Today, the business world is more competitive than ever, and you need to ensure that you maximize the value of the resources at your disposal. That is where performance appraisals can be helpful. Performance appraisals are periodic assessments that you can use to let an employee know how he or she is doing. Providing your employees with feedback puts them in the best position possible to be productive for your company.
At the same time, you must understand how to deliver a performance appraisal effectively. There are different types of performance appraisal below, so figure out which works best for your company. Whatever method you choose, it can be beneficial to use an employee evaluation form.
What is a Performance Appraisal?
A performance appraisal allows you to let an employee know how he or she is doing. Your employee is probably eager for feedback on his or her performance, and you want to maximize each employee’s value to your business.
You can use a performance appraisal to justify (or deny) bonuses or raises. You can also create a track record of performance appraisals if you need to terminate an employment contract. Even though you can provide a performance appraisal at just about any time, most companies provide regular employee performance appraisals according to a set schedule. You might give employees performance appraisals quarterly, semi-annually, or yearly.
Importance of Employee Performance Appraisal
There are several reasons why you need to conduct employee performance appraisals. Some of the most important reasons include:
- Reward employees: You need to reward employees who are doing well. Recognizing their efforts through tools like employee recognition software can provide an easy way to offer meaningful praise, boosting morale and encouraging continued productivity.
- Create a culture of transparency: You can also use performance appraisals to create a culture of transparency. Your employees need to know how they are being judged and evaluated. With regular performance appraisals, you provide them with that information.
- Foster employee growth and development: If you want employees to be as productive as possible, you must provide them with educational and development opportunities. For example, you can use performance appraisal to provide employees with goals for the subsequent evaluation, which can foster their growth.
- Identify employees with potential: Nobody will stay with your company forever. When people in leadership positions decide to depart, you need other employees to replace them. With periodic performance evaluations, you can identify employees who might be right for those positions.
- Collect feedback: Feedback goes both ways. Just as you will use a performance appraisal to provide employees with information on what they can do to improve, it also allows employees to give you feedback. That way, you can implement changes that can improve your work environment.
- Improve retention: You need to conduct regular performance appraisals to reduce turnover rates. If your employees feel like they have a say in their work environments, they will be more likely to stick around, increasing your retention rates.
These are just a few of the biggest reasons you must regularly conduct performance appraisals. There are different ways to conduct an employee appraisal, and you need to figure out which one works best for your company.
8 Modern Methods of Performance Appraisal
There are a lot of methods for appraising performance. You must evaluate each option’s benefits and drawbacks before deciding which suits your company. Eight performance appraisal methods you may want to consider include:
1. Management by Objectives (MBO)
Management by Objectives (MBO) is a strategic management model that aims to improve an organization’s performance by clearly defining objectives agreed to by both management and employees. The focus is on setting measurable goals that are achievable, realistic, and time-bound.
The process involves setting specific objectives at the beginning of a performance period, monitoring progress, and evaluating performance against these objectives. Feedback and discussions are integral to MBO, ensuring alignment and adjustment of objectives as necessary.
Example:
A tech startup adopts MBO to improve its product development. The CEO and team set quarterly goals: launch a new software feature, enhance the user interface, and improve feedback collection. Goals have measurable targets, such as finishing the feature launch by quarter’s end, boosting user satisfaction by 25%, and increasing feedback by 40%. Progress is reviewed in monthly meetings, with adjustments made as necessary.
Case Study:
A notable example of successful Management by Objectives (MBO) implementation is seen in Tata Motors. By adopting MBO, Tata Motors was able to align individual objectives with the company’s overall vision, which empowered employees and led to significant improvements in innovation, quality, and performance. This approach also fostered a sense of ownership among the workforce, enhancing motivation and engagement [1] .
2. Behaviorally Anchored Rating Scale (BARS) Method
The behaviorally anchored rating scale (BARS) is a performance appraisal method combining quantitative and qualitative data elements to assess employee performance. BARS uses specific behavioral examples anchored to numerical ratings on a scale, providing a clear, objective measure of performance.
This method involves defining critical incidents of effective and ineffective behavior and then placing these behaviors on a scale. Each point on the scale is associated with specific behaviors that exemplify various performance levels.
By focusing on observable behaviors rather than abstract traits, BARS helps reduce subjective bias and ensures fair and consistent appraisals. The clear standards set by BARS also aid in providing constructive feedback, correcting behaviors without personal criticism, and aligning employee performance with organizational goals.
Example:
An example of a BARS for a customer service representative might look like this:
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5 – Outstanding Performance: Goes above and beyond to assist customers, consistently receives positive feedback, and resolves complex issues efficiently.
- Example: “Handled a difficult customer complaint with patience and empathy, leading to a commendation from the customer.”
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4 – Above Average Performance: Frequently provides helpful solutions and maintains a positive demeanor; often receives customer praise.
- Example: “Resolved customer issues promptly and received positive feedback in follow-up surveys.”
