All companies and organizations use performance appraisals, or performance reviews, performance evaluations, or employee appraisals, to assess and review progress that individuals are making, to see who has contributed most to business growth, and to reward high-achieving workers.
Effective leadership is aware of the fact that employees are going to want feedback on what they have been doing, but many managers and senior members of organizations don’t enjoy the process and often the entire thing becomes futile.
Modernizing performance appraisals
Typical appraisals as they have been conducted for decades will tend to focus on recent problems, overlooking the good that an employee has done for an organization in the previous year. Often, this has the effect of intimidating and demotivating the individual rather than encouraging them to learn and grow from their experience.
Positives that could be taken from the performance review are rarely put to good use, either, because the most commonly used performance appraisal processes do not internalize employee performance results.
To solve this issue and to bring the idea of performance appraisals up-to-date with the rest of an organization, it is vital that leadership change or alters their existing process. Human Resources (HR) experts recommend a range of different (and now very popular) modern appraisal types and methods, some of which we have elaborated on more below:
360-degree feedback
360-degree feedback is a multidimensional performance appraisal method that evaluates an employee using feedback collected from the employee’s circle of influence. This circle of influence normally includes their managers, peers, customers, and direct reports. Using this method is not only designed to eliminate bias in performance reviews but also to offer a clearer understanding of how competent an individual is in the workplace.
Components of 360-degree feedback
There are 5 integral components to this appraisal method:
- Self-appraisals
This offers employees the chance to look back at their performance and to understand their strengths and weaknesses based on this. This component needs to be carried out carefully, however; as if self-appraisals are performed without structural forms or formal procedures they can become lenient and biased.
- Managerial reviews
Performance reviews conducted by managers are one of the most traditional and basic forms of appraisal. These reviews must include individual employee ratings awarded by supervisors as well as the evaluation of a team or program carried out by senior managers.
- Peer reviews
Coworkers will always have a unique perspective on a particular employee’s performance. This makes them particularly relevant evaluators. They will also be able to offer more information on how well an employee works with their team, takes up initiatives, and acts as a contributor. However, there should also be caution here, as friendship or animosity between peers may distort the final evaluation results.
- Subordinates appraising manager (SAM)
This is an upward appraisal component, and as such is both significant and must be handled delicately. Reportees themselves will usually have the most unique perspective from a managerial point of view, but it is often the case that fear of consequences or reluctance to perform can have an impact on the results.
- Customer or client reviews
This component can either include internal customers, such as users of products within the organization, or external customers who are not part of the organization but interact with this specific employee regularly.
Customer reviews can help to evaluate the output of an employee more effectively. On the other hand, there are disadvantages to this because external users will often not see the impact of processes or policies on an employee’s output.
Advantages to 360-degree feedback
This appraisal method has several different advantages:
- It increases the individual’s awareness of how they perform and how it has an impact on stakeholders
- It encourages employees to invest in self-development and embrace the concept of change management
- It integrates performance feedback with the work culture and promotes engagement
- It serves as a key to initiate coaching, counseling, and career development activities
Reasons 360-degree feedback might fail
The most common reasons that this appraisal method fails are:
- Leniency in reviews
- Cultural differences
- Competitiveness
- Ineffective planning
- Misguided feedback
Who could 360-degree feedback work for?
Private sector organizations are more likely to find 360-degree feedback useful, as peer reviews at public sector organizations tend to be more lenient.
Examples of organizations that use 360-degree feedback
The following organizations all use 360-degree feedback as their appraisal method or use some form of it in their review process:
- GE (General Electric)
- Goldman Sachs
- Netflix
Assessment center method
The concept of assessment center was first introduced in 1930 by the German Army, but has undergone updates and rewrites to fit today’s standards. This method enables employees to get a clear picture of how they are observed (and thought about) by others and how this has an impact on their performance. It not only assesses existing job performance but also helps to predict future job performance.
During the assessment, the employee will be asked to take part in a range of different social-simulation exercises. These might be in-basket exercises, informal discussions, fact-finding exercises, decision-making problems, role-play, and other exercises that ensure success in a job. The largest disadvantage to this is that it takes time and money to complete the process.
