Performance Appraisal

Business Dictionary defines Performance Appraisal as "the process by which a manager or consultant (1) examines and evaluates an employee's work behavior by comparing it with preset standards,
(2) documents the results of the comparison, and
(3) uses the results to provide feedback to the employee to show where improvements are needed and why."
Performance appraisals determine who needs what training and who will be promoted, demoted, retained, or fired.[1]

Because companies have a limited pool of funds to award raises and bonuses, performance appraisals help determine how to allocate those funds. They provide a way for companies to determine which employees have contributed the most to their growth so companies can reward their top-performing employees accordingly. Performance appraisals also help employees and their managers create a plan for employee development through additional training and increased responsibilities, as well as to identify shortcomings the employee could work to resolve. Ideally, the performance appraisal is not the only time during the year that managers and employees communicate about the employee’s contributions. More frequent conversations help keep everyone on the same page, develop a stronger relationship between employees and managers, and make annual reviews less stressful.[2]

Critics of performance appraisals say they are prone to an ‘overinflation’ effect, where managers rate employees as better-performing than they actually are to avoid conflict. They also say employees often have negative perceptions of performance appraisals as inherently critical, outdated evaluation methods. Another criticism is that formal performance appraisals do not always gel with modern organizational culture.[3]

Purpose of Performance Appraisal[4]

Performance appraisals are essential for the effective management and evaluation of staff. Appraisals help develop individuals, improve organizational performance, and feed into business planning. Formal performance appraisals are generally conducted annually for all staff in the organization. Each staff member is appraised by their line manager. Directors are appraised by the CEO, who is appraised by the chairman or company owners, depending on the size and structure of the organization.

  • Annual performance appraisals enable management and monitoring standards, agreeing on expectations and objectives, and delegating responsibilities and tasks. Staff performance appraisals also establish individual training needs and enable organizational training needs analysis and planning.
  • Performance appraisals also typically feed into organizational annual pay and grading reviews, which coincide with the business planning for the next trading year.
  • Performance appraisals generally review each individual's performance against objectives and standards for the trading year, agreed upon at the previous appraisal meeting.
  • Performance appraisals are also essential for career and succession planning - for individuals, crucial jobs, and the organization.
  • Performance appraisals are important for staff motivation, attitude, and behavior development, communicating and aligning individual and organizational aims, and fostering positive relationships between management and staff.
  • Performance appraisals provide a formal, recorded, regular review of an individual's performance and a plan for future development.
  • Job performance appraisals - in whatever form they take - are therefore vital for managing the performance of people and organizations.

Objectives of Performance Appraisal[5]

Performance Appraisal can be done with the following objectives in mind:

  • To maintain records to determine compensation packages, wage structure, salary raises, etc.
  • To identify the strengths and weaknesses of employees to place the right men on the right job.
  • To maintain and assess the potential present in a person for further growth and development.
  • To provide feedback to employees regarding their performance and related status.
  • To provide feedback to employees regarding their performance and related status.
  • It serves as a basis for influencing the working habits of the employees.
  • To review and retain the promotional and other training programs.

Performance Review Tips[6]

  • The employee should never hear about positive performance or performance in need of improvement for the first time
  • No matter the components of your performance review process, the first step is goal setting
  • During preparation and goal setting, you need to make how you will evaluate the employee’s performance clear.
  • Avoid the horns and halo effect in which everything discussed in the meeting involves positive and negative recent events.
  • Solicit feedback from colleagues who have worked closely with the employee.
  • If your company uses a form that you fill out in advance of the meeting, give the performance review to the employee in advance of the meeting.
  • Prepare for the discussion with the employee.
  • When you meet with the employee, spend time on the positive aspects of his or her performance.
  • The spirit in which you approach this conversation will make a difference in whether it is effective.
  • Conversation is the keyword that should define a performance review meeting.

Scale Formats of Performance Appraisal[7]

  • The earliest performance appraisal rating scales were graphic scales—they generally provided the rater with a continuum on which to rate a particular trait or behavior of the employee. Although these scales vary in the degree of explicitness, most provide only general guidance on the nature of the underlying dimension or on the definition of scale points along the continuum. Some scales present mere numerical anchors:

Performance Appraisal

Others present adjectival descriptions at each anchor point:

Performance Appraisal 1

Raters are given the freedom to mark anywhere on the continuum—either at a defined scale point or somewhere between the points. Trait scales, which are constructed from employees' personal characteristics (such as integrity, intellectual ability, and leadership orientation) are generally graphic scales. Many decades of research on ratings made with graphic scales found them fraught with measurement errors of unreliability, leniency, and range restriction, which many scholars attributed to the limited amount of definition and guidance they provided the rater.

