What Is a Performance Appraisal? Types, Methods, Objectives & Benefits

Everyone dreams of a great appraisal. In fact, every employee works towards a great appraisal, though not everyone is lucky to receive it. And they shouldn’t be, it’s what sets the brilliant from the regular and helps an organization achieve its goals by retaining the former. Not to say that the regular cannot shine. That’s exactly what a performance appraisal intends to do.

Allie’s Story: Satellite to Star

Allie had served the organization for five long years, where her performance was directly evaluated by her boss, who would then discuss it with the head of the department and decide if she should be given a performance appraisal.

In five years, she had got the performance appraisal only once. She had been dedicated and was pulling out all the stops in everything that she did, but she only considered herself lucky and was low on self-confidence.

But things changed for the better. Sam joined the company as the new CHRO and one of the first changes he implemented was to have managers not only have a discussion with employees but also among themselves.

This crucial change to have a horizontal discussion rather than just a vertical one revolutionized how performance appraisal was being handled in the company. Managers soon realized that their great performers were only good enough and that those good enough could in fact be great performers. It was just a problem of bias or in some cases leniency.

The result? Allie received significant praise in her performance appraisals, and suddenly a person who went unnoticed became a star. This is one example of a positive change in the performance review system that brought about a different result. We are not saying that the change made is always right, but that it made a difference in the subjective evaluation.

What This eBook Is All About?

This eBook should serve as a guide to anyone looking to understand what performance appraisal is, the steps in performance appraisal, the methods used for performance appraisal and how to eliminate bias for a great performance appraisal for every employee.

What is the Importance of Performance Appraisal?

It’s a two-way street, and we are talking about employee appraisals. A performance appraisal is important for both the employee as well as the company.  It helps the company navigate the corporate landscape by deciding which employees are working towards the company’s goals and how well they are able to do it. It helps the employee decide if their contribution to the company is respected and helps the company grow, and if not what they must do to ensure that it happens.

How do You Conduct a Performance Appraisal?

The regular review of an employee’s performance and contribution to the company, a performance appraisal, is also referred to as a performance review, employee appraisal, or annual review. A performance appraisal assesses all aspects of an employee’s skills, what the employee has achieved and how far the employee has progressed in the career path.

The concept of performance appraisal has been expanded over the years to include several steps. The performance appraisal process in HRM has the following steps:

1. An assessment method is agreed on. We have discussed the appraisal methods in more detail in a later section.
2. Every employee is different. Behavioural expectations and job competencies must be drafted for each employee.
3. HR establishes the agenda. The HR contacts both manager and employee and informs them about the appraisal.
4. The appraisal starts. The performance appraisal process begins and is conducted by using the method decided.
5. The interview between manager and employee. The manager interviews the employee, applauds successes, and discusses challenges.
6. Remedial actions are suggested. The manager discusses ideas for development and action.
7. Goal setting happens. Future goals are discussed between employee and manager.
8. The interview ends. The performance review is summarized by the manager.
9. The document is retained for posterity. The performance appraisal is signed off on and it is then archived by HR.
10. HR and the organization benefit from it. HR utilizes performance appraisal information for making reports, allocate bonuses and for succession planning.

What is a Performance Appraisal System?

A performance appraisal system could be one of two things.

• A system (software) that manages the performance appraisals of employees, or
• The system (process) that is in place in an organization to give employees their performance appraisals.

The following are the features of a performance appraisal system:

1. Clear objectives: What do you want to achieve? Is it greater productivity, on-time completion, or greater customer satisfaction?
2. Well-defined criteria: How do you measure if the employee has achieved these goals?
3. Data sourced reliably: How reliable is the data and is it sourced through a reliable channel?
4. Matches organizational needs: It must match organizational needs and be adjusted accordingly.
5. Improves with feedback: A performance appraisal can improve with feedback from peers and immediate managers.