Implementing assessment center practice
These are the guidelines for implementing the assessment center method:
- Use a job analysis to determine the components of effective performance
- Identify performance metrics that can be measured using this assessment center
- Classify meaningful and relevant candidate behavior in the assessment process
- Find assessment techniques that can elicit ideal behavioral information
- Spot assessors and assessees, excluding immediate supervisors
- Provide thorough training to assessors and reviewers
- Maintain a system of performance records for each candidate
- Review records and reward employees or provide training accordingly
Advantages of the assessment center method
Benefits of the assessment center method include the following:
- It enhances a participant’s knowledge, boosts their thought process, and improves employee efficiency
- It can be tailored to fit different roles, competencies, and business needs
- It can offer insight into an employee’s personality (ethics, tolerance, problem-solving skills, whether they are introverts or extroverts, how adaptable they are, etc.)
Reasons the assessment center method might fail
The most common reasons the assessment center method might not work include the following:
- It is costly and time-consuming (it will take at least 3 days to complete for each assessor; 1 day for training, 1 day for assessing, and 1 more day for making a decision)
- It requires highly-skilled observers (as observers may bring their own perceptions and biases when evaluating)
- Individuals who receive poor assessments might become demotivated and lose confidence in their abilities
- Personal characteristics examined via assessment center exercises cannot be measured accurately over 3 or 4 days
Who could the assessment center method work for?
Manufacturing organizations, service-based companies, institutions of education, and consulting firms could all benefit from the assessment center method to identify future leaders and managers.
Examples of organizations that use the assessment center method
These organizations, as well as many others, use the assessment center method as part of their performance appraisals:
- Microsoft
- Philips
Behaviorally anchored rating scale (BARS)
Behaviorally anchored rating scales, also known as BARS, bring out both the qualitative and quantitative benefits in the appraisal process. It compares employees’ performance with specific behavioral examples that are anchored to numerical ratings.
Each performance on a BAR scale is anchored by multiple BARS statements, which describe common behaviors that an employee routinely exhibits. These statements act as a way of measuring an individual’s performance against predetermined standards that are applicable to their job level and role in the organization.
The first step in the creation of a BARS is the generation of critical incidents that depict typical workplace behavior. The next step after this will be to edit these critical incidents into a common format and remove any unnecessary steps or features.
Once normalized, the critical incidences can be randomized and assessed for their effectiveness. Remaining critical incidents can be used to create BARS and evaluate employee performance.
Advantages of using BARS
There are a number of benefits and advantages to using BARS:
- An organization will get to make use of clear standards, improved feedback, accurate performance analysis, and consistent evaluation methods
- An organization will get to eliminate construct-irrelevant variance in performance appraisal ratings by placing emphasis on more specific, set, and observable behaviors
- It will decrease the chances of bias and ensure fairness throughout the process
Reasons BARS might fail
There are also some downsides and disadvantages to using BARS:
- There is a high chance for subjectivity during evaluations
- It is difficult to make compensation and promotion decisions based on it
- It is time-consuming to create and to implement
- It demands more from senior managers and executives
Who could BARS work for?
Businesses of all sizes and industries can use BARS to assess workplace performance. This includes the entire workforce,, so everyone from entry-level employees to the highest executives can be appraised using the same method.
Human Resource (cost) accounting method
The Human Resource (cost) accounting method involves an analysis of an employee’s performance through the monetary benefits they yield to the organization. It can be obtained by comparing the cost of retaining an employee (the cost to the organization) and the monetary benefits (contributions) an organization has gained from that specific employee.
When an employee’s performance is evaluated based on cost accounting methods, factors such as unit-wise average service value, quality, overhead cost, and interpersonal relationships are all taken into account.
Implementing the Human Resource (cost) accounting method
These are the guidelines for implementing the Human Resource (cost) accounting method:
- Identify the gap between the market and the current package an employee receives
- Determine the monetary and non-monetary value that the employee brings to the organization
- Make a list of the things that the employee has achieved in the review period (e.g. improved revenue, secured the organization a number of deals, etc.)
Advantages of using the Human Resource (cost) accounting method
The benefits and advantages to using the Human Resource (cost) accounting method are:
- It effectively measures the cost and value and an employee brings to an organization
- It helps to identify the financial impact that any one employee’s performance has on the organization’s bottom line
Reasons the Human Resource (cost) accounting method might fail
There are also some disadvantages to using this method:
- It is highly dependent on cost and benefit analysis
- The reviewer needs to have a good memory for individual details
Who could the Human Resource (cost) accounting method work for?
Startups and small businesses are most likely to benefit from having this method implemented, as they are more likely to be in a position where one employee’s job performance can mean the difference between success and failure.
Management by objectives (MBO)
The MBO method involves both manager and employee working together to identify, plan, organize, and communicate objectives to focus on during an appraisal period.
