Everything You Need to Know About Performance Appraisal Methods and Processes

Performance appraisal and assessment lays the foundation for highly engaged and productive employees. Learn about main performance appraisal methods such as 360 degree feedback, psychological appraisals, BARS, MBOs, HR Cost Accounting method etc.

Introduction

Performance appraisal and assessment lays the foundation for highly engaged and productive employees. Having a motivated workforce allows companies to meet, or even surpass, their business objectives. It enables enterprises to extract the best from their employees and contributes to their professional growth.

However, performance appraisal remains to be an empty, meaningless buzzword in some ventures. Only a handful of organizations are capable of harnessing the true potential of performance appraisal.

This post attempts to demystify all aspects of performance appraisal and citing performance appraisal methods and examples to revamp your human resource management policies.

What is Performance Appraisal?

Performance appraisal is a periodic review of an employee’s performance for a particular job position and the overall contribution to the organization.

On the surface, performance appraisal may appear rather straightforward - you review the key competencies of the individual. Accordingly, you take action on what needs to be done. However, it possesses layers of complexities as it involves reviewing the end result while also assessing the intent and process utilized by the employee.

According to a publication in Harvard Business Review, performance appraisal relates to three primary functions:

To share personalized feedback on the employee’s performance, be it good or bad.
To define KPIs that serve as the basis for measuring the output and suggesting employee behavioral changes to increase efficiency.
To quantify the employee’s performance and assess suitability for compensation, training, project assignment, etc.

What is the Purpose of Performance Appraisal?

When one adopts a holistic view of performance appraisal, it becomes clearer that it serves both businesses and employees.

Here’s how performance appraisal benefits the individual:

Recognizes and acknowledges the contributions and achievements of the employee.
Justifies decisions related to promotions, pay raise, bonus, etc. Similarly, it also helps identify weaknesses that call for additional training.
Locates key areas that require skill improvement and development.
Motivates the employee to work and nurtures employee satisfaction.
Makes an employee feel that their company is interested and invested in their professional growth.
Helps in measuring the impact and contribution to the overall growth of the company.
Starts dialogues on employee’s professional aspirations and long-term goals.

And here’s how performance appraisal benefits the company:

Identifies key areas where management can step in and improve the working environment to make it more employee-friendly.
Addresses any employee behavioral issues before they affect productivity or work quality.
Nurtures a motivated workforce that contributes to business growth.
Rewards high-performing employees and equips average performers with the necessary skills and tools to overcome performance issues.
Improves talent retention and lowers churn rate.
Promotes the sentiment that businesses care about the employee’s well-being by supporting their skill and career development endeavors.
Helps in strategizing and formulating SOPs for decisions related to succession, internal promotions, layoffs, etc.

Hence, one can see that it offers keen insights into the value offered by the employee to the organization and vice versa.

What are the Main Performance Appraisal Methods?

Generally, performance appraisal measures:

Communication and problem-solving skills
Ability to collaborate and work as a team
Quality and accuracy of work
Ability to accomplish goals and adhere to deadlines
Attendance and dependability

However, the methodology to measure the above qualities can vary depending on your preferred performance appraisal methods.

The five modern performance appraisal methods include:

Psychological Appraisals
360-degree Feedback
Behaviorally Anchored Rating Scale (BARS)
Management by Objectives (MBOs)
Human-Resource (Cost) Accounting Method

Let’s take a look at these one at a time:

Psychological Appraisals
Best For: Assessing employees in large corporations for specific roles.

This performance appraisal method relies on the prospective benefit offered by an employee, rather than addressing the retrospective performance. It relies mostly on assessing the psychological aspects such as interpersonal skills or emotional quotient (EQ) for identifying the hidden potential in employees.

Pros
- Measures capabilities along with potential.
- Can work seamlessly with other performance appraisal methods.
Cons
- May not do justice to shy or introverted employees.
- Subject to dilution in results due to anxiety or nervousness in participants.
360-degree Feedback
Best For: Large public and private sector organizations

It is a multidimensional performance appraisal method that captures feedback from the employee, managers, employees, team members, peers, and other parties that work or interact with the employee. It starts with self-appraisal and moves up the hierarchy until the end-user submits their assessment.

Pros
- Offers a holistic view of the employee’s performance.
- Integrates work performance with office culture to increase employee engagement.
Cons
- Highly complex procedure that may take too much time.
- Susceptive to generalization as it involves inputs from individuals that do not work directly with the employee.
Behaviorally Anchored Rating Scale (BARS)
Best For: All companies and all positions.

It is one of the commonest performance appraisal methods. It makes use of predefined criteria against which the manager may grade an employee. At the end of the review, a weighted average calculates the overall performance.

