Performance Management

(MBA HREP 403)

Chapter-2 (Performance Appraisal & Potential Appraisal)

Performance Appraisal:

Performance appraisal is a method of evaluating the behaviour and performance of

employees in the workplace. This includes appraisal of both qualitative and
quantitative aspects of job performance.

A merit rating, performance appraisal, employee appraisal, performance review, or

(career) development discussion is a method by which the job performance of an
employee is evaluated (generally in terms of quality, quantity, cost, and time) by the
superior manager or supervisor.

A performance appraisal is a systematic and objective method of judging the quality

of an employee in performing his job and a part of guiding and managing career
development. It is the process to obtain, analyze, and record the information about the
relative worth of an employee to the organization. Performance appraisal is an
analysis of an employee’s recent successes and failures, personal strengths and
weaknesses, and his/her suitability for promotion or further training.

It is also the judgment of an employee’s performance in a job based on considerations

other than productivity alone.

Performance appraisal is done periodically, but on a continuous basis. It is a part of a

larger performance management system and includes both managerial and non-
managerial employees in its scope.

Objectives of Performance Appraisal:

Generally, the aims of a performance appraisal are to:

a. To provide employees feedback on their performance.

b. Identify employee training needs.

c. Document criteria used to allocate organisational rewards.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

d. A basis for decisions relating to salary increases, promotions, disciplinary actions,

bonuses, etc.

e. Provide the opportunity for organisational diagnosis and development.

f. Facilitate communication between employee and employer.

g. Validate selection techniques and human resource policies to meet regulatory

requirements.

h. To improve performance through counseling, coaching and development.

i. To motivate employees through recognition and support.

Features of Performance Appraisal:

1. Systematic process of evaluation of an employee.

2. Analysis of the strengths and weaknesses of an employee.

3. To find out how well an employee is performing the job.

4. Appraisal is done periodically.

5. It is based on a definite plan.

6. Performance appraisal is different from job evaluation.

7. Performance appraisal is a continuous process that is accepted by every

organization.

Need for Performance Appraisal:

There are certain requirements expected from the employees for which performance
appraisal are conducted.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

1. Providing information about the performance ranks on which decision regarding

salary fixation, promotion, etc. are taken.

2. Review of the performance of the subordinates.

3. Providing information that helps to counsel the subordinates.

4. Getting information to diagnose deficiency in employees regarding skills,

knowledge, etc.

5. To prevent grievance and in disciplinary activities.

Methods of Performance Appraisal:

There are numerous methods in use to appraise employee performance depending

upon the size and nature of the organizations. A common approach to assess
performance is to use a numerical or scalar rating system whereby managers are asked
to score an individual against a number of objectives/attributes.

In some companies, employees receive assessments from their manager, peers,

subordinates, and customers, while also performing a self assessment. The most
popular methods used in the performance appraisal process can be divided in two
categories:

These methods include Ranking methods, Graphic Rating Scale method, Critical
Incidents Method, Checklist Methods, Essay Method and Field Review Method.

Modern Appraisal methods include Management by Objectives, 360 – Degree

Feedback Appraisal, Behaviourally Anchored Rating Scales, Assessment Genre,
Human Resource Accounting, and Balanced Scorecard.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)
Traditional Trait Appraisal Methods:
1. Ranking Methods:
Ranking can be based on the followings:
(а) Straight Ranking Method:
This is one of the oldest and simplest techniques of performance appraisal. In this
method, the appraiser or evaluator ranks the employees from the best to the poorest on
the basis of their overall performance. It is very useful for a comparative evaluation.

(b) Paired Comparison Method:

It is a better way of comparison than the straight ranking method. In this method each
employee is compared with all others on a one- to-one basis, and then ranked.

(c) Forced Distribution Method:

It is a method of appraising employees on the basis of a predetermined distribution
scale. The evaluator is asked to rank 10% employees in the best category, 20% in the
next category, 40% in the middle category, 20% in before the low, and 10% in the
lowest brackets.

2. Graphic Rating Scale Method:

In this method, an employee’s quality and quantity of work is assessed in a graphic
scale indicating different degrees of a particular trait, i.e., behavior or characteristics
as they relate to work performance.

For example a trait like Job knowledge may be judged on the range of average, above
average, outstanding or unsatisfactory or on the basis of numbers (1,2,3,4, 5, and so
on). The list of factors to be appraised is dependent upon the company requirements.

