Performance management system and its role for employee performance: Evidence from Ethiopian SMEs

Abstract

Small and mediumenterprises (SMEs) are crucial to Ethiopia's economy in creating jobs and reducing poverty. Despite the extensive literature on performance management systems (PMS) and employee productivity, there remain unanswered questions regarding which PMS predictors most effectively contribute to improved employee performance. This study aims to investigate the role of PMS in enhancing employee productivity in Ethiopian SMEs using both qualitative methods such as a literature review alongside quantitative techniques like linear regression analysis based on primary & secondary data sources. The findings provide valuable insights into effective strategies for implementing an efficient performance management system that can enhance employees' work outcomes within SMEs operating in Ethiopia.The results show that the implementation of an effective performance management system can significantly improve productivity among SMEs in Ethiopia. The five predictors identified by the linear regression model are important factors that contribute to better work outcomes among employees in Ethiopian SMEs; however, evaluation has been found to have the strongest positive relationship with improved job outcomes among those studied. Based on these findings, we recommend that SME owners/managers/HR professionals implement an effective performance management system that includes clear job responsibilities defined through performance planning, regular feedback provided about progress made towards goals set during the planning stage, periodic appraisals providing constructive criticism as well as recognition for good work done; offering training opportunities helping employees develop new skills or refine existing ones; rewarding high-performing employees who meet or exceed expectations with incentives such as bonuses or promotions can motivate them further.

1. Introduction

Small and medium enterprises (SMEs) are essential to Ethiopia's economy and play an important role in creating jobs and reducing poverty [1]. However, Ethiopian small and medium enterprises face some challenges to improve their employees' performance, including the lack of an appropriate performance management system [2]. Employee morale and productivity might suffer as a result of imprecise expectations, inconsistent feedback, and insufficient recognition and reward if a performance management system is not in place [3]. Ethiopian businesses must implement an efficient performance management system to tackle these problems. Performance management systems are complete techniques that encompass performance planning, feedback, appraisal, training, development, and rewards [4]. The system ensures that employees' goals are aligned with the company's goals, provides regular feedback on employee performance, identifies areas for growth, and acknowledges and rewards excellent performance. The purpose of this topic is to investigate the role of performance management systems in enhancing employee performance in Ethiopian SMEs. We can identify successful solutions for SMEs to establish performance management systems, increase employee performance, and achieve competitive advantages by analyzing the most recent research and best practices in performance management. This study introduces fresh perspectives, methodologies, and findings that significantly contribute to the field of performance management systems (PMS) and employee productivity in Ethiopian SMEs. Firstly, it combines both qualitative methods such as a literature review with quantitative techniques like linear regression analysis based on primary and secondary data sources. This mixed-method approach allows for a comprehensive understanding of the role of PMS in enhancing employee productivity. Secondly, this study identifies five predictors through the linear regression model that are important factors contributing to better work outcomes among employees in Ethiopian SMEs. The finding that evaluation has the strongest positive relationship with improved job outcomes provides new insights into which specific aspects of PMS have the most significant impact on employee performance. Lastly, this research offers practical recommendations for implementing an effective PMS within SMEs operating in Ethiopia. These recommendations include clear job responsibilities defined through performance planning, regular feedback provided about progress made towards goals set during planning stages, periodic appraisals providing constructive criticism as well as recognition for good work done; offering training opportunities helping employees develop new skills or refine existing ones; rewarding high-performing employees who meet or exceed expectations with incentives such as bonuses or promotions can motivate them further. Overall, these fresh perspectives on methodology and findings contribute to advancing knowledge about how PMS can be effectively utilized to enhance employee productivity specifically within Ethiopian SMEs context. Besides, the issue is critical for business owners, managers, and human resource experts who wish to improve employee performance, increase productivity, and contribute to Ethiopia's economic growth and development (see Table 5, Table 6, Table 7).

Table 5.

ANOVA table.

ANOVAa
Model		Sum of Squares	df	Mean Square	F	Sig.
1	Regression	22.096	5	4.419	201.777	.000b
	Residual	2.803	128	.022
	Total	24.899	133

^aDependent variable: Employee Performance.

^bPredictors: (Constant), Performance Rewards, Performance Planning, Feedback, Performance Training, Performance Appraisal.

Source: Owen Survey Result, 2023

Table 6.

Regression coefficients.

Coefficientsa
Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
		B	Std. Error	Beta
1	(Constant)	.285	.189		1.509	.134
	Performance Planning	.244	.043	.234	5.673	.000
	Feedback	.181	.044	.168	4.148	.000
	Performance Appraisal	.464	.034	.600	13.775	.000
	Performance Training	.181	.045	.164	4.032	.000
	Performance Rewards	−.116	.047	−.089	−2.455	.015

^aDependent variable: Employee Performance.

Source: Owen Survey Result, 2023

Table 7.

Regression analysis.

Residuals Statisticsa
	Minimum	Maximum	Mean	Std. Deviation	N
Predicted Value	2.9718	5.0956	3.9977	.40759	134
Residual	−.37879	.35160	.00000	.14518	134
Std. Predicted Value	−2.517	2.694	.000	1.000	134
Std. Residual	−2.560	2.376	.000	.981	134

^aDependent variable: Employee Performance.

