Designing a Performance Appraisal System

There are a number of things to consider before designing or revising an existing performance appraisal system. Some researchers suggest that the performance appraisal system is perhaps one of the most important parts of the organization (Lawrie, 1990), while others suggest that performance appraisal systems are ultimately flawed (Derven, 1990), making them worthless. For the purpose of this chapter, let’s assume we can create a performance appraisal system that will provide value to the organization and the employee. When designing this process, we should recognize that any process has its limitations, but if we plan it correctly, we can minimize some of these.

The first step in the process is to determine how often performance appraisals should be given. Please keep in mind that managers should constantly be giving feedback to employees, and this process is a more formal way of doing so. Some organizations choose to give performance evaluations once per year, while others give them twice per year, or more. The advantage to giving an evaluation twice per year, of course, is more feedback and opportunity for employee development. The downside is the time it takes for the manager to write the evaluation and discuss it with the employee. If done well, it could take several hours for just one employee. Depending on your organization’s structure, you may choose one or the other. For example, if most of your managers have five or ten people to manage (this is called span of control), it might be worthwhile to give performance evaluations more than once per year, since the time cost isn’t high. If most of your managers have twenty or more employees, it may not be feasible to perform this process more than once per year. To determine costs of your performance evaluations, see Table 11.1 “Estimating the Costs of Performance Evaluations”. Asking for feedback from managers and employees is also a good way to determine how often performance evaluations should be given.

8 employees × 2 hours per employee + 1/2 hour administrative time to set up times to meet with employees = 16.5 hours of time for one manager to complete all performance reviews

25 employees × 2 hours per employee + 1 hour administrative time to set up times to meet with employees = 51 hours

Once you have the number of hours it takes, you can multiply that by your manager’s hourly pay to get an estimated cost to the organization

16 hours × $50 per hour = $850
51 hours × $50 per hour = $2550

Should pay increases be tied to performance evaluations? This might be the second consideration before development of a performance evaluation process. There is research that shows employees have a greater acceptance of performance reviews if the review is linked to rewards (Bannister & Balkin, 1990).

The third consideration should include goal setting. In other words, what goals does the organization hope to achieve with the performance appraisal process?

Once the frequency, rewards, and goals have been determined, it is time to begin to formalize the process. First, we will need to develop the actual forms that will be used to evaluate each job within the organization. Every performance evaluation should be directly tied with that employee’s job description.

Determining who should evaluate the performance of the employee is the next decision. It could be their direct manager (most common method), subordinates, customers or clients, self, and/or peers. Table 11.2 “Advantages and Disadvantages of Each Source for Performance Evaluations” shows some of the advantages and disadvantages for each source of information for performance evaluations. Ultimately, using a variety of sources might garner the best results.

A 360-degree performance appraisal method is a way to appraise performance by using several sources to measure the employee’s effectiveness. Organizations must be careful when using peer-reviewed information. For example, in the Mathewson v. Aloha Airlines case, peer evaluations were found to be retaliatory against a pilot who had crossed picket lines during the pilot’s union strike against a different airline.

Management of this process can be time-consuming for the HR professional. That’s why there are many software programs available to help administer and assess 360 review feedback. Halogen 360, for example, is used by Princess Cruises and media companies such as MSNBC (Halogen Software, 2011). This type of software allows the HR professional to set criteria and easily send links to customers, peers, or managers, who provide the information requested. Then the data are gathered and a report is automatically generated, which an employee can use for quick feedback. Other similar types of software include Carbon360 and Argos.

Performance Appraisal System Errors

Before we begin to develop our performance review process, it is important to note some of the errors that can occur during this process. First, halo effects can occur when the source or the rater feels one aspect of the performance is high and therefore rates all areas high. A mistake in rating can also occur when we compare one employee to another, as opposed to the job description’s standards. Sometimes halo effects will occur because the rater is uncomfortable rating someone low on a performance assessment item. Of course, when this occurs, it makes the performance evaluation less valuable for employee development. Proper training on how to manage a performance appraisal interview is a good way to avoid this. We discuss this in Section 11.3.4 “Performance Appraisal Interviews”.

