Performance appraisal

Abstract

Performance appraisal is the process of evaluating an employee's performance and providing feedback. Appraisals are necessary not only for employees to understand and improve their performance on the job and for employers to adequately evaluate and select their employees for rewards (e.g., money, prestige, promotion), but it is also important so that the organization can determine the degree to which its employees are contributing toward meeting strategic goals and objectives. There are many ways to judge an employee's performance on the job ranging from objective performance data to global rating scales to more detailed rating scales that represent each of the important aspects of the job. No matter the method used, however, it is vital that the rating scales be anchored to objective, well-defined criteria of job success. This will help ensure that the performance appraisal system is not only accurate but also fair.

Overview

There is an old saying that advises, "if you do not know where you are going, you will never get there." Certainly, nowhere is this truer than in a business or organizational setting. From an employee's perspective, knowing where one wants to go may mean wanting to do the things on the job that will help ensure a pay raise or promotion. From the organization's perspective, knowing where one is going may mean wanting to do the things that will improve its effectiveness and efficiency and, in general, help it become a high-performing organization. However, neither the employee nor the organization can meet these goals unless they know how they are currently performing and can determine what changes must be made in order to improve overall performance. For the individual, this information usually comes in the form of feedback from a performance appraisal or review. Performance appraisal is the process of evaluating an employee's work performance and providing feedback on how well he or she is doing, typically against some standard of performance for that job. Performance appraisal can also provide the organization with some of the information that it needs in order to make strategic decisions to help it succeed in the marketplace.

Uses for Performance Appraisal Information. Performance appraisal is one of the key functions of an organization's human resources department. Organizations use the data collected in performance appraisal systems for several purposes. Perhaps the most well known of these is to establish standards and an evaluation system that can be used to form the basis of judgments as to whether to reward employees for good performance or punish them for poor performance. For example, management might set an individual productivity target of manufacturing two hundred widgets per day. Those who meet this standard might be given a pay raise or bonus and those who do not might not receive a monetary reward or may be put on probation. Performance appraisal data are also used to provide the criterion information that is used to select new candidates for the job. For example, the results of a job analysis might tell management what tasks a production worker needs to perform on the job. This information is used in conjunction with performance appraisal data that provide information regarding the standards to which employees must be able to perform these tasks in order to develop criteria to be used in hiring new employees for the job.

Another use for performance appraisal data is to provide objectives for organizational training programs. For example, if a department-wide performance appraisal finds that widget makers do not have the necessary skills to meet the organization's goal of two hundred widgets per employee per day, the human resources department might design or contract for a training program that would teach line workers the skills necessary to be better able to meet this goal. Finally, performance appraisal data can provide management with the data needed to provide feedback to employees and to better control their behavior on the job. In most cases, both the employees and management would like to see improved performance on the job. From the employees' perspective, improved performance can be the key to raises, bonuses, perks, and promotions. Such things can help them better meet their needs on the job or in other areas of their lives. Similarly, management would like to see improved performance because it helps to improve the effectiveness and efficiency of the organization, improves the return on investment for hiring and training, and helps the organization reach its strategic goals and become a high-performing organization.

Job Analyses. Before an objective performance appraisal system can be developed, one must first perform a job analysis to determine what tasks are actually performed on the job, the standards to which these tasks need to be performed, and the knowledge, skills, abilities, and other characteristics necessary in order to adequately perform these tasks. Job analysis is the systematic, empirical process of determining the exact nature of a job, including the tasks and duties to be done; the knowledge, skills, and abilities necessary to adequately perform these tasks and duties; and the criteria that distinguish between acceptable and unacceptable performance. The results of a job analysis are typically used in writing job descriptions, selecting new employees for hire, and setting standards for use in performance appraisals.

