INFORMAL VS. SYSTEMATIC APPRAISAL

Performance appraisal can occur in two ways, informally or systematically. The informal appraisal is conducted whenever the supervisor feels it necessary. The day-to-day working relationship between a manager and an employee offers an opportunity for the employee’s performance to be judged. This judgment is communicated through conversation on the job, over coffee, or by on-the-spot examination of a particular piece of work. Informal appraisal is especially appropriate when time is an issue. The longer feedback is delayed, the less likely it is to motivate behavior change. Frequent informal feedback to employees can also prevent surprises when the formal evaluation is communicated. However, informal appraisal can become too informal.

A senior executive at a big auto maker so dreaded face-to-face evaluations that he recently delivered one manager’s review while both sat in adjoining stalls in the men’s room. The boss told the startled subordinate: “I haven’t had a chance to give you a performance appraisal this year. Your bonus is going to be 20%. I am really happy with your performance.”

A systematic appraisal is used when the contact between manager and employee is formal, and a system is in place to report managerial impressions and observations on employee performance. Although informal appraisal is useful, it should not take the place of formal appraisal. Even some Chief Executive Officers receive and indeed often want formal appraisal.

APPRAISAL RESPONSIBILITIES

The appraisal process can be quite beneficial to the organization and to the individuals involved if done properly. It also can be the source of a great deal of discontent. The manager does the actual appraising of the employee, using the procedures developed by the HR unit. As the formal system is being developed, the manager usually offers input on how the final system will work. Only rarely does an HR specialist actually rate a manager’s employees.

TIMING OF APPRAISALS

Appraisals typically are conducted once or twice a year, most often annually, near the employee’s anniversary date. For new employees, common timing is to conduct an appraisal 90 days after employment, again at six months, and annually thereafter. “Probationary” or new employees, or those who are new and in a trial period, should be evaluated frequently—perhaps weekly for the first month and monthly thereafter until the end of the introductory period for new employees. After that, annual reviews may be sufficient. Indeed, some argue that performance can be appraised too often.

Some companies in high-technology fields are promising accelerated appraisals— six months instead of a year—so that employees receive more frequent raises. The result for some companies has been a reduction in turnover among these very turnover-prone employees.

A regular time interval is a feature of systematic appraisals that distinguishes them from informal appraisals. Both employees and managers are aware that performance will be reviewed on a regular basis, and they can plan for performance discussions. In addition, informal appraisals should be conducted whenever a manager feels they are desirable.

APPRAISALS AND PAY DISCUSSIONS

Many experts argue that the timing of performance appraisals and pay discussions should be different. The major reason for this view is that employees often focus more on the pay amount than on what they have done well or need to improve. Sometimes managers may manipulate performance appraisal ratings to justify the desired pay treatment for a given individual .

INDIVIDUAL INCENTIVES

Individual incentive systems attempt to relate individual effort to pay. 

Conditions necessary for the use of individual incentive plans are as follows:

• Identification of individual performance: The performance of each individual can be measured and identified because each employee has job responsibilities and tasks that can be categorized from those of other employees.
• Independent work: Individual contributions result from independent work and effort given by individual employers.
• Individual competitiveness desired: Because individuals generally will pursue the individual incentives for themselves, competition among employees will occur. Therefore, independent competition whereby some individuals “win” and others do not must be desired.
• Individualism stressed in organizational culture: The culture of the organization must be one that emphasizes individual growth, achievements, and rewards. If an organization emphasizes teamwork and cooperation, then individual incentives will be counterproductive.

1. PIECE-RATE SYSTEMS

The most basic individual incentive system is the piece-rate system, whether of the straight or differential type. Under the straight piece-rate system, wages are determined by multiplying the number of units produced (such as garments sewn or customers contacted) by the piece rate for one unit. The rate per piece does not change regardless of the number of pieces produced. Because the cost is the same for each unit, the wage for each employee is easy to figure, and labor costs can be accurately predicted.

A differential piece-rate system pays employees one piece-rate wage for units produced up to a standard output and a higher piece-rate wage for units produced over the standard. Developed by Frederick W. Taylor in the late 1800s, this system is designed to stimulate employees to achieve or exceed established standards of production. Managers often determine the standards, or quotas, by using time and motion studies. For example, assume that the standard quota for a worker is set at 300 units per day and the standard rate is 14 cents per unit. For all units over the standard, however, the employee receives 20 cents per unit. Under this system, the

worker who produces 400 units in one day will get $62 in wages. There are many possible combinations of straight and differential piece-rate systems. The specific system used by a firm depends on many situational factors. The effects of a piece-rate system can be seen in the HR Perspective on Safelite Glass Corporation in Columbus, Ohio. Despite their incentive value, piece-rate systems are difficult to use because standards for many types of jobs are difficult and costly to determine. In some instances, the cost of determining and maintaining the standards may be greater than the benefits derived. Jobs in which individuals have limited control over

output or in which high standards of quality are necessary also may be unsuited to piecework.

2. BONUSES

Individual employees may receive additional compensation payments in the form of a bonus, which is a one-time payment that does not become part of the employee’s base pay. Generally, bonuses are less costly to the employer than other pay increases because they do not become part of employees’ base wages, upon which future percentage increases are figured. Growing in popularity, individual incentive compensation in the form of bonuses often is used at the executive levels of an organization, but bonus usage also is spreading to lower-level jobs.

Bonuses also can be used to reward employees for contributing new ideas, developing skills, or obtaining professional certifications. When the skills or certification requirements are acquired by an employee, a pay increase or a one-time bonus may follow. For example, a financial services firm provides the equivalent of two week’s pay to employees who master job-relevant computer skills. Another firm gives one week’s pay to members of the HR staff who obtain their professional certifications such as PHR, SPHR, CCP, and others.

Firms in the information technology industry pay bonuses for obtaining special technical skills in order to keep employees from looking for new jobs elsewhere using their newly acquired skills and certification.

A bonus recognizes performance by both the employee and the company. When both types of performance are good, bonuses go up. When both are bad, bonuses go down. When an employee has done poorly in a year that was good for the company, most employers base the employee’s bonus on individual performance. It is not always as clear what to do when an employee does well but the company does not. However, a growing number of companies are asking employees to put a portion of their pay “on the line.” While offering big incentive bonuses for high performance, they are withholding them when performance is poor and insisting that employees share both the risks and rewards of business.

One method of determining an employee’s annual bonus is to compute it as a percentage of the individual’s base salary. Often, such programs pay bonuses only if specific individual and organizational objectives have been achieved. Though technically this type of bonus is individual, it comes close to being a group or organizational incentive system. Because it is based on the profits of the division, management must consider the total performance of the division and its employees.

Whatever method of determining bonuses is used, legal experts recommend that bonus plans be described in writing, especially for key managers. A growing number of lawsuits are being filed by employees who leave organizations either voluntarily or involuntarily, demanding payment of bonuses promised to them.

3. SPECIAL INCENTIVE PROGRAMS

There are numerous special incentive programs that provide awards to individuals. These programs can take various forms, ranging from one-time contests for meeting performance targets to rewards for performance over time. For instance, safe-driving awards are given for truck drivers who have no accidents or violations during a year. Although special programs also can be developed for groups and for entire organizations, these programs often focus on rewarding only highperforming individuals.

INCENTIVE PROGRAM AWARDS

Cash merchandise, gift certificates, and travel are the most frequently used rewards. Cash is still highly valued by many employees because they have discretion on how to spend it; however, travel awards, particularly those to popular destinations such as Disney World, Las Vegas, Hawaii, and international locations, appeal to many employees. In one study, Goodyear Tire & Rubber Company conducted an experiