What is Performance Appraisal?

If you’re managing a business on your own, you likely have a clear sense of your performance. However, whether your enterprise has just one employee or a thousand, assessing how well they are performing can be challenging. This is why it’s essential to have an objective method for evaluating employee performance

.So, today, we’re talking about performance appraisals. 

But what exactly is a performance appraisal, how does it operate, and why should businesses consider implementing it?

 

What is a Performance Appraisal?

The term “performance appraisal” refers to a systematic and periodic process that assesses an employee’s job performance and productivity relative to certain pre-established criteria and organizational objectives. 

It is an important aspect of organizational performance management, aimed at enhancing individual and company-wide performance.

A performance appraisal, also known as an annual review, employee appraisal, performance review, or evaluation, assesses an employee’s skills, achievements, and development or the absence of it.

A performance appraisal directs and aligns employees toward achieving organizational objectives, like a GPS guiding a driver to their destination. It serves as a structured method for providing feedback, setting future performance goals, and identifying opportunities for career growth.

Performance Management vs Performance Appraisal

 

Characteristic	Performance Management	Performance Appraisal
Definition	An ongoing process of communication and feedback between managers and employees to ensure the achievement of organizational objectives	A systematic and periodic process of measuring an individual’s work performance against established job requirements
Frequency	Continuous, with regular feedback sessions throughout the year	Typically annual, semi-annual, or quarterly
Focus	Proactively manages employee performance to ensure alignment with company goals, vision, mission, and values	Objectively evaluates an employee’s past performance
Purpose	Guides employees towards achieving goals, identifies blockers, and helps them perform better in the future	Provides feedback on mistakes and communicates how the employee could have performed better
Approach	Uses a mix of qualitative and quantitative methods to enhance employee performance	Primarily uses a quantitative approach
Stakeholders	Involves managers, supervisors, and multiple stakeholders in the ongoing process	Usually undertaken by the HR department
Flexibility	Flexible process	Inflexible
Strategic Value	Considered a strategic tool for organizational success	An operational tool for increasing employee efficiency
Outcomes	Helps employees realize their full potential and align individual goals with organizational objectives	Provides insights for decisions related to promotions, terminations, training needs, compensation, and employee development

 

What is the Purpose of a Performance Appraisal?

Successfully meeting performance appraisal goals provides companies with the infrastructure for growth and expansion. Performance appraisals’ significance is evident in their profound impact on the organization, shaping its development and future success.

Purpose of Performance Appraisal For Organizations

Assess Employee Contribution: Performance appraisals offer valuable insights into an employee’s contributions, helping management make informed decisions about promotions, salary adjustments, and other rewards.

Identify Development Needs: These reviews highlight areas where employees may need additional training or support, ensuring their skills are aligned with the organization’s goals.

Enhance Strategic Decision-Making: Appraisals provide data on employee performance trends, aiding in decisions related to promotions, layoffs, and succession planning.

Address Behavioral Issues: They offer a structured way to address any performance or behavioral issues before they become more serious.

Improve Working Conditions: Feedback from appraisals can pinpoint areas for workplace improvement, boosting overall productivity and job satisfaction.

Documentation for HR Decisions: Performance appraisals serve as documented evidence for HR decisions like promotions, terminations, and disciplinary actions, ensuring these actions are based on objective criteria.

Purpose of Performance Appraisal For Employees

Feedback and Recognition: Appraisals allow employees to receive formal feedback, recognize their achievements, and understand their impact on the organization.

Career Development: They help employees identify their strengths and weaknesses, guiding their professional growth and career advancement.

Goal Setting: Performance appraisals facilitate discussions about future goals and expectations, helping employees align their personal objectives with the organization’s needs.

Motivation and Engagement: Recognizing employee contributions can boost morale and motivation, encouraging greater engagement with their work.

Clarification of Expectations: Appraisals clarify what is expected from employees, reducing ambiguity and helping them focus on key performance indicators.

Types of Performance Appraisals

 

360-Degree Feedback

360-degree feedback, also known as multi-source or multi-rater feedback, is a comprehensive method of performance appraisal that gathers input from various sources surrounding an employee.

