Module-1:Performance

.
and Compensation
Management

Performance Appraisal
Performance Appraisal (PA) refers to all those
procedures that are used to evaluate the
personality, performance and potential, of
individuals, groups or organizations.
PA is the identification, measurement and
management of human performance in
organizations.

Types of Performance Information

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Identifying and Measuring

Employee Performance
Performance
What an employee does and does not do.
Quantity of output
Quality of output
Timeliness of output Presence at work
Cooperativeness

Job Criteria
Important elements in a given job

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Difference Between Performance Management

and Performance Appraisals
Performance
Management

Performance
Appraisal

Processes used to
identify, encourage,
measure, evaluate,
improve, and reward
employee performance.

The process of evaluating

how well employees
perform their jobs and then
communicating that
information to the
employees.

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Nature and Characteristics of PA

It is a step by step process
It examines the employee strengths and
weaknesses

Scientific and objective study

Ongoing and continuous process

Secure information for making correct decisions

on employees

Nature and Features of Performance Management

Performance Management
Processes used to identify, encourage, measure,
evaluate, improve, and reward employee
performance
Provide information to employees about their performance.
Clarify organizational performance expectations.
Identify the development steps that are needed to enhance
employee performance.
Document performance for personnel actions.

Provide rewards for achieving performance objectives.

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Process of PA
Taking corrective
steps

Setting
performance
standards
Communicating
standards

Discussing
results

Measuring
standards

Comparing
standards

Objectives of Performance Appraisal

1. Provides communication and feedback on individual
performance
2.Provides basis for self-evaluation
3.Setting and monitoring performance objectives
4.Rationale basis of HR related decisions
5.Maintaining fairplay and justice
6 Helps in identifying potentialities of people
7. Assessing effectiveness of HR policies and practices
8.Retaining top talent
9.To foster team spirit
10.Increases individual accountability and ownership

HR programs
Administrative
uses

Communication

Constructive
criticism and
guidance

Organizational
Maintenance

PA
Objectives

Documentation
Pay scales & Pay
raise

Training and
development
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Promotions

Uses of Performance Appraisal

organizational planning

Human Resource Planning

Organizational Effectiveness

Compensation Management

Placement adjustment decisions

To identify training and development needs of th

employees

For Career planning and development

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PCM, MBA-III Sem, Module-1

Conflicting Uses for Performance Appraisal

Figure 114

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How PA contributes to firms

competitive advantages
Improving
performance

Making correct
decision
Values and behavior

Competitive
advantage

Ensuring legal
competence

Minimizing dissatisfaction
And turnover

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Performance Appraisal and Other HRM

Functions
Performance appraisal judges
effectiveness of recruitment
efforts

Recruitment

Quality of applicants
determines feasible
performance standards

Performance appraisal
validates selection function

Selection

Selection should produce

workers best able to meet
job requirements

Performance appraisal
determines training needs

Training and
Development

Training and development

aids achievement of
performance standards

Performance appraisal is a
factor in determining pay

Compensation
Management

Compensation can affect

appraisal of performance

Performance appraisal
justifies personnel actions

Appraisal standards and

Labor Relations methods may be subject to
negotiation

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Problems of performance
Appraisal/Reasons for failure of PA
Lack of top-management information and
support
Unclear performance standards

Rater bias
Too many forms to complete

Use of the appraisal program for for

conflicting purposes.

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Common Appraisal Problems

Inadequate preparation
on the part of the
manager.

Inconsistency in ratings
among supervisors or
other raters.

Employee is not given

clear objectives at the
beginning of
performance period.

Performance standards
may not be clear.

Rating personality rather

than performance.

Manager may not be

able to observe
performance or have all
the information.

The halo effect, contrast

effect, or some other
perceptual bias.

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Problems of PAs
Manager
lacks
information
Insufficient
reward for
performance

Lack of
appraisal
skills

Manager not
taking
appraisal
seriously

Performance
appraisals fail
because

Unclear
language

Manager not
prepared
Ineffective
discussion of
employee
development

Manager not
being honest
or sincere

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Employee not
receiving
ongoing
feedback

Managerial Issues Concerning

Appraisals
Managers may feel that little or no benefit will
be derived from the time and energy spent in
the process.
Managers dislike the face-to-face confrontation
of appraisal interviews.
Managers are not sufficiently adept in providing
appraisal feedback.

