[20] Performance appraisal methods: Here’s how to pick the best one!

A performance appraisal cycle in any company can get tricky. There are so many different methods that can be used. Hence, as a team leader or startup founder, it is your responsibility to use the right performance appraisal methods for your employees. This will in turn ensure better performance management and overall higher productivity.

What can you expect from this blog?

I have collated an extensive list of appraisal methods just for you! I have also included the pros and cons for each of these. So now you won’t have to worry about another performance appraisal ever again.

Download an employee evaluation template for free by clicking here!

• What is a performance appraisal?
• Why are performance appraisals important?
• Download an employee evaluation template for your business now!!!
• Difference between performance appraisal and performance management
• Traditional versus modern methods of performance appraisal?
• Traditional performance appraisal methods
  • Straight ranking method
  • Free-form or essay method
  • Rating scales
  • Confidential Report
  • Paired comparison method
  • Forced distribution method
  • Forced choice method
  • Grading scale
  • Checklist method
  • Field review method
  • Critical incident method
• Modern methods of performance appraisal
  • MBO or Management by objectives
  • 360-degree feedback method
  • 720-degree feedback method
  • Behaviorally anchored rating scale (BARS)
  • Assessment Centre method
  • HR Cost accounting method
  • Self-Appraisals
  • Psychological appraisals
• Common errors in Performance appraisal
• Choosing the right appraisal method for my business
• Summary
• FAQs

So now on to the most basic question of all,

What is a performance appraisal?

A performance appraisal is a systematic and timely process whereby the performance of an employee’s job is evaluated. It is also often referred to as a performance review, performance evaluation or employee appraisal.

Firstly, employers use performance appraisals to evaluate the performance of employees. Following that, the report generated after is used to help in employee development by recommending the next steps.

What is a performance appraisal method?

These methods are tools and techniques used to evaluate employee performance. Different organizations use different methods based on what they want to get out of these reviews.

Here, the person conducting the review and giving feedback is called the appraiser. On the other hand, the person receiving the feedback or appraisal is called the appraisee.

Why is a performance appraisal important?

There are many benefits that come out of employee reviews. Right from helping an employee and their manager understand where the employee is excelling or falling short in the work. Reviews also help plan strategies that will help develop the employee’s skill set post appraisal.

Employee reviews also help boost the morale of the employee because the reviews show them you care about the employees. It can further help align the goals and ambitions of the individual employee with that of the company.

Performance appraisals are a structured way of understanding which employees are meeting their goals based on key results achieved!

Download an employee evaluation questionnaire now!! For FREE!

This questionnaire is well researched. It covers various parameters such as 

• Employee’s soft skills
• Job-related knowledge
• Ability to apply knowledge to the job

You can also rate the employee’s overall performance in an aggregated, yet easy to calculate score and rank your employees accordingly.

Difference between performance appraisal and performance management

Very often I hear team leaders and managers interchange the two terms as if they were synonymous. But they aren’t!

Performance management for starters is an entire process, including all of the following,

• Planning– Setting goals for an employee
• Monitoring– Helping them achieve those goals through constant feedback and guidance
• Appraisal– Evaluating the work of the employee, which is a performance appraisal
• Feedback– Closing the loop with feedback (or as many people are now calling it feed-forward) on their performance
• Next steps– Planning for the next steps to ensure employee growth and development

Performance appraisal as you can see, on the other hand, is just one step in the entire performance management cycle. But this one step has a lot of importance, as it affects all of the other areas within performance management.

Traditional performance appraisal methods versus modern performance appraisal methods

According to Strauss and Sayles (George Strauss and Leanord Sayles, writers of the book ‘Behavioral Strategies for Managers), there are two major classifications of performance appraisal methods, They are,

1. Traditional methods of performance appraisal
2. Modern methods of performance appraisal

Strauss and Sayles say that the major difference between the two is that traditional methods give more importance to the personality traits of the employee, factors such as initiative, dependability, drive, creativity and so on. On the other hand, modern methods focus on the job.

This also means that modern methods place more importance on job achievements. Also, they are more objective in nature and often tend to be more worthwhile.

