Performance Appraisal (Encyclopedia of Business and Finance)
Performance appraisal (PA) is one of the important components in the rational and systemic process of human resource management. The information obtained through performance appraisal provides foundations for recruiting and selecting new hires, training and development of existing staff, and motivating and maintaining a quality work force by adequately and properly rewarding their performance. Without a reliable performance appraisal system, a human resource management system falls apart, resulting in the total waste of the valuable human assets a company has.
There are two primary purposes of performance appraisal: evaluative and developmental. The evaluative purpose is intended to inform people of their performance standing. The collected performance data are frequently used to reward high performance and to punish poor performance. The developmental purpose is intended to identify problems in employees performing the assigned task. The collected performance data are used to provide necessary skill training or professional development.
The purpose of performance appraisal must be clearly communicated both to raters and ratees, because their reactions to the appraisal process are significantly different depending on the intended purpose. Failure to inform about the purpose or misleading information about the purpose may result in inaccurate and biased appraisal reports.
CRITICAL CRITERIA OF DEVELOPING A PA SYSTEM
In order for performance appraisal information to be useful, the PA system must be able to consistently produce reliable and valid results. Measurement items in the performance appraisal system must be designed in such a way that the results of rating are consistent regardless of the raters and the timing of the assessment.
Another critical criterion in developing a PA system is the validity of the measurements. It is important to make sure that the appraisal items are really measuring the intended performance or target behavior. If they are not, the PA system encourages the wrong kind of work behaviors and produces unintended, frequently negative, organizational outcomes. For instance, if the number of traffic violation tickets issued is an item in performance appraisal of police officers, it encourages them to sit on a corner of a street and pull over as many violators as possible during heavy traffic hours. The true purpose of a police force, which is public safety, may become secondary to issuing a large number of tickets for many officers.
WHAT TO EVALUATE
The first important step in developing a PA system is to determine which aspects of performance to evaluate. The most frequently used appraisal criteria are traits, behaviors, and task outcomes.
Traits. Many employees are assessed according to their traits, such as personality, aptitudes, attitudes, skills, and abilities. Traits are relatively easy to assess once a rater gets to know ratees. But traits are not always directly related to job per formance. Trait-based assessment lacks validity and thus frequently raises legal questions.
Behaviors. For many jobs, performance is so broadly defined or so conceptual in naturesuch as ensuring public safety in the police de partmenthat it is hard to come up with reliable performance measures. In such cases, desirable behaviors can be identified and assessed in the belief that such behaviors lead to successful performance. Such behavior-focused assessment encourages employees to adopt desirable behavioral patterns in the workplace.
Task outcomes. When information about task outcomes is readily available, it is the most appropriate factor to use in evaluating performance. When an organization has a clear and measurable goal as in the case of a sales force, this approach is recommended. However, it has its own pitfalls. There is a problem if employee behaviors are not directly related to the task out-come. Too narrow a focus on measuring out-come only sometimes results in unintended negative consequences. When sales staff narrowly focus on target sales figures to increase their performance measure, for example, they are encouraged to help a few large-volume customers and to ignore many smaller buyers. This may result in poor customer service on the floor.
The most common raters of performance are employees' immediate supervisors, who are usually in the best position to know and observe the employees' job performance. They are also responsible for employees' work. Their evaluation is a powerful tool in motivating employees to achieve successful and timely completion of tasks. However, as a result of working together over a long time with the same employees, the immediate supervisor may build up a fixed impression about each employee and use it every time he or she has to evaluate performance.
Some companies find that subordinates are in an excellent position to observe and evaluate their managers' performance, especially when it comes to measuring effective management of their department. While there is merit in asking subordinates to evaluate how they are managed, such evaluation may turn into a popularity contest. Accurate and objective assessment may not be obtained if employees are fearful of possible retaliation from their supervisors. Anonymity of the evaluators is key to the successful use of subordinates for objective evaluation.
Other raters who are frequently used in some companies include peers, customers, and the employees themselves. Peer evaluation is particularly useful when teamwork and collegiality are important to successful task performance. Peer pressure is sometimes a powerful motivator in encouraging teamwork among members. Customer satisfaction is vital to a company's success and can be used in performance appraisal. Many companies systematically collect performance information from customers, typically through anonymous surveys and interviews. Self-assessment is also a useful means, especially when the performance appraisal is intended to identify the training and development needs of potential employees.
Each of these raters contributes to assessing certain aspects of performance. Since job performance is multidimensional in nature, it is important to use different raters or a combination of multiple raters depending on the goal of a performance appraisal system. This multirater
evaluation, or so-called 360-degree feedback system, is becoming increasingly popular among many American corporations, including General Electric, AT&T, Warner Lambert, and Mobil Oil.
