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CHAPTER ELEVEN
PERFORMANCE APPRAISALS
Overview
This chapter discusses the difficulties associated with measuring performance, particularly
when using subjective procedures. Performance reviews are used for a wide variety of
organizational decisions, one of which is to guide the allocation of merit increases.
Unfortunately, the link between performance ratings and organizational outcomes may be
lacking. Performance ratings—things entered into an employee’s record—are influenced by
numerous factors besides the employee behaviors observed by raters. These factors include:
organization values; competition among departments; differences in status between
departments; and economic conditions. Thus, employees often voice frustration about the
appraisal process. The biggest complaint from both employees and managers is that appraisals
are too subjective. In addition to subjectivity is the possibility of unfair treatment by a
supervisor. Some experts argue that rather than throwing out the entire appraisal process, total
quality management principles should be applied to improve the process. One method of
improving appraisal processes is to recognize that part of performance is influenced more by
the work environment and system than by employee behaviors. Another way to improve
performance appraisal focuses on identifying strategies for understanding and measuring
performance better.
The central focus of this chapter is on the strategies to improve the understanding and
measurement of job performance. These strategies address the following issues:
The various appraisal formats and suggestions to improve them
How to select the right raters
Understanding how raters process information
Training raters to rate more accurately
Next, the key elements of the performance evaluation process that ensure a good outcome in
the appraisal process are outlined. Legal issues—Equal Employment Opportunity (EEO) and
affirmative action—affecting performance appraisal are presented. Based on the legal issues,
guidelines are provided to establish a performance appraisal system. The chapter concludes
with a discussion of the issues associated with tying pay to performance appraisals using merit
pay guidelines.
Learning Objectives
Define the role of performance appraisals including performance metrics.
Identify strategies for better understanding and measuring job performance, including
the balanced scorecard, improving appraisal formats, selecting the right raters,
understanding how raters process information, and training raters to rate more
accurately.
Synthesize the performance evaluation process, mindful of equal employment
opportunity.
Discuss tying pay to subjectively appraised performance including defining
competency, performance- and position-based guidelines, and designing merit
guidelines.
Lecture Outline: Overview of Major Topics
I. The Role of Performance Appraisals in Compensation Decisions
II. Strategies for Better Understanding and Measuring Job Performance
III. Putting It All Together: The Performance Evaluation Process
IV. Equal Employment Opportunity and Performance Evaluation
V. Tying Pay to Subjectively Appraised Performance
VI. Your Turn: Performance Appraisal at American Energy Development
VII. Appendix 11-A: Balanced Scorecard Example: Department of Energy (Federal Personal
Property Management Program)
VIII. Appendix 11-B: Sample Appraisal Form for Leadership Dimension: Pfizer Pharmaceutical
Lecture Outline: Summary of Key Chapter Points
I. The Role of Performance Appraisals in Compensation Decisions
Most companies use multiple measures of performance to link to pay increases
and bonuses, as shown in Exhibit 11.1.
Performance reviews are used for a wide variety of decisions in organizations—
only one of which is to guide the allocation of merit increases.
It is common to make a distinction between performance judgments and
performance ratings.
Performance ratings—the things employer’s enter into an employee’s
permanent record—are influenced by a host of factors besides the employee
behaviors observed by raters:
oOrganization values (e.g., valuing technical skills or interpersonal skills more
highly)
oCompetition among departments
oDifferences in status between departments
oEconomic conditions (labor shortages which make for less willingness to
terminate employees for poor performance)
There is even some evidence that much of job performance ratings can be
attributed to a general performance factor (after accounting for error) that is present
across a wide variety of jobs and situations. Thus, employees often voice frustration
about the appraisal process.
oThe biggest complaint from employees (and managers too) is that appraisals are
too subjective.
oLurking behind subjectivity, is the possibility of unfair treatment by supervisors.
A. Performance Metrics
Huge advances in the development of metrics have been made over the
past 15 years.
oIs the measure (metric) results-oriented or behaviorally oriented?
oDoes the measure focus on individual employees or teams or the whole
organization?
Some reliable estimates suggest that between 13 percent of the time
(hourly workers) and 70 percent of the time (managerial employees),
employee performance is tied to quantifiable or results oriented measures.
Just because something is quantifiable, though, does not mean it is an
objective measure of performance. Such potential for subjectivity has led
some experts to warn that so-called objective data can be criterion-deficient
and might not provide all the details.
Despite these concerns, most HR professionals probably would prefer to
work with quantitative data. Sometimes, especially at the individual level,
performance isn’t easily quantified.
oEither job output is not readily quantifiable or the components that are
quantifiable do not reflect important job dimensions.