Performance Management V/S Performance Appraisal

Performance management is a continuous process of improving the employee’s skills, both job-related and behavioural, and it involves training and development, productivity tracking etc. A performance appraisal is the process of reviewing the performance of an employee and assigning a rating to it. In other words, performance appraisal is a way to measure the success of performance management.

What are the Objectives of Performance Appraisal?

The end-purpose of any performance appraisal in an organization is very clear. It is to increase the organizations profits, to boost the bottom line. The other objectives of performance appraisal are listed below:

1. Assist with goals-setting: It helps the manager and the employee agree on what goals are to be met in the upcoming period.
2. Reward high performers: The appraisal helps reward those who did well in the period and motivates them to keep going strong.
3. Counsel underperformers: It can help underperformers understand what they are doing wrong and how they can improve.
4. Affirms a raise or promotion: The appraisal can act as a supporting document for a bonus or other benefits provided to an employee.
5. Improve organizational performance: Gives a firm a competitive advantage by increasing productivity and timeliness at each level in every department.
6. Determine training needs for the group: Such assessments in appraisals help determine if the employee needs more training to be better at the job.
7. Paper trail creation: To have a documented proof that the performance management of employees in the company is moving forward as planned.

What are the Types of Performance Appraisals?

Performance appraisals can fall into different types depending on

1. Self-assessment: Individual assign a rating to themselves based on the work they have done.
2. Peer assessment: The peers in the workgroup of the individual rate his/her performance.
3. 360-degree feedback assessment: Includes input from individual, managers and peers.
4. Negotiated appraisal: This trend involves a mediator too in the performance appraisal process, which helps prevent conflicts and lets the employee speak first. And allowing the employee to speak has its benefits in the performance appraisal process too!

Josh’s Story: The Saviour is the Hero

Josh, despite being a new employee, had always been someone who stood up for himself and others.  He was also very accountable for anything he did, be it good or bad that resulted from it. He had exhibited strong performance in the past too, and for this he had received accolades, a reward or recognition to be specific.

His appraisal was due in March. That’s when the unthinkable happened. His colleague Swinton was severely reprimanded for a project Josh was part of. Josh confirmed that the mistake was his and saved Swinton from the blame. Though he did have to hear from both client and company, everyone appreciated the good work he had done in the past, and his honesty in the present.

When the appraisal came, the incident was fresh in the manager’s memory, but he overcame the recency bias and affirmed that Josh deserves a great appraisal. And he got one too.  His compensation almost doubled, and he was even offered additional insurance benefits. Josh is now looking towards serving many more years at his workplace.

What are the Methods of Performance Appraisal?

Performance appraisal has evolved from the simple essay describing how an employee has performed, which was not only liable to a good amount of bias but also misinterpretation. Today’s methods of performance appraisal are more trustworthy, yield more accurate results, and have a lot less bias. Let us now look at the methods in performance appraisal, first at the traditional ones and where they can be used and then the modern ones and where they find application.

Traditional Methods

Ranking

The manager ranks the employees who work for him in a ranked order based on overall work done. In this method, there is no benchmark or standard the employees must adhere too, only a comparison among themselves.

Paired Comparison

In a paired comparison system, each employee’s performance is compared with the other and a score is awarded to the one who is better than the other. Once all the paired groups are compared, the points are tallied, giving a direct score for performance.

Grading

Several categories are assigned for the abilities. It could be excellent, very good, good etc. depending on how the employee performed. This is a very holistic method of assessing employee performance and maybe more suited to government or less crucial employee performance appraisals.

Checklist

The characteristics and performance of employees are listed as questions which a manager must check as positive or negative. A checklist could be a simple one where each question has the same weight or a weighted one, where the questions have different weights.

Essay

In the essay method or the free form method, the appraiser (manager or supervisor) prepares the appraisal by adding the contributions of the employee, achievements and strengths and weaknesses and makes suggestions on how performance can be improved.

