Chapter 10: Performance Management and Appraisal
Chapter 10
Performance Management and Appraisal
Learning Objectives
After students read this chapter, they should be able to:
• Identify why performance management is necessary.
• Distinguish among three types of performance information.
Chapter Overview
Performance management systems are used to identify, encourage, measure,
evaluate, improve, and reward performance. Performance appraisal is the specific
process used to evaluate how well employees perform their jobs and then
communicating that information to the employees. The components of effective
performance management are discussed in this chapter and include:
• The nature of performance management
• Identifying and measuring employee performance
Chapter 10: Performance Management and Appraisal
than an entitlement culture. Executive commitment to performance management is a
crucial aspect to a performance-focused culture.
Then, the issue of who conducts appraisals is covered. Traditionally, appraisals have
been conducted by an individual’s immediate supervisor, but increasingly
organizations are turning to 360o (multisource) evaluation. Managers and
supervisors may evaluate subordinates, team members may rate each other,
outsiders such as consultants and customers may do ratings, and employees may do
self-appraisals. Not to be overlooked is the possibility of employees being given the
freedom to rate their managers which is normally a part of multisource evaluation.
methods is described with the relative advantages and limitations of each.
The chapter then presents a discussion of rater errors. Several errors are described—
varying standards; recency and primacy effects; central tendency, leniency, and
strictness errors; rater bias; halo and horn effects; contrast error; similar to
Chapter Outline
Chapter 10: Performance Management and Appraisal
Well-designed performance management efforts greatly increase the likelihood that for
many good performance will follow and for others poor performance will be identified and
dealt with. Performance management identifies the necessary performance for an
individual. It also should encourage, measure, and evaluate that performance. And finally it
I. The Nature of Performance Management
The performance management process starts by identifying the strategic goals an
organization needs to accomplish to remain competitive and profitable. Managers then
identify how they and their employees can support objectives by successfully completing
HR Headline: Performance Management at Intuit
Performance management, if it is done correctly, sends clear messages to employees
about what matters to the company and its managers. Intuit Inc. is a provider of financial
Intuit believes that making a distinction among peoples’ contributions is essential to a
performance culture, and the firm uses the following performance labels: top performers,
solid contributors, trailing performers, and continually low performers. The evaluation
given to top performers signals they have contributed beyond most others, and Intuit
insists that managers make full use of all the performance rewards they control to
Chapter 10: Performance Management and Appraisal
work. The sum of the work completed in all jobs should be what is necessary to advance
the strategic plan.
Performance management is often confused with one of its key components—performance
appraisal. Performance management is a series of activities designed to ensure that the
organization gets the performance it needs from its employees. Performance appraisal is
the process of determining how well employees do their jobs relative to a standard and
communicating that information to them.
At a minimum a performance management system should do the following:
• Make clear what the organization expects
A. Global Cultural Differences in Performance Management
In some countries and cultures, it is uncommon for managers to rate employees or to
give direct feedback, particularly if some points are negative. For instance, in several
countries, including China and Japan, there is much respect for authority and age.
Consequently, expecting younger subordinates to engage in joint discussions with their
managers through a performance appraisal process is uncommon. Use of such programs
as multisource/360-degree feedback would also be culturally unusual.
Chapter 10: Performance Management and Appraisal
B. Performance-Focused Organizational Culture
Organizational cultures can vary on many dimensions, and one of these differences
involve the degree to which performance is emphasized. Some corporate cultures are
based on an entitlement approach, meaning that adequate performance and
There are benefits to developing a performance-focused culture throughout the
organization. Firms with performance-focused cultures have more positive performance
than those with a maintenance-orientation culture. Figure 10-2 shows the components
of a successful performance-focused culture, which usually means pay is dependent
on performance. However, a pay-for-performance approach can present several
challenges to organizations, particularly in educational institutions. For instance, teacher
II. Identifying and Measuring Employee Performance
Performance criteria vary from job to job, but common employee performance measures
include the following:
• Quantity of output
Chapter 10: Performance Management and Appraisal
• Quality of output
Specific job duties from a job description should identify the important elements in a
given job. It is useful for manager and employee to discuss job duties and agree on their
relative importance because such agreement is not always emphasized. Job duties help to
define what the organization pays employees to do. Therefore, the performance of
individuals on their job duties should be measured, compared against appropriate
standards, and the results should be communicated to the employee.
A. Types of Performance Information
Managers can use three different types of information about employee performance
(Figure 10-3):
• Trait-based information identifies a character trait of the employee—such as
attitude, initiative, or creativity—and may or may not be job related.
o Because traits tend to be ambiguous, and favoritism of raters can affect how
• Behavior-based information focuses on specific behaviors that lead to job
success.
o Behavioral information can specify the behaviors management wants to see.