Source: Owen Survey Result, 2023

1.1. Statement of the problem

Small and medium enterprises (SMEs) are critical to Ethiopia's economic growth, but they confront obstacles in enhancing employee performance [1]. The lack of an adequate performance management system is one of the most significant difficulties. Small and medium businesses struggle to match employees' and organizational goals, provide regular feedback, and identify areas for improvement without a suitable performance management system. As a result, employee morale, productivity, and market competitiveness all suffered [5]. Furthermore, the situation is exacerbated by a lack of training and development options for small and medium businesses [6]. According to the findings of [7], any employee lacks the skills and knowledge required to properly perform their tasks, resulting in poor performance and dissatisfaction. Furthermore, an insufficient recognition and reward system demotivates personnel, leading to significant turnover and productivity losses [8]. As a result, Ethiopian SMEs lack efficient performance management systems that can align employee goals with business goals, give regular feedback, identify areas for growth, and recognize and reward exceptional performance. The lack of suitable training and development opportunities, as well as recognition and incentive systems, exacerbates the situation, resulting in lower staff morale, lower productivity, and lower market competitiveness.

Despite numerous studies conducted in various countries on the correlation between performance management systems (PMS) and employee performance, no such research has been carried out in Ethiopia. Consequently, there are still unanswered questions regarding which set of PMS predictors can most effectively enhance employee productivity. By investigating the impact of PMS factors such as performance planning, appraisal, feedback mechanisms, training opportunities and reward programs within Ethiopian SMEs context we aim to provide a more comprehensive understanding of how these factors relate to improved staff output levels. The objective is to identify under what conditions PMS proves effective or ineffective at enhancing employee efficiency while proposing practical solutions for owners/managers/HR professionals working with small businesses that will help optimize their workforce's job proficiency levels. Ultimately this study aims at contributing towards Ethiopia's economic growth and development by providing necessary tools & strategies for SMEs' HR departments so they can improve their employees' work output efficiently.

1.2. Objectives of the study

The purpose of this study is to investigate the current performance management practices in Ethiopian SMEs and suggest effective strategies for optimizing employee performance. More specifically.

• 1.To investigate the significance of performance planning in Ethiopian SMEs and its potential impact on enhancing employee performance.
• 2.To assess the efficacy of feedback as a means for improving employee performance within Ethiopian SMEs.
• 3.To evaluate whether a well-structured performance appraisal process can lead to improved employee productivity in Ethiopian SMEs.
• 4.To exame how training initiatives can contribute towards augmenting employee job proficiency within Ethiopian SMEs.
• 5.To explore the importance of rewards as an incentive for motivating employees and enhancing their work output in Ethiopian SMEs.

2. Review literature and hypothesis

2.1. The importance of performance management in Ethiopian SMEs

An effective performance management system is crucial for any organization, and this holds particularly true for Ethiopian SMEs [9]. These small businesses encounter distinctive challenges such as limited resources and intense competition. Therefore it becomes even more critical to have a well-structured performance management system in place that can help them overcome these obstacles efficiently. By implementing performance management practices, employees can have clear expectations of what is expected of them, how they are performing against those expectations, and where they need to improve. This leads to increased employee engagement and motivation, which ultimately drives productivity levels up. Furthermore, a strong performance management system enables managers to identify the top performers among their staff. Recognising high-performing employees with rewards or promotions can boost morale across the entire team while creating healthy competition within the workplace [10]. In addition to motivating individual employees, implementing a consistent performance management process ensures that everyone in the organisation is working toward common goals. This allows businesses to better align their strategies and objectives with overall organizational goals leading to greater business success [11]. Performance Management has become increasingly important in today's competitive market environment not just in Ethiopia but globally too.

2.1.1. The relationship between performance planning and employee performance

Studies have shown that there is a positive relationship between performance planning and employee performance. When employees are given specific, challenging goals that are aligned with organizational objectives, they tend to be more motivated and engaged in their work, leading to better performance [12]. Furthermore, setting goals and tracking progress can lead to increased clarity and focus for employees, which can improve their ability to prioritise tasks and manage their time effectively. Overall, effective performance planning can help employees to understand what is expected of them and how their work contributes to the success of the organization, which can lead to improved performance.

Several researchers have found a positive relationship between performance planning and employee performance. For example, a study by Ref. [13] found that organizations with effective performance management systems, including clear goal setting and regular feedback, had higher levels of employee motivation and job satisfaction. Another study by Ref. [14] also showed that employees who were involved in the process of setting their own goals performed better than those who were not. This suggests that involving employees in the planning process can lead to greater ownership over their work which ultimately leads to improved results. Another research conducted by Ref. [15], demonstrated how specific goals led to higher levels of task persistence as well as increased effort towards achieving these objectives; this is because when individuals know exactly what they are working towards it creates an intrinsic motivation within them which drives them forward even during difficult times or setbacks along the way. Overall, these findings suggest that there is indeed a positive relationship between effective performance planning processes such as goal setting or feedback mechanisms, on the one hand, while also improving overall team morale leading directly back to increasing retention rates within organizations over time due largely again too clearer communication channels between all parties involved.