You could also check out our blog on “OKR The Ultimate Guide: Learn how to create goals for your team” to understand how to check better goals for your team 

Traditional performance appraisal methods

As we have seen previously there are 2 major classifications of appraisal methods. Here below is a list of traditional methods, and the pros and cons of each of them. Then will also help you choose which of these methods will be most useful in your organization.

Straight ranking method for performance appraisal

This method is as simple as the name suggests. The employer or manager basically ranks all the employees based on their performance and various other parameters. It is one of the oldest and simplest forms of employee review.

Employees are ranked from best to worst or highest or lowest on various factors. In this way, the employer understands which are the topmost-performing and lowest-performing employees in the team.

For example, if there are 5 members in the team (for simplicity- A, B, C, D & E). The employer will then assign ranks to each of them. Much like this, A-3, B-2, C-1, D-5, E-4 (1 being the best and 5 being the worst).

Pros:

1. Easy to use. Especially in smaller teams.
2. The team lead understands who is better than who.
3. Ranking helps identify the top performers in the group.

Cons:

1. This method does not explain how much an employee is better than another
2. Not scalable. Because the bigger the team, the more challenging it is to rank.

Essay method for performance appraisal

The essay method is also known as the free-form method. Here, the manager or the appraiser writes an essay or statement about the employee. The major focus here is to write about the strengths and weaknesses of the employee on the job. The statement also focuses on the different steps that could be taken to rectify the drawbacks in the employee’s performance.

There are 2 ways in which this essay is written. On one hand, it could be single-handedly written and framed by the appraiser. On the other hand, the appraiser could work on it in collaboration with the employee in question.

Pros:

As the name suggests, this method is fairly unstructured. As a result, the manager is free is talk about all the factors and concerns that need to be addressed in the employee evaluation. This is also extremely personal in nature, and if used in collaboration with other appraisal methods, it can prove to be very insightful.

The appraiser is not limited to a set of questions. He can also then assign varying weightage to different areas of importance and work as needed.

The test allows for a great deal of freedom of expression, in terms of being able to write about the employee’s job and achievements.

Cons:

This method is not so easy to administer. This is because an administer of this method could find it extremely time-consuming and difficult.

The essay method is also extremely subjective in nature, and not very easy to compare across different employees. The result of this test is also often limited to the language skills and abilities of the appraiser.

Very often, the biggest advantage of this method- freedom of expression- becomes a challenge when the manager isn’t able to express him/herself very well.

Rating scales for performance appraisal

Rating scales as performance appraisal methods are quite commonly used among employers. It is required to rate employees on a particular scale based on various factors and traits.

Rating scales could either be numeric in nature (e.g. 1 to 5, where 5 is the best and 1 is the worst) or alphabetic in nature (a, b, c, d, e, where e= excellent, c=satisfactory and so on…).

Rating scales could also have narrative options to choose from (e.g. “acceptable behaviour”, “fails to complete tasks assigned in a given time” etc.)

Pros and cons:

A major advantage here is that appraisers can apply this method to any job role. However, each of the variants of the rating scale come with their own set of pros and cons.

Say, for example, a 3-level rating scale could be very simple to administer, but may not be complex enough to address the subtle nuances of complex jobs. On the other hand, even a 5-level scale may not be effective as very often, managers tend to have a tendency to choose the central option or drift upwards of the choices.

Confidential Report for performance appraisal

As the name suggests, this form of performance appraisal is highly confidential. The immediate supervisor of the employee is usually the one who writes the report. Many times, only this particular supervisor and upper-level management have access to this report. Yup, you read that right. Even the employee whom the report is about does not get access to this review.

The main focus is performance evaluation and not performance improvement. While private-sector organizations do not usually use this method, it is quite common in public companies and government organizations.