  • In reaction to these perceived limitations of graphic scales, a second type of scale—behaviorally anchored rating scales (BARS)—was developed. The seminal work on BARS was done by Smith and Kendell (1963). Although BARS scales still present performance on a continuum, they provide specific behavioral anchors to help clarify the meaning of the performance dimensions and help calibrate the raters' definitions of good and poor performance. Some proponents of behaviorally focused scales also claimed that they would eliminate unnecessary subjectivity (Latham and Wexley, 1977). The methodology used in BARS was designed by researchers to form a strong link between the critical behaviors in accomplishing a specific job and the instrument created to measure those behaviors. Scale development follows a series of detailed steps requiring careful job analysis and the identification of effective and ineffective examples of critical job behavior. The design process is iterative, and there are often two or three groups of employees involved in review and evaluation. The final scales usually range from five to nine points and include behavioral examples around each point to assist raters in observing and evaluating employees' performance.
  • A third type of scale, the Mixed Standard Scale proposed by Blanz and Ghiselli (1972), was designed to prevent rater biases proactively. For each performance dimension of interest, three behavioral examples are developed that describe above-average, average, and below-average performance. However, raters are presented with a randomly ordered list of behavioral examples without reference to performance dimensions. They are asked to indicate whether the ratee's performance is equal to, worse than, or better than the performance presented in the example. In this method, the graphic continuum and the definitions of the performance dimensions are eliminated from the rating form. The actual performance score is computed by someone other than the rater.
  • Forced-choice scales represent an even more extreme attempt to disguise the rating continuum from the rater. This method is based on carefully developing behavioral examples of the job that are assigned a preference value based on social desirability estimates made by job experts. Raters are presented with three or four equally desirable behaviors and asked to select the one that best describes the employee. The employee's final rating is calculated by someone other than the rater.

== Techniques/Methods of Performance Appraisals[8]
Numerous methods have been devised to measure the quantity and quality of performance appraisals. Each of the methods is effective for some purposes for some organizations only. None should be dismissed or accepted as appropriate except as they relate to the particular needs of the organization or an employee. Broadly all methods of appraisals can be divided into two different categories.

  1. Past-Oriented Methods
    • a) Rating Scales: Rating scales consist of several numerical scales representing job-related performance criterions such as dependability, initiative, output, attendance, attitude, etc. Each scale ranges from excellent to poor. The total numerical scores are computed, and final conclusions are derived. Advantages – Adaptability, easy to use, low cost, every type of job can be evaluated, many employees covered, no formal training required. Disadvantages – Rater’s biases
    • b) Checklist: Under this method, a checklist of statements of traits of employees in the form of Yes or No based questions is prepared. Here the rater only does the reporting or checking, and the HR department does the actual evaluation. Advantages – economy, ease of administration, limited training required, standardization. Disadvantages – Raters biases, use of improper weighs by HR, does not allow rater to give relative ratings
    • C) Forced Choice Method: The series of statements arranged in the blocks of two or more are given, and the rater indicates which statement is true or false. The rater is forced to make a choice. HR department does the actual assessment. Advantages – Absence of personal biases because of forced choice. Disadvantages – Statements may be wrongly framed.
    • d) Forced Distribution Method: Employees are clustered around a high point on a rating scale. Rater is compelled to distribute the employees on all points on the scale. It is assumed that the performance conformed to normal distribution. Advantages – Eliminates Disadvantages – Assumption of normal distribution, unrealistic central tendency errors.
    • e) Critical Incidents Method: The approach is focused on certain critical behaviors of employee that makes all the difference in the performance. Supervisors, as and when they occur, record such incidents. Advantages – Evaluations are based on job behaviors, ratings are supported by descriptions, feedback is easy, reduces recency biases, and chances of subordinate improvement are high. Disadvantages – Negative incidents can be prioritized, forgetting incidents, and overly close supervision; feedback may be too much and may appear to be punishment.
    • f) Behaviorally Anchored Rating Scales: statements of effective and ineffective behaviors determine the points. They are said to be behaviorally anchored. The rater is supposed to say which behavior describes the employee's performance. Advantages – helps overcome rating errors. Disadvantages – Suffers from distortions inherent in most rating techniques.
    • g) Field Review Method: This is an appraisal done by someone outside the employees’ own department, usually from the corporate or HR department. Advantages – Useful for managerial level promotions when comparable information is needed; disadvantages – Outsider is generally not familiar with employees' work environment, Observation of actual behaviors not possible.
    • h) Performance Tests & Observations: This is based on the test of knowledge or skills. The tests may be written or an actual presentation of skills. Tests must be reliable and validated to be useful. Advantage – Tests may be apt to measure potential more than actual performance. Disadvantages – Tests may suffer if the costs of test development or administration are high.
    • i) Confidential Records: Mostly used by government departments; however, its application in industry is not ruled out. Here the report is given in the form of an Annual Confidentiality Report (ACR) and may record ratings with respect to the following items; attendance, self-expression, teamwork, leadership, initiative, technical ability, reasoning ability, originality, resourcefulness, etc. The system is highly secretive and confidential. Feedback to the assessee is given only in case of an adverse entry. The disadvantage is that it is highly subjective, and ratings can be manipulated because the evaluations are linked to HR actions like promotions.
    • j) Essay Method: In this method, the rater writes down the employee description in detail within a number of broad categories, the overall impression of performance, promoteability of the employee, existing capabilities and qualifications of performing jobs, strengths and weaknesses, and training needs of the employee. Advantage – It is extremely useful in filing information gaps about the employees that often occur in a better-structured checklist. Disadvantages – It is highly dependent upon the writing skills of the rater, and most of them are not good writers. They may get confused because success depends on the memory power of raters.
    • k) Cost Accounting Method: Here, performance is evaluated from the monetary returns yielded to his or her organization. The cost to keep employees and the benefit the organization derives is ascertained. Hence it is more dependent upon cost and benefit analysis.
    • l) Comparative Evaluation Method (Ranking & Paired Comparisons): These are collections of different methods that compare performance with that of other co-workers. The usual techniques used may be ranking methods and paired comparison methods.
    • m) Ranking Methods: In this method, the worker is ranked based on merit, from best to worst. However, how best and why best are not elaborated on in this method. It is easy to administer and explain.
    • n) Paired Comparison Methods: In this method, each employee is rated with another employee in the form of pairs. The number of comparisons may be calculated with the help of a formula as under.
    N x (N-1) / 2
  1. Future-Oriented Methods
    • a) Management By Objectives: It means management by objectives, and the performance is rated against the achievement of objectives stated by the management. The MBO process goes as under.
      • Establish goals and desired outcomes for each subordinate
      • Setting performance standards
      • Comparison of actual goals with goals attained by the employee
      • Establish new goals and strategies for goals not achieved in the previous year.