Pros
- Allows room to capture a variety of quantitative and qualitative data, while also sharing insights on personality traits.
- The weighted rating system offers a complete picture of several aspects of the employee’s performance.
Cons
- May not shed light on decisions related to compensation, bonus, promotion, etc.
- Can be difficult to interpret without any clarification from managers.
Management by Objectives (MBOs)
Best For: Measuring performance of senior employees in managerial positions

MBOs may be one of the latest performance appraisal methods, but it is steadily gaining traction across industries. It involves defining and outlining a set of attainable performance goals that employees must achieve within a timeframe. These goals are then adjusted depending on the outcome.

Pros
- Focuses on professional growth and career development of the employee.
- Fosters an employee-centric work environment.
Cons
- May dictate inadequate corporate objectives.
- Lacks the involvement of top management.
Human-Resource Cost Accounting Method
Best For: Measuring the performance of employees at startups or small businesses.

The Human-Resource Cost Accounting Appraisal Method measures the performance in terms of the monetary benefit that they yield to the company. It involves comparing the cost of hiring, training, retention vs. the financial contribution to the business’ growth.

Pros
- Quantifies the business value an employee fetches the organization.
- Calculates the financial implication of employee’s performance by mapping it against the organization’s bottom line.
Cons
- No defined guidelines for measuring the cost and value of the human asset.
- May overlook the non-monetary contribution.

How to Organize a Performance Appraisal Process?

Your company’s HR department facilitates the performance appraisal process in accordance with a defined timeline. Typically, appraisals are carried out annually. Hence, it would help to maintain consistency and have it at the same time year after year.

Here is an ideal performance appraisal process that lays the groundwork for sharing constructive feedback:

During on-boarding, every employee receives training along with a clear outline of the job expectations. They may also receive a briefing on the performance appraisal methods utilized by the organization.
Depending on the role and position, reports containing the KPIs are generated and distributed to capture the competencies and performance against the expectations.
Departments conduct individual performance appraisal per employee.
Based on the output, the manager may schedule a one-on-one interview to discuss the performance review at length.
Adjustments or modifications are made to the goals or processes or behavior depending on the meeting.
The performance appraisal is signed and archived for future reference.
If required, HR may utilize the document to report or take necessary action such as bonuses, promotions, terminations, etc.

Performance Appraisal Examples

By now, you may have realized the importance of performance appraisal from an employee and employer’s point of view. The primary purpose of the performance appraisal is to motivate the employee to work harder and to push them to reach their full potential. It also lets the employees know that their performance is being closely monitored.

Unfortunately, performance appraisals get a bad rap due to the underlying assumption that it grants employers the opportunity to criticize the employees. Businesses tend to focus on the negatives and overdo it to the point that the criticism pushes the employee to start performing poorly!

Thus, there is a need for keeping personal appraisal impactful yet sensitized.

When done right, a performance appraisal should open up an honest dialogue to objectively discuss the good and bad aspects of the employee’s performance without anybody taking it personally. Thus, managers may have to watch their words, tone, and even body language.

Following are four major performance appraisal examples to tackle a variety of approaches:

Good Performance Review
“You have exceeded all the company expectations as a customer service representative. Your positive attitude and adaptability have played a crucial role in maintaining team morale despite the increasing workload. You have continued to deliver even under pressure and completed your tasks on time. In fact, your initiative for seeking out additional roles is highly appreciated.”
Satisfactory Performance Review
“You have met all the company expectations as a sales executive. You have reached your quota and met all the demands of the changing workload. Your work is detail-oriented, but it comes at the cost of time management. We would like to see you chase down some more leads and up your numbers. Should we take it up with marketing to get you more clients?”
Poor Performance Review
“You possess great potential to meet your goals as a software developer, provided that you are heavily engaged and involved in the task. However, we have received complaints regarding your inability to meet the deadlines, which is impacting the team’s overall productivity. In the next quarter, we would like to focus on streamlining the timelines so that you can submit your codes on time. We could draft a new plan to make it easier for you. Let me know what suits you.”
Mixed Performance Review
“As a project manager, you have met most goals assigned to your position. However, there are also a few misses in these quarters. You have managed to meet deadlines, and your team has delivered high-quality results. However, we need to work on your communication skills. A few of your team members felt confused and out of the loop while working on this project. It would be best if we can have you on leadership training programs to hone these skills. Do you think it would help?”

Final Thoughts

Performance appraisal holds great potential to increase the productivity and overall output of your workforce. However, it is also a sensitive matter that requires the art of balancing employee effort recognition and company expectations. Thus, the first step would be sensitizing the managers and HR professionals to walk this fine line.

The best approach for discussing the review report would be sandwiching the negative between the positives. In US, it is called as 'The Shit Sandwich'. Leading with the positives keeps the employee open to what you are about to discuss. Similarly, ending on a positive note takes off the sting from all the concerns that you may have discussed. Make it a point to offer an actionable solution while addressing the main issues.

If you have a global team, we suggest you to read 'The Culture Map' by Erin Myer.

Finally, while performance appraisal may be an annual activity, open up ways to carry out informal reviews throughout the year. In this manner, employees can work towards the path to betterment every day!