Pros:

1. It is a very detailed and qualitative assessment
2. Useful to decision-makers, especially when it comes to providing transfers, salary hikes etc.
3. Generally submitted only once a year, so not much load of work on the manager

Cons:

1. Since it’s submitted only once a year, there is no continuous evaluation of the employee, hence low scope for employee development
2. Employees themselves don’t have access to the report and as a result, cannot take any corrective measures wherever required
3. Highly subjective and open to biases

Paired comparison method as a performance appraisal method

In this form of appraisal, each employee in a team is compared to every single other employee in that team. Say, for example, the team is made up of A, B, C, D & E, then A is compared with B, C, D & E. The appraiser will then repeat the same thing for all the other employees.

Here, the number of times an employee fares better than other team members is noted down and eventually, ranks are given accordingly. 

The number of pairs formed can be calculated by n(n-1)/2. In the case of the above example, 5(5-1)/2=10 pairs will be formed.

Pros:

1. A better version of the straight ranking method we saw earlier in this blog
2. All employees are compared based on similar parameters and hence relatively fair as a process

Cons:

1. Very time consuming
2. This method is not scalable, as in larger organizations it might be impractical to compare so many employees with each other.

Forced distribution method for performance appraisal

We all know what a Normal distribution in statistics is (more famously known as the ‘Bell Curve’). Here, appraisers fit all their employees within a bell curve based on their performance on the job. Appraisers have been using this method widely used in large organizations since the 1990s. In this method is it believed that employee performance within a team or an organization conforms to a bell curve.

For example, it says that, roughly, 10% of your employees are really bad, 15% are satisfactory, 50% are average, 15% are good and 10% are excellent. In the most basic form of this method, managers fit employees into 5 categories, excellent, good, average, satisfactory and bad.

In this case, most employees get put into the average section. The excellent employees are rewarded, while the bad ones are put into performance improvement programs

Pros:

1. In the rating method, we had seen that most managers usually tend to give all employees average or above-average ratings. This method helps overcome that problem.
2. This method reduces some scope for bias
3. May encourage healthy competition among team members
4. Helps pinpoint the extremely good employees and the ones that need serious help to buck up

Cons:

1. People often tend to question if the bell curve is an appropriate representation of human behaviour and the method is sometimes seen as outdated or old
2. There is a lack of transparency in this method as only the appraiser knows why they slotted the employees the way they did

Forced choice method for performance appraisal

In comparison to the forced distribution method, this one is pretty simple to understand and execute. An employer is given is series of statements and they must mention if those statements are true or false for a given employee. Different statements may carry varying weightage. This would depend on the importance of that statement and the overall appraisal aim.

Examples of statements here could include, “The employee finishes all the tasks assigned on time” or “The employee often reaches the office late”

Pros:

1. Objective approach since options are true or false
2. Save the time of the appraiser.
3. Scalable since the answers are only true or false.
4. Since evaluators aren’t aware of the weightage of each statement until the final result arrives, it is considered quite fair.

Cons:

1. The creation of set statements may be time-consuming, especially in larger companies that have many and varying job roles.

Performance appraisal using the Grading scale

In this method, the appraiser gives the employee a grade for each parameter. The grades often look like this

• Excellent
• Above average
• Average
• Below average
• Unsatisfactory

The evaluator judges the performance of the employee based on the job achievements across various factors and considerations.

Pros:

1. Very simple to administer
2. Does not take up much time for the administer
3. Paints a very clear picture of how the employee has performed over the said span of time

Cons:

1. Since this system does not require any reasoning for the choice of grade, the method can be considered to lack transparency
2. Managers usually tend to rank/grade employees as average or above average in general.

   

Checklist method as a performance appraisal method

This is an extremely simple appraisal method as it only requires the appraiser to tick mark statements that are applicable to a given employee. In a more recent version of this method, the makers of the test assign different weightage to each statement based on how important they are. Based on the answers and the weightage, a score a calculated and assigned to the employee.

Pros:

1. Extremely easy to administer.
2. Saves a lot of time.
3. Objective, since it only required a tick mark near each statement.

Cons:

1. Difficult to implement in big organizations that have many and varying roles.
2. Selecting and not selecting a statement is very limiting as an appraisal method. The appraiser may need to club this method with another for better insights.
3. Since the evaluator does not provide reasons, it is difficult to understand why he or she selected or didn’t select a particular statement.