Although there are many studies supporting the positive relationship between performance planning and employee performance, some researchers have found no significant correlation between the two. For example, a study by Locke and Latham (2019) found that, while goal setting is important for motivation and direction, it did not necessarily lead to improved job performance. Another study by Mone and London (2021) also suggested that traditional approaches to goal setting may hinder employee motivation and creativity in certain situations. They argue that rigid goals can limit employees' ability to think outside of the box or pursue alternative solutions. Furthermore, a meta-analysis conducted by Kluger and DeNisi (1996) showed mixed results on the effectiveness of feedback in improving job performance. While feedback was generally beneficial when given correctly, ineffective or poorly delivered feedback could harm an individual's self-esteem leading ultimately towards decreased productivity over time instead of increased output as intended initially through these processes, such as performance planning, etc. To replicate these findings in this study we developed the following hypothesis.

H1

Performance planning has a significant positive impact on employee performance in Ethiopian SMEs.

2.1.2. The relationship between feedback and employee performance?

Feedback has been shown to have a positive relationship with employee performance [19]. When employees receive regular feedback on their performance, they are better able to understand what is expected of them and how they can improve. By setting specific performance goals and taking appropriate action to achieve them, employees can improve their work performance. Moreover, receiving feedback on their performance can make employees feel appreciated for their contributions, which in turn increases motivation and engagement at work [20]. However, a lack of feedback can lead to confusion, frustration, and a lack of direction, which can ultimately negatively impact employee performance [21]. Therefore, organizations need to establish a system of regular and constructive feedback to improve employee performance.

Several researchers have found a positive relationship between feedback and employee performance. For example, a study by Ref. [22] showed that effective feedback can lead to significant improvements in job performance. The study found that when employees receive specific, timely, and constructive feedback on their work, they are more likely to improve their skills and knowledge. Another research conducted by Ref. [23], demonstrated how regular coaching conversations with managers led to higher levels of employee engagement, as well as increased productivity; this is because when individuals feel supported through these processes, it creates an intrinsic motivation within them which drives them forward even during difficult times or setbacks along the way. A study conducted by Ref. [24] also suggested that 360-degree feedback systems - where employees receive input from multiple sources including peers, subordinates, and supervisors - can be particularly effective at improving job performance since it provides a more comprehensive view of an individual's strengths and weaknesses.

Although there are many studies supporting the positive relationship between feedback and employee performance, some researchers have found no significant correlation between the two. For example, a study by Ref. [25] also showed that ineffective or poorly delivered feedback could harm an individual's self-esteem leading ultimately towards decreased productivity over time instead of increased output as intended initially through these processes such as feedback. Another research conducted by Ref. [26], suggested that employees may not always be receptive to feedback due to factors such as personality traits or cultural differences. They argue that individuals who are more sensitive to criticism may become defensive when receiving negative feedback which can lead them to feel demotivated rather than motivated. Additionally, a meta-analysis conducted by Ref. [24] showed mixed results on the effectiveness of 360-degree feedback systems in improving job performance. While they found some evidence supporting its effectiveness in certain situations, they also noted potential drawbacks including concerns about confidentiality and fairness in how ratings were assigned.

The following hypothesis was generated to explore the link between feedback and employee performance in an Ethiopian context.

H2

Regular feedback provided to employees has a significant positive impact on employee performance in Ethiopian SMEs.

2.1.3. The relationship between performance appraisal and employee performance

Performance appraisal is a formal evaluation process that assesses an employee's job performance and productivity over a specific period of time. There is a significant relationship between performance appraisal and employee performance, as appraisal results can motivate employees to improve their performance, set clear expectations for future performance, and identify areas where training and development are needed [27]. If the appraisal process is seen as fair, accurate, and useful, employees may feel more engaged and committed to their job, leading to improved performance. However, if the appraisal process is perceived as unfair or inaccurate, it can have negative effects on employee morale and job satisfaction [28]. Therefore, organizations need to develop and implement effective performance appraisal systems that are perceived by employees as fair and useful.

Several researchers have found a positive relationship between performance appraisal and employee performance. For example, a study by Ref. [29] showed that employees who received regular feedback through the appraisal process performed better than those who did not receive any feedback. Another research conducted by Ref. [30], demonstrated how effective appraisals can lead to higher levels of job satisfaction as well as increased productivity; this is because when individuals feel valued and recognized for their work it creates an intrinsic motivation within them which drives them forward even during difficult times or setbacks along the way. A third study by Ref. [31] suggested that when appraisals are tied to rewards such as promotions or salary increases, they can be particularly effective at improving job performance since it provides clear incentives for employees to improve their skills and knowledge.