Validity issues are the extent to which the tool measures the relevant aspects of performance. The aspects of performance should be based on the key skills and responsibilities of the job, and these should be reviewed often to make sure they are still applicable to the job analysis and description.

Reliability refers to how consistent the same measuring tool works throughout the organization (or job title). When we look at reliability in performance appraisals, we ask ourselves if two raters were to rate an employee, how close would the ratings be? If the ratings would be far apart from one another, the method may have reliability issues. To prevent this kind of issue, we can make sure that performance standards are written in a way that will make them measurable. For example, instead of “increase sales” as a performance standard, we may want to say, “increase sales by 10 percent from last year.” This performance standard is easily measured and allows us to ensure the accuracy of our performance methods.

Acceptability refers to how well members of the organization, manager and employees, accept the performance evaluation tool as a valid measure of performance. For example, let’s assume the current measurement tools of Blewett Gravel, Inc. are in place and show validity for each job function. However, managers don’t think the tool is useful because they take too much time. As a result, they spend minimal time on the evaluation. This could mean the current process is flawed because of acceptability error.

Another consideration is the specificity, which tells employees the job expectations and how they can be met. If they are not specific enough, the tool is not useful to the employee for development or to the manager to ensure the employee is meeting expectations. Finally, after we have developed our process, we need to create a time line and educate managers and employees on the process. This can be done through formal training and communicated through company blogs or e-mails. According to Robert Kent (Kent, 2011), teaching people how to receive benefit from the feedback they receive can be an important part of the process as well.

Performance Appraisal Legal Considerations

The legality of performance appraisals was questioned in 1973 in Brito v. Zia, in which an employee was terminated based on a subjective performance evaluation. Following this important case, employers began to rethink their performance evaluation system and the legality of it.

The Civil Service Reform Act of 1978 set new standards for performance evaluation. Although these standards related only to public sector employees, the Reform Act began an important trend toward making certain performance evaluations were legal. The Reform Act created the following criteria for performance appraisals in government agencies:

1. All agencies were required to create performance review systems.
2. Appraisal systems would encourage employee participation in establishing the performance standards they will be rated against.
3. The critical elements of the job must be in writing.
4. Employees must be advised of the critical elements when hired.
5. The system must be based exclusively on the actual performance and critical elements of the job. They cannot be based on a curve, for example.
6. They must be conducted and recorded at least once per year.
7. Training must be offered for all persons giving performance evaluations.
8. The appraisals must provide information that can be used for decision making, such as pay decisions and promotion decisions.

Early performance appraisal research can provide us a good example as to why we should be concerned with the legality of the performance appraisal process (Field & Holley, 1982). Holley and Field analyzed sixty-six legal cases that involved discrimination and performance evaluation. Of the cases, defendants won thirty-five of the cases. The authors of the study determined that the cases that were won by the defendant had similar characteristics:

1. Appraisers were given written instructions on how to complete the appraisal for employees.
2. Job analysis was used to develop the performance measures of the evaluation.
3. The focus of the appraisal was actual behaviors instead of personality traits.
4. Upper management reviewed the ratings before the performance appraisal interview was conducted.

This tells us that the following considerations should be met when developing our performance appraisal process:

1. Performance standards should be developed using the job analysis and should change as the job changes.
2. Provide the employees with a copy of the evaluation when they begin working for the organization, and even consider having the employees sign off, saying they have received it.
3. All raters and appraisers should be trained.
4. When rating, examples of observable behavior (rather than personality characteristics) should be given.
5. A formal process should be developed in the event an employee disagrees with a performance review.

Now that we have discussed some of the pitfalls of performance appraisals, we can begin to discuss how to develop the process of performance evaluations.