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3—Satisfactory Performance: The employee meets the basic job requirements and occasionally receives positive feedback, but there are also areas for improvement.
- Example: “Addresses customer inquiries adequately but sometimes needs prompting to follow through.”
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2 – Below Average Performance: Struggles to meet job expectations, receives mixed feedback and requires additional supervision.
- Example: “Often transfers calls to supervisors instead of attempting to resolve issues independently.”
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1 – Unsatisfactory Performance: Fails to meet job requirements, frequently receives negative feedback, and requires constant supervision.
- Example: “Regularly fails to resolve customer issues and has received multiple complaints.”
Case Study:
General Electric (GE) successfully implemented the BARS method to improve its performance appraisal process. GE created more objective and reliable evaluations by focusing on specific behaviors tied to job performance. The company developed detailed BARS for various positions within the organization, ensuring that employees understood the behaviors expected at different performance levels.
GE’s use of BARS helped managers provide more accurate and constructive feedback, ultimately enhancing employee performance and development. This approach also minimized bias in the appraisal process, promoting a fairer and more transparent evaluation system. The success of BARS at GE demonstrates its effectiveness in aligning employee performance with organizational goals and improving overall productivity.
3. Three-Hundred-Sixty (360) Degree Feedback Method
The 360-degree feedback method is an extensive performance appraisal system that collects evaluations from superiors, peers, subordinates, and sometimes customers to provide a well-rounded view of an employee’s performance. It promotes self-awareness, highlighting areas for improvement and strengths from different perspectives.
This feedback is vital for pinpointing coaching and development opportunities. However, it’s essential to consider the feedback’s relevance and context, as not all feedback should be equally weighted.
Example:
An example of implementing the 360-degree feedback method in an organization could be structured as follows:
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Feedback Collection:
- Supervisor Feedback: The direct manager provides employee performance feedback, focusing on key performance indicators (KPIs) and overall job responsibilities.
- Peer Feedback: Colleagues who work closely with the employee provide insights into teamwork, collaboration, and interpersonal skills.
- Subordinate Feedback: Direct reports offer leadership, communication, and managerial effectiveness feedback.
- Customer Feedback: Customers who interact with the employee provide feedback on customer service, problem-solving abilities, and professionalism.
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Feedback Analysis:
- The collected feedback is compiled and analyzed to identify common themes and areas for improvement.
- Feedback is categorized into strengths and weaknesses, highlighting specific behaviors and examples.
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Feedback Review:
- A feedback session is conducted where the employee reviews the feedback with their manager or a coach.
- Together, they develop an action plan for improvement, setting specific goals and timelines.
Case Study:
IBM implemented the 360-degree feedback method to enhance its performance appraisal process and promote a culture of continuous improvement. By incorporating feedback from various sources, IBM aimed to provide employees with a more comprehensive understanding of their performance. This approach helped identify areas for development, facilitated better communication, and supported career growth.
IBM’s 360-degree feedback method involved collecting feedback from managers, peers, subordinates, and customers. The feedback was used to create detailed reports highlighting strengths and improvement areas. These reports were then discussed in feedback sessions, where employees and managers collaborated to develop personalized development plans.
IBM found that the method improved employee self-awareness, increased engagement, and supported a more transparent and fair appraisal process. By leveraging diverse perspectives, IBM was able to create a more supportive and developmental environment for its employees. [2]
4. Assessment Center Method
The assessment center method is a comprehensive evaluation approach where employees are assessed through structured activities and exercises that simulate real job challenges. These activities include in-basket exercises, group discussions, role-plays, and interviews.
The goal is to observe and measure employees’ potential, performance, and suitability for specific roles, mainly managerial positions. The method emphasizes situational behavior, allowing organizations to assess competencies like leadership, decision-making, communication, and problem-solving skills.
Example:
To implement the assessment center method, an organization might set up a day-long event where selected employees participate in various exercises. For instance, participants could be given a case study to solve, engage in role-playing scenarios where they must demonstrate leadership skills, and participate in group discussions to showcase their teamwork and communication abilities. Trained assessors observe and rate their performance based on pre-defined criteria.
Case Study:
Coca-Cola USA successfully implemented the assessment center method to select its managerial personnel. The company conducted a detailed study that revealed that those chosen through assessment centers were significantly less likely to leave the company or be terminated than those selected through traditional methods.
Despite the assessment center approach adding about 6% to the hiring costs, the resulting lower turnover rates led to substantial overall savings for the company. This implementation helped Coca-Cola to identify and develop managerial talent more effectively, ensuring that the selected individuals were better suited for their roles and had higher retention rates.
5. Human Resource Accounting Method
The human resource accounting (HRA) method assesses employees’ worth to the organization by valuing them monetarily. This method compares the cost of retaining an employee, which includes salary, benefits, and other expenses, against the revenue generated by that employee.
It provides a financial perspective on the value of human capital, helping organizations make informed decisions about hiring, training, and employee retention.
