
C. Non-financial parameters.
Under the competition circumstance that more and more
concern from managers should be given to the non-financial
parameters such as innovation, quality, and service and
customer satisfaction index, Professor RobertS. Kaplan and
Professor DavidP. Norton in Harvard Business School put
forward the non-financial performance evaluation methods
based on Balanced Scorecard in the early 1990s. With this the
performance appraisal of banks should consider the following
indicators:
1) Customer level indicators of performance evaluation. It
mainly includes market share, e.g. Deposit market share, the
loan market share, individual business market share,
international business market share, payment and settlement
business market share, etc.; customer profitability rates, such as

913

of scientificness, fairness and comprehensiveness with an

adherence to the combination of qualitative and quantitative
appraisal which is beneficial in guiding employee behavior to
the set work objectives, establishing fair competition
mechanism and the founding of impartial assessment norm.
However, no matter by qualitative or quantitative appraisal, the
standards are difficult to make certain, such as in the case of
the brain worker it is unreasonable to adopt the method of
quantitative appraisal. As to apply qualitative one, it also has a
certain difficulty in practice. The standard of bank performance
appraisal should be consisted of appraisal factors and scales.
The former embodies the key reconcilability of measurement
parameters and the latter shows the degree of divergence, order
of conditions and scales of appraisal parameters and factors.
Banks should take the criteria of Baldrige Excellence
Performance into consideration on basis of contingency
thought when placing the standards of performance appraisal.

personal consumption credit customer contribution rate,

contribution rate of personal housing mortgage customers,
credit card customer contribution rate, contribution rate of
institutional loan customers, institutional depositors
contribution rate, etc.; customer satisfaction, such as the quality
of banking products and price satisfaction, satisfaction with the
level of banking services, etc.; customer retention rate and the
rate of customers, such as customer default rates, service levels
and exchange of information with customers, new customer
growth rate, the average volume of new customers, new
customers such as the average development cost.
2) Performance evaluation indicators on internal operating
level. It includes back-office support indicators, such as the
effectiveness of departments (cross-appraisal among
department), the average customer satisfaction; marketing
capability indicators, such as marketing input-output ratio,
diversified marketing, marketing team structure, the quality
structure of personnel, etc.; capital operating indicators, such as
capital operating efficiency, capital operating personnel
quality, inter-bank lending market transaction share and so on.

Through the analysis of related problems influencing bank

performance appraisal system during its building process, a
high-effective appraisal system is expected to set up, which
aims to suit the bank strategies, reflect the core competitive
advantages and environment adaptability. The contingency
thought runs from beginning to the end in the analysis,
emphasizing changes with time, banks and persons.

3) Performance evaluation indicators in learning and

growth perspective. It includes staff capacity indicators, such
as employee satisfaction, competence for the key tasks, staff
training and improvement, staff quality, staff retention and staff
productivity, etc.; information system capacity indicators, such
as the degree of centralization of information, information
access speed , information technology investment percentage,
the degree of information mining; incentive and power
indicators, such as the number of comments received from the
staff and the percentage of staff opinion adoption and
employee reward and so on.
VI.

REFERENCES
[1]
[2]
[3]
[4]

THE STANDARD OF BANK PERFORMANCE APPRAISAL

SYSTEM

[5]

Performance standards, just like a ruler with exact scales,

are comparatively difficult to define. According to comparison
results, clerk performance will be differentiated and will
determine the pay, promotion and training of employees. Thus
the establishment of the standards should follow the principles

[6]

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Peter Drucker, corporate performance measurement, Beijing: China

Renmin University Press, 1999, 83-109.
Michael Porter, Competitive Strategy, Beijing: Huaxia Publishing
House, 2001 ,100-120.
Zhao Xu, etc, China's banking market structure and empirical research
of performance, Monetary Research 2001 (3).
Wang Shuang, the application of Boston matrix, enterprise reform and
management, 2001 (8).
Yang Wenshi, etc. Principles of Management (second edition), Beijing:
China Renmin University Press, 2004 ,75-106.
ZHU Zhan-yu, research on comprehensive evaluation system of bank
operation performance, the International Finance Research 2004 (12) 2930.