3. Critical Incidents Methods:

In this method, the evaluator rates the employee on the basis of critical events and
how the employee behaved during those incidents. It includes both negative and

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

positive points. The negative point incident might be damage to machinery because of
not following safety measures.

Positive point incident may be staying beyond working hours to repair a machine. The
drawback of this method is that the supervisor has to note down the critical incidents
and the employee behavior as and when they occur.

4. Checklist Methods:
The appraiser is given a checklist of several behaviours, traits, or job characteristics of
the employees on job. The checklist contains a list of statements on the basis of which
the evaluator describes the on the job performance of the employees. If the rater
believes that employee does have a particular listed trait it is marked as positive
check, otherwise the item is left blank.

The company has a choice to choose either Weighted Checklist Method or Forced
Checklist Method.

5. Essay Appraisal Method:

It is also known as “Free Form Method”. It involves a description of the performance
in a number of broad performance criteria of an individual employee by his superior
based on the facts and often supported by examples and evidences. A major drawback
of the method is how to keep the bias of the evaluator away.

6. Field Review Method:

In this method, a representative of the HR department or a training officer discusses
and interviews the supervisors to evaluate and rate their respective subordinates. This
method is very time consuming method. However, this method helps to reduce the
superiors’ personal bias.

At this stage it would not be out of context to mention some of the limitations
associated with trait-based methods of performance evaluation. First, the trait-based

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

methods are based upon traits (like integrity and consciousness) which may not be
directly related to successful job performance. An employee can change behaviour,
but not personality.

An employee who is dishonest, may stop stealing, but is likely to involve the moment
he feels the threat of being caught is gone. Second, trait-based methods are easily
influenced by ‘office politics’ and is thus, less reliable.

Modern Appraisal Methods:

These methods are described as under:
1. Management by Objectives:
The concept of ‘Management by Objectives’ (MBO) was given by Peter F. Drucker in
1954. It can be expressed as a process whereby the employees and the superiors come
together to identify common goals – the organizational goals as well as individual
goals, the standards to be taken as the criteria for measurement of their performance
and contribution and deciding the course of action to be followed.

Thus, the essence of MBO is participative goal setting, choosing course of actions and
decision making. Ideally, when employees themselves have been involved with the
goal setting and the choosing the course of action to achieve them, they are more
committed.

2. 360 -Degree Feedback Appraisal Method:

360-degree feedback, also known as ‘multi-rater feedback’, is the most comprehensive
appraisal where the feedback about the employees’ performance comes from all the
sources that come in contact with the employee on his job.

These sources include superiors, subordinates, peers, team members, customers, and
suppliers apart from the employee himself, who can provide feedback on the
employee’s job performance.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

Self appraisal gives a chance to the employee to look at his/her strengths and
weaknesses, his achievements, and judge his own performance.

Subordinates (part of internal customers) evaluation gives an opportunity to rate the

employee on the parameters like communication and motivating abilities, superior’s
ability to delegate the work, leadership qualities etc.

Evaluation by peers can help to find employees’ abilities to work in a team, co-
operation and sensitivity towards others. Thus an evaluation by one and all is a 360-
degree review and the feedback is considered to be one of the most credible. Some of
the organisations using this method include Wipro, Infosys, and Reliance Industries
etc.

3. Behaviourally Anchored Rating Scales:

Behaviourally Anchored Rating Scales (BARS) is a modern technique which is a
combination of the graphic rating scale and critical incidents method. It comprises
predetermined critical areas of job performance or sets of behavioral statements
describing important job performance qualities as good or bad (like the qualities such
as inter-personal relationships, adaptability and reliability, job knowledge etc.).

The typical BARS includes seven or eight performance behaviours each one measured
by a seven-or-nine point scale. These statements are developed from critical incidents.

In this method, an employee’s actual job behaviour is judged against the desired
behaviour through recording and comparing the behavior with BARS. Developing and
practicing BARS needs expert knowledge.

