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An organization’s goals can be achieved only when people put in their best efforts.

How to
ascertain whether an employee has shown his or her best performance on a given job? The
answer is performance appraisal. It is one of the fundamental jobs of HRM

Meaning and definition

In simple terms, performance appraisal may be understood as the assessment of an individual's


performance in a systematic way, the performance being measured against such factors as job
knowledge, quality and quantity of output, initiative, leadership abilities, supervision,
dependability, co-operation, judgment, versatility, health, and the like. Assessment should not be
confined to past performance alone. Potentials of the employee for future performance must also
be assessed. A formal definition of performance appraisal is: It is the systematic evaluation of
the individual with respect to his or her performance on the job and his or her potential for
development.
A more comprehensive definition is: Performance' appraisal is a formal structured system of
measuring and evaluating an employee’s job related behaviors and outcomes to discover how
and why the employee is presently performing on the job and how the employee can perform
more effectively in the future so that the employee organization and society all benefit.
The other terms used for performance appraisal are performance rating, employee assessment.
Employees performance review, personnel appraisal, performance evaluation, employee
evaluation and (perhaps the oldest of the terms used) merit rating.
Performance appraisal means systematic evaluation of the personality and performance of each
employee by his supervisor or some other person trained in the techniques of merit rating. It
employs various rating techniques for comparing individual employees in a work group, in terms
of personal qualities or deficiencies and the requirements of their respective jobs.

To quote Dale Yoder, “Performance appraisal includes all formal procedures used to
evaluate personalities and contributions and potential of group members in a working
organization. It is a continuous process to secure information necessary for making correct
and objective decisions on employees.” The comparison of performance with job requirements
helps in finding out the merit of individual employees in a work group.
According to Flippo, “Performance Appraisal is the systematic, periodic and an important
rating of an employee’s excellence in matters pertaining to his present job and his potential
for a better job.” Performance appraisal can be either formal or informal. Usage of
former systems schedule regular sessions in which to discuss an employee’s performance. Informal
appraisals are unplanned, often just chance statements made in passing about an employee’s performance.
Most organizations use a formal appraisal system. Some organizations use more than one appraisal system
for different types of employees or for different appraisal purposes. Organizations need to measure
employee performance to determine whether acceptable standards of performance are being maintained.
The six primary criteria on which the value of performance may be assessed are: quality, quantity, time,
cost effectiveness, need for supervision, and interpersonal impact.

Objectives

Data relating to performance assessment of employees are recorded, stored, and used for seven
purposes. The main purposes of employee assessment are:

1. To effect promotions based on competence and performance.


2. To assess the training and development needs of the employees.
3. To decide upon the pay raise.
4. To let the employees know where they stand insofar as their performance is concerned
and to assist them with constructive criticism and guidance for the purpose of their
development.
5. To improve communication. Performance appraisal provides a format for dialogue
between the superior and the subordinate, and improves understanding of personal goals
and concerns. This can also have the effect of increasing the trust between the rater and
the ratee.
6. Performance appraisal can be used to determine whether HR programmes such a
selection, training, and transfers have been effective or not.
7. To conform the services of probationary employees upon their completing the
probationary period satisfactorily.

Broadly, performance appraisal serves four objectives-

• Developmental uses,
• Administrative uses/decisions,
• Organizational maintenance/objectives, and
• Documentation purposes.

Multiple purposes of performance appraisal

General applications Specific purposes

Developmental Uses Identification of individual needs

Performance feedback

Determining transfers and job assignments

Identification of individual strengths and

development needs

Administrative Uses/Decisions Salary

Promotion

Retention or termination

Recognition of individual performance

Lay-offs

Identification of poor performers


Organizational Maintenance/ Objectives HR planning

Determining organization training needs

Evaluation of organizational goal

achievement

Information for goal identification

Evaluation of HR systems

Reinforcement of organizational

development needs

Documentation Criteria for validation research

Documentation for HR decisions

Helping to meet legal requirements

Characteristics

1. Performance Appraisal is a process.


2. It is the systematic examination of the strengths and weakness of an employee in terms of
his job.
3. It is scientific and objective study. Formal procedures are used in the study.