Although there are many studies supporting the positive relationship between performance appraisal and employee performance, some researchers have found no significant correlation between the two. For example, a study by Ref. [32] also showed that when appraisals are not conducted effectively or fairly, they can harm employee morale and job satisfaction. Another research conducted by Ref. [33], suggested that employees may view appraisals as subjective or biased if they perceive their managers to be unfair in how ratings were assigned. This can lead to feelings of resentment towards management, which ultimately leads to decreased productivity over time instead of increased output as intended initially through these processes such as performance appraisal. To add to the existing body of knowledge, either by confirming or challenging existing theories or by generating new insights and understanding we develop the following hypothesis to check it in the Ethiopian context.

H3

A well-designed performance appraisal system has a significant positive impact on employee performance in Ethiopian SMEs.

2.1.4. The relationship between training and employee performance

There is a positive relationship between training and employee performance. When employees receive adequate training and development opportunities, they acquire the skills and knowledge to perform their job tasks more effectively and efficiently [34]. This can lead to higher levels of job satisfaction, motivation, and overall performance. Training can also enhance employee engagement and reduce turnover, as employees feel valued and invested in by their organization. Therefore, organizations must provide regular training and development opportunities for their employees to improve their performance and achieve their business goals. Several researchers have found a positive relationship between training and employee performance. For example, a study by Ref. [35] showed that employees who received job-specific training had higher levels of job satisfaction and performed better on the job than those who did not receive any training. Another research conducted by Ref. [36], demonstrated how effective training programs can lead to higher levels of skill acquisition as well as increased productivity; this is because when individuals are trained in new skills or knowledge, it creates an intrinsic motivation within them which drives them forward even during difficult times or setbacks along the way. Although there are many studies supporting the positive relationship between training and employee performance, some researchers have found no significant correlation between the two. For example, a study by Ref. [37], suggested that employees may not always apply what they learn in training to their actual work tasks due to factors such as lack of motivation or poor transfer of learning from the classroom setting into real-world situations.

To confirm or challenge previous results in Ethiopian SMEs contexts, we develop the following hypothesis.

by generating new insights and understanding, we develop the following hypothesis to verify it in the Ethiopian context.

H4

Providing training opportunities to employees has a significant positive impact on employee performance in Ethiopian SMEs.

2.1.5. The relationship between reward and employee performance

Research has shown that there is a positive relationship between rewards and employee performance. When employees perceive that their efforts are valued and rewarded, they are more likely to feel motivated and committed to their work, leading to increased job satisfaction and better performance [38]. In addition, rewards can serve as a means of reinforcing desired behaviors and encouraging employees to continue working towards achieving organizational goals. However, it is important to note that the type and frequency of rewards can also have an impact on employee performance and that rewards alone may not be sufficient to improve performance if other factors such as management support or training are lacking.

Several researchers have found a positive relationship between rewards and employee performance. For example, a study by Ref. [39] showed that when employees are rewarded for their good work, they tend to be more motivated and perform better on the job. Another research conducted by Ref. [40], demonstrated how effective reward systems can lead to higher levels of intrinsic motivation as well as increased productivity; this is because when individuals feel valued and recognized for their work, it creates an intrinsic motivation within them which drives them forward even during difficult times or setbacks along the way.

Although there are many studies supporting the positive relationship between rewards and employee performance, some researchers have found no significant correlation between the two. For example, a study by Ref. [41] showed that when rewards were used as a way to control or manipulate employees' behaviour rather than recognising their good work, it could actually lead to decreased motivation and job satisfaction. Another research conducted by Refs. [42,43], suggested that extrinsic rewards such as bonuses or promotions may not always be effective at improving intrinsic motivation since they can create an external focus on outcomes rather than internal drive towards personal growth. The following hypothesis was established to investigate the same link in Ethiopian SMEs’ situations and to support the universality of the idea.

H5

Rewards have a significant positive impact on employee motivation and performance in Ethiopian SMEs.

2.2. Conceptual framework

This study presents a conceptual framework that offers a holistic approach to enhancing employee performance in Ethiopian SMEs. The proposed framework incorporates several key elements, including performance planning, feedback and appraisal, training and development, as well as rewards. By integrating these components into their operations, SMEs can align the goals of their employees with those of the organization. This approach enables businesses to identify areas for improvement which ultimately leads to enhanced employee productivity resulting in increased competitiveness within the industry (Fig. 1).

Fig. 1.

Conceptual framework work of the study.

This study's conceptual framework is founded on the notion that a comprehensive performance management system, which encompasses performance planning, feedback, appraisal, training and rewards can improve employee performance in Ethiopian SMEs. The framework comprises six primary components:

Performance Planning: The performance planning component of the framework involves establishing clear and specific goals and objectives that align with the organization's strategic objectives. This includes identifying relevant key performance indicators (KPIs) and developing achievable, measurable, and time-bound performance goals [44].

Feedback: Providing constructive feedback to employees about their job performance is an essential aspect of this component. It entails discussing strengths, areas for improvement, as well as ways to enhance employee productivity. Feedback can be given by supervisors or peers formally or informally; it helps employees identify areas where they need improvement while staying motivated towards achieving their set targets [45].