Performance appraisal using the field review method

In this method, the appraisee does not receive an appraisal from their immediate supervisor or manager like in most cases. Instead, a member of the HR department or from the corporate team evaluates the employee.

The appraiser conducts interviews both with the appraisee as well as with their supervisor and also observes the employee as they work. This gives the appraiser an all-around qualitative yet objective view of the way the employee works.

Pros:

1. There isn’t much pressure on the appraisee, since their direct supervisor isn’t the evaluator.

Cons:

1. An outsider who doesn’t work continuously with the employee does not know how the employee works on a daily basis.
2. An outsider is also not familiar with the employee’s day-to-day working conditions that would in turn drive his/her behaviour at work.
3. Performance appraisal and management are important aspects of employee engagement and the essence of that is completely lost in this method of appraisal.

Critical incident method as a performance appraisal method

In this method, the appraiser asks the employee a set of questions pertaining to bast behaviours or incidents. The appraisee then describes the incident in great detail explaining all the factors that played a role in the unfolding of that incident.

The appraiser gathers information about various incidents that occurred while on the job -> Collects facts about these incidents -> Analyses the data collected -> Determine the underlying issues -> Reports the evaluation and presents potential solutions.

The focus here lies not just on the hard skills but also on the soft skills of the employee. It helps define the appraisee’s knowledge, skill-sets, attitude and many other attributes that drive their behaviour. The focus is also on the employee’s ability to perform in critical situations, either where they have done excellently well or fail to do so.

Pros:

1. Unlike other methods, this appraisal method focuses on rare, unusual events and how the employee performs in such scenarios.
2. A cost-effective method.
3. Does not restrict the appraiser or the appraisee to any framework.
4. Takes into consideration the appraisee’s side of the incident.

Cons:

1. This method can be extremely subjective.
2. Time-consuming for the evaluator and hence not a scalable option (in larger organizations).

Modern performance appraisal methods

So far we have looked at all the possible traditional appraisal methods you can use in your company. Now we shall see a list of modern methods along with the pros and cons of each of them.

MBO or Management by objectives for performance appraisal

Management by objectives, also very commonly called MBO, is an appraisal method where managers and subordinates usually sit together and come up with a set of goals and objectives. Once these goals are decided upon, the 2 have regular meetings and follow-ups to track progress.

This method is generally used in high performing teams, by the use to setting S.M.A.R.T. goals for employees and ensuring the achievement of these goals. The focus during this process is on setting tangible goals that can be monitored.

See also our blog on goal setting by clicking here -> “Goal setting for startups and SMEs: Set goals in 7 steps”

Pros:

1. Since the manager and subordinate sit together to set goals, there is a mutual agreement on the workload and employees do not feel overburdened.
2. Periodical follow-ups ensure continuous tracking and review of the work being done. Continuous feedback automatically results in higher efficiency.
3. There is no ambiguity in terms of the work that has to be done and the feedback received.
4. Employee participation in goal setting makes them feel motivated and also part of the larger organization.
5. Goals can be aligned with employees’ career ambitions and hence allows employees to develop their career as well.

Cons:

1. Requires continuous involvement of top management and hence can be time-consuming for them.
2. Limited application as goals once set may rarely be subject to any change, and also may not be suitable for all roles within an organization.

Performance appraisal using the 360-degree feedback method

The 360-degree feedback method of employee appraisal is becoming extremely popular within organizations. In this method, basically, the employee receives feedback or appraisal from all around i.e. 360-degrees.

What this essentially means, is that, every single area the employee interacts with, one person from that area provides feedback. Say, for example, a sales representative is up for appraisal. This person will get feedback from their immediate supervisor, a peer (another sales rep they work closely with), a couple of clients the sales rep has worked with and sometimes even a subordinate.

Exactly as the name suggests, the feedback mechanism is quite literally an all-around, 360-degree system.

You could also check out our blog “How Balanced Scorecard [BSC] can unlock peak performance for you“

Pros:

1. Since the feedback is taken from so many people, it is extremely thorough.
2. No chance of any bias or partiality.
3. Different aspects of the employee’s work get reviews through this method.
4. It can help improve productivity and work relationships.
5. Increases transparency across the various departments within the organization.