To ensure the reliability and validity of a PA system, a company must design the evaluation process carefully and develop appropriate measuring scales. Among the many assessment methods developed by human resource management experts, commonly used ones include the Graphic Rating Scale, Behaviorally Anchored Rating Scale, Narrative Technique, Critical-Incident Method, Multiperson Comparison Method, Forced Choice Method, and Forced Distribution Method.
The Graphic Rating Scale is the simplest and most popular method for performance appraisal. As shown on Figure 1, the Graphic Rating Scale offers a list of areas related to job performance. A manager rates each employee on the listed areas according to a numerical score. Although this method is relatively simple and quick to complete, some experts question its validity and reliability. Without elaborate description, appraisal items and scores are subject to various interpretations of raters.
In order to overcome pitfalls of the Graphic Rating Scale, numerous other methods have been developed. The Behaviorally Anchored Rating Scale (BARS), illustrated in Figure 2, offers rating scales for actual behaviors that exemplify various levels of performance. Because raters check off specific behavior patterns of a ratee, PA results of BARS are more reliable and valid than those of the Graphic Rating Scale. Human resource managers must carefully analyze each job and develop behavior patterns pertinent to various levels of performance for the job before they use the BARS.
The Narrative Technique is a written essay about an employee's job performance prepared by a rater. The essay typically describes the rate's job-related behaviors and performance. Without standard performance description, it is a cumbersome task for raters to write an essay for several employees. For example, a rater can be asked to describe the activities, achievements, and level of performance of the employee in a completely open-ended format (unstructured narration). Alternatively, the rater can be pro vided with some structure to use in the evaluation; for example, "Describe briefly the activities, achievements, and level of performance of the staff member in the following areas: (1) work habits, (2) planning and organizing the tasks, (3) management skills, communications, and development of others."
The performance review form at a college asks an evaluator to describe the activities, accomplishments, and creative works of the professors in the areas of (1) teaching and (2) research/creative activity. A dean of the college writes about the professor's teaching performance: "Dr. Michael Johnson has been nominated by his students for the Outstanding Teacher Award several times during his service. He introduced many teaching innovations into his classes. His teaching record is exemplary." In the area of creative activity, the dean writes: "Dr. Johnson has a strong and productive research record with a defined focus in organizational leadership. His research has been recognized with several awards given by professional organizations. His creative activity is exemplary."
Similar to the Narrative Technique is the Critical-Incident Method, which involves keeping a running log of effective and ineffective job performance. For example, the PA log of an employee, Mr. Campbell, contains Unsatisfactory Incidents as follows: 1/28/2000: "Refused to try a new work procedure," and 2/15/2000: "Argued with a customer about the origin of error in the paperwork." The log also contains Satisfactory Incidents as follows: 1/20/2000: "Volunteered to help Charlie complete his assignment in time"; 2/19/2000: "Trained new employees in safety regulations."
The Multiperson Comparison Method asks raters to compare one person's performance with that of one or more others. It is intended to effectively eliminate the possibility of giving the same rating to all employees. In order to separate performance scores among multiple employees, the Forced Choice or Forced Distribution Methods are adopted. Raters must choose one high performer from the list of employees or distribute certain scores to employees at different ranks. For example, only one top person will get 40 percent, two second-rank persons 20 percent, and the bottom one person 10 percent. The Paired Comparison Method is a special case of the Multiperson Comparison Method. Everyone in the evaluation pool is compared against everyone else as a pair and recorded "plus" or "minus" when the target ratee is better or worse,
respectively, than his/her comparison. The final performance ranks are determined by the number of positives. Figure 3 provides for an example.
SUBJECTIVITY AND OBJECTIVITY
Accuracy is critical to performance appraisal. In order to obtain accurate performance information, raters must provide objective and unbiased ratings of employees. But, because it is almost impossible to develop a perfectly accurate performance checklist, managers' subjective opinions are frequently called for. Many companies use some combination of subjective and objective assessment for actual performance appraisal.
Yet there are numerous problems in the actual assessment of employee performance, mainly due to rater bias. Some raters tend to rate all employees at the positive end rather than to spread them throughout the performance scale; this is called "leniency." Alternatively, "central tendency", which places most employees in the middle of the scale, also raises concern about possible appraisal error.
Another common error in performance appraisal is the halo effect. This occurs when a manager's general impression of an employee, after observing one aspect of performance, influences his/her judgment on other aspects of the employee's performance.
Researchers have found that personal preferences, prejudices, appearances, first impressions, race, and gender can influence many performance appraisals. Sometimes raters' personal opinions or political motives creep into the performance appraisal process. They intentionally inflate or deflate performance ratings of certain employees as a way to punish them or promote them out of the department.