Performance Appraisal: This element involves a formal evaluation process that assesses employee progress against established goals using objective measures whenever possible. The appraisal process should be transparently conducted based on clear criteria in a consistent manner [46].

Training: This component of the framework involves equipping employees with the essential skills, knowledge, and resources required to perform their job functions effectively [47].

Rewards: The rewards component entails providing incentives such as bonuses, promotions or other forms of recognition for good performance. It includes developing a rewards and recognition system that aligns with organizational objectives while promoting a positive work culture that encourages achievement of performance goals [48].

Employee performance: is the level of productivity, efficiency, and effectiveness with which an employee carries out their job responsibilities. It is a measure of how well an employee meets or exceeds the expectations set for them by their employer [44].

The six components of the framework are interconnected, with each component influencing and being influenced by the others. Successful implementation of a performance management system requires coordinated effort across all four components, with clear communication and support from top management.

3. Materials and methods used

The objective of this study is to examine the impact of performance management systems (PMS) on employee productivity in Small and Medium Enterprises (SMEs) operating in Ethiopia. A cross-sectional research design was adopted, allowing data collection at a single point in time due to its cost-effectiveness and efficiency for this study. Both qualitative and quantitative data were collected using primary sources such as questionnaires with a five-likert scale from strongly agree to strongly disagree while secondary sources were obtained through relevant literature reviews. According to the annual report of the National Bank of Ethiopia (NBE) released this month (March 2022) there are 29,555 registered SMEs in Addis Ababa city, Ethiopia. Hence, the target population of the study was all active employees working in 29,555 registered SMEs in the city. Purposive sampling technique was used for participant selection based on specific criteria, including being employees of SMEs that have implemented PMS within their organizations; ensuring participants had experience with performance management systems. A sample size consisting of 134 employees was selected based on statistical power analysis using G * Power software version 3.1. The relationship between the components of PMS (planning, feedback, appraisal & training) and employee productivity were analysed via multiple regression analysis & Pearson's correlation techniques. Once all relevant data had been collected from each SME participating in this study (n = 134), the data was analysed statistically using SPSS version 27. Then, descriptive statistics such as mean scores were computed for each variable under investigation (performance management system components) to determine their level of influence on employee performance. Finally, inferential statistics such as regression analysis were carried out to identify which specific components or elements within a comprehensive performance management system have significant effects on improving employee performance among small & medium enterprises (SMEs) operating within Ethiopia's context.

3.1. Reliability and validity of the data

In our study, we attempted to assess the efficacy of the performance management system by utilizing six primary variables, each with four indicators, which were included in the questionnaire. We accept that in examining the reliability and validity of these important variables, we used an average method [45].'s past studies that supported this manner inspired this approach.

Cronbach's Alpha is a measure of internal consistency reliability, which assesses how well a set of items in a questionnaire or survey measure a single construct or concept. In this case, the Cronbach's Alpha value is 0.852, which indicates that the six items in the questionnaire are highly correlated and that they are measuring the same underlying construct related to the topic of interest. The value of Cronbach's Alpha ranges from 0 to 1, and a higher value indicates greater internal consistency or reliability. A value of 0.852 suggests that the items in the questionnaire are reliable and consistent in measuring the construct of interest.

When interpreting the value of Cronbach's Alpha, it is crucial to take into account the number of items in the questionnaire. In this study, since there are six items in the questionnaire and Cronbach's alpha indicates that these items are internally consistent, it suggests that they effectively measure the construct under investigation.

3.2. Demographic characteristics of respondents

The interpretations of the respondents' characteristics in terms of gender, age, education and experience offer valuable demographic information that can aid in comprehending the sample composition for this study.

From this Table 2, we can understand that the majority of respondents were male (63.5 %) compared to female respondents (36.5 %) and the largest age group among the respondents was in the range of 41–50 years (26.9 %), followed by the age range of 31–40 years (22.2 %) (see Table 1). The smallest age group was older than 61 years (17.2 %) in this study. Besides, the highest proportion of respondents had a certificate-level education (34.7 %), followed by high school education (23.9 %) and a degree-level education (23.1 %). A smaller percentage of respondents had an elementary education (15.3 %), and a very small percentage had a master's or PhD degree (2.9 %). In relation to their business experience, nearly half of the respondents (49.9 %) had less than 2 years of business experience. The second largest group had 3–6 years of experience (35.1 %), while the remaining respondents had varied levels of experience ranging from 7 to 10 years (3.5 %) to over 15 years (4.6 %). Therefore, these figures provide information on the demographic characteristics of the study sample, which was valuable to understand the generalisability of the findings and the possible influence of these demographic factors on the relationship being studied.

Table 2.

Demographic characteristics of respondents.

Item	Option	frequency	Percent
Gender	Male	86	63.5
	Female	48	36.5
	Total	134	100
Age	20–30 yrs	26	19.2
	31–40 yrs	30	22.2
	41–50 yrs	36	26.9
	51–60 yrs	23	14.5
	>61 yrs	19	17.2
	Total	134	100
Education	Elementary	21	15.3
	High school	32	23.9
	Certificate	46	34.7
	Degree	31	23.1
	Masters or PhD	4	2.9
	Total	373	100
Experience in their business	<2 yrs	66	49.9
	3–6 yrs	48	35.1
	7–10 yrs	5	3.5
	11–14 yrs	9	7.0
	>15 yrs	6	4.6
	Total	134	100

Source: Owen Survey Result, 2023

Table 1.