4. Assessment Centres:
Assessment centres are a contribution of German psychologists. The main feature of
assessment centres is that they process. Assessment Centres consist of many
multiples.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

a. Multiple competencies to be evaluated for in a candidate.

b. Multiple observers to eliminate the subjectivity and increase objectivity involved in

the process.

c. Multiple participants: 18 – 21 in case of TMTC (Tata Management Training

Centre).

d. Multiple exercises: Exercises like role plays, case analysis, presentations, group
discussions etc.

e. Multiple simulations: These could be creative, crisis or exploitative type of

simulations.

f. Multiple observations: Each observation is observed at least twice. There are five
main ways in which evaluation is made. A group of participants takes part in a variety
of exercises observed by a team of trained assessors who evaluate each participant
against a number of predetermined, job related behaviours. Decisions are then made
by pooling.

5. Human Resource Accounting Method:

Human resources are valuable assets for every organization. Human resource
accounting method values the relative worth of these assets in the terms of money. In
this method the valuation of the employees is calculated in terms of cost and
contribution to the employers.

The cost of employees includes all the expenses incurred on them , viz., their
compensation, recruitment and selection costs, induction and training costs etc.,
whereas their contribution includes the total value added (in monetary terms).

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

The difference between the cost and the contribution will be the performance of the
employees. Ideally, the contribution of the employees should be greater than the cost
incurred on them.

6. Balanced Score Card:

It was developed by Robert Kaplan and David Norton in 1990s. The purpose of
balanced scorecard is to evaluate the organizational and employee performance in
performance appraisal management processes. The conventional approach measures
the performance only on a few parameters like the action processes, results achieved
or the financial measures etc.

The Balanced scorecard provides a framework of different measures to ensure the

complete and balanced view of the performance of the employees. Balanced scorecard
focuses on the measures that drive performance.

The balanced scorecard has two basic characteristics – a balanced set of measures
based on four measures (financial – profits, market share, ROI; customer – perspective
about organization loyalty to firm, acquisition of new customers; internal business
measures – infrastructure, organisational processes and systems, human resources; and
the innovation and learning perspective – ability to learn, innovate and improve) and
linking these measures to employee performance. Senior managers are allocated
rewards based on their success at meeting or exceeding the performance measures.

Different types of rating errors are:

(i) Halo effect:
This is a presumption by managers that a person doing well in one area will be doing
well in other areas also. This is not always the case. A person good at sales may not be
good in production or vice versa.

(ii) Horns effect:

It is the opposite of halo effect. Managers presume that employees who do not
perform well in one area are poor performers in other areas too. They tend to give

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)
such employees a low grade if they have performed badly on one job while they may
have actually performed better on other jobs.

(iii) Contrast error:

Managers rate the subordinates by comparing their individual performances rather
than measuring their performance against the standards. When two sub-standard
employees are rated on this basis, manager will give Grade A to one and B to another
while both of them may actually fall in Grade E.

(iv) Recency error:

The employees are rated on the basis of their latest or recent performance. The earlier
performance is ignored. An outstanding employee who, for some reason, has not been
able to do well in the latest assignment, shall be placed in Grade D or E. This is not a
satisfactory method of rating.

(v) Leniency error:

Supervisors give lenient rating to all the employees without measuring their actual
performance. The results are, thus, likely to be biased.

(vi) Severity error:

This is the opposite of leniency error. The supervisor gives low rating to all the
employees, without appraising their actual performance. The results would, therefore,
be again inaccurate.

(vii) Central tendency error:

An average rating or grade is given to everyone, disregarding their actual
performance. The rater marks all the people as average without discriminating as
superiors or inferiors. This may happen because the rater does not have sufficient
knowledge about employees or because he is indifferent towards employees.

(viii) Constant errors:

Some raters have the habit of rating people as high or low. They either rate everyone
high or everyone low. Some rate on the basis of present performance while others on
the basis of potential to perform in future. The results of two raters are, thus, not
comparable.

Barriers to Performance Appraisal:

The following barriers may arise in making appraisals:

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)
1. Despite best efforts to be objective in making appraisals, appraisers’ may become
subjective in their judgment.

2. Appraisals based on the assumption that appraisal system is perfect cannot give
accurate results. Targets and techniques of appraisal cannot be standardized forever.

3. Holding personal opinion about appraises can make appraisals a mere formality.
Appraisers do not spend sufficient time in designing the appraisal system and
completing the appraisal forms. This lacks a systematic review of performance, both
present and potential.

4. Appraisal is like a check on employees’ performance. Therefore, they may be

resistant to appraisals. They often tend to provide faulty or disguised information
about their performance. This makes appraisal ineffective in nature.