Once goals have been set, they will periodically discuss the progress made to control and debate on the feasibility of achieving said goals.
MBO is used to effectively match the goals of the organization with the objectives of employees, while validating objectives using the SMART method to see if the set objective is specific, measurable, achievable, realistic, and time-sensitive.
At the end of the review period (this can be quarterly, half-yearly, or annually), employees will be appraised based on their results. Success might be rewarded with things like promotions or raises, while failure may be dealt with through transfers or extra training.
Implementing an MBO program
Here, we have detailed the process of implementing an MBO program within an organization:
- Every manager should start out with 5 to 10 goals expressed in specific, measurable terms
- Managers can propose their goals in writing, which will be finalized after the review is done
- Each goal should include a description and a clear plan (or a list of tasks) to accomplish it
- It should be determined how progress will be measured and how frequently (experts recommend an annual review at minimum)
- List down corrective actions that will be taken if progress is not achieved in accordance with plans
- Ensure the goals at each level are related to organizational objectives and levels above and below them
Incorporating MBO programs into performance management processes
To ensure that the MBO process is a success, it needs to be embedded in the organizational-wide goal setting and appraisal process. By incorporating it into a performance management process, a business can improve employee commitment, amplify the chances that the goal will be achieved, and enable employees to think about the future.
Advantages of MBO programs
Some of the main benefits and advantages of MBO programs include:
- Improved communication between management and employees
- Better performance results from the main focus of MBO, which is setting measurable objectives and clear processes so these objectives can be achieved
- Efficient utilization of Human Resources
- More involvement and more commitment from everyone in the organization
- A more efficient organizational structure
- A more objective performance evaluation
Reasons an MBO program might fail
There are also some disadvantages to implementing an MBO program that mean the program could fail:
- Senior management needs to support it, as such a lack of support may cause it to fail
- It can be costly and time-consuming, and managers can often feel like they are working more towards the MBO than their actual goals
- The objectives can be difficult to quantify
- Employees might resist the change
- A short-term emphasis on quantitative goals might limit an organization’s willingness or ability to set long-term goals
Who could an MBO program work for?
Businesses and organizations of any size will find that MBO programs work for measuring the quantitative and qualitative output of senior positions, such as managers, directors, and executives.
Examples of organizations that use MBO programs
All of these companies and organizations use MBO programs in their performance appraisals:
- Hewlett-Packard
- Intel
- Walmart
- Xerox
Psychological appraisals
These appraisals are useful for determining hidden potential in employees. They focus on analyzing an employee’s future performance, rather than their past work, and are used to analyze seven major components of an employee’s performance. Usually, these will include:
- Cognitive abilities
- Emotional quotient
- Intellectual traits
- Interpersonal skills
- Leadership skills
- Personality traits
Other skills and abilities related to this might also be taken into consideration.
Qualified psychologists conduct a variety of tests to effectively assess an employee. These may be in-depth interviews, discussions, or psychological tests.
Specific scenarios are taken into account when performing this kind of appraisal; for example, the way an employee deals with an aggressive customer can be used to appraise persuasion skills, behavioral response, and emotional response.
Advantages of psychological appraisals
There are a range of benefits and advantages to conducting psychological appraisals:
- It is possible to extract objective measurable data about an employee’s potential as well as their performance
- They are easily deployed when compared to other performance appraisal systems
- They offer a platform that more easily demonstrates potential in shy or introverted employees
Reasons psychological appraisals might fail
There are also a number of disadvantages and reasons why a psychological appraisal might not work:
- Absence of real training
- A lack of trained professionals to administer reviews to employees
- Nervousness or anxiety in the candidates distorting the results
Who could psychological appraisals work for?
Large enterprises and organizations will find that psychological appraisals work for them for many different reasons, including the development of a leadership pipeline, team building purposes, and for the purpose of conflict resolution.
Examples of organizations that use psychological appraisals
These companies and organizations all use psychological appraisals to assess performance review progress and predict future performance:
- Exxon Mobil
- Ford Motors
- Procter & Gamble
Choosing performance appraisal method
Carrying out the ideal performance appraisal goes beyond choosing the most effective phrases and right things to say. It also reflects what an organization’s management thinks of its employees and how much these individuals care about employee morale.
This is why it is important to ensure the right modern appraisal method is chosen for your organization and implemented correctly to eliminate critical performance gaps and to address issues that could impact an organization’s ROI.