Performance Appraisal is a process of evaluating the performance of employees and their productivity in connection with certain predetermined goals and organizational objectives. Performance appraisal also measures other aspects of each of the employees including their organizational behavior, achievements, potential for improvement, strengths and weaknesses. Though performance appraisals are usually conducted on an annual basis, many companies are adopting the process of making evaluation on a quarterly basis. The objectives of performance assessment include 1) deciding and defining the performance goals, 2) evaluating the performance of the employees, 3) setting target bonus for various levels of performances and 4) giving rewards and bonus according to performance ratings (Linking Compensation to Performance). This paper will highlight the characteristics of good performance appraisals and how appraisals are linked to performance based pay.
Characteristics of Good Appraisals
Mission and Objectives
The performance appraisal system should be aligned with the mission and objectives of the organization so that both the employees and employer get benefitted by the process. An organization needs to make sure that the performance appraisal process motivates employees towards the accomplishment of organizational goals and objectives.
Valid and Reliable
Performance appraisal process should be valid and reliable. The measurement tools used for evaluating performance should be consistent all the time. The appraisal system should be objective, consistent in effect, relevant to the job and uniform in application.
Acceptable and Feasible
Performance appraisal tools should be acceptable and feasible. People who would be using the performance measurement tools should feel that the tools are satisfactory and viable. For instance, if both the managers and employees feel that the performance assessment form accurately touches upon the major aspects of the job being assessed and is relevant to the purpose of measuring success in the job, then the form even if it is two or three pages long becomes acceptable and feasible. On the other hand, a lengthy performance evaluation form of 25 pages long which is not largely related to the job might become unacceptable and unfeasible to the managers, partially owing to its length, even if the form is acceptable to the employees. Similarly, if a two pages long performance evaluation form is acceptable to the managers who believe that the form accurately covers all the major elements of the job might not be acceptable and feasible to the employees if they feel that form is leaving a good chunk of their performance related information. Therefore, it is very important to have an acceptable and feasible performance appraisal so that the parties involved in the process find it up to their satisfaction.
The appraisal document which is used for making assessment of an employee's performance determines his goals. Therefore, it is important for the managers to break down the goals of the employees into smaller milestones so that the goals are easily achievable and the employees understand the expectation kept of them. A good appraisal system makes the company's expectation from the employee clear to him so that he can work accordingly to obtain satisfactory performance rating. The goals should be SMART - specific, measurable, attainable, realistic and time bound.
Performance evaluation process should be sufficiently specific to capture information related to an employee's performance so that everyone can easily understand the level of performance achieved by the employee. The evaluation form should provide enough information for the employees to perceive what they are doing well and what they are not. If the evaluation form is too general in content, then it would not serve in improving and modifying the behavior of employees and therefore, the appraisal form should be very specific and to the point.
Performance Appraisals Linked to Compensation
Since promotions, transfers and increase of compensation and benefits depend on performance reviews, the managers carrying out the performance appraisals should be objective in assigning performance ratings. Performance appraisals need not necessarily result in increase of salaries. The overall performance of the employee and his salary level and his job responsibilities are carefully assessed before a salary increase is decided. In recent years, however, many companies in order to maintain retention of employees and talent management are linking compensation to performance by allowing performance based pay. Organizations are simultaneously making variable compensation plans for a variety of roles and positions within the organization. Some of the performance based pay systems touched upon below includes profit sharing, incentives and performance bonus, gain sharing and merit pay.
Profit Sharing Plan
Profit sharing plan refers to a defined contribution plan in which an employer shares a determined amount of profit earned in a year with the covered employees especially with those in the top management using a formula for distribution. Profit sharing is a good way of motivating employees because employees develop a sense of belonging by getting a share of a percentage of the company's profits. However, profit sharing is viable only when the company earns profit for a considerable period of time. This plan works effectively in motivating senior management employees who work harder to help the organization earn profit.
Incentives and Performance Bonus
Performance based incentives or bonus program is an effective way to motivate employees to deliver high performance because the high performing employees based on their performance rating receive a determined amount of incentives or bonus or a determined percentage of the basic pay under this program. For example, in Accenture performance scores are given in the rating of high performer, medium performer and average performer. If an employee earns the rating designated for high performer then he receives 7.5% of his basic pay as onetime payment for that year. These incentive or bonus programs boost up the morals of the employees who feel motivated to give the best shot in their performance by constantly trying to develop themselves.
Gainsharing refers to a bonus incentive program which helps improve the productivity of a company by sharing gains between the employer and employees in accordance with a predetermined formula. Gainsharing though has certain similarities with profit sharing is definitely not a profit sharing. Profit sharing depends on the overall performance of the company whereas gain sharing relies on the most important performance metrics of the company. Profit sharing takes place either annually or quarterly whereas gainsharing runs on a monthly cycle. Gainsharing has been proved to have attributed to the increase of productivity of a company by motivating employees. For instance, the gainsharing plan was launched in Chelsea Sugar Company Ltd. in 1996 with the purpose of rewarding employees for their contribution and commitment. Employees’ productivity increased considerably after the launching of gainsharing program and within a few years the company produced remarkably improved results in a good many key areas for success (Weckmann).
Performance appraisal is instrumental in measuring how much the performance of employees and their contribution are in alignment with the organizational objectives. Since a lot of decisions including transfer, promotions and increase of salary depend on performance reviews, a good performance appraisal system should be aligned with organizational mission. It should be further valid and reliable, acceptable and feasible, accountable and specific. In recent years many companies have started pairing up performance reviews with compensation packages which is referred as performance based pay. Gainsharing, profit sharing, incentives and bonus system are some of the performance based pay systems which help improve the productivity of the organizations by making the employees feel responsible for the success of the organization. Due to the rewards of additional payments based on the performance, employees feel motivated to develop themselves personally to give their best effort in fulfilling the mission and vision of the company.
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