4. It is an ongoing and continuous process wherein the evaluations are


arranged periodically according to a definite plan.

5. The main purpose of Performance Appraisal is to secure information


necessary for making objective and correct decision an employee.

Designing an appraisal program


Determining the objectives of Performance Appraisal

Before any performance appraisal program is initiated, it is essential to determine its objectives.
The objective of the appraisal program may either to appraise the actual performance of the
individuals on their present jobs or to determine the potential of individuals to do higher jobs or
both. Sometimes, performance appraisal programs are associated with specific objectives like
training and development, transfer and promotion, increase in pay,etc.

Establishing Standards of Performance

For effective rating of employees, it is necessary to establish standard of performance against


which their performance should be compared. However, an approach that is more preferable is to
establish, in writing, definite standards of accomplishment which the employee can reasonably
expected to meet. Such a method will make it possible for both supervisor and his subordinate to
reach agreement on just what is expected in terms of performance.

Who is to do the Appraisal?

Generally, the appraiser is the immediate superior of the man to be appraised. He is most familiar
with the employee’s work and is in contact with him and so he is considered to be able to
appraise him well. But there are certain limitations of appraisal by one person. That is why some
organizations try to obtain two or more ratings on each employee. But again the difficulty may
arise because the second rater may not have the necessary contact with the individual who is to be
rated. The possibility is the constitution of a rating committee which may consist of a number of
supervisors and specialists from personnel department and a representative of the workers. The
committee will rate each individual collectively. Some people feel that employees should be
allowed to rate themselves. When this is done their ratings may be offered in conjunction with
ratings by their immediate superiors.

Frequency of Appraisal

The frequency of appraisals differs from organization to organization and with the nature of
duties performed. There are spot appraisals, monthly, quarterly, half yearly or yearly appraisals.
But most of the organizations conduct yearly or half yearly appraisals because more frequent
appraisals besides taking away time of the appraiser or raters, may create a sense of fear amongst
the rates. Idea frequency is one which fits into the objectives of the appraisal. However, new
employees should be rated more frequently than the older ones.

Designing of Forms

This is an important step in performance appraisal to design the rating forms to be utilized in the
program. The forms should be related to job families such as clerical, mechanical, sales, technical
and supervisory. All require a different evaluation form. Performance forms may be classified as
those involving comparative ranking and others involving the comparison of each employee’s
actual performance with predetermined standards. The first category of forms is designed to
evaluate employee performance for the purpose of making wage adjustments, layoffs,
promotions, etc. and the second category of forms is used to improve the performance of workers
on their present jobs.

Process
Figure below outlines the performance- appraisal process. Each step in the process is crucial and
is arranged logically. The process as shown in Figure below is somewhat idea1ised. Many
organizations make every effort to approximate the ideal process, resulting in first-rate appraisal
systems. Unfortunately, many others fail to consider one or more of the steps and, therefore, have
less-effective appraisal system.
Establishing Performance Standards

The first step in the process of performance appraisal is the setting up of the standards which
will be used to as the base to compare the actual performance of the employees. This step
requires setting the criteria to judge the performance of the employees as successful or
unsuccessful and the degrees of their contribution to the organizational goals and objectives. The
standards set should be clear, easily understandable and in measurable terms. In case the
performance of the employee cannot be measured, great care should be taken to describe the
standards.

Communicating the Standards

Once set, it is the responsibility of the management to communicate the standards to all the
employees of the organization. The employees should be informed and the standards should be
clearly explained to the. This will help them to understand their roles and to know what exactly is
expected from them. The standards should also be communicated to the appraisers or the
evaluators and if required, the standards can also be modified at this stage itself according to the
relevant feedback from the employees or the evaluators.

Measuring the Actual Performance

The most difficult part of the performance appraisal process is measuring the actual
performance of the employees that is the work done by the employees during the specified period
of time. It is a continuous process which involves monitoring the performance throughout the
year. This stage requires the careful selection of the appropriate techniques of measurement,
taking care that personal bias does not affect the outcome of the process and providing assistance
rather than interfering in an employees work.