One of the biggest attacks against appraisals in general and subjective
appraisals in particular, comes from top names in the total quality
management area.
oEdward Deming contended that the work situation (not the individual) is
the major determinant of performance.
Variation in performance arises many times because employees
don’t have the necessary information, technology, or control to
adequately perform their jobs.
Further, Deming argued, individual work standards and
performance ratings rob employees of pride and self-esteem.
Some experts argue that rather than throwing out the entire appraisal
process, total quality management principles should be applied to improve it.
oOne way to improve performance appraisals would be to recognize that
part of performance is influenced more by the work environment and
system than by employee behaviors.
oAnother way to improve performance appraisal concerns identifying
strategies for understanding and measuring performance better.
II. Strategies for Better Understanding and Measuring Job Performance
Efforts to improve the performance rating process take several forms.
oFirst, researchers and compensation people alike devote considerable energy to
defining job performance: what exactly should be measured when evaluating
employees?
oManagers can be grouped into one of three categories, based on the types of
employee behaviors they focus on.
One group looks strictly at task performance, how the employees
perform the responsibilities of their job.
A second group looks primarily at counterproductive performance,
evaluating based on the negative behaviors employees show.
The final group looks at both types of behaviors.
oStudies that examine more specific factors focus on such performance dimensions
as:
Planning and organizing
Training
Coaching
Developing subordinates
Technical proficiency
A. The Balanced Scorecard Approach
A balanced scorecard approach is a way to look at what contributes
value in an organization. It acknowledges that bottom line success depends on
satisfied customers buying products and services from effective and satisfied
employees who both serve the customers and produce goods (or deliver
services) in the most operationally efficient way possible.
If this is true, then employers need to measure all four of the following
dimensions and be prepared to say that success depends on high scores for
each:
oCustomer satisfaction
oEmployee internal growth and commitment
oOperational efficiency in internal processes
oFinancial measures
Besides the widespread enthusiasm in industry for this approach, there is
data that suggest implementation of a balanced scorecard can have positive
impacts on the bottom line and on rating accuracy.
oAppendix 11-A shows a balanced scorecard used by the Department of
Energy.
A second direction for performance research notes that the definition of
performance and its components is expanding.
oJobs are becoming more dynamic, and the need for employees to adapt
and grow is increasingly stressed.
oThis focus on individual characteristics, or personal competencies, is
consistent with the whole trend toward measuring job competency.
A third direction for improving the quality of performance ratings
centers on identifying the best appraisal format.
oIf only the ideal format could be found, raters would use it to measure job
performance better, that is, make more accurate ratings.
Recent attention has focused less on the rating format and more on the
raters themselves.
oThis fourth direction identifies possible groups of raters (supervisors,
peers, subordinates, customers, self) and examines whether a given group
provides more or less accurate ratings.
The fifth direction attempts to identify how raters process information
about job performance and translate it into performance ratings.
Finally, data also suggest that raters can be trained to increase the
accuracy of their ratings.
B. Strategy 1: Improve Appraisal Formats
Types of Formats
oEvaluation formats can be divided into two general categories:
Ranking
Rating
Ranking formats require that the rater compare employees against each
other to determine the relative ordering of the group on some performance
measure. Exhibit 11.2 illustrates three different methods of ranking
employees.
oThe straight ranking procedure is just that: employees are ranked relative
to each other.
oAlternation ranking recognizes that raters are better at ranking people at
extreme ends of distribution. Raters are asked to indicate the best
employee and then the worst employee.
Working at the two extremes permits a rater to get more practice
prior to making the harder distinctions in the vast middle ground of
employees.
oThe paired-comparison ranking method forces raters to make ranking
judgments about discrete pairs of people. Each individual is compared
separately with all others in the work group.
The person who “wins” the most paired comparisons is ranked
top in the group and so on. Unfortunately, when the size of the work
group goes above 10 to 15 employees, the number of paired
comparisons becomes unmanageable.
The second category of appraisal formats— ratings—is generally more
popular than ranking systems. The various rating formats have two elements
in common.
oIn contrast to ranking formats, rating formats require raters to evaluate
employees on some absolute standard rather than relative to other
employees.
oEach performance standard is measured on a scale whereby appraisers can
check the point that best represents an employee’s performance. In this
way, performance variation is described along a continuum from good to
bad.
oIt is the types of descriptors used in anchoring this continuum that provide
the major difference in rating scales. These descriptors may be:
Adjectives
Behaviors
Outcomes
oWhen adjectives are used as anchors, the format is called a standard
rating scale. Exhibit 11.3 shows a typical rating scale with adjectives as
anchors.
oSwitching to behaviors as anchors, behaviorally anchored rating scales
(BARS) seem to be the most common format using behaviors as
descriptors.