Performance appraisals need to be based on the tasks that are actually required to be performed on the job rather than on some general impression of the performance of the employee. These tasks and the standards to which they must be performed are usually based on a solid job description based on an objective, thorough job analysis. Good job descriptions and the performance appraisals that are based on them are competency based, describing the job in terms of measurable, observable, behavioral competencies that the employee must demonstrate in order to perform the job well. For example, rather than saying that a salesperson needs to have good customer rapport, the employee would be required to do such things as greet the customer within thirty seconds of entering the store, immediately drop any tasks not directly related to helping customers in the store if a customer needs help, or any other requirement found to be important to good work performance as determined by the job analysis. The performance standards developed as a product of a thorough job analysis are then used not only to frame the performance appraisal criteria but also to communicate to employees what kind of behavior will be rewarded (or not rewarded) by the organization. Performance appraisal data are then used to give employees feedback on how well they are meeting the standards in order to encourage high performance.

Further Insights

Methods of Data Collection. There are many sources of data that can be used in developing a performance appraisal system. For some jobs, empirical, quantitative data are available to objectively judge the quality of an employee's work. For example, for production workers, one might use a combination of quantitative data such as the average number of widgets produced per hour, the amount of waste material produced as a byproduct of manufacturing that number of widgets, and the number of widgets produced that are within specification.

In addition to objective production data, in some situations there are personnel data that are available that need to be taken into account when judging an employee's performance. For example, one might want to consider the number of days the employee was late to work, excessive days taken off, or other hard data that might be found in the employee's personnel file that address the employee's level of performance on the job. Although sometimes personnel data can be useful adjuncts when judging performance, they are typically not a substitute for more directly related data concerning performance.

Of course, not every job can be neatly reduced to quantifiable data. Although one can judge the performance of manufacturing workers, for example, based on the number of widgets they produce per hour, such objective data are not available for every position. In the twenty-first century, an increasing number of employees are knowledge workers and deal in the realm of information and expertise rather than in the realm of tangible products. For example, although it is possible to collect data on the number of calls a technical support employee takes on a help line, this datum does not provide information on how difficult the problem was, how well it was solved, how polite the employee was to the customer, or how satisfied the customer was with the service. As most of us who use technical support lines know, these are important pieces of information and are not captured in the easily collectible "number of calls per hour" statistic. To help management make better-informed decisions regarding an employee's performance, it is often necessary to collect subjective, judgmental data regarding performance. An example of this kind of data collection instrument is the "short survey" that often pops up after an online interaction with a sales or support employee.

Rating Scales. There are many approaches to designing a rating scale to be used in performance appraisal. The simplest of these is the global rating scale in which each employee is given a single score that rates his or her overall performance. However, global ratings do not give the employee sufficient data for how to improve his or her performance. In addition, such scales are prone to various kinds of rating error (see below). Therefore, many organizations develop rating scales based on job-related data and standards. One can use a job description, for example, to break out the major aspects of the job and then rate employees on each of these aspects. However, without well-defined standards for poor, acceptable, and outstanding performance, such rating scales can also be highly subjective in nature and prone to rating errors. Behaviorally anchored rating scales and mixed standards rating scales are two techniques that can be used to increase the objectivity of rating scales and link them to tangible, job-related criteria. Both these methods are based on the collection of critical incidents to discern between good and poor performance on the job. These critical incidents are used to anchor the rating scales and judge current employees against these criteria of success or failure on the job.

As mentioned above, rating scales and other instruments that are used to collect subjective data can be easily affected by various rating errors. The most common of these are halo error, leniency error, and central tendency error.

The halo error (sometimes referred to as the halo/horn error depending on which direction the error is made) occurs when a manager or other rater judges a person in all aspects of job performance based on a single aspect of the job or, on whether he or she likes the individual. For example, if someone is seen as an excellent worker (or nice person) in general, the rater may overlook performance problems in the individual's work and rate him or her highly on all aspects of the job.