Advantage – It is more useful for managerial positions.
Disadvantages – Not applicable to all jobs, allocation of merit pay may result in setting short-term goals rather than important and long-term goals, etc.

  • b) Psychological Appraisals: These appraisals are more directed to assess employees' potential for future performance rather than the past one. It is done through in-depth interviews, psychological tests, discussions with supervisors, and reviews of other evaluations. It focuses more on employees' emotional, intellectual, motivational, and other personal characteristics affecting their performance. This approach is slow and costly and may be useful for bright young members with considerable potential. However, the quality of these appraisals largely depends upon the skills of the psychologists who perform the evaluation.
  • c) Assessment Centers: This technique was first developed in USA and UK in 1943. An assessment center is a central location where managers may come together to have their participation in job-related exercises evaluated by trained observers. It focuses more on observing behaviors across select exercises or work samples. Assesses are requested to participate in in-basket exercises, work groups, computer simulations, role-playing, and other similar activities which require the same attributes for successful performance in the actual job. The characteristics assessed in the assessment center can be assertiveness, persuasive ability, communication ability, planning and organizational ability, self-confidence, resistance to stress, energy level, decision-making, sensitivity to feelings, administrative ability, creativity, mental alertness, etc. Disadvantages – Costs of employees traveling and lodging, psychologists, ratings strongly influenced by assessee’s interpersonal skills. Solid performers may feel suffocated in simulated situations. Those who are not selected for this also may get affected.

Advantages – well-conducted assessment centers can achieve better forecasts of future performance and progress than other methods of appraisals. Also, reliability, content validity, and predictive ability are high in assessment centers. The tests also ensure that the wrong people are not hired or promoted. Finally, it clearly defines the criteria for selection and promotion.

  • d) 360-Degree Feedback: It is a technique that is a systematic collection of performance data on an individual group derived from a number of stakeholders like immediate supervisors, team members, customers, peers, and self. Anyone with useful information on how an employee does a job may be one of the appraisers. This technique is highly useful for a broader perspective; greater self-development and multi-source feedback are useful. 360-degree appraisals measure interpersonal skills, customer satisfaction, and team-building skills. However, on the negative side, receiving feedback from multiple sources can be intimidating, threatening, etc. Multiple raters may be less adept at providing balanced and objective feedback.