Reliability & validity.

Reliability Statistics
Cronbach's Alpha	N of Items
.852	6

Source: Owen Survey Result, 2023

3.3. Pearson correlation analysis between performance management system and employee performance

Table 3 shows the correlation coefficients between five different variables related to performance management: performance planning, feedback, performance appraisal, performance training, and performance rewards. Each variable is correlated with the others, and the Pearson correlation coefficient is used to determine the strength and direction of the relationship between them (see Table 3).

Table 3.

Correlation table.

Correlations
				PerPlanning	PerFeedback	PerAppraisal	PerTraining	PerRewards
PerPlanning	Pearson Correlation			1	.508a	.678a	.330a	.217a
	Sig. (1-tailed)				.000	.000	.000	.006
	N			134	134	134	134	134
	Bootstrapc	Bias		0	.000	.002	.002	−.002
		Std. Error		0	.066	.053	.079	.080
		95 % Confidence Interval	Lower	1	.373	.552	.168	.056
			Upper	1	.631	.768	.484	.370
PerFeedback	Pearson Correlation			.508a	1	.580a	.508a	.248a
	Sig. (1-tailed)			.000		.000	.000	.002
	N			134	134	134	134	134
	Bootstrapc	Bias		.000	0	.002	.000	.000
		Std. Error		.066	0	.059	.082	.095
		95 % Confidence Interval	Lower	.373	1	.457	.332	.053
			Upper	.631	1	.689	.653	.423
PerAppraisal	Pearson Correlation			.678a	.580a	1	.336a	.218a
	Sig. (1-tailed)			.000	.000		.000	.006
	N			134	134	134	134	134
	Bootstrapc	Bias		.002	.002	0	.001	−.003
		Std. Error		.053	.059	0	.092	.098
		95 % Confidence Interval	Lower	.552	.457	1	.149	.031
			Upper	.768	.689	1	.508	.405
PerTraining	Pearson Correlation			.330a	.508a	.336a	1	.566a
	Sig. (1-tailed)			.000	.000	.000		.000
	N			134	134	134	134	134
	Bootstrapc	Bias		.002	.000	.001	0	−.005
		Std. Error		.079	.082	.092	0	.069
		95 % Confidence Interval	Lower	.168	.332	.149	1	.408
			Upper	.484	.653	.508	1	.680
PerRewards	Pearson Correlation			.217a	.248a	.218a	.566a	1
	Sig. (1-tailed)			.006	.002	.006	.000
	N			134	134	134	134	134
	Bootstrapc	Bias		−.002	.000	−.003	−.005	0
		Std. Error		.080	.095	.098	.069	0
		95 % Confidence Interval	Lower	.056	.053	.031	.408	1
			Upper	.370	.423	.405	.680	1

^aCorrelation is significant at the 0.01 level (1-tailed).

^cUnless otherwise noted, bootstrap results are based on 1000 bootstrap samples.

Source: Owen Survey Result, 2023

The Pearson correlation coefficient ranges from −1 to 1, where a value of 1 indicates perfect positive correlation, 0 indicates no correlation and −1 represents perfect negative correlation. The table reveals that all variables are positively correlated with each other; as one variable increases, the others also tend to increase. Performance appraisal and performance planning exhibit the strongest positive relationship (0.678), followed by feedback and performance appraisal (0.580), then by training and rewards (0.566) while the weakest is between rewards and planning(0 0.217).

All correlations are significant at a high level of confidence (p < 0.01 one-tailed). This suggests that implementing an effective performance management system comprising planning, feedback, appraisal training & reward can enhance employee productivity significantly. Managers can use this information to develop more efficient systems for managing employee performances effectively across these aspects in order to improve overall organizational competitiveness.However, it's important noting that correlational analysis does not imply causation hence further research is necessary in establishing causal relationships among these variables.

3.4. Multiple linear regression analysis

The Model Summary table presents details regarding the adequacy of fit for the regression model employed to forecast employee performance using five predictors: performance rewards, performance planning, feedback, training and appraisal. The R value, which represents the correlation coefficient between the predicted values and the actual values, is 0.942. This indicates a strong positive relationship between the predictors and the dependent variable. The R Square value, which represents the proportion of the variation in the dependent variable explained by the predictors, is 0.887. This means that approximately 88.7 % of the variability in employee performance can be explained by the five predictors included in the model, The adjusted R square value is 0.883, which is slightly lower than the R square value, but still indicates a good fit for the model. The Standard Error of the Estimate is 0.14799, which represents the average distance that the observed values are from the predicted values. A lower standard error of the estimate indicates a better fit for the model. The Durbin-Watson statistic, which is used to test for autocorrelation in residuals (the difference between predicted values and actual values), has a value of 1.752. This value falls within the acceptable range of 1.5–2.5, indicating that there is no significant autocorrelation in the residuals (Table 4).

