Definition of a Performance Appraisal System

by Ruth Mayhew - Updated August 23, 2018
Young quality inspector checking production line

Performance appraisal systems help organizations justify their employment decisions. The system may consist of more than just an annual performance review. A robust appraisal system might include an annual review as well as spot rewards, commendations and disciplinary processes. The purpose of a basic performance appraisal system is to recognize and sustain strong performance and motivate employees to improve in areas where their job performance fails to meet the company's standards.

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  • A performance appraisal system recognizes and rewards employees who meet or exceed your company's expectations. Performance appraisal systems also identify areas where marginal employees can improve their skills and knowledge.

Performance Appraisal Objectives

Organizations use performance appraisals to make employment decisions that help the company achieve a number of objectives. Performance appraisals are useful in helping employers decide whether to count on the new employee for the long term or whether to increase the employee's pay. In addition, the performance appraisal process can be especially helpful in determining an employee's potential for increased responsibilities, higher-level job duties or a promotion. Job transfers, reassignments or demotions are other employment decisions that can be based on an employee's performance appraisal.

When an employee is in the early stages of his tenure with the company, the company might use an appraisal to determine whether the job is a good fit for his skills and qualifications. For newly hired workers, this appraisal might occur anywhere from 60 days to six months from the employee's start date. The longer period (six months) gives the employer sufficient time to observe the employee's performance of virtually all of the assigned job tasks and responsibilities. It also provides enough time to determine whether there is a cultural fit in terms of how well the new employee is building working relationships through getting along with his peers, colleagues and supervisor.

Based on how high (or low) their scores are on a performance appraisal, employees who perform exceptionally in their jobs may receive pay raises or bonuses. For example, companies that reward workers with performance-based bonuses might use the appraisal scoring method to determine how generous the company will be when bonus time comes around. Similarly, if there is a salary raise scale in place, employees who merely meet the company's performance standards would receive the lowest-percentage pay raise, while employees whose performance is outstanding would receive the highest pay raise, or they might receive a year-end bonus that rewards them for excellent performance.

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Employment decisions such as transfers and reassignments could depend on how well the employee ranks in her current job. For example, an employee whose performance is rated mediocre for work in a client-facing position might demonstrate far better performance in a role that does not require interaction with the company's clients. Specifically, a sales representative who finds it challenging to cultivate relationships with clients may perform better in a behind the scenes role where she is not required to interact with clients. This kind of employment decision can be supported by a performance appraisal that shows that she scores lower in developing relationships but scores high in detail-oriented tasks that don't require constant interaction with clients or customers.

Performance appraisals are commonly used for developmental purposes, such as to provide training or guidance on how to improve the employee's job performance or to assist the employee in acquiring new skills. Whether performance appraisals contain only numerical scores or include the supervisor's feedback in a narrative format, the review is an excellent source of information. That information can be used to decide the type of training that is required to help the employee improve her performance or professional development options that will assist in preparing her for future leadership roles, for example. For high-potential employees, consistently strong job performance that's documented in annual appraisals often is justification for making promotion decisions.

Another performance appraisal objective has to do with motivation. Employees who receive praise and recognition for a job well done often are motivated to sustain or even improve upon their job performance. While a pay raise may be a motivator for some workers, recognition such as a supervisor rating their technical expertise as "outstanding" is the inspiration other employees appreciate more than, say, a 3 percent wage increase.

Performance Appraisal Methods

There are several popular performance appraisal or review methods. Choosing the best method depends on factors such as the levels and positions within your organization, supervisory and management expertise and the type of job duties and tasks your employees perform. For example, if you are a supervisor in a production facility, a production-based appraisal is ideally suited to the employees' job duties. A production-based appraisal typically uses a numeric scale that measures employee output. Employees whose output doesn't meet your minimum quantity standards or employees whose output doesn't meet your quality standards are likely to receive a low performance appraisal report or score.

Several of the common types of performance appraisals include management by objectives, graphic rating scales, multi-rater feedback and forced ranking. Which one you choose for your employees depends on the job functions, position or rank and whether you want your employees to complete a self-assessment or coworkers to provide feedback.