Modern Management by Objectives

This concept was introduced by Peter Drucker in 1954. This method is results oriented. First, the employee and the manager sit down to discuss the objectives for a specific period. At the time of the performance review, the manager and the employee sit down again and discuss what the objectives were and if they were met.

Such open communication between the manager and the employee is the advantage of this method. This method is best suited for roles that require a lot of thinking. To develop the approach a SMART approach is used. In other words, each objective must be specific, measurable, attainable, result-oriented and time limited.

360-degree Appraisal

This is a very unique method for appraisal. This method of appraisal involves feedback from the employers, the employee’s peers and subordinates too. It helps the employee understand issues with the performance.

It is to be noted that the 360-degree method by itself is not used for performance reviews. It is always combined with another method for greater accuracy and to help the employee achieve his/her goals. The 360-degree appraisal is also used by leaders to assess self-performance and for learning.

Cost Accounting Method

The cost accounting method (in HR) is the ratio of the cost of retaining that employee to the total share of profit that the organization has made, that can be attributed to the employee. This helps identify the financial implications of an employee’s performance to the bottom line of an organization.

This method is particularly useful for small businesses and startups, because the headcount is low. By using the cost accounting method, they can easily determine if the few employees who are onboard are doing their job well and if it is of utility to keep them onboard.

Assessment Centres

The assessment centre method is perhaps the most comprehensive and grueling method of performance appraisal for any employee. The employee must complete several assessments such as situational role plays, fact-finding, informal discussions etc. to gauge if he/she has the skills necessary to continue in the role.

This method of performance appraisal is useful for manufacturing companies, service-based companies, and consultancies to discover who would be a great future leader. This is because it uncovers crucial aspects of leadership such as problem-solving, level of tolerance, ethics, extent of introversion and adaptability.

Behaviourally Anchored Rating Scales (BARS)

Want to access both the qualitative and quantitative benefits in a performance appraisal? You could use behaviourally anchored scales. In this method, the employee performance with a specific behavioural example is tied to each rating.

The method then tries to determine how well each employee matches the scale by using specific statements. The answers to these statements will help take the performance appraisal based on BARS forward and once a method on how to use it is finalized, the process can be completed. The main advantage of BARS is that it is a very well-structured and consistent performance appraisal process. The second is that it is also almost completely free of any kind of bias.

How to Create a Performance Appraisal Form?

A performance appraisal form is maintained by managers and HR executives to help analyse the employee’s performance in various areas, by listing out KRAs and assigning a grade to each and getting the manager’s and the employee’s opinion on how good/bad performance was for each KRA.

Both the employee and the manager are encouraged to leave comments in the form of feedback for the performance appraisal process while it happens and there is space in the form for that. The HR can also make additional comments once the performance appraisal form is ready, and it goes out to them.

Let us now look at the components of a performance appraisal form for a free form feedback appraisal. This can be extended to other methods of feedback as well if it helps meet the objectives of the appraisal and the company’s business goals. The form mentions the major duties and responsibilities of an employee, the level of performance in each and the comments on the performance by the supervisor.

It then invites ratings for each responsibility fulfilled by the employee, beginning with knowledge of job/organization. Post this, the performance appraisal form asks the manager to give an overall performance rating for each employee.

The manager and the employee then discuss the goals for the upcoming performance year at the beginning of the year. The actual progress is then monitored throughout the year and at each stage learning and development goals and other accommodations necessary to ensure that performance improves is also added.

What are the Disadvantages of Performance Appraisal?

Though a must in every office, performance appraisal comes with its set of challenges. But it is possible to overcome these challenges. In this section we will list out the challenges and suggest methods to overcome them.

Can be biased

A performance appraisal system is at a risk of great bias if not designed properly. How can we tackle bias in a performance appraisal? We can do so by inviting the employee’s feedback on performance in a particular KRA.

Another thing that the company can do is adopt the process of normalization. This reduces the differences across ratings by the manager. This also helps remove leniency and severity bias. We will be looking in more detail at how biases can be eliminated in performance reviews.