Using unreliable and unvalidated performance appraisals may cause a legal problem. A number of court cases have ruled that the performance appraisal systems used by many companies were discriminatory and in violation of Title VII of the Civil Rights Act.
In order to avoid legal problems, companies must develop an appraisal system based on careful job analysis and establish its reliability and validity. They must give clear written instructions to raters for completing evaluations and provide them adequate training if necessary. The company must allow employees to review the results of the appraisals. Human resources departments must play a key role in the development and implementation of an effective performance appraisal system.
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Employee Performance Appraisals (Encyclopedia of Small Business)
An employee performance appraisal is a processften combining both written and oral elementshereby management evaluates and provides feedback on employee job performance, including steps to improve or redirect activities as needed. Documenting performance provides a basis for pay increases and promotions. Appraisals are also important to help staff members improve their performance and as an avenue by which they can be rewarded or recognized for a job well done. In addition, they can serve a host of other functions, providing a launching point from which companies can clarify and shape responsibilities in accordance with business trends, clear lines of management-employee communication, and spur re-examinations of potentially hoary business practices. Yet Joel Myers notes in Memphis Business Journal that "in many organizations, performance appraisals only occur when management is building a case to terminate someone. It's no wonder that the result is a mutual dread of the performance evaluation sessionomething to be avoided, if at all possible. This is no way to manage and motivate people. Performance appraisal is supposed to be a developmental experience for the employee and a 'teaching moment' for the manager."
PERFORMANCE APPRAISAL AND DEVELOPMENT
While the term performance appraisal has meaning for most small business owners, it might be helpful to consider the goals of an appraisal system. They are as follows:
- To improve the company's productivity
- To make informed personnel decisions regarding promotion, job changes, and termination
- To identify what is required to perform a job (goals and responsibilities of the job)
- To assess an employee's performance against these goals
- To work to improve the employee's performance by naming specific areas for improvement, developing a plan aimed at improving these areas, supporting the employee's efforts at improvement via feedback and assistance, and ensuring the employee's involvement and commitment to improving her performance.
All of these goals can be more easily realized if the employer makes an effort to establish the performance appraisal process as a dialogue in which the ultimate purpose is the betterment of all parties. To create and maintain this framework, employers need to inform workers of their value, praise them for their accomplishments, establish a track record of fair and honest feedback, be consistent in their treatment of all employees, and canvas workers for their own insights into the company's processes and operations.
A small business with few employees or one that is just starting to appraise its staff may choose to use a pre-packaged appraisal system, consisting of either printed forms or software. Software packages can be customized either by using a firm's existing appraisal methods or by selecting elements from a list of attributes that describe successful employee's work habits such as effective communication, timeliness, and ability to perform work requested. Eventually, however, many companies choose to develop their own appraisal form and system in order to accurately reflect an employee's performance in light of the business's own unique goals and culture. In developing an appraisal system for a small business, an entrepreneur needs to consider the following:
- Size of staff
- Employees on an alternative work schedule
- Goals of company and desired employee behaviors to help achieve goals
- Measuring performance/work
- Pay increases and promotions
- Communication of appraisal system and individual performance
- Performance planning
SIZE OF STAFF A small business with few employees may choose to use an informal approach with employees. This entails meeting with each employee every six months or one year and discussing an individual's work performance and progress since the last discussion. Feedback can be provided verbally, without developing or using a standard appraisal form, but in many cases, legal experts counsel employers to maintain written records in order to provide themselves with greater legal protections. As a company increases its staff, a more formal system using a written appraisal form developed internally or externally should always be used, with the results of the appraisal being tied to salary increases or bonuses. Whether the appraisal is provided verbally or in writing, a small business owner needs to provide consistent feedback on a regular basis so that employees can improve their work performance.
ALTERNATIVE WORK SCHEDULES Employees working alternative work schedulesorking at home, working part-time, job-sharing, etc.ill most likely need to have their performance appraised differently than regular full-time staffs in order to be fairly evaluated. An alternative work schedule may require different duties to perform a job and these new responsibilities should be incorporated into the appraisal. A small business owner should also be careful to ensure that these employees are treated fairly with regard to both the appraisal and resulting promotions.
COMPANY GOALS AND DESIRED PERFORMANCE
The performance of employees, especially in a smaller firm, is an essential factor in any company's ability to meet its goals. In a one-person business, goal-setting and achieving is a matter of transforming words into action, but moving the business towards its goals in a larger firm means that the employer has to figure out each person's role in that success, communicate that role to them, and reward or correct their performance. It also means that the appraisal should incorporate factors such as collaborative ability and sense of teamwork, not just individual performance.