Table 4.

Model summary.

Model Summaryb
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate	Durbin-Watson
1	.942a	.887	.883	.14799	1.752

^aPredictors: (Constant), Performance Rewards, Performance Planning, Feedback, Performance Training, Performance Appraisal.

^bDependent variable: Employee Performance.

Source: Owen Survey Result, 2023

Overall, the Model Summary table indicates that the regression model is a good fit for the data and can be used to make predictions about employee performance based on the five predictors included in the model.

The table depicts the results of an ANOVA analysis, which revealed a significant association between the dependent variable (employee performance) and its predictors (rewards, planning, feedback, training and appraisal). Hence, the ANOVA table indicates that the predictor variables (performance rewards, planning, feedback, training, and appraisal) have a significant effect on employee performance, as evidenced by the highly significant F-statistic and low significance level (p < 0.001). This means that the model is statistically significant and can be used to predict employee performance based on predictor variables. This is also fitted with the research findings of [[13], [14], [15],20,21,29,35], and [39].

The table shows the coefficients for the five predictors (independent variables) and the constant term in a linear regression model with the dependent variable of employee performance. The unstandardized coefficients represent the change in the dependent variable (employee performance) associated with a one-unit change in the predictor variable while holding all other predictors constant.

The constant term (0.285) represents the expected value of employee performance when all predictors are equal to zero. The standardized coefficient (Beta) for each predictor is a measure of the relative importance of each predictor in explaining the variation in employee performance while controlling for the other predictors.

The coefficients show that all five predictors have a statistically significant relationship with employee performance. Performance appraisal has the strongest positive relationship with employee performance (B = 0.464, p < 0.001). This finding supports the results of research conducted by Refs. [27,29,30], and [31]. However, the results of this study contradict the results of studies conducted by Refs. [32,33] that have explained the interaction between performance appraisal and employee performance. In addition, performance planning (B = 0.244, p < 0.001), feedback (B = 0.181, p < 0.001), and training (B = 0.181, p < 0.001) also have a strong positive relationship with employee performance. This result is fitted with the research findings of [[12], [13], [14], [15],19,20,22,23,35], and [36], and contradicts with the findings of Locke and Latham, (2019), Mone and London, (2021), Kluger and DeNisi, (1996) [25], Ashford, Blatt and VandeWalle, (2003) [26], and [37]. Performance rewards, on the other hand, has a negative relationship with employee performance (B = −0.116, p = 0.015), suggesting that providing rewards may not always lead to better employee performance. This finding was also supported by the findings of [42,43]. From this we can understand that, H1, H2, H3 and H4 of the formulated hypotheses were supported by the data and found to be statistically significant in this study and accepted. But the last hypothesis was rejected as reward has a negative relationship between employees’ performance. However, it should be noted that these findings do not necessarily mean that rewards are never effective in improving employee performance. Different organizations and contexts may produce different results, and the design and implementation of performance reward systems may be critical factors in determining their effectiveness.

Overall, this data implies that incorporating performance planning, feedback, appraisal, training and rewards can enhance employee productivity in Ethiopian SMEs. Nevertheless,it's important to note that correlation does not necessarily indicate causation; other factors not included in the model may also influence employee performance.

The ANOVA and regression analyses indicate that a performance management system comprising of planning, feedback, appraisal, training and rewards can significantly enhance employee productivity in Ethiopian SMEs. The regression model revealed that all five components of the performance management system had a positive influence on employee performance. Performance appraisal had the most significant impact followed by planning, feedback and training while rewards showed negative effects on employee productivity. Overall,the findings suggest that an efficiently designed & implemented performance management system is an effective tool for improving employees' work output in Ethiopian SMEs.

3.5. Regression analysis between performance management system and employee performance

3.5.1. Normality, Linearity, homoscedasticity, and autocorrelation

Fig. 2, which displays a normal distribution of employee performance data, is a significant representation of the effectiveness of the performance management system in Ethiopian SMEs (see Fig. 2). The normal distribution pattern suggests that most employees perform at an average or expected level. This indicates that the performance management system has been successful in setting clear expectations and goals for employees while providing adequate training and resources to meet those expectations. Additionally, this pattern implies fewer exceptional or poor performers compared to those who perform at an average level; this could be attributed to targeted training provided by identifying areas requiring improvement through effective appraisal & rewards systems motivating employees towards better performances resulting in reduced numbers performing poorly.

Fig. 2.

Normality.

Source: Owen Survey Result, 2023

In general, the implementation of a performance management system has enhanced employee productivity by providing regular feedback, identifying areas for improvement and rewarding good performances. This has resulted in a normal distribution pattern of employee performance data indicating that most employees are meeting or exceeding expectations.

