Top Performance Appraisal Methods Followed by Companies

Performance Appraisal can be described as a formal process of assessment and evaluation of the employees on an individual as well as group level. The word “formal” is crucial, as it is important that the managers or supervisors review the worker or individual on a periodic basis. Even though, PA is only an element of performance management, it is very crucial for the success of performance management as it directly relates to the strategic plan set by the organisation.

Managers may choose from among a number of performance appraisal methods. The type of performance appraisal system used depends on its purpose. If the major emphasis is on selecting people for promotion, training, and merit pay increases, a traditional method of performance appraisal, such as rating scales, may be appropriate. Collaborative methods, including input from the employees themselves, may prove to be more suitable for developing employees.

1. 360-Degree Feedback Evaluation Method

The 360-degree feedback evaluation method is a popular performance appraisal method that involves evaluation input from multiple levels within the firm as well as external sources.

The 360-degree method is unlike traditional performance reviews, which provide employees with feedback only from supervisors. In this method, people all around the rated employee may provide ratings, including senior managers, the employee himself or herself, supervisors, subordinates, peers, team members, and internal or external customers.

As many as 90 percent of Fortune 500 companies use some form of 360-degree feedback for either employee evaluation or development. Many companies use results from 360-degree programs not only for conventional applications but also for succession planning, training, and professional development. Unlike traditional approaches, 360-degree feedback focuses on skills needed across organizational boundaries. Also, by shifting the responsibility for evaluation to more than one person, many of the common appraisal errors can be reduced or eliminated. Software is available to permit managers to give the ratings quickly and conveniently. The 360-degree feedback method may provide a more objective measure of a person’s performance. Including the perspective of multiple sources results in a broader view of the employee’s performance and may minimize biases that result from limited views of behaviour.

Having multiple raters also makes the process more legally defensible. However, it is important for all parties to know the evaluation criteria, the methods for gathering and summarizing the feedback, and the use to which the feedback will be put. An appraisal system involving numerous evaluators will naturally take more time and, therefore, be more costly. Nevertheless, the way firms are being organized and managed may require innovative alternatives to traditional top-down appraisals.

According to some managers, the 360-degree feedback method has problems. Ilene Gochman, director of Watson Wyatt’s organization effectiveness practice, says, “We’ve found that use of the 360 is actually negatively correlated with financial results.” GE’s former CEO Jack Welch maintains that the 360-degree system in his firm had been “gamed” and that people were saying nice things about one another, resulting in all good ratings. Another critical view with an opposite twist is that input from peers, who may be competitors for raises and promotions, might intentionally distort the data and sabotage the colleague. Yet, since so many firms use 360-degree feedback evaluation, it seems that many firms have found ways to avoid the pitfalls. The biggest risk with 360-degree feedback is confidentiality. Many firms outsource the process to make participants feel comfortable that the information they share and receive is completely anonymous, but the information is very sensitive and, in the wrong hands, could impact careers.

2. Critical Incident Method

The critical incident method is a performance appraisal method that requires keeping written records of highly favorable and unfavorable employee work actions. When such an action, a “critical incident,” affects the department’s effectiveness significantly, either positively or negatively, the manager writes it down. At the end of the appraisal period, the rater uses these records along with other data to evaluate employee performance. With this method, the appraisal is more likely to cover the entire evaluation period and not focus on the past few weeks or months.

3. Essay Method

The essay method is a performance appraisal method in which the rater writes a brief narrative describing the employee’s performance. This method tends to focus on extreme behavior in the employee’s work rather than on routine day-to-day performance. Ratings of this type depend heavily on the evaluator’s writing ability. Supervisors with excellent writing skills, if so inclined, can make a marginal worker sound like a top performer. Comparing essay evaluations might be difficult because no common criteria exist. However, some managers believe that the essay method is not only the most simple but also an acceptable approach to employee evaluation.

4. Work Standards Method

The work standards method is a performance appraisal method that compares each employee’s performance to a predetermined standard or expected level of output.