Unlike traditional appraisals, which usually involve feedback solely from a direct supervisor, 360-degree feedback incorporates perspectives from peers, subordinates, supervisors, and sometimes even customers. This comprehensive approach provides a well-rounded view of an employee’s performance, skills, and interpersonal behaviors.

While the 360-degree feedback system has traditionally been utilized for leaders and managers, its use is now expanding to all employee groups as organizations shift from conventional top-down, single-source feedback and performance management.

This approach is gaining traction as a valuable development tool because it provides a comprehensive view of both strengths and areas for improvement.

For example: Cleveland Clinic uses 360-degree feedback to enhance collaboration among medical staff.

Self-Appraisal

Self-appraisal, also known as self-assessment or self-evaluation, is a reflective process where employees evaluate their own performance, achievements, and areas for improvement.

This introspective method places the responsibility of assessment in the hands of the employee, encouraging a deeper understanding of their role and contributions within the organization.

By analyzing their own performance, employees can gain valuable insights into their strengths and weaknesses.

Self-appraisal is often used in combination with other appraisal methods, such as 360-degree feedback or traditional appraisals, to provide a comprehensive evaluation.

For example: Teachers often engage in self-appraisals to assess their teaching effectiveness.

Management by Objectives (MBO)

Management by Objectives (MBO) is a strategic performance appraisal method where managers and employees collaboratively set clear, measurable goals.

This method emphasizes the alignment of individual performance with the organization’s objectives, fostering a sense of purpose and direction.

Unlike traditional appraisals that may be more top-down, MBO involves a collaborative approach to setting goals, ensuring that employees have a say in their performance objectives.

The primary purpose of MBO is to align individual goals with the strategic objectives of the organization.

For example, General Electric implemented MBO to drive performance and align individual objectives with corporate goals.

Narrative or Essay Appraisals

Narrative or essay appraisals are a qualitative approach to performance evaluation. Managers provide a written, detailed account of an employee’s performance over a specific period.

Unlike quantitative methods that rely on numerical ratings, narrative appraisals offer a descriptive analysis, capturing the nuances of an employee’s achievements, behaviors, and areas for improvement.

 The detailed feedback helps employees understand specific areas of strength and opportunities for growth, building a more personalized development plan.

Over time, narrative appraisals can help track performance trends and identify long-term development needs or accomplishments.

For example: Advertising Agencies often use narrative appraisals to evaluate creative contributions.

 

Rating Scales

Rating scales are a popular and widely used method of performance appraisal. They involve evaluating an employee’s performance based on a predefined scale.

This quantitative approach allows managers to assess various aspects of an employee’s job performance, typically ranging from numerical ratings (such as 1 to 5) to descriptive categories (such as “excellent,” “satisfactory,” and “needs improvement”).

One key characteristic of rating scales is their simplicity and ease of use. Managers can quickly complete appraisals, making them a time-efficient method, especially for organizations with a large number of employees. 

For example, in the hospitality industry, hotels often utilize rating scales to evaluate staff performance in areas such as customer service, punctuality, and teamwork. 

Walmart also uses rating scales for employee evaluations to streamline performance assessments.

Despite efforts to standardize, personal biases can still influence ratings. Managers may be influenced by recent events (recency bias) or may rate all employees similarly to avoid conflict (central tendency bias).

Behaviorally Anchored Rating Scales (BARS)

Behaviorally Anchored Rating Scales (BARS) represent a sophisticated performance appraisal method that combines quantitative and qualitative assessment elements. BARS utilizes specific behavioral examples, or “anchors,” to define various performance levels for each competency or job dimension.

This approach enhances the objectivity of ratings by providing concrete illustrations of what constitutes different performance levels.

One key characteristic of BARS is its detailed development process, which involves identifying critical incidents of effective and ineffective job performance. 

For example, in the healthcare sector, BARS might be used to assess the performance of nurses.

Starbucks employs BARS to evaluate barista performance based on customer interaction behaviors.

However, Creating BARS involves a detailed job analysis and the collection of critical incidents, which can be time-consuming and resource-intensive.