Cons:

1. Subordinates or peers could resort to dishonest (tending towards only good) feedback in order to safeguard professional relationships.
2. Extremely time-consuming process.

Performance appraisal using the 720-degree feedback method

This method is identical to the 360-degree feedback mechanism with one single exception. Here, the 360-degree feedback is done twice. The first time, the feedback is shared with the employee with the intention of developing a performance improvement plan for the appraisee.

The second time, the 360-degree review is done, the focus is on checking the success of the performance improvement plan and then better it if needed.

The pros and cons of the 720-degree review and similar to that of the 360-degree review method.

Performance appraisal method –  Behaviorally anchored rating scale (BARS)

This performance appraisal method uses a more descriptive way to rate employees. Instead of simply putting out a statement and having the appraiser choose options like excellent, above average, average, below average and unsatisfactory, the options themselves are more informative.

Say for example, here, the options would somewhat look like this,

Pros:

1. Since the options are so specific, there is almost no space for subjectivity here
2. Results turn out to be very accurate.
3. Saves time for the appraiser.
4. Completely individualised. This means that every role will have statements specific to them.

Cons:

1. The last positive point mentioned can also prove to be the first problem because it becomes difficult to create the test for larger organizations that have many and varying roles.
2. Managers tend to select average or above-average responses, so responses might not be 100% accurate.

Assessment Centre method for performance appraisal

The assessment centre method is also often used in various selection procedures to ensure that candidate is the right person for a job. This could be used in the case of inter-department transfers etc. Assessment centres combine a variety of different activities such as role-plays, interviews, group activities, presentations and so on to ensure an overall analysis of an employee.

A combination of the results of all the above-mentioned activities is used to get a very deep understanding of the employee and their development in the company.

Pros:

1. Very in-depth report.
2. Accuracy levels are high because of the multiple and all-around reviews.
3. This method is highly adaptable to various job profiles and roles.
4. Creates high employee engagement and is completely different from regular monotonous appraisal methods.

Cons:

1. Extremely time-consuming.
2. Can be an expensive affair, since it involves so many different activities for each employee.

Check out our salary increment breakup to understand how to divide salary increment across employees in a fair way!

HR Cost accounting method as a performance appraisal method

Just as the name suggests- accounting- this method tracks employee performance from a monetary standpoint. How?

Calculate the cost of retaining the employee (more commonly known as the employee’s CTC or cost to company). Then compare this with the value generated by the employee in terms of the service provided and the work done. Do this by considering the improvement in revenue generated during the review period, sales deals closed by the employee, increase in subscriber count and so on (obviously these are more for marketing or sales employees).

This method is ideal for start-ups and small businesses, especially since one employee’s performance plays such a huge role in the growth (or lack thereof!) of the company.

Pros:

1. It is an accurate and objective method since it is quantitative and doesn’t take into consideration people’s opinions
2. Helps determine the monetary value the employee adds to the company and hence helps make changes (if needed) to the employee’s salary package.
3. An easy method to compare 2 or more employees based on monetary value-added.

Cons:

1. There are no specific guidelines to measure the value of human resources within an organization.
2. Human Resources accounting is based on assumptions that may not always hold true. For example, you would assume that an employee will continue to work for you over a fixed period of time, which may or may not be true.

Self-Appraisals

The name here itself is pretty self-explanatory. The employee writes their own review. So I’m going to jump straight to the pros and cons for this one!

Pros:

1. Ownership of the appraisal is placed on the employees, so they feel important. Maybe even motivated to do better.
2. Managers will get insights into why an employee works the way they do. This may otherwise be rare in other forms of appraisals.
3. Employees feel more engaged as this method calls for the employee to communicate more about their performance. This may help managers work better in coming up with performance improvement plans.

Cons:

1. Here, perceptions could be very skewed, because employees could end up being overly lenient or extremely hard on themselves. In both cases, the review is pointless. So, no objectivity.
2. Resentment may arise if negative feedback is not taken well.