• Results-based information considers employee accomplishments.
o For jobs in which measurement is easy and obvious, a results-based
approach works well.
Chapter 10: Performance Management and Appraisal
Performance measures can be viewed as objective or subjective. The objective measures
can be observed. Subjective measures require judgment on the part of the evaluator and
are more difficult to determine. Consequently, subjective measures should be used
carefully.
B. Performance Standards
Performance standards define the expected levels of employee performance.
Sometimes they are labeled benchmarks, goals, or targets—depending on the approach
taken. Realistic, measurable, clearly understood performance standards benefit both
To make sure performance standards are applied uniformly many organizations
“calibrate” performances. Calibrating is often a group review by managers in a unit to
discuss the reasons behind each employee’s rating. Ratings can be adjusted up or down
by the group to ensure that the ratings reflect similar performance standards.
C. Performance Metrics in Service Businesses
Measuring service performance is difficult because services are often very
individualized for customers, there is typically great variation in the services that can be
Chapter 10: Performance Management and Appraisal
• Regional differences in labor costs
• Service agreement differences
• Equipment/infrastructure differences
• Work volume
On an individual employee level, common measures are:
• Cost per employee
• Incidents per employee per day
Once managers have determined appropriate measures of the service variance in their
company, they can deal with waste and service delivery. Performance that is measured
can be managed.
III. Performance Appraisals
Performance appraisals are used to assess an employee’s performance and provide a
platform for feedback about past, current, and future performance expectations. Several
terms can be used when referring to performance appraisals. These include employee
rating, employee evaluation, performance review, performance evaluation, or results
appraisal.
A gap may exist between actual job performance and the way it is rated. Poorly done
performance appraisals lead to disappointing results for all concerned, and can cause bad
feelings and damaged relationships if not managed well. Indeed, performance reviews can
Chapter 10: Performance Management and Appraisal
A. Performance Appraisals and Ethics
Performance appraisals may or may not focus on the manager’s ethics with which a
manager performs his or her job. Managers may be expected to take an active role in
managing ethics in their area of responsibility but often do not understand the process.
Many companies do not have a program to develop awareness of ethics and some have
B. Uses of Performance Appraisals
HR Perspective: Making Appraisals Work at Hilton Worldwide
The new chief HR officer at Hilton Worldwide found he had to create a performance
management system from scratch when he arrived. Performance appraisals varied greatly
if they existed at all. In many companies (including Hilton) the Performance Management
process is needlessly complex, is not connected to business goals, and is hated by
managers and employees alike.
At Hilton, managers now set objectives at the beginning of the year and check mid-way
to see how things are going. The system documents individual accomplishments so there
are no surprises during the evaluation. The idea of keeping things simple, focusing on the
Chapter 10: Performance Management and Appraisal
Organizations generally use performance appraisals in two potentially conflicting ways
(Figure 10-5):
• One use is to provide a measure of performance for consideration in making pay
or other administrative decisions about employees. This administrative role often
creates stress for managers doing the appraisals and the employees being
evaluated, because the rater is placed in the role of judge.
Administrative Uses of Appraisals
Three administrative uses of appraisal impact managers and employees the most:
• Determining pay adjustments
• Making job placement decisions on promotions, transfers, and demotions
• Choosing employee disciplinary actions up to and including termination of
employment
A performance appraisal system is often the link between employee job performance
and the additional pay and rewards that they can receive. Performance-based
compensation affirms the idea that pay raises are given for performance
Many U.S. workers say that they see little connection between their performance and
the size of their pay increases due to flaws in performance appraisals. Consequently,
many people argue that performance appraisals and pay discussions should be done
separately. Two major realities support this view:
Chapter 10: Performance Management and Appraisal
process as a game, because compensation increases have been predetermined
before the appraisal was done.
To address these issues, managers can first conduct performance appraisals and
discuss the results with employees, and then several weeks later hold a shorter
meeting to discuss pay issues. By adopting such an approach, the results of the
performance appraisal can be considered before the amount of the pay adjustment is
Developmental Uses of Appraisals
For employees, a performance appraisal can be a primary source of information and
feedback that builds their growth in an organization. By identifying employee
strengths, weaknesses, potentials, and training needs through performance appraisal
feedback, supervisors can inform employees about their progress, discuss areas in
which additional training may be beneficial, and outline future developmental plans.
The use of teams provides a different set of circumstances for developmental
appraisals. The manager may not see all of an employee’s work, but the employee’s
team members do. Team members can provide important feedback. However,
whether teams can handle administrative appraisals is still subject to debate; clearly
Chapter 10: Performance Management and Appraisal
C. Decisions about the Performance Appraisal Process
A number of decisions must be made when designing performance appraisal systems.
Some important ones are identifying the appraisal responsibilities of the HR unit and of
the operating managers, selecting the type of appraisal system to use, and establishing
the timing of appraisals.