5. Sometimes, appraisals are affected by psychological blocks to appraisals.

They may:
(a) Take appraisals as an added burden on them

(b) Dislike to find faults with appraises’ performance

(c) Dislike that employees’ promotions are withheld or deferred because of their
rating.

(d) Be afraid of becoming unpopular amongst employees, etc.

These fears are a hindrance to effective appraisals resulting in subjective appraisals.

Appraisers tend to give high ratings to those whom they want to favour irrespective of
their performance. This defeats the very purpose of appraisals.

6. Appraisals are done by comparing actual performance with standard performance as

stated in the appraisal form. If these forms are not properly designed, the desired
information cannot be extracted from the appraises. Performance criteria may be non-
measurable (honesty, politeness etc.) or ambiguous (contribution to output or number
of hours worked). When performance traits are not exactly measurable, they can be
interpreted differently by different people. This fails to give effective ratings to
employees’ performance.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)
7. Despite the best efforts in making performance appraisal error free, errors may
occur, consciously or otherwise.

Process of Performance Appraisal:

Performance appraisal process consists of the following steps:
1. Goal setting:

Goals are set for appraising performance which become standards. Standards should
be applicable, adequate and objective. There should be scope for stretching human
abilities. They should be high but reasonable and attainable in a given situation.

2. Measure performance:
Once standards are set, next job is to measure performance against standards.
Measurement can be annual, periodic or continuous.

3. Find deviations:
Managers observe actual performance of employees, look at the environmental
conditions and find deviations in performance.

4. Corrective action:
Some deviations are desirable and some are undesirable when compared against goals/
standards. Corrective actions are taken and in some cases, the goals are modified.

Diagrammatically, the performance appraisal process/control chart can be

shown as follows:

In the performance evaluation

system, manager should not just
perform his role theoretically but
really look forward to apply
fundamentals to practice i.e.
implementation. In addition to basic
managerial functions, he should
focus on other areas of concern like
personality, cooperation, maturity,
intelligence, loyalty, a good trainer
etc.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)
These areas should be used in conjunction with appraisal of plans and goals. Appraisal
system is a continuous and sequential activity performed by managers to institute a
sound reward system for its personnel and also promote market share for its products.

What is Appraisal Interview?

Appraisal interview is a formal discussion process between an employee and his/her
manager regarding performance and other aspects of job role. It is one of the best
ways for an employee to increase productivity and change work habits. In appraisal
interview, the employer and the employee discuss the performances of the individual
and the key areas of improvement and how the employee can grow through a feedback
mechanism.
Importance of Appraisal Interview
An appraisal interview gives the employee the chance to shield himself/herself from
poor evaluation by the manager. It also gives the manager an opportunity to spell out
his/her reviews.
It helps the employees to determine whether there is a need for training if they lack in
any particular skill and who will be promoted, demoted, retained or fired.

Types of Appraisal Interview

1. Satisfactory-Promotable: The employee’s performance is satisfactory and there is
a promotion ahead. This interview’s objective is to develop is to discuss the
employee’s career plans and to develop a specific action plan for the professional
development that he/she needs to move up.
2. Satisfactory-Not promotable: The employee’s performance is satisfactory but
there is no possibility for promotion. This interview’s objective is to motivate the
employee enough so that the performance satisfactory.
3. Unsatisfactory-Correctable: The interview’s objective is to find a way to correct
the unsatisfactory performance.
4. Unsatisfactory-Uncorrectable: This interview is usually to warn the employee
about his/her performance. The worst case would be that the employee is fired.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha
 Performance Management
(MBA HREP 403)

Guidelines for conducting Appraisal Interviews

The following things should be kept in minds while conducting appraisal interviews:
1. Use of work data: Use of actual numbers like productivity reports, leaves, orders
and so on.
2. Don’t get personal: Try and avoid negative sentences that directly affects the
employee. Compare the employee’s performance with a standard not with other
people.
3. Value employee’s opinion: Encourage the employee to talk. Ask his/her opinion to
improve the situation.
4. Don’t tiptoe around: Make sure the employee gets to know what he/she is doing
correctly or incorrectly. Advise the employee on how to improve things.

Pabisha Chattopadhyay, Guest Faculty, Department of Business Management, Central University of Odisha