Performance Appraisal

How performance appraisal can contribute to firm’s 

competitive advantage?

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ü  Improving Performance

ü  Making Correct Decisions (pay, promotion etc)

ü  Ensuring Legal Compliance

ü  Minimising Job Dissatisfaction and Turnover

ü  Consistency between Organizational Strategy and Behaviour

ü  Organizational Strategy and Performance Appraisal 

    (feedback mechanism, consistency between organizational strategy and job behaviour, and consistency between organizational values and job behaviour)

Design Appraisal Program

ü  Designing an appraisal program poses several questions which need answers. They are –

ü  Formal vs informal appraisal

ü  Whose performance should be rated?

ü  Who are the raters? (Immediate supervisors, Subordinates, Peers, Clients – if by all – the appraisal system is called 360-degree appraisal system, Rating committees, Self-appraisal – the combination of above can be used)

ü  What are the problems of rating?

ü  How to solve?

ü  What to evaluate? [Criteria]

ü  When to evaluate?

ü  What methods? [Techniques]

Performance Evaluation - Concept

Performance management is the process of identifying, measuring, managing, and developing the perfor­mance of the human resources in an organization. Basically we are trying to figure out how well employees perform and then to ultimately improve that performance level. When used correctly, performance management is a systematic analysis and measurement of worker performance (including communication of that assessment to the individual) that we use to improve performance over time. Performance appraisal, on the other hand, is the ongoing process of evaluating employee performance. Performance appraisals are reviews of employee performance over time3, so appraisal is just one piece of performance management.

Performance evaluation is the systematic evaluation of individual with respect to their performance on the job and their potential for development. – Dale S Beach

Performance evaluation is a review of the job-relevant strengths and weaknesses of an individual or a team in an organization. – Wayne F Cascio

Performance appraisal is an objective assessment of an individual performance against well defined benchmarks. – K Aswathappa

According to Edwin Flippo, "Performance Appraisal is the systematic, periodic and impartial rating of an employee's excellence, in matters pertaining to his present job and his potential for a better job."

Performance appraisal should not be confined to the past performance alone; potentials of the employee for future performance must also be assessed.

The other terms used for PA are: performance rating, employee assessment, employee performance review, personnel appraisal, performance evaluation, employee evaluation and merit rating.

The relationship with Job Analysis

 Broadly Performance Appraisal serves four objectives –

i.                    Developmental Uses

a.       Identification of individual needs

b.      Performance feedback

c.       Identification of individual strengths and weakness, and developmental needs

ii.                  Administrative Uses/Decisions

a.       Salary

b.      Promotion

c.       Retention or termination

d.      Determining transfers and job assignments

e.       Lay-offs

f.       Recognition of individual performance

g.      Identification of poor performers

h.      Grievance and discipline programs

iii.                Organizational Maintenance/Objectives

a.       HR planning

b.      Determining organization training needs

c.       Evaluation of organizational goal achievement

d.      Evaluation of HR systems

e.       Reinforcement of organizational development needs

iv.                Documentation Purposes

a.       Documentation for HR decisions

b.      Validation of selection programs

c.       Helping to meet legal requirements

v.                  Others (Career planning and succession planning, Policy formulation, Supervisory understanding)

[Adapted from Cynthia D. Fisher, et al., Human Resource Management, Houghton Mifflin, 1997, p. 455 cited in Aswathappa (2010)]

Performance Appraisal Process

1.      State the major objectives of performance appraisal

2.      Set performance standards

3.      Communicate the standards to employees

4.      Design an Appraisal Program

5.      Appraise Performance

6.      Find deviations and archive data

7.      Communicate the rating to the employee

8.      Discuss the feedback with the employee

9.      Conduct post-appraisal Interview

10.  Initiate corrective actions (correct deviations/change standards/other uses of appraisal data for appropriate purposes)

Note: Step 10 is the domain of performance management.