Subjective

A rating that is given by the manager is always subjective, which means that you can argue that a performance appraisal is a one-sided thing.

We can also have specific goals that are preset at the start of the year, so that not only is the employee also aware of what the organization wants but the manager also has to rate on specific targets only. If the employee can prove he/she has achieved them, there’s nothing the manager can do.

Time consuming

For larger teams, with no automation or a software for performance appraisals, such appraisals can be very time-consuming for the managers. The managers also must be very careful with the feedback and provide as constructive feedback as well, which makes it a bit stressful also.

Adds on employee stress

A performance appraisal can create a stressful work environment for the employee if the manager does not provide constructive feedback. Even if the HR does suggest providing constructive feedback it may not happen.

In such cases, it is necessary to allow employees to approach the HR if they have any concerns. HR can also have discussions with the managers if they feel that feedback has been too harsh.

What are the Errors in Performance Appraisals?

A few limitations can be identified within a performance appraisal system (process), primarily because of the validity and reliability of the techniques used. Validity refers to how exact and valid the measurement is, and reliability refers to how it can be trusted over time to yield the same result each time it is used. The errors often introduced in performance appraisals are:

1. Central Tendency Error

There is a tendency among supervisors to group all the employees in a narrow band, ignoring very good and very poor performers, keeping everyone in the good, average, bad range. This is how we can overcome the central tendency error:

1. Use a very descriptive and specific rating scale.
2. Provide examples and evidence to support ratings.
3. Make note of employee behaviours and outcomes closely.

2. Strictness or Leniency Error

Sometimes the supervisor or manager is overly strict or overly lenient. At the workplace this translates to everyone receiving a bad rating or the same group receiving a good rating (not good as the company cannot make a distinction for its top performers or suggest methods to improve the performance of poor performers). This is generally because of the standards set by the supervisor or manager. This is how we can overcome strictness or leniency error:

 

1. Compare with objective benchmarks.
2. Seek feedback from their peers or customers.
3. Use a clear and consistent scale to measure performance.

3. Halo/Horns Effect

Managers sometimes give a great rating/poor rating to a single employee. They ignore the actual performance of the employee. Whether the work is good or bad, the rating remains the same always across several areas. Some believe that the halo effect is because of the similarity bias. This is how a manager can overcome the halo/horns effect:

1. Use a performance review template and stick to every point.
2. Use only objective data.
3. Focus on the behaviour of the individual and not traits.
4. Seek inputs from your peers.

4. Recency Error

Often managers and supervisors focus on the most recent performance of the employee, overlooking the performance prior to that. And as a result:

• Employee is either graded good or bad unfairly.
• Employees start to use this to their advantage by doing better in months closer to the review and ignoring their performance prior to that.

Managers and supervisors can overcome this by:

1. Set clear goals which must be attained in each period.
2. Maintain a systematic record of employee performance.
3. Ask your peers if you are doing something wrong.

Is There a Solution for All These Problems?

Is there something you can do to alleviate these problems and make the performance appraisal more effective, free of bias and less of a stress to employees?

Yes, you can use performance appraisal software that keeps track of the employee performance and detects any inconsistencies or bias in the ratings that are given by managers.

It can combine the notes shared by employees and draw inferences from them too. But here too effectiveness is not a 100% guaranteed and will depend on the performance appraisal software that is used.

What are the Advantages of a Performance Appraisal

The performance appraisal is such a revered process in all organization for good reason. There are many benefits of employee performance appraisal. Let us now look at the benefits of employee performance appraisal.