The leniency error (sometimes referred to as the leniency/severity error) occurs when a rater tends to rate employees in general higher (or lower) than they would be if the rater had been objective. For example, some supervisors tend to be lenient in the ratings because they want to be kind to their employees and, as a result, rate them higher than they deserve. Similarly, some supervisors believe that everyone can always improve and, therefore, tend to rate their employees more severely than they objectively deserve.

The central tendency error occurs when a supervisor tends to give ratings toward the middle of the scale, believing that although the employees have room for improvement, they also do not deserve to be punished for their performance.

Management by Objectives (MBO). It is important to evaluate an employee's performance by measuring it against a predetermined standard or set of specific goals to be achieved during the appraisal period. Rating scales are one way to do this; another popular way is through a method called Management by Objectives (MBO). In MBO, managers or the manager and employee together set objectives for the employee to meet during the upcoming appraisal period. Employees are evaluated in terms of how well they have met these goals in the intervening period. MBO can be used not only to evaluate the performance of an individual employee, but also that of a workgroup, department, or the organization as a whole. Under this approach, organization-wide goals and objectives based on its strategic plan (e.g., increase company profits from the widget product line by $500,000 over the next year) are first set. Using this information, each department or workgroup then sets its own goals and objectives to support the organization's goals (e.g., increase sales of widgets in the Eastern Region by 10 percent over the next year). Managers and individual employees then discuss these goals and possible contributions that can be made by each individual and set specific, short-term goals (e.g., obtain ten more customers per quarter; call on five more potential customers per week; include two more cities in the region), and individual objectives are set.

Like rating scales, however, MBO is not without its drawbacks. One of the most frequent is the development of objectives that are either unclear or unmeasurable. For example, in the example of "good customer rapport," if there is no operational definition of the concept, then the objective is as open to rating error as a poorly written rating scale. Similarly, some objectives are unreasonable, such as the objective for a research scientist to develop a cure for cancer within the next year. Another difficulty with setting MBO objectives is that supervisors tend to set objectives that are too difficult to meet while employees tend to set objectives that are too easy to meet.

360-Degree Feedback. To help ensure fair evaluations under a performance appraisal system, human resource policies or procedures are developed and implemented to help increase the objectiveness of the appraisal feedback or give the employee feedback from multiple sources. A technique called 360-degree feedback (because the feedback comes from people who work all around the employee, not just from one person working above him or her) gives employees feedback on their job performance from representatives of the major groups with whom they interact on the job both inside and outside the organization. Under 360-degree feedback, for example, employees may receive feedback not only from their supervisors but also from their subordinates, coworkers, customers, and other groups with whom they work. By doing this, an employee receives more feedback than he or she would receive under the traditional supervisor-only appraisal system. This approach to feedback can also help neutralize biased opinions of one person by giving the employee and the supervisor and range of reactions to look at so that they can look at the preponderance of evidence rather than reactions from just one person and, in general, give the employee a better idea of how s/he can improve performance.

Issues

Pay-for-Performance. Performance appraisal tools and systems are not ends in and of themselves. Among the major purposes of performance appraisal are the ability to provide employees with measurable criteria of success on the job and to provide feedback on how they can improve their performance in order to better meet their performance goals and objectives. One of the ways in which performance appraisal data are frequently being used is to link pay to performance. Under this paradigm, an employee is rewarded financially for high performance and contributing to the organization's goals. Pay-for-performance systems can be used at all levels of the organization, including "C-level" personnel (e.g., chief executive officer, chief operating officer).

The US Government Accountability Office (GAO) has investigated the viability of pay-for-performance systems and has found a number of factors that make them successful. First, it is important to use objective competencies to assess the quality of the employee's performance. As discussed above, this means that performance objectives need to be based on the empirical data developed through a thorough job analysis and be written in such a way that employees can achieve them. Second, employee performance ratings need to be directly tied to pay increases or awards so that employees can see a direct, positive consequence of their actions. In this way, employees are more likely to continue to perform at a level that will bring rewards. Third, fair pay-for-performance systems need to consider both the employee's current salary and his or her contribution to the organization so that rewards for similar contributions are equitable. Finally, pay-for-performance systems needs to be clear and well published so that employees know the basis on which decisions are made and what kind of awards are made across the organization.