Problems of Performance Evaluation (Agrawal, 2011)

·        Shifting standards

·        Different patterns

·        Role conflict

·        Time gap

·        Bias

·        Lack of skills

·        Organizational apathy

·        Human error

·        Lack of linkage with reward, punishment and employee development

Problems of Rating

Bias - Bias is simply a personality-based tendency, either toward or against something. In the case of performance assessment, bias is toward or against an individual employee. Biases make the evaluation process subjective rather than objective, and certainly provide the opportunity for a lack of consistency in effect on different groups of employees. So to overcome the bias problem, we need to be objective and not let our feelings of liking or disliking the individual influence our assessment.

Stereotyping - Stereotyping is mentally classifying a person into an affinity group, and then identifying the person as having the same assumed characteristics as the group. Though stereotyping is almost always assumed to be negative, there are many incidents of positive stereotypes. So we can avoid stereotyping by getting to know each employee as an individual and objectively evaluating individual employees based on their actual performance.

Halo error - This error occurs when the evaluator has a generally positive or negative (nega­tive halo error is sometimes called “horns error”) impression of an individual, and the evaluator then artificially extends that general impression to many individual categories of performance to create an overall evaluation of the individual that is either positive or nega­tive. In other words, if employees are judged by their supervisor to be generally “good” employees, and the supervisor then evaluates each of the areas of their performance as good, regardless of any behaviours or results to the contrary, the supervisor is guilty of halo error. We can avoid halo error by remembering that employees are often strong in some areas and weaker in others, and we need to objectively evaluate individual employees based on their actual performance for each and every item of assessment.

Distributional errors - These errors occur in three forms: severity or strictness, central ten­dency, and leniency. They are based on a standard normal distribution, or the bell curve that we are all so familiar with. In severity or strictness error, the rater evaluates everyone, or nearly everyone, as below average. Central tendency error occurs when raters evaluate everyone under their control as average—nobody is either really good or really bad. Finally, leniency error occurs when the rater evaluates all others as above average. Leniency error, therefore, is basically a form of grade inflation. We can avoid distributional errors by giving a range of evaluations. The distri­bution is often based on the ranking method of evaluation and forced distribution.

Similarity error - This error occurs when raters evaluate subordinates that they consider more similar to themselves as better employees, and subordinates that they consider dif­ferent from themselves as poorer employees. We all have a tendency to feel more comfort­able with people who we feel are more similar to ourselves, and if we are not careful, we can allow this feeling of comfort with similar individuals to be reflected in the performance appraisal process. We can avoid similarity error by embracing diversity and objectively evaluating individual employees based on their actual performance, even if they are differ­ent from us and don’t do things the same way that we do.

Proximity error - This error states that similar marks may be given to items that are near (proximate to) each other on the performance appraisal form, regardless of differences in performance on those measures. We can avoid proximity error by objectively evaluating employees’ actual performance on each and every item on the assessment form.

What helps most solve problems is the selection of right raters. Sanders (1979) proposed that right evaluators are those who should be able to – ■ Accurately describe the object (the evaluand) and context of that which is being evaluated ■ Conceptualize the purpose and framework of the evaluation ■ Derive useful evaluation questions, data requirements, and appropriate data sources ■ Select the means for collecting and analyzing data ■ Determine the value of the evaluand ■ Effectively communicate results and recommendations to the audience ■ Manage the evaluation project ■ Maintain ethical standards ■ Adjust to external factors influencing the evaluation ■ Evaluate the evaluation

Recency error - This error occurs when raters use only the last few weeks or month of a rating period as evidence of their ratings of others. For instance, if a warehouse worker has been a strong performer for most of the appraisal period, but right before his annual evalu­ation he knocks over a stack of high-cost electronic equipment while driving a forklift, he may be rated poorly due to recency error. We can avoid the recency error by evaluating the employee based on the entire assessment period, commonly 6–12 months. Using the critical incidents method really helps our recall and assessment of the entire period more objectively.