Example:
To implement the HRA method, a company could start by calculating the total cost of retaining an employee. This includes direct costs such as salary, benefits, and training expenses, as well as indirect costs like office space and equipment.
Next, the company would estimate the revenue generated by the employee through their contributions to projects, sales, or other revenue-generating activities. By comparing these figures, the company can determine the employee’s net value and strategically allocate resources.
Case Study:
Infosys, a global technology services and consulting company, successfully implemented the Human Resource Accounting method to measure and enhance the value of its human capital. The company aimed to align its HR investments with strategic business goals and quantify the economic value of its employees.
Infosys developed a framework to assess the value of its human resources by considering various factors, including the cost of employee retention and the revenue generated by each employee. The framework included detailed data collection on employee performance, training, development costs, and contributions to the company’s revenue streams. By implementing this method, Infosys was able to:
- Improve Decision-Making: The HRA method provided insights into the return on investment (ROI) of HR initiatives, enabling better decision-making regarding hiring, training, and employee development.
- Enhance Employee Value: Infosys identified areas where employees could enhance their skills and productivity, leading to increased revenue generation and higher employee value.
- Align HR with Business Goals: The method helped align HR strategies with overall business objectives, ensuring that HR investments supported the company’s growth and profitability.
This case study demonstrates the effectiveness of the Human Resource Accounting method in providing a financial perspective on human capital, leading to more strategic HR management and better alignment with business goals [3] .
6. Critical Incident Method
The critical incident method involves identifying specific incidents of employee behavior that led to success or failure. This method focuses on documenting what happened during these incidents, allowing managers to provide targeted feedback on performance and behavior.
Example:
A retail store manager might document an incident where an employee handled a customer complaint exceptionally well. By analyzing this behavior, the manager can provide positive feedback and use the example to train other employees.
Case Study:
The critical incident technique was applied in a healthcare setting to refine intervention programs. Researchers interviewed hospital staff about incidents where team interventions succeeded or failed. By analyzing these critical incidents, they could identify the behaviors that led to successful outcomes and improve future interventions [4] .
These case studies demonstrate the practical application of human resource accounting and critical incident methods in real-world scenarios, providing valuable insights into employee performance and organizational improvement.
7. Psychological Appraisals
Psychological appraisals aim to uncover an employee’s potential by focusing on their future performance rather than past achievements. This method evaluates various attributes, including cognitive abilities, interpersonal skills, leadership qualities, intellectual traits, emotional awareness, and personality traits.
Psychologists use various tests to gather comprehensive data, which can inform the company’s decisions regarding promotions, career development, and training needs.
Example:
A company looking to identify future leaders might implement psychological appraisals by conducting assessments designed to measure leadership potential, problem-solving skills, and emotional intelligence.
These assessments could include personality tests, cognitive ability tests, and structured interviews. The results would provide insights into which employees will likely excel in leadership roles and inform targeted development programs.
Case Study
Procter & Gamble (P&G) implemented psychological appraisals to identify high-potential employees and leaders within the company. They used various psychological tests and assessments to evaluate cognitive abilities, leadership potential, and interpersonal skills.
The data collected from these assessments informed their talent development programs and succession planning, ensuring a steady pipeline of capable leaders [5] .
8. Negotiated Appraisal
A negotiated appraisal involves a mediator in the employee evaluation process to facilitate a balanced discussion. The reviewer begins by highlighting the employee’s strengths and areas of success before addressing areas for improvement.
The employee is also given an opportunity to present their perspective on the feedback. The mediator ensures that both parties are heard and any misunderstandings are clarified, which helps to maintain a constructive and positive dialogue.
Example:
An HR manager and an employee might sit down with a neutral third party who guides the conversation, ensuring that both the positive aspects of the employee’s performance and areas needing improvement are discussed fairly.
For instance, employees might receive praise for their project management skills and be encouraged to improve their communication with team members. The mediator helps to ensure that the conversation stays on track and that both parties understand each other’s viewpoints.
Case Study:
One notable example is the University of California’s application of the NPA model. The process involves both parties preparing lists of strengths, areas of improvement, and actionable goals before meeting.
During the appraisal meeting, the employee and the supervisor read their lists and engage in a dialogue facilitated by a mediator to ensure clarity and mutual understanding. This structured approach has been shown to improve performance and job satisfaction by fostering open communication and reducing defensiveness [6] .
Best Performance Appraisal Method
Because there are so many performance appraisal methods, you might be wondering about your company’s most effective performance appraisal methods. Remember that the right performance appraisal method for one company might not necessarily be the right method for yours. Furthermore, you may want to choose specific performance appraisal methods for certain employees. Either way, it can be advantageous to use an employment evaluation template.
You need to consider the size of your company, the information you want to deliver, and how the employee will be most receptive to what you have to say. If you select the best performance appraisal method for your company, you can put yourself and your company in the best position possible to maximize each employee’s value.