Standards reflect the normal output of an average worker operating at a normal pace. Firms may apply work standards to virtually all types of jobs, but production jobs generally receive the most attention. An obvious advantage of using standards as appraisal criteria is objectivity. However, in order for employees to perceive that the standards are objective, they should understand clearly how the standards were set. Management must also explain the rationale for any changes to the standards.

5. Ranking Method

The ranking method is a performance appraisal method in which the rater ranks all employees from a group in order of overall performance. For example, the best employee in the group is ranked highest, and the poorest is ranked lowest. You follow this procedure until you rank all employees. A difficulty occurs when all individuals have performed at comparable levels (as perceived by the evaluator). Paired comparison is a variation of the ranking method in which the performance of each employee is compared with that of every other employee in the group. A single criterion, such as overall performance, is often the basis for this comparison. The employee who receives the greatest number of favorable comparisons receives the highest ranking.

6. Forced Distribution Method (Bell Curve analysis)

The forced distribution method of performance appraisal requires the rater to assign individuals in a work group to a limited number of categories, similar to a normal frequency distribution. The purpose of forced distribution is to keep managers from being excessively lenient and having a disproportionate number of employees in the “superior” category. Forced distribution systems have been around for decades and firms such as General Electric, Cisco Systems, EDS, Hewlett-Packard, Microsoft, Pepsi, Caterpillar, Sun Microsystems, Goodyear, Ford Motor, and Capital One use them today. Proponents of forced distribution believe they facilitate budgeting and guard against weak managers who are too timid to get rid of poor performers. They think that forced rankings require managers to be honest with workers about how they are doing.

The forced distribution systems tend to be based on three levels. In GE’s system, the best performers are placed in the top 20 percent, the next group in the middle 70 percent, and the poorest performing group winds up in the bottom 10 percent. The underperformers are, after being given a time to improve their performance, generally let go. If any of the underperformers are able to improve their performance, you might wonder if any in the 70 percent group would get nervous!

Although used by some prestigious firms, the forced distribution system appears to be unpopular with many managers. In a survey of HR professionals, 44 percent of respondents thought their firm’s forced ranking system damages morale and generates mistrust of leadership. Some believe it fosters cutthroat competition, paranoia, and general ill will, and destroys employee loyalty. A Midwestern banker states that his company “began a rank-and-yank system that flies directly in the face of the ‘teamwork’ that senior management says it wants to encourage. Don’t tell me I’m supposed to put the good of the team first and then tell me the bottom 10 percent of us are going to lose our jobs because, team be damned, I’m going to make sure I’m not in that bottom 10 percent.”

Critics of forced distribution contend that they compel managers to penalize a good, although not a great, employee who is part of a superstar team. One reason employees are opposed to forced ranking is that they suspect that the rankings are a way for companies to rationalize firings more easily.

7. Behaviorally Anchored Rating Scale Method

The behaviorally anchored rating scale (BARS) method is a performance appraisal method that combines elements of the traditional rating scales and critical incident methods; various performance levels are shown along a scale with each described in terms of an employee’s specific job behavior.

A BARS system differs from rating scales because, instead of using terms such as high, medium, and low at each scale point, it uses behavioral anchors related to the criterion being measured. This modification clarifies the meaning of each point on the scale and reduces rater bias and error by anchoring the rating with specific behavioral examples based on job analysis information. Instead of providing a space for entering a rating figure for a category such as Above Expectations, the BARS method provides examples of such behavior. This approach forced facilitates discussion of the rating because it addresses specific behaviors, thus overcoming weaknesses in other evaluation methods. Regardless of apparent advantages of the BARS method, reports on its effectiveness are mixed. A specific deficiency is that the behaviors used are activity oriented rather than results oriented. Also, the method may not be economically feasible since each job category requires its own BARS. Yet, among the various appraisal techniques, the BARS method is perhaps the most highly defensible in court because it is based on actual observable job behaviors.

8. Results-Based System

The manager and subordinate jointly agree on objectives for the next appraisal period in a results-based system, in the past a form of management by objectives. In such a system, one objective might be, for example, to cut waste by 10 percent. At the end of the appraisal period, an evaluation focuses on how well the employee achieved this objective.

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