Conclusion

Performance appraisal is one of the key elements of the human resources function within an organization. This process of evaluating an employee's performance and providing feedback is necessary not only for the individual to improve his or her performance on the job so that he or she can earn the rewards for which he or she is working, such as a promotion or raise, but it is also important so that the organization can determine the degree to which its employees are contributing to meeting its strategic goals and objectives. Performance appraisal data can also be used for other purposes as well, including as inputs into training programs or to develop criteria on which to hire new employees.

There are many ways to judge an employee's performance on the job ranging from objective performance data to global rating scales to more detailed rating scales that represent each of the important aspects of the job. However, whenever a subjective rating method is used, it is vital that the rating scales be anchored to objective, well-defined criteria of job success. This will help ensure that the performance appraisal system is not only accurate but fair.

Terms and Concepts

Criterion: A dependent or predicted measure that is used to judge the effectiveness of persons, organizations, treatments, or predictors. The ultimate criterion measures effectiveness after all the data are in. Intermediate criteria estimate this value earlier in the process. Immediate criteria estimate this value based on current values.

Empirical: Describing theories or evidence that are derived from, or based on, observation or experiment.

Feedback: Information a person receives about his/her behavior or its consequences.

Human Resources: In general, human resources are any personnel employed by an organization or, the field of study related to recruiting and managing the organization's personnel. Human resources systems need to consider human resource planning; recruitment, hiring, and placement; training and development; wages, compensation, perquisites ("perks"); and employee relations.

Job Analysis: The systematic, empirical process of determining the exact nature of a job, including the tasks and duties to be done; the knowledge, skills and abilities necessary to adequately perform these; and the criteria that distinguish between acceptable and unacceptable performance. The results of a job analysis are typically used in writing job descriptions and setting standards for use in performance appraisals.

Management by Objectives (MBO): An approach to performance appraisal in which the employee and his or her manager jointly set performance objectives for the coming appraisal period and then review the progress made toward accomplishing these at predefined times. The employee's performance is evaluated in terms of how well s/he met the objectives previously determined.

Operational Definition: A definition that is stated in terms that can be observed and measured.

Pay for Performance: An incentive plan in which employees are rewarded financially for high performance and contributing to the organization's goals. Pay for performance plans are applicable to all levels within the organization.

Performance Appraisal: The process of evaluating an employee's work performance and providing feedback on how well s/he is doing (typically against some standard of performance for that job).

Perquisites ("perks"): Something given to the employee in return for work over and above regular pay or compensation. Perks may include such things as health insurance, a company car, or a private office.

Return on Investment (ROI): A measure of the organization's profitability or how effectively it uses its capital to produce profit. In general terms, return on investment is the income that is produced by a financial investment within a given time period (usually a year). There are a number of formulas that can be used in calculating ROI. One frequently used formula for determining ROI is (profits — costs) / (costs) x 100. The higher the ROI, the more profitable the organization.

Survey: (a) A data collection instrument used to acquire information on the opinions, attitudes, or reactions of people; (b) a research study in which members of a selected sample are asked questions concerning their opinions, attitudes, or reactions are gathered using a survey instrument or questionnaire for purposes of scientific analysis; typically the results of this analysis are used to extrapolate the findings from the sample to the underlying population; (c) to conduct a survey on a sample.

360-Degree Feedback: An approach to giving employees feedback on their job performance in which representatives of the major groups working with the person offer them feedback on their performance. In 360-degree feedback, employees may receive not only feedback from their supervisors as in the traditional performance appraisal paradigm, but also from their subordinates, co-workers, customers, and other groups with whom they work.

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