By anchoring scales with concrete behaviors, firms adopting a
BARS format hope to make evaluations less subjective.
When raters try to decide on a rating, they have a common
definition for each of the performance levels.
This rating format directly addresses a major criticism of
standard adjective rating scales: Different raters carry with them into
the rating situation different definitions of the scale levels.
Exhibit 11.4 illustrates a complete behaviorally anchored rating
scale for teamwork.
Overall employee performance is calculated as a weighted
average of the ratings on all performance dimensions in both the
standard rating scale and BARS.
Exhibit 11.5 shows one way to derive an overall evaluation from
the dimensional ratings.
In both the standard rating scale and the BARS, overall
performance is calculated as some weighted average (weighted by the
importance the organization attaches to each dimension) of the ratings
on all dimensions.
oIn addition to adjectives and behaviors, outcomes also are used as a
standard. The most common form is Management By Objectives
(MBO).
As a first step, organization objectives are identified from the
strategic plan of the company.
Each successively lower level in the organizational hierarchy is
charged with identifying work objectives that will support attainment
of organizational goals.
Exhibit 11.6 illustrates a common MBO objective – for
communications skill.
At the beginning of a performance review period, the employee
and supervisor discuss performance objectives.
At the end of the review period, the employee and the supervisor
meet again to record results formally.
Results are then compared against objectives, and a performance
rating is determined based on how well the objectives were met.
A review of firms using MBO indicates generally positive
improvements in performance both for individuals and for the
organization.
This performance increase is accompanied by managerial
attitudes toward MBO that become more positive over time,
particularly when the system is revised periodically to reflect the
feedback of participants.
Exhibit 11.7 shows some of the common components of an MBO
format and the percentage of experts who judge this component vital
to a successful evaluation effort.
A final type of appraisal format does not easily fall into any of the
categories yet discussed. In an essay format, supervisors answer open-ended
questions, in essay form, describing employee performance.
oSince the descriptors used could range from comparisons with other
employees to the use of adjectives describing performance, types of
behaviors, and goal accomplishments, the essay format can take on
characteristics of all the formats discussed previously.
oExhibit 11.8 illustrates the relative popularity of these formats in industry.
Evaluating Performance Appraisal Formats
oA good performance appraisal format scores well on five dimensions: (1)
employee development potential (amount of feedback about performance
that the format offers), (2) administrative ease, (3) personnel research
potential, (4) cost, and (5) validity.
oDifferent organizations will attach different weights to these dimensions.
The five main criteria are explained below.
Employee development criterion—feedback has a positive
impact on job performance. There is also evidence that different kinds
of feedback have different effects. The desire for feedback doesn’t
extend across all cultures.
Administrative criterion—ease of use of evaluation results for
administrative decisions concerning wage increases, promotions,
demotions, terminations, and transfers. Comparisons among
individuals for personnel action require some common denominator.
Typically this is a numerical rating of performance.
Personnel research criterion—does the instrument lend itself
well to validating employment tests? As with the administrative
criterion, evaluations typically need to be quantitative to permit the
statistical tests so common in personal research.
Cost criterion—does the evaluation form initially require a long
time to be developed? Is it time-consuming for supervisors to use the
form in rating their employees? Is it expensive to use?
Validity criterion—by far the most research on formats in recent
years has focused on reducing error and improving accuracy. Success
in this pursuit would mean that decisions based on performance ratings
could be made with increased confidence.
oExhibit 11.8 provides a report card on the five most common rating
formats relative to the criteria just discussed.
oThe choice of an appraisal format is dependent on the types of tasks being
performed.
Tasks can be ordered along a continuum from those that are very
routine to those for which the appropriate behavior for goal
accomplishment is very uncertain.
Different appraisal formats require assumptions about the extent
to which correct behavior for task accomplishment can be specified.
oThe choice of an appraisal format requires a matching of formats with
tasks that meet the assumptions for that format.
At one extreme of the continuum are behavior-based evaluation
procedures that define specific performance expectations against
which employee performance is evaluated. Behaviorally anchored
rating scales fall into this category.
When tasks are less routine, it is more difficult to specify a single
sequence of procedures that must be followed to accomplish a goal.
For such tasks an MBO strategy would be appropriate.
At the other extreme of the continuum are tasks that are highly
uncertain in nature. Judgment-based evaluation procedures—as
exemplified by standard rating scales—may be the most appropriate.