MEASURING/ASSESSING PERFORMANCE Once a list of tasks and attributes is developed, a small business owner or manager needs to determine how to measure an employee's performance on these tasks. Measurement provides another objective element to the appraisal. Ideally, measurement would be taken against previous performance, whether of the individual employee, the group, or the company at large. If a company is just developing its appraisal system or does not have a baseline performance to measure against, it should develop realistic goals based on business needs or on the similar performance of competitors.
PAY INCREASES AND PROMOTIONS When developing an appraisal system, a small business owner needs to consider the connection between the appraisal and pay increases or promotions. While performance feedback for development/improvement purposes may be given verbally, a written summary of the individual's work performance must accompany a pay increase or promotion (or demotion or termination). It is crucial, therefore, that a manager or small business owner regularly document an employee's job performance.
The method of pay increases impacts the appraisal as well. If a small business uses merit-based increases, the appraisal form would include a rating of the employee on certain tasks. If skill-based pay is used, the appraisal would list skills acquired and level of competency. Appraisals and resulting salary increases that take into account group or company performance should include the individual's contributions to those goals.
COMMUNICATING THE SYSTEM A performance appraisal system is only effective if it is properly communicated and understood by employees. When devising an appraisal system for his or her company, an entrepreneur may want to consider involving staff in its development. Supporters contend that this promotes buy-in and understanding of the plan, as well as ensuring that the appraisal takes into account all tasks at the company. If the small business owner is unable to involve her staff, she should walk through the system with each employee or manager and have the manager do the same, requesting feedback and making adjustments as necessary.
COMMUNICATING PERFORMANCE AND PLANNING
Part of the appraisal system is the actual communication of the performance assessment. While this assessment may be written, it should always be provided verbally as well. This provides an opportunity to answer any questions the employee may have on the assessment, as well as to provide context or further detail for brief assessments. Finally, the employee and the entrepreneur or manager should make plans to meet again to develop a plan aimed at improving performance and reaching agreed-upon goals for the following review period. This planning session should relate company and/or group goals to the individual's tasks and goals for the review period and provide a basis for the next scheduled review.
TYPES OF APPRAISALS AND ASSESSMENT TERMS
TRADITIONAL In a traditional appraisal, a manager sits down with an employee and discusses performance for the previous performance period, usually one year. The discussion is based on the manager's observations of the employee's abilities and performance of tasks as noted in a job description. The performance is rated, with the ratings tied to salary percentage increases. However, as David Antonioni notes in Compensation & Benefits, "The traditional merit raise process grants even poor performers an automatic cost of living increase, thereby creating perceived inequity In addition, most traditional performance appraisal forms use too many rating categories and distribute ratings using a forced-distribution format." Antonioni suggests the appraisal form use just three rating categoriesutstanding, fully competent, and unsatisfactorys most managers can assess her best and worst employees, with the rest falling in between.
SELF-APPRAISAL Somewhat self-explanatory, the self-appraisal is used in the performance appraisal process to encourage staff members to take responsibility for their own performance by assessing their own achievements or failures and promoting self-management of development goals. It also prepares employees to discuss these points with their manager. It may be used in conjunction with or as a part of other appraisal processes, but does not substitute for an assessment of the employee's performance by a manager.
EMPLOYEE-INITIATED REVIEWS In an employee-initiated review system, employees are informed that they can ask for a review from their manager. However, cautions Ellyn E. Spragins in Inc., "The on-demand appraisal isn't meant to replace a conventional semiannual review, but it promotes an attitude of self-management among workers and often makes critiques more honest." Adherents to this type of review process contend that it promotes regular communication between staff and managers. Detractors, though, note that it is dependent on the employees' initiative, making it a less than ideal alternative for some workers with quiet, retiring personalities or confidence issues.
360 DEGREE FEEDBACK 360 degree feedback in the performance appraisal process refers to feedback on an employee's performance being provided by the manager, different people or departments an employee interacts with (peer evaluation), external customers, and the employee herself. This type of feedback includes employee-generated feedback on management performance (also known as upward appraisals). As a company grows in size, a small business owner should consider using 360 degree feedback to appraise employees. Communication in a business of ten people varies wildly from that of a company of 100 persons and 360 degree feedback ensures that an employee's performance is observed by those who work most closely with her. Small business owners or managers can either include the feedback in the performance review or choose to provide it informally for development purposes.
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 employee 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 regards to the system at large:
- Job expectations as well as 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 reasonable amount of time and support in improving their performance
Assistance in developing a system is available through a variety of sources including consultants, periodicals and books, and software. In addition, given the legal implications of appraisals, small business owners should have their company's performance assessment process, including training of managers and employees, reviewed by a qualified attorney.
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