Appraisal Responsibilities
If done properly, the appraisal process can benefit both the organization and the
employees. The HR unit typically designs a performance appraisal system (Figure
10-6). The operating managers then appraise employees using the appraisal system.
During development of the formal appraisal system, managers usually offer input
about how the final system will work.
Type of Appraisals: Informal versus Systematic
Performance appraisals can occur in two ways:
• Informally—a supervisor conducts an informal appraisal whenever necessary.
The day-to-day working relationship between a manager and an employee
offers an opportunity for the evaluation of individual performance.
• Systematically—a systematic appraisal is used when the contact between a
manager and employee is more formal, and a system is in place to report
managerial impressions and observations on employee performance. This
approach to appraisals is quite common.
o Systematic appraisals feature a regular time interval, which distinguishes
Chapter 10: Performance Management and Appraisal
Timing of Appraisals
Most companies require managers to conduct appraisals once or twice a year, most
often annually. Employees commonly receive an appraisal 60 to 90 days after hiring,
again at 6 months, and annually thereafter. Probationary or introductory employees,
D. Legal Concerns and Performance Appraisals
Because appraisals are supposed to measure how well employees are doing their jobs, it
may seem unnecessary to emphasize that performance appraisals must be job related.
HR Skills and Applications: Elements of a Legal Performance Appraisal System
The elements of a performance appraisal system that can survive court tests can be
determined from existing case law. It is generally agreed that a legally defensible
performance appraisal should include the following:
• Performance appraisal criteria based on job analysis
• Absence of disparate impact
• Formal evaluation criteria that limit managerial discretion
• A rating instrument linked to job duties and responsibilities
Chapter 10: Performance Management and Appraisal
IV. Who Conducts Appraisals?
Performance appraisals can be conducted by anyone familiar with the performance of
individual employees. Possible rating situations include the following:
• Supervisors rating their employees
A. Supervisory Rating of Subordinates
The most widely used means of rating employees is based on the assumption that the
immediate supervisor is the person most qualified to evaluate an employee’s
performance realistically and fairly. To help provide accurate evaluations, some
B. Employee Rating of Managers
A number of organizations ask employees to rate the performance of their immediate
managers. A variation of this type of rating takes place in colleges and universities,
where students evaluate the teaching effectiveness of professors in the classroom. These
performance appraisal ratings are generally used for management development
purposes.
Having employees rate managers provides three primary advantages:
• In critical manager-employee relationships, employee ratings can be quite useful
Chapter 10: Performance Management and Appraisal
C. Team/Peer Rating
Peer and team ratings are especially useful when supervisors do not have the
opportunity to observe each employee’s performance but other work group members
do. Peer evaluations are common in collegiate schools of business where professors
commonly require students to conduct peer evaluations after the completion of group-
D. Self-Rating
Self-appraisal works in certain situations. As a self-development tool, it requires
employees to think about their strengths and weaknesses and set goals for improvement.
Employees working in isolation or possessing unique skills may be particularly suited to
E. Outsider Rating
People outside the immediate work group may be called in to conduct performance
reviews. This “field review” approach can include someone from the HR department as
Chapter 10: Performance Management and Appraisal
F. Multisource/360-Degree Rating
Multisource rating, or 360-degree feedback, has grown in popularity in organizations.
Multisource feedback recognizes that for many jobs, employee performance is
multidimensional and crosses departmental, organizational, and even national
boundaries. Therefore, information needs to be collected from many sources to
adequately and fairly evaluate an incumbent’s performance in one of these jobs.
Developmental Use of Multisource Feedback
Multisource feedback focuses on the use of appraisals for the development of
individuals. Conflict resolution skills, decision-making abilities, team effectiveness,
communication skills, managerial styles, and technical capabilities are just some of
Administrative Use of Multisource Feedback
When using 360-degree feedback for administrative purposes, managers must
anticipate the potential problems. Differences among raters can present a challenge,
especially when using 360-degree ratings for discipline or pay decisions. Bias can
Chapter 10: Performance Management and Appraisal
Evaluating Multisource Feedback
Research on multisource/360-degree feedback has revealed both positives and
negatives. More variability than expected may be seen in the ratings given by the
different sources. Thus, supervisor ratings may need to carry more weight than peer
or subordinate input to resolve the differences. One concern is that those peers who
rate poor-performing coworkers tend to inflate the ratings so that the peers
themselves can get higher overall evaluation results in return.
V. Tools for Appraising Performance
Performance can be appraised by a number of methods. Some employers use one method
for all jobs and employees, some use different methods for different groups of employees,
and others use a combination of methods.
A. Category Scaling Methods
The simplest methods for appraising performance are category scaling methods, which
require a manager to mark an employee’s level of performance on a specific form
divided into categories of performance. A checklist uses a list of statements or words