 

Project-Based Reviews

Project-based reviews are a specialized form of performance appraisal that evaluates an employee’s contributions and performance within specific projects.

This method emphasizes assessing the outcomes and processes of particular assignments or initiatives. It is distinct from traditional, time-bound reviews that typically cover broader performance over a set period.

In a project-based review system, evaluation occurs at the completion of a project or a significant project milestone. Managers, team members, and sometimes clients provide feedback on the employee’s performance within the project context. This feedback is typically structured around key performance indicators (KPIs) related to the project’s objectives, such as meeting deadlines, quality of work, problem-solving abilities, and teamwork.

For example, project-based reviews might evaluate a developer’s performance on a major software release in the software development industry. 

However, If projects vary greatly in scope and complexity, it can be challenging to maintain consistent evaluation standards across different reviews.

Peer Reviews

Peer reviews are a collaborative and insightful approach to performance appraisals, utilizing colleagues’ perspectives to evaluate an employee’s performance.

Unlike traditional top-down reviews, peer reviews involve feedback from co-workers who interact with the employee regularly, providing a well-rounded view of their abilities and contributions.

Feedback is typically gathered through structured questionnaires or surveys, focusing on key performance areas such as teamwork, communication, problem-solving, and reliability. Managers then compile and review this information to form a comprehensive appraisal of the employee’s performance.

For example, in the technology sector, software engineers might participate in peer reviews to evaluate each other’s code quality, problem-solving abilities, and project collaboration.

However, Personal relationships and dynamics can influence the feedback provided, leading to potential biases such as favoritism or grudges.

 

External/Client Appraisals

External/Client Appraisals bring a unique and valuable perspective to performance evaluations by incorporating feedback from customers or clients who interact directly with employees.

This method is particularly beneficial for roles that involve substantial client interaction, such as sales, customer service, and consultancy.

By considering the viewpoints of clients, organizations can gain insights into how well employees meet external expectations and requirements.

In an external/client appraisal system, feedback is solicited from clients who have had significant interactions with the employee. This can be done through structured surveys, feedback forms, or direct interviews. 

For example, external/client appraisals might be used in the consulting industry to evaluate a consultant’s performance on a major project. Accenture gathers client feedback to assess consultant performance and improve service delivery.

Clients could provide feedback on the consultant’s ability to deliver solutions on time, the effectiveness of their communication, and the overall impact of their recommendations.

However, Clients may have different expectations and experiences, leading to varied and sometimes conflicting feedback, which can complicate the appraisal process.

Checklist Appraisals

Checklist appraisals are a straightforward and systematic performance evaluation method in which evaluators use predefined criteria to assess an employee’s performance. Each item on the checklist represents a specific behavior, skill, or outcome, allowing for a comprehensive and objective review of an employee’s contributions.

Managers or supervisors use a standardized checklist to evaluate employees in a checklist appraisal system. The checklist includes statements or questions related to key performance indicators (KPIs) relevant to the employee’s job responsibilities.

In some cases, each item on the list is checked as ‘met’ or ‘not met’; additional comments may be provided for further clarification. 

For example, in the retail industry, checklist appraisals might be used to evaluate the performance of sales associates. The checklist could include criteria such as “greets customers promptly,” “maintains store cleanliness,” “achieves daily sales targets,” and “demonstrates product knowledge.”

However, Checklist appraisals may not capture the full complexity of an employee’s performance, as they focus on specific, predefined criteria.

Forced Distribution

Forced distribution, also known as “stack ranking” or “rank-and-yank,” is a performance appraisal method where employees are ranked relative to each other and categorized into different performance levels.

This approach usually involves assigning a fixed percentage of employees to predefined performance categories, such as top, average, and low performers, often following a bell-curve distribution.

For example, in the financial services sector, a forced distribution system might be used to evaluate the performance of sales representatives.

The top 20% of representatives could be classified as high performers, the middle 70% as average performers, and the bottom 10% as low performers.

High performers might be rewarded with bonuses, promotions, or special projects, while low performers could be placed on performance improvement plans or considered for termination if no improvement is observed.