1. Documented record of work achievement: Everything that the employee has achieved is documented and can be referred to at any time by the HR or the manager.
2. Increases employee engagement: Employees get a chance to speak freely about their performance with the manager and the HR, and employee views are accepted, increasing engagement.
3. Improves performance: As a result of increase in engagement, rewards, appreciation, and suggestions to improve, there is a marked improvement in performance too.
4. Creates career growth: As a result of improvement in employee performance and with learning and development, the employee’s career trajectory does well.
5. Helps understand training needs: Performance appraisals help understand the level of knowledge an employee has and how skills can be improved to improve productivity and reduce turnaround time.
6. Clarifies expectations: A performance appraisal helps the employee understand what the management and senior leader expect and suggests what can be done to get there.
7. Enables beneficial conversations: the discussions between an employee and a manager have more relevance and are useful.
8. Helps evaluate goals: Assists with a continuous process of goal-setting that improves with time, as goals become SMART. Read more on SMART goals

Eliminating Bias from Performance Appraisals

Eliminating bias from performance appraisals requires careful management at all levels in a company and requires the successful investment of time and effort by all the decision makers. Some of the ways of eliminating bias from performance appraisals are:

Unconscious Bias Training

Managers must be provided training in how to manage unconscious bias. To achieve this training must be conducted on the types of biases possible in performance appraisals, how they affect employees and appraisals, and how to mitigate them.

Clear Expectations on the Job

Set the expectation clear on what you expect from your employees. Inform them of the job skills and the behavioural expectations and the targets that they must meet. Set the goals in the performance appraisal form at the beginning of the assessment period bearing this in mind. This will help prevent any unrealistic expectations from the manager or the employee. Managers must also communicate the evaluation criteria to their employees.

Use formal prompts in the appraisal form

This encourages objectivity in the performance appraisal process. By asking the right questions through these prompts, employers can ensure that the rating is objective. An instance of such a prompt is “Does the assessing of the employee on this capability with the rating take into account the actual loss or gain for the company from the employee?”

Adjust the weighting of evaluation criteria appropriately

Give suitable weights to the evaluation criteria to ensure that the right criterion gets more weight in a particular scenario ensures accurate and useful assessment for each appraisal. For instance, in a particular role, let’s say sales, interpersonal skills need more weight than time management, then adjust the weight accordingly. This is an indirect solution for tackling bias where the effect of a bias is reduced.

Now the crucial question. Is unconscious bias the only great enemy of a successful performance appraisal. No, a bad ego can hurt the process just as much; a failure to acknowledge a subordinate who comes up with a great idea or may know more than us about a problem can be just as bad.

Jack’s Story: Jack of All, Master of His Trade

Jack was hired as a junior in the Ops Team. He was learning a lot over the past six months and as he got more acquainted with the APM tools that they were using, he realized that the APM tools were great with Java code but not so much with .NET when it came to understanding the application code. They are both different technologies and this can happen.

When he pointed out the issue to his Senior Manager, he was smirked at and ignored. A few days later, there was an issue related to system availability in few areas and several users complained of a bad experience. The manager realized his mistake and went over to Jack and discussed possible solutions with him.

After a few hours of brainstorming, they came up with a solution. The Manager replaced the APM with a better one, the visibility into the code improved and the engineers were able to fix the problem. The system availability and user experience improved significantly, and the whole office resounded with applause. Jack was no stranger to applause but when he heard the response from the team and the congratulatory remarks from his manager, he was overcome by happiness. Sure enough, the next time there was an appraisal, he received a great one!

Performance Appraisal Need Not Be a Nightmare

For the harvest to succeed, there must be sufficient rain, sun, enough toil and great soil. The same is the case with performance appraisals. To achieve the end goal of having a perfect performance appraisal, one needs to go through each step with great focus and presence of mind, and this is true for both employee and manager.

In addition to the steps, we have mentioned in this eBook, there are a few things you could practice as a manager. Excellent communication, great problem-solving skills, accountability, and emotional intelligence are just a few of them, helping you get the best benefits out of a performance appraisal process.

This brings us to the problem of hiring a great manager, which again requires good expertise. Because a manager is as vital a link in the performance management chain as is the employee. For more tips on how to hire a great manager, please refer another article of ours. We hope this playbook was just as rewarding for you as it was a challenging and fruitful exercise for us to go through.

Happy Reading!