Performance appraisal using psychological appraisals

Psychological appraisals are generally more future-focused as opposed to reviewing the past performance of the employee. What I mean here is that psychological appraisal methods are used to understand the potential of employees, what they might be good at but their current job doesn’t showcase it.

These are a series of tests and interviews conducted by trained psychologists. They include in-depth interviews, tests, discussions and so on.

Pros:

1. Since these tests are conducted by psychologists, there is no scope for any bias to creep in.
2. Information becomes available not just about the employee’s past job achievements, but also about their potential.

Cons:

1. Lack of trained professionals to conduct the tests and assessments.
2. Results could get skewed because of nervous and anxious employees.

Common errors made during a performance appraisal cycle

There are many different performance appraisal methods as we have seen so far. But there are also many errors that are common to a lot of these methods.

Yeah, I know, to err is human! But as a small business owner, manager or team leader, you need to make sure you do your best for the sake of your employees and your company. And, being aware of these errors is the first step toward rectifying them.

So, here are some of the errors and biases you must be aware of during an employee review process.

Stereotyping

Stereotyping occurs when a bunch of concepts or ideas get attributed to a particular set of people over a period of time. These ideas then play a role and affect the way people behave towards these sets of people. Stereotypes could be based on race, gender, religion etc.

In the case of performance appraisals, the appraiser can very easily let such a bias come in the way of honest feedback.

Halo effect

When someone says halo, you automatically think of an angel, no? Pretty much in the same, the halo effect implies that your perception of a person always tends to be on the positive side.

Usually, this happens when an appraiser notices that an employee is doing very well in one aspect of their job, and generalises it to everything else they do. You think better of them than they actually are. This could translate into overly positive feedback and reviews. So, employees will never truly understand how they are performing.

Single deficiency focus

This is also often referred to as the “horns effect” exactly the opposite of the “halo effect”.

As the name very clearly says, here, the appraiser gets hung up on a single problem, error, deficiency on the appraisee and generalises that across all areas.

Distribution errors

While the halo effect and the single deficiency error talk specifically about biases that affect a single employees review, the distribution error affects the overall review of all the employees. Let’s see how distribution errors play a role in performance appraisals. The overall reviews get skewed in this way as shown in the graph.

There are 3 types of distribution errors as mentioned below:

Severity error: In this case, the appraiser tends to be extra harsh with his/her reviews. All the employees get below-average ratings.

Centrality errors: Here, all the reviews tend to be average. Most of the employees get average feedback. The problem here is that the poor performers get feedback better than they deserve, while top performers don’t get good enough reviews.

Leniency errors: Leniency errors refer to when a manager gives all the appraisees good or above-average reviews/appraisals.

Recency errors

This is a very common error made by managers and supervisors during performance appraisals. In this case, the appraiser’s reviews get affected based on any event that may have occurred in the recent past with the employee in question.

Say, for example, if an employee recently broke their own sales target which resulted in a very high number of new clients for the company, the appraiser will let that one incident impact the entire review, leading to an overall positive response. Whereas on the other hand, if the same employee were to get into an argument with another employee before the performance appraisal, then that would negatively affect the overall review.

Attribution error

Attribution is a process whereby, a manager tends to make assumptions about an employee’s motives. This leads to extremely subjective responses by the appraiser for the appraisee.

An example of this situation would be, if an employee gave a negative answer for something related to the job, the manager would assume that the employee has negative feelings towards his/her job.

Choosing the right performance appraisal methods for your small business

Different methods are targeted toward different results. How you select which appraisal method is best for your company depends totally on the kind of reviews you’re looking for and the end goal. Factors such as

• Number of employees to appraise
• The budget allocated for the task
• Time within which the review must happen
• Level of expertise of the person conducting the appraisal

Employee appraisal and employee performance management and key elements of employee engagement. So, selecting the right appraisal method also becomes very important.

Once you have selected the method or methods best suited to your company, you need to implement it well and ensure that a robust performance improvement plan follows the appraisal. But be sure to reward your top-performing employee too 😉

Summary

Performance appraisal Methods – FAQs

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.