Potential Benefits and Complications of Performance Appraisals[9]

  • Potential Benefits: There are a number of potential benefits of organizational performance management conducting formal performance appraisals (PAs). There has been a general consensus in the belief that PAs lead to positive implications for organizations. Furthermore, PAs can benefit an organization’s effectiveness. One way is PAs can often lead to giving individual workers feedback about their job performance. This may spawn several potential benefits, such as individual workers becoming more productive. Other potential benefits include:
    • Facilitation of communication: communication in organizations is considered an essential function of worker motivation. It has been proposed that feedback from PAs aid in minimizing employees’ perceptions of uncertainty. Fundamentally, feedback and management-employee communication can serve as a guide in job performance.
    • Enhancement of employee focus through promoting trust: behaviors, thoughts, and/or issues may distract employees from their work, and trust issues may be among these distracting factors. Such factors that consume psychological energy can lower job performance and cause workers to lose sight of organizational goals. Properly constructed and utilized PAs can lower distracting factors and encourage organizational trust.
    • Goal setting and desired performance reinforcement: organizations find it efficient to match individual workers’ goals and performance with organizational goals. PAs provide room for discussion in collaborating on these individual and organizational goals. Collaboration can also be advantageous, resulting in employee acceptance and satisfaction with appraisal results.
    • Performance improvement: well-constructed PAs can be valuable tools for communication with employees pertaining to how their job performance stands with organizational expectations. "At the organizational level, numerous studies have reported positive relationships between human resource management (HRM) practices" and performance improvement at both the individual and organizational levels.
    • Determining training needs: “Employee training and development are crucial in helping an organization achieve strategic initiatives.” It has been argued that for PAs to truly be effective, post-appraisal opportunities for training and development in problem areas, as determined by the appraisal, must be offered. PAs can especially be instrumental in identifying the training needs of new employees. Finally, PAs can help in the establishment and supervision of employees’ career goals.
  • Potential Complications: Despite all the potential advantages of formal performance appraisals (PAs), there are also potential drawbacks. It has been noted that determining the relationship between individual job performance and organizational performance can be a difficult task. Generally, there are two overarching problems from which several complications spawn. One of the problems with formal PAs is there can be detrimental effects on the organization(s) involved if the appraisals are not used appropriately. The second problem with formal PAs is they can be ineffective if the PA system does not correspond with the organizational culture and system. Complications stemming from these are:
    • Detrimental to quality improvement: it has been proposed that using PA systems in organizations adversely affects organizations’ pursuits of quality performance. Some scholars and practitioners believe using PAs is more than unnecessary if there is total quality management.
    • Subjective evaluations: Traditional performance appraisals are often based upon a manager's or supervisor's perceptions of an employee's performance, and employees are evaluated subjectively rather than objectively. Therefore the review may be influenced by many non-performance factors such as employee 'likeability,' personal prejudices, ease of management, and/or previous mistakes or successes. Reviews should instead be based on data-supported, measurable behaviors and results within the performer's control.
    • Negative perceptions: "Often, individuals have negative perceptions of PAs." Receiving and/or anticipating a PA can be uncomfortable and distressful and potentially cause "tension between supervisors and subordinates." If the appraised person does not trust their employer or appraiser or believes they will benefit from the process it may become a "tick box" exercise.
    • Errors: Performance appraisals should provide accurate and relevant ratings of an employee’s performance compared to pre-established criteria/goals (i.e., organizational expectations). Nevertheless, supervisors will sometimes rate employees more favorably than their true performance to please the employees and avoid conflict. "Inflated ratings are a common malady associated with formal" PA.
    • Legal issues: when PAs are not carried out appropriately, legal issues could place the organization at risk. PAs are used in organizational disciplinary programs and for promotional decisions within the organization. The improper application and utilization of PAs can affect employees negatively and lead to legal action against the organization.
    • Performance goals: performance goals and PA systems are often used in associations. Negative outcomes concerning the organizations can result when goals are overly challenging or overemphasized to the extent of affecting ethics, legal requirements, or quality. Moreover, challenging performance goals can impede an employee’s ability to acquire knowledge and skills. Especially in the early stages of training, it would be more beneficial to instruct employees on outcomes than performance goals.
    • Derail merit pay or performance-based pay: some researchers contend that the deficit in merit pay and performance-based pay is linked to the fundamental issues stemming from PA systems.

Legal Issues with Performance Appraisals[10]

Given that the results of a performance appraisal are often used to support a promotion, termination, salary increase, or job change, they are looked at very closely in employment discrimination suits. Besides providing a written summary of the appraisal to the employee, a small business owner would be well-advised to ensure the following with regard to the system at large:

  • Job expectations, as well as the appraisal system and its impact on employee's work status, are adequately communicated to all employees
  • Performance measures are related to the job being performed
  • Managers or co-workers providing input into the appraisal must be sufficiently trained as to be able to provide objective input
  • Employees are given timely feedback on performance and a reasonable amount of time and support in improving their performance

See Also


Further Reading