The judgmental role of appraisal conflicts with

the helping role of developing employees.
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Common Rater Errors

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Training of Managers and Employees to overcome

Problems of PA

Appraisal Training Topics:

Appraisal process and timing
Performance criteria and job standards that should be
considered
How to communicate positive and negative feedback
When and how to discuss training and development goals
Conducting and discussing the compensation review
How to avoid common rating errors

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Multisource /360 0 Appraisal

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Who Conducts Appraisals

Supervisors who rate their subordinates

Employees who rate their supervisors

Team members who rate each other
Employees self-appraisal
Outside sources rating employees
Multisource (360 feedback) appraisal

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Team/Peer Rating
Advantages
Helps improve the
performance of lower-rated
individuals
Peers have opportunity to
observe other peers.
Peer appraisals focus on
individual contributions to
teamwork and team
performance.

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Disadvantages
Can negatively affect working
relationships.
Can create difficulties for
managers in determining
individual performance.
Organizational use of
individual performance
appraisals can hinder the
development of teamwork

Employee Rating of Managers

Disadvantages

Advantages
Helps in identifying competent
managers
Serves to make managers
more responsive to
employees
Can contribute to the career
development of managers

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Negative reactions by
managers to employee
ratings
Subordinates fear of reprisal
may inhibit them from giving
realistic (negative) ratings
Ratings are useful only for
self-improvement purposes

Group Appraisal & Annual Confidential

Reports (ACR)
Assessing the
Group appraisal
employees
employees are apprised
performance
by group appraisers
confidentially
E.g kinetic honda,IT
E.g public sector
Firms
organisation

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Companies using 360 degree

feedback
GE
TELCO
Philips
Johnson & Johnson

Motorola
Wipro
BPL
Tata tea
Dr.Reddy Laboratories
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BBC
pilot groups to
BBC 360 Degree
establish acceptance
Feedback Leadership
After initial
Development,
reluctance and
Culture Change and
suspicion, BBC
Organization
leaders have now
Development
widely accepted
BBC 360 as part of
the way they work
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Methods of Performance Appraisal

Traditional Methods

Graphic Rating Scales(GRS)-Individual performance is compared to an

absolute standard and is recorded on a scale. This method is also known as
linear /simple rating scale.

Ranking Method(RM)-Under this method employees are ranked as best or worst on

the basis of some characteristics.

Paired Comparison Method(PCM)-It is a simple method under which appraiser

compares one employee in the group with other employees one at a time.

Forced Distribution Method(FDM)-Under this method the raters spread their

employee evaluations in a prescribed distribution on a bell-shaped curve.

Critical incident method records the critical incidents of exceptional or poor

performance of the employees in comparison with the preset standards

Essay or free form appraisal Under this method managers write short essays
describing the performance of the employees during the rating period.

Group appraisal Under this method employee is appraised by a group of

appraisers consisting of supervisor of the employee and other supervisors who
have close contact with the working of the employee.

Confidential Reports Under this method the superior ,confidentially appraises the
subordinates based on his observations, judgment and intuitions .
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Traditional
Performance
Appraisal Process

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Behaviorally Anchored Rating Scales

BARS is an appraisal tool that anchors a
numerical scale with specific behavior
examples of good or marginal
performance. Its a combination of critical
incidents and graphic rating scale
Trait+ behavior ( work related)+job
outcomes

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Category Scaling Methods

Graphic Rating Scale
A scale that allows the rater to indicate an employees
performance on a continuum of job behaviors.
Aspects of performance measured:
Descriptive categories, job duties, and behavioral dimensions
Behavioral rating scales (e.g., BARS)

Drawbacks
Restrictions on the range of possible rater responses
Differences in the interpretations of the meanings of scale items
and scale ranges by raters
Poorly designed scales that encourage rater errors
Rating form deficiencies limit effectiveness of the appraisal

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Rating scales
Graphic Rating Scales rate worker on
number of different dimensions by checking a
box, circling a #, Likert scale, etc.

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Paired Comparison ranking

Ranking employees by making a chart of all possible pairs
Of the employees for each trait and indicating which is the
Better employee of the pair

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Checklist Methods
Checklist Methods (Simple, Weighted or forced)Under this method the rater checks the checklist consisting of a number of
statements concerning employee behavior.
1.

In a simple checklist the employee performance is rated on the basis

the number of positive checks while negative checks are ignored.

2.

Weighted checklist involves assigning different weight age to differe

items in the checklist in accordance of their importance in comparison
each other

3.