Management by objectives, or MBO, appraisals contain specific performance appraisal objectives the manager and the manager's supervisors have worked on together to identify for completion during the review period. During the appraisal discussion the manager and supervisor review each objective, the actions the employee took to attain each one and whether the objective has been completed. If the manager failed to achieve an objective, they typically discuss how far along the manager is in reaching that objective and obstacles that may have prevented her from 100 percent completion. For the objectives the manager has accomplished, the employee marks that those accomplishments were completed and adds comments that describe the action steps she took to accomplish them. She might also add any challenges she encountered while working toward that objective. Comments like this may be useful down the road if she is assigned similar objectives, or they might be useful to her supervisor in determining whether the objective was indeed achievable. An overall assessment of the completed MBO can determine whether the objectives were appropriate for the employee's skill set or experience level.

Graphic rating scales often are the simplest and most expedient performance appraisal method for evaluating an employee's job performance; however, there is a potential for subjectivity to skew the results, based on the supervisor's perception and ratings. This performance appraisal form contains the employee's traits and work styles as well as a rating scale (for example, a scale of 1 to 5, with 5 being excellent). Alternatively, the rating scale might range from "poor" to "acceptable" to "excellent." The supervisor rates each trait or qualification. If the company wants feedback from the employee, there might be another column for the employee to provide a self-rating. One of the challenges to inviting employee feedback is reconciling potential distance in the ratings. For example, the employee could rate her organizational skills as excellent, while the supervisor thinks her performance is just acceptable. Including specific job tasks for rating is one way to eliminate the subjective nature of this type of performance appraisal. By simply adding factors such as "turns in assigned work on time and without errors" or "works collaboratively with team members to completed assigned tasks," you can control the amount of subjectivity the supervisor imparts while completing this type of appraisal.

Multi-rater feedback – usually 360-degree evaluations – solicit feedback from the employee's supervisor, peers and direct reports. This type of appraisal then assesses the employee's performance from three different perspectives, and it's especially useful for first-level supervisors who routinely work with a manager to whom they report, peers with whom they collaborate and employees they supervise. The advantage of 360-degree evaluations is that they identify areas for improvement and, of course, highlight areas where the employee excels. It's important to gather feedback from several raters for an evaluation of this type to be truly effective. For example, if the supervisor has only one direct report, it's obvious what that subordinate's rating is, and just knowing how the subordinate rated the supervisor can make for an awkward working relationship. Therefore, it's wise to have at least three raters in each category: at least three peers and three direct reports.

The forced ranking performance appraisal method was popularized by General Electric former CEO Jack Welch. Using this method, supervisors rank employees into three groups: the top 20 percent of workers, the middle 70 percent and the bottom 10 percent. Often called the "rank and yank" method, it means that supervisors consider the bottom 10 percent of workers as employees who really aren't essential. They may be terminated because their performance falls way short of the company's standards. The middle 70 percent get to keep their jobs, but they also receive coaching, training and professional development that will hopefully motivate them to strive to join the top 20 percent of employees or at least not fall into the bottom 10 percent by the time the next performance appraisal comes around. The top 20 percent are superstars and obviously are so valuable to the company that they not only get to keep their jobs, but they are rewarded for exemplary performance with pay raises, bonuses or both. (Employees in the middle range might receive pay raises and bonuses as well but not nearly as generous as the top performers). This type of performance appraisal method requires a great deal of work to prepare employees for this type of review, and it requires training supervisors to prevent them from haphazardly or arbitrarily ranking employees based on anything but their job performance.

Performance Appraisal Report

A written performance appraisal report is important for two critical reasons. First, because performance appraisals are generally used to make such employment decisions as pay raises, promotions, demotions, bonuses and work assignments or transfers, you should have documentation that supports your decisions. Second, every employee is entitled to have a hard copy (or electronic copy if you run a paperless operation) of the evaluation for his personal files.

When you conduct the performance appraisal discussion, present the employee with his copy and review it in a face-to-face meeting when feasible. The performance appraisal process is most effective if you have the discussion in a private office or conference room, preferably a neutral location for both the supervisor and the employee. Privacy is paramount when you're discussing an employee's performance, particularly if the performance appraisal addresses sensitive matters or if it includes serious concerns about the employee's performance or work habits. If you're managing a remote worker, provide the employee with an email copy, marked confidential, before you review his performance in a conference call. The manner in which you present the employee's evaluation often can affect the employee's morale and job satisfaction.

The performance appraisal objective is to communicate how well an employee is performing his job duties or to communicate to the employee that you are invested in his professional growth. A key element in this communication is the actual performance appraisal report. It gives the employee a reference to which he can refer throughout the next appraisal period to see where he stands in terms of meeting your organization's performance standards.

About the Author

Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. Ruth resides in the nation's capital, Washington, D.C.

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