Fig. 3 displays a scatter plot with a regression line between the dependent variable (employee performance) and five independent variables (performance planning, feedback, appraisal, training and rewards) in Ethiopian SMEs. The data points are closely clustered around the regression line indicating that there is a strong linear correlation between these variables which has been confirmed by statistical analysis. The positive slope of the regression line suggests that as independent variables increase so does employee performance while its intercept indicates minimum levels of employee productivity even if all independent factors are zero. This relationship provides valuable insights for managers seeking to enhance employees' work output through effective performance management systems. It suggests that focussing on improving performance planning, feedback, appraisal, training, and rewards can have a positive impact on employee performance. Managers can use this information to identify areas for improvement and design targeted interventions to improve employee performance. Furthermore, the close clustering of data points around the regression line suggests that the relationship between these variables is almost constant. This means that managers can expect a predictable change in employee performance for a given change in any of these independent variables. This information can be used to set realistic goals, measure progress, and evaluate the effectiveness of performance management systems over time (see Fig. 3).

Fig. 3.

Linearity.

Source: Owen Survey Result, 2023

In summary, Fig. 3 provides valuable information on the relationship between performance management systems and employee performance in Ethiopian SMEs. Strong linear correlation and constant rate of change suggest that managers can use this information to design effective performance management systems, set realistic goals, and measure progress over time.

Homoscedasticity refers to the assumption that the variance of errors in a regression model is constant across all levels of the predictor variable. This assumption is important because violations of homoscedasticity can lead to biased and inefficient parameter estimates and inaccurate hypothesis tests. In the table provided, we see that for each pair of variables, a scatter plot is displayed along with the Pearson correlation coefficient and associated p-value. However, in order to assess homoscedasticity, we need to examine the scatter plot for each pair of variables. A scatter plot with homoscedasticity would show an approximately equal amount of spread of data points around the regression line across all levels of the predictor variable. On the contrary, a scatter plot with heteroskedasticity would show an unequal amount of spread of data points around the regression line across different levels of the predictor variable, resulting in a funnel-like shape (Fig. 4).

Fig. 4.

Heteroscedasticity.

Source: Owen Survey Result, 2023

In this case, we can conclude that homoscedasticity assumptions had been met because the distribution of scatter plots appears more random and evenly spread, rather than funnel-shaped. This suggests that the variance of errors in the regression models is approximately equal across all levels of the predictor variable, and the parameter estimates and hypothesis tests are likely to be reliable.

4. Conclusions and recommendations

This paper emphasizes the importance of performance management systems for small and medium-sized enterprises (SMEs) in Ethiopia. The absence of an effective system can lead to low morale and reduced productivity among employees, which ultimately affects the growth and development of Ethiopia's economy. Additionally, the article analyses various research studies and best practices related to performance management systems and identifies effective strategies for SMEs to implement such systems. Additionally, a linear regression model is used to demonstrate that five key predictors, including performance planning, feedback, appraisal, training, and rewards - have a statistically significant positive relationship with employee performance. Therefore, it is crucial for SMEs to implement a successful system that aligns employee goals with organisational objectives, provides regular feedback on performance, and recognises exceptional work done by employees. By adopting these strategies mentioned above, such as providing regular feedback on employee performance, will help identify areas where improvements are needed leading to increased job satisfaction levels amongst workers resulting in higher productivity rates within Ethiopian SMEs. Additionally, recognising the exceptional work done by employees through rewards or promotions will motivate them further toward achieving their goals while contributing positively towards business success. Furthermore, proper training opportunities should also be provided, as lack thereof exacerbates problems leading to poor job satisfaction levels among workers resulting from low job performances affecting overall business operations negatively. By implementing these measures recommended within this study, Ethiopian SME owners/managers/HR professionals can increase their workforce's potential leading toward sustainable business success contributing positively towards economic growth through poverty reduction measures creating more jobs opportunities across various sectors benefiting society at large. Besides, this paper has practical implications not only for business owners/managers/HR professionals but also policymakers interested in promoting economic growth through SME development.

Study Limitations; It's important to acknowledge that this study has some limitations. Firstly the research may not fully represent the range of SMEs because of how the sample was selected. This could potentially limit how applicable the findings are. Additionally relying on self reported or manager evaluations to measure employee performance introduces a potential, for bias. The cross sectional nature of the study may not capture how performance management systems evolve over time. Lastly even though both qualitative and quantitative methods were used there could still be factors that influence PMS effectiveness.

Further Research Recommendations; To build upon this study future research could include long term investigations to track how PMS impacts SMEs over time and enhance our understanding of its development. Comparative analyses could assess approaches to PMS effectiveness and their suitability across industries and organizational sizes. Qualitative research could delve deeper into employee and manager perspectives on PMS. Exploring the impact of technology adoption, employee engagement and sustainable PMS practices can contribute to an understanding. Additionally case studies examining PMS implementations and benchmarking against industry standards could provide insights for SMEs, in Ethiopia and similar contexts.

Data availability statement

Data can be available based on request @ getnur2000@gmail.com.

CRediT authorship contribution statement

Nuru Siraj: Mohammed, Conceptualization, Data curation, Formal analysis, Methodology, Resources, Software, Validation, Visualization, Writing – original draft. István Hágen: Funding acquisition, Project administration, Supervision, Writing – review & editing.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.