Forced choice/checklist method involves preparation of a large number

statements in groups, each group consisting of four descript
statements(tetrad) concerning employee behaviour.Two are favorable a
the remaining two are unfavorable statements. The rater will not
informed about the favourable and unfavourable statements to avo
appraiser prejudice

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Sample
Performance
Appraisal
Form

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Comparative Methods (contd)

Forced Distribution
Performance appraisal method in which ratings of
employees are distributed along a bell-shaped curve.
Drawbacks
Assumes a normal distribution of performance.
Resistance by managers to placing individuals in the lowest or
highest groups.

Providing explanation for placement in a higher or lower grouping

can be difficult.
Is not readily applicable to small groups of employees.

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Forced Distribution on a Bell-Shaped Curve

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Critical incidents Method

Keeping a record of uncommonly good or undesirable
examples of an employees work-related behavior and
reviewing it with the employee at predetermined times.
Continuing Duties

Targets

Critical Incidents

Schedule production
for plant

90% utilization of
personnel and
machinery in plant;
orders delivered on
time

Instituted new production

scheduling system; decreased late
orders by 10% last month; increased
machine utilization in plant by 20%
last month

Supervise
procurement of raw
materials and
inventory control

Minimize inventory
costs while keeping
adequate supplies on
hand

Let inventory storage costs rise 15%

last month; overordered parts A
and B by 20%; underordered part
C by 30%

Supervise machinery
maintenance

No shutdowns due to
faulty machinery

Instituted new preventative

maintenance system for plant;
prevented a machine breakdown by
discovering faulty part

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Narrative Methods
Critical Incident
Manager keeps a written record of highly favorable and
unfavorable employee actions.
Drawbacks
Variations in how managers define a critical incident
Time involved in documenting employee actions
Most employee actions are not observed and may become
different if observed
Employee concerns about managers black books

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Terms Defining Standards at One Company

Figure 119

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Modern Methods
1.Behavioral/Objective Methods
Behavioral Rating Approach
Assesses employees behaviors instead of other
characteristics
Consists of a series of scales created by:
Identifying important job dimensions
Creating statements describing a range of desired and
undesirable behaviors (anchors)

Types of behavioral scales

Behaviorally anchored rating scales (BARS)
Behavioral observation scales (BOS)
Behavioral expectation scales (BES)

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Behaviorally-Anchored Rating Scale

for Customer Service Skills

Figure 1110

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2 . Management by Objectives (MBO)

Management by Objectives
Specifying the performance goals that an individual and
his or her manager agree the employee will try to attain
within an appropriate length of time.

Key MBO Ideas

Employee involvement creates higher levels of
commitment and performance.
Encourages employees to work effectively towards
achieving desired results.
Performance measures should be measurable and should
define results.
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2 . The MBO Process

Objective setting

Setting up Targets

Development of Performance Standards

Measuring Performance based on standards

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Management by objectives (MBO)

MBO refers to a comprehensive and
formal organizational wide goal setting
and appraisal program of six steps.
1. set the organizational goals

2.set department goals

3.dicuss department goals

4. define expected results

5.performance review
6. provide feedback
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3 .Assessment Centers

Under this method performance of the individuals is appraised using several

techniques like in basket, role playing, case studies, simulation exercises ,
transactional analysis,etc.

4 . Human Resource Accounting

This deals with the cost of the employees and their contributions to the
organizations. Cost of the employees includes cost of manpower planning,
recruitment , selection , induction ,placement ,training ,development, wages and
benefits ,etc. and contribution is the money value of employee service measured in
terms of labour productivity.

5. Psychological Appraisal

This is conducted to appraise the employees potential. It consists of in-depth interview

psychological tests, consultations and discussions with employees, supervisors, sub
ordinates and peers ,reviews of other evaluations
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6.Behaviour Observation Scales(BOS)

Under this method appraiser observes how frequently each
behaviour has been observed
Satyam Computers ,Infosys,Dr.Reddys Lab use this method.

Advantages:
Objective in approach
Differentiates good from bad performers
Provides feedback
Identifies training needs
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Sample Methods For Behavior Observation

Scale

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7.ResultsMethod

In this method employees are assessed on the basis of their accomplishment

in terms of sales turnover, productivity, number of customers served
,complaints settled,etc.

8.The Balanced ScoreCard

BSC was developed by Robert Kaplan and David Norton. Performance is
assessed on the basis of financial performance , customer relations ,
processes and learning.

9.Productivity Measures

In this method employees are assessed on the rate of output turned out by them
to the rate of input used.
Ex.-Sales to salary and benefits ratio
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Computerized Performance Appraisal

Visit these web sites for online performance

rating tools
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