Comparing the Actual with the Desired Performance

The actual performance is compared with the desired or the standard performance. The
comparison tells the deviations in the performance of the employees from the standards set. The
result can show the actual performance being more than the desired performance or, the actual
performance being less than the desired performance depicting a negative deviation in the
organizational performance. It includes recalling, evaluating and analysis of data related to the
employees’ performance.

Discussing Results

The result of the appraisal is communicated and discussed with the employees on one-to-one
basis. The focus of this discussion is on communication and listening. The results, the problems
and the possible solutions are discussed with the aim of problem solving and reaching consensus.
The feedback should be given with a positive attitude as this can have an effect on the
employees’ future performance. The purpose of the meeting should be to solve the problems
faced and motivate the employees to perform better.

Decision
The last step of the process is to take decisions which can be taken either to improve the
performance of the employees, take the required corrective actions, or the related HR decision
like rewards, promotions, demotions, transfers etc.

Benefits

Perhaps the most significant benefit of appraisal is that, in the rush and bustle of daily working
life, it offers a rare chance for a supervisor and subordinate to have "time out" for a one-on-one
discussion of important work issues that might not otherwise be addressed. Almost universally,
where performance appraisal is conducted properly, both supervisors and subordinates have
reported the experience as beneficial and positive.
Appraisal offers a valuable opportunity to focus on work activities and goals, to identify and correct
existing problems, and to encourage better future performance. Thus the performance of the whole
organization is enhanced.

Motivation and recognition


Performance appraisal can have a profound effect on levels of employee motivation and satisfaction - for
better as well as for worse. Performance appraisal provides employees with recognition for their work
efforts. The power of social recognition as an incentive has been long noted. If nothing else, the existence
of an appraisal program indicates to an employee that the organization is genuinely interested in their
individual performance and development. This alone can have a positive influence on the individual's
sense of worth, commitment and belonging. The strength and prevalence of this natural human desire for
individual recognition should not be overlooked. Absenteeism and turnover rates in some organizations
might be greatly reduced if more attention were paid to it. Regular performance appraisal, at least, is a
good start.

Training and Development


Performance appraisal offers an excellent opportunity - perhaps the best that will ever occur - for a
supervisor and subordinate to recognize and agree upon individual training and development needs.
During the discussion of an employee's work performance, the presence or absence of work skills can
become very obvious - even to those who habitually reject the idea of training for them! Performance
appraisal can make the need for training more pressing and relevant by linking it clearly to performance
outcomes and future career aspirations. From the point of view of the organization as a whole,
consolidated appraisal data can form a picture of the overall demand for training. This data may be
analyzed by variables such as sex, department, etc. In this respect, performance appraisal can provide a
regular and efficient training needs audit for the entire organization.

Recruitment and Induction


Appraisal data can be used to monitor the success of the organization's recruitment and induction
practices. For example, how well are the employees performing who were hired in the past two years?
Appraisal data can also be used to monitor the effectiveness of changes in recruitment strategies. By
following the yearly data related to new hires (and given sufficient numbers on which to base the analysis)
it is possible to assess whether the general quality of the workforce is improving, staying steady, or
declining.

Limitations
Performance appraisal may not yield the desired results because of the following deficiencies:

1. If the factors included in the assessment are irrelevant, the result of merit rating will not
be accurate.
2. Different qualities to be rated may not be given proper weightage certain in cases.
3. Some of the factors are highly subjective like initiative and personality of the employees;
so the actual rating may not be on scientific lines.
4. Supervisors often do not have critical ability in assessing the staff. Sometimes, they are
guided by their personal emotions and likes. So the ratings are likely to be biased.

Performance appraisal and competitive advantage


The objectives of performance appraisal, listed above, point out the purpose which such an
exercise seeks to meet. What needs emphasis is that performance evaluation contributes to firm's
competitive strength. Besides encouraging high levels of performance, the evaluation system
helps identify employees with potential, reward performance equitably and determine employee's
need for training. Specifically, performance appraisal helps an organization gain competitive
edge in the following ways (see Fig below)

Making
Ensuring
Values
Strategy
Minimizing
Competitive
correct
and
Improvingand
Legal
dissatisfaction
Behaviors
Compliance
decisions
Behavior
Advantageand
Performance
turnover

Fig: How Performance Appraisal can contribute to Firm's Competitive Advantage?