IBM has historically used forced distribution to rank sales employees for promotions and bonuses.

However, The rigid nature of forced distribution can lead to unfair rankings, forcing managers to rate a certain percentage of employees as low performers, even if overall performance is high.

Assessment Centers

Assessment centers are a comprehensive and multi-dimensional approach to performance appraisal that evaluates an employee’s competencies through standardized exercises and activities.

These centers are typically conducted over one or more days and involve various assessment techniques, such as simulations, role-playing, group discussions, and behavioral interviews.

The primary aim is to assess an employee’s potential for specific roles or career advancement by observing their performance in scenarios that mirror real-world challenges.

For example, in the banking industry, assessment centers might be used to identify high-potential employees for leadership roles.

Goldman Sachs uses assessment centers to evaluate candidates for analyst positions through simulations.

However, Setting up and conducting assessment centers can be time-consuming and costly, requiring significant resources in terms of planning, assessors, and facilities.

Grading Method

The grading method is a structured performance appraisal approach that categorizes employees into specific performance levels based on predefined criteria. This method assigns grades, often in letters (A, B, C, etc.) or numerical scores, to evaluate an employee’s overall performance.

Each grade corresponds to a particular level of performance, providing a clear and standardized measure of an employee’s contributions and effectiveness.

For example, in the education sector, the grading method evaluates teacher performance. Criteria for grading could include student test scores, classroom management, lesson planning, and professional development. 

The grading method may not capture the complexity and nuances of an employee’s performance, as it reduces their contributions to a single grade or score.

Check-Ins

Check-ins are a dynamic and ongoing performance appraisal method. It involves regular, informal conversations between managers and employees about work progress, goals, and development needs.

Unlike traditional annual reviews, check-ins are usually conducted frequently, such as weekly, bi-weekly, or monthly, allowing for continuous feedback and timely adjustments.

For example, in the technology sector, check-ins might be used to monitor the progress of software development projects. A manager could hold bi-weekly check-ins with their team to discuss the current status of tasks, review any issues encountered, and adjust priorities as needed. 

Google encourages regular check-ins between managers and employees to discuss ongoing projects and performance.

However, Google encourages regular check-ins between managers and employees to discuss ongoing projects and performance.

FAQs

Q. What Are Performance Appraisals Used for?

1. Performance appraisals are essential tools organizations use to evaluate an employee’s job performance over a specific period. These evaluations are versatile and serve several critical purposes that benefit both the individual and the organization.

Q. What Are the Benefits of a Performance Appraisal?

1. When implemented effectively, performance appraisals can yield substantial benefits. They can enhance employee morale and engagement, clarify job expectations, maximize staff potential, and motivate hard work and commitment.

Moreover, the advantages extend beyond the organization. Open communication channels allow employees to voice concerns, express their thoughts, identify their career paths, feel valued, and receive recognition for their achievements.

Q. When Should a Performance Appraisal Take Place?

1. Performance management is a continuous process. Throughout the year, managers should regularly interact with employees to set goals, track progress, and provide feedback. Formal reviews or appraisals typically occur annually or quarterly.

Q. What Should You Avoid Saying in a Performance Appraisal Meeting?

1. In a performance appraisal meeting, it’s important to choose your words carefully to foster a positive and constructive environment. Avoid being offensive, overly self-critical, gossiping, making excuses, placing blame on others, and engaging in negative comparisons.

Q. What Are the Five Steps in the Performance Appraisal Process?

1. The performance appraisal process typically involves five key steps:

1. Goal Setting: Managers and employees collaborate to establish clear, measurable goals aligned with organizational objectives.
2. Performance Monitoring: Managers continuously monitor employee performance throughout the review period, providing feedback and support as needed.
3. Performance Measurement: At the end of the review period, managers assess employee performance based on predetermined criteria, such as goals achieved, competencies demonstrated, and behaviors exhibited.
4. Performance Review: Managers and employees engage in a formal discussion about the employee’s performance, strengths, areas for improvement, and development opportunities.

Performance Improvement:

Based on the appraisal, managers and employees create a plan for professional development, addressing any performance gaps and outlining strategies for growth and improvement.