Contrast error - In contrast error, the rater compares and contrasts performance between two employees, rather than using absolute measures of performance to measure each employee. For example, the rater may contrast a good performer with an outstanding performer, and as a result of the significant contrast, the good performer may seem to be “below average.” This would be a contrast error. We can avoid contrast error by objectively evaluating individual employees based on their actual performance. We must use the rank­ing method correctly; first we assess each individual based on the items on the assessment form—then we rank the individuals based on their assessments.

Attribution error - In simplified terms, attribution is a process where an individual assumes reasons or motivations (such as attitudes, values, or beliefs) for an observed behavior. So, attribution error in performance appraisal might occur when the rater observes an employee action—such as an argumentative answer to a question—and assumes that the individual has a negative attitude toward the job and is a poor performer. This may not be true, and in such a case the rater would be guilty of an attribution error. We need to avoid attribution error because it is based on our subjective conclusion. When in doubt, we shouldn’t assume we know why the employee did or didn’t do something. We should talk to employees to find out so that we can objectively evaluate employees based on their actual performance.

Others - Spill-over effect (influence of past performance appraisal); Status effect (overrating of employees in higher-level job and vice versa), lack of uniform standards, appropriate appraisal technique, rater’s incompetency, lack of communication and time-consuming job.

What should be rated? [Performance Evaluation Criteria]

Traits, Behaviour and Results create the basis or criteria for performance evaluation (Traits identify the physical or psychological characteristics of a person; behaviors are simply the actions taken by individuals; Results are simply a measure of the goals achieved through a work process). Bernadin & Russell (1993) has identified the seven criteria for assessing performance, they are –

1.       Quality (conforming to some ideal way of performing the activity, or fulfilling the activity’s intended purpose)

2.       Quantity (the amount prodeuced, expressed in monetary terms, number of units, or number of completed activity cycles)

3.       Timeliness (the completion of activity in specified or desired time)

4.       Cost-effectiveness (best utilization of resources in wise manner)

5.       Need for supervision (the degree to which a job performer needs supervisory assistance)

6.       Interpersonal impact (the degree to which a job performer promotes feeling of self-esteem, goodwill and cooperation among peers and sub-ordinates)

7.       Community service (employee’s community involvement)

[Note – the first four are objective and the last three are subjective in nature]

Above criteria relate to past performance and behaviour of an employee. There is also the need for assessing the potential of an employee for future performance, particularly when employee is tipped for assuming greater responsibilities. Other criteria are initiative, attendance, sincerity, appearance, attitude, honesty, handling customers’ issue etc.

Timing of Evaluation

The general trend is to evaluate once in three months, or six months or once in a year. According to a survey conducted in 1997 by Aurther Anderson, 70% of the organizations conduct it once a year. Newly hired one are rated more frequently than the older ones. It depends upon organization though frequent evaluation gives constant feedback to the rate, thus enabling him or her to improve performance if there is any gap.

Methods of Appraisal (Techniques)

Numerous methods have been devised to measure the quantity and quality of employee’s job. Broadly all the methods can be classified into – i. Past-oriented methods ii. Future-oriented methods

i. Past-oriented methods

a.       Rating Scales

b.       Checklist

c.        Forced Choice

d.       Forced Distribution

e.        Critical Incident

f.        BARS

g.        Field Review

h.       Tests and Observations

i.         Essay

j.         Cost Accounting

ii. Future-oriented methods

a.       MBO

b.       360 Degree Appraisal

c.        Psychological Appraisal

d.       Assessment Centres

Reasons Why Appraisal Fails

ü  Appraiser lacks information concerning an employee’s performance

ü  Unclear performance standards

ü  Appraiser’s insincerity (honesty)

ü  Appraiser lacks appropriate skills

ü  Ineffective communication of standards

ü  No or ineffective performance feedback

ü  No or ineffective link between performance and reward

ü  Misunderstanding about the appraisal to both appraisee and appraiser

ü  Weak preparation of appraiser

Performance Interview

It is the important part of appraisal process. Once the appraisal has been made of employees, the raters should discuss and review the performance with ratees.  So that, they will receive feedback about where they stand in the eyes of supervisors.

Performance interview has three goals:

·         to change behaviour of employees,

·         to maintain the behaviour and

·         to recognize superior performance behaviours.

Edward Deming on Performance Appraisal

Deming is opposed to employee assessment because it –

ü  Rewards people for manipulating the system rather than improving it,

ü  Is often self-defeating,

ü  Is inconsistent,

ü  Acts as a substitute for proper management, and

ü  Is inherently unfair.

His alternatives to Performance Appraisal are

ü  Meticulous selection of leaders,

ü  Educating workers about their obligations, and improved training and education after selection,

ü  Getting leaders to function as colleagues rather as judges,

ü  Subordinate performance to be assessed using statistical data, and

ü  Three to four hours interview annually, with subordinates aimed at support and encouragement.

Emerging Issues on Performance Appraisal

ü  360 Degree Appraisal (Multiple appraisal)

ü  Team Appraisal (self-appraisal, appraisal by peers etc)

ü  360 Degree Feedback

ü  Focus on achievement (people try to maximize achievement; employee driven)

ü  More focus on behaviours and results

ü  Trained Raters

ü  Effective reward system (performance-reward link)

ü  Combination of relative and absolute standards

ü  Ongoing feedback

Challenges of Performance Appraisal

ü  Appraising the self-managed teams or empowered teams

ü  Appraising the individual and team performance in a team

ü  Create a culture of excellence

ü  Align organizational objectives to individual aspirations

ü  Clear growth path for talented individuals

ü  Embed (set in) teamwork in almost all operational process

Summary of Establishing the Performance Management System [DeCenzo & Robbins – Fundamental of HRM]

1. Identify the three purposes of performance management systems and whom they serve. The three purposes of performance management systems are feedback, development, and documentation. They are designed to support employees, appraisers, and organizations.

2. Explain the six steps in the appraisal process. The six-step appraisal process is to (1) establish performance standards with employees, (2) set measurable goals (manager and employee), (3) measure actual performance, (4) compare actual performance with standards, (5) discuss the appraisal with the employee, and (6) if necessary, initiate corrective action.

3. Discuss absolute standards in performance management systems. Absolute standards refer to a method in performance management systems whereby employees are measured against company-set performance requirements. Absolute standard evaluation methods involve the essay appraisal, the critical incident approach, the checklist rating, the graphic rating scale, the forced-choice inventory, and the behaviorally anchored rating scale (BARS).

4. Describe relative standards in performance management systems. Relative standards refer to a method in performance management systems whereby an employee’s performance is compared with that of other employees. Relative standard evaluation methods include group-order ranking, individual ranking, and paired comparisons.

5. Discuss how MBO can be an appraisal method. MBO becomes an appraisal method by establishing a specific set of objectives for an employee to achieve and reviewing performance based on how well those objectives have been met.

6. Explain why performance appraisals might be distorted. Performance appraisal might be distorted for several reasons, including leniency error, halo error, similarity error, central tendency, low appraiser motivation, inflationary pressures, and inappropriate substitutes for performance.

7. Identify ways to make performance management systems more effective. More effective appraisals can be achieved with behavior-based measures, combined absolute and relative ratings, ongoing feedback, multiple raters, selective rating, trained appraisers, peer assessment, and rewards to accurate appraisers.

8. Describe the term 360-degree appraisal. In 360-degree performance appraisals, evaluations are made by oneself, supervisors, employees, team members, customers, suppliers, and the like. In doing so, a complete picture of one’s performance can be assessed.

9. Explain the criteria for a successful performance appraisal meeting. Performance appraisal meetings require manager preparation, a supportive environment, clear purpose, employee involvement, focus on work behaviors, specific work examples, positive and negative feedback, employee understanding, and an employee development plan.

10. Discuss how performance appraisals may differ in a global environment. Performance management systems used away from the home country may differ in who performs the evaluation and the format used. Cultural difference may dictate that changes in the U.S. performance management system are needed.