Improving Performance

An effective appraisal system can contribute to competitive advantage by improving employee


job performance in two ways-by directing employee behavior towards organizational goals, as
was done by the second beekeeper (see opening case), and by monitoring that behavior to ensure
that the goals are met.

Making Correct Decisions


As stated above, appraisal is a critical input in making decisions on such issues as pay raise,
promotion, transfer, training, discharges and completion of probationary periods. Right decision
on each of these can contribute to competitive strength of an organization. If promotion, for
example, is made on performance, the promote feels motivated to enhance his or her
performance.

Ensuring Legal Compliance

Promotions made on factors other than performance might land up a firm in a legal battle, thus
diverting its focus on non-productive areas, as it happened to Williamson Magar. Organizations
can minimize costly performance-related litigation by using appraisal systems that give fair and
accurate ratings.

Minimizing Job Dissatisfaction and Turnover

Employees tend to become emotional and frustrated if they perceive that the ratings they get are
unfair and inaccurate. Such employees find that the efforts they had put in became futile and
obviously get de-motivated.

Dissatisfaction in the job sets in and one of the outcomes of job dissatisfaction is increased
turnover. Fair and accurate appraisal results in high motivation and increased job satisfaction. An
organization having satisfied and motivated employees will have an edge over its competitors.

Consistency between Organizational Strategy and Behavior

An organization needs a strategy consistent with the behavior of its employees if it were to
realize its goals. A truism of organizational life is that people engage themselves in behaviors that
they perceive will be rewarded. As employees want to be rewarded, they tend to occupy
themselves more with those activities on which the organization emphasizes. For example, if the
focus is on service, employees will behave in ways that will help them in gaining rewards
associated with service delivery. If the focus is on cost control, employees will seek to control
cost and thus be recognized and rewarded. If the focus is on rewarding productivity, employees
will strive for productivity.

Rating errors in performance appraisal


Performance appraisals are subject to a wide variety of inaccuracies and biases referred to as
'rating errors'. These errors can seriously affect assessment results. Some of the most common
rating errors are: -
Leniency or severity: - Leniency or severity on the part of the rater makes the assessment
subjective. Subjective assessment defeats the very purpose of performance appraisal. Ratings are
lenient for the following reasons:
a) The rater may feel that anyone under his or her jurisdiction who is rated unfavorably will reflect
poorly on his or her own worthiness.
b) He/ She may feel that a derogatory rating will be revealed to the rate to detriment the relations
between the rater and the ratee.
c) He/ She may rate leniently in order to win promotions for the subordinates and therefore,
indirectly increase his/her hold over him.
Central tendency: - This occurs when employees are incorrectly rated near the average or
middle of the scale. The attitude of the rater is to play safe. This safe playing attitude stems from
certain doubts and anxieties, which the raters have been assessing the rates.
Halo error: - A halo error takes place when one aspect of an individual's performance influences
the evaluation of the entire performance of the individual. The halo error occurs when an
employee who works late constantly might be rated high on productivity and quality of output as
well as on motivation. Similarly, an attractive or popular personality might be given a high
overall rating. Rating employees separately on each of the performance measures and
encouraging raters to guard against the halo effect are the two ways to reduce the halo effect.
Rater effect: -This includes favoritism, stereotyping, and hostility. Extensively high or low score
are given only to certain individuals or groups based on the rater's attitude towards them and not
on actual outcomes or behaviors; sex, age, race and friendship biases are examples of this type of
error.
Primacy and Regency effects: - The rater's rating is heavily influenced either by behavior
exhibited by the ratee during his early stage of the review period (primacy) or by the outcomes,
or behavior exhibited by the ratee near the end of the review period (regency). For example, if a
salesperson captures an important contract/sale just before the completion of the appraisal, the
timing of the incident may inflate his or her standing, even though the overall performance of the
sales person may not have been encouraging. One way of guarding against such an error is to ask
the rater to consider the composite performance of the rate and not to be influenced by one
incident or an achievement.
Performance dimension order: - Two or more dimensions on a performance instrument follow
each other and both describe or rotate to a similar quality. The rater rates the first dimensions
accurately and then rates the second dimension to the first because of the proximity. If the
dimensions had been arranged in a significantly different order, the ratings might have been
different.
Spillover effect: - This refers to allowing past performance appraisal rating to unjustifiably
influence current ratings. Past ratings, good or bad, result in similar rating for current period
although the demonstrated behavior does not deserve the rating, good or bad.
Potential appraisal
Generally, people earn promotions on the basis of their past performance. The past performance
is considered a good indicator of future job success. This could be true if the roles to be played by
the promotes are similar. However, in actual practice, the roles that a job holder has played in the
past may not be the same if he assumes a different job after his transfer or promotion to a new
position. Past performance, therefore, may not be a good indicator of the suitability of an
indicator for a higher role. To overcome this inadequacy, organizations must initiate the process
of potential appraisal.
The potential appraisal refers to the appraisal i.e. identification of the hidden talents and skills
of a person. The person might or might not be aware of them. Potential appraisal is a future –
oriented appraisal whose main objective is to identify and evaluate the potential of the employees
to assume higher positions and responsibilities in the organizational hierarchy. Many
organisations consider and use potential appraisal as a part of the performance appraisal
processes.

Potential appraisal can serve the following purposes:


i. To advise the employees about their future prospects.
ii. To advise the employees about what they must do to improve their career prospects.
iii. To help the organization chalk out a suitable succession plan.
iv. To update training efforts from time to time.

The mechanisms that could be used for potential appraisal are discussed below:
i. Rating by superior.
The potential of a candidate could be rated by the immediate supervisor who is acquainted
with the candidate’s work and also his technical capabilities.
ii. Psychological tests.
Managerial and behavioural dimensions can be measured through a battery of
psychological tests.
iii. Games.
Stimulation games and exercises( assessment centre, in basket, role play,etc.) could be
used to uncover the potential of the candidate.
iv. Performance records.
Performance records and ratings of the candidate on his previous jobs could be examined
carefully on various dimensions such as initiative, creativity, risk taking ability, etc.,
which might play a key role in discharging his duties in a new job.

Philip model

More and more number of organizations are trying to assess potential of their employees,
particularly at the managerial level. Cadbury India, Sandoz, Pfizer, Mafatlal, Philips,
National Organic Chemical Industries, Glaxo and P&G are a few of the companies which
seek to top managerial potential.
At Philips a 2 by 2 matrix is used to assess performance and potential to perform. The
vertical axis measures potential while the horizontal, actual performance. Both are further
subdivided into parameters – high and low – resulting in 4 quadrants of classification.

Low Potential-Low Performance: these employees are categorized as question marks.The


company asks such employees to improve their performance levels. Failure to improve would
result in their planned separation.

High Potential-Low Performance: these are the problem children. In order to help them
improve their performance, these employees are shifted to new locations to work and are
closely monitored. If performance levels do not improve, these employees are reclassified
as question marks and the separation process initiated.
High Potential-High Performance: these are the star performers. They have to be kept
engaged with complex assignments all the time and groomed to take up the top positions.
Otherwise, they might leave.

Low Potential-High Performance: these are called as solid citizens and constitute 70 to
75 % of the total number of employees in any organization. They have skills but lack the
potential to grow beyond their current job-profile. The organization has to constantly
recognize their limitations and take care of their needs.

In order to assess employee potential, Philips has adopted the system that prevails at
Philips NV, Holland. The system at Philips NV uses 4 broad attributes

1. Conceptual effectiveness. Vision, business orientation, entrepreneurial orientation and


sense of reality.

2. Operational effectiveness. Result orientation, individual effectiveness, risk taking and


control.

3. Interpersonal effectiveness. Network directedness, negotiating power, personal


influence and verbal behavior.

4. Achievement motivation. Drive. Personal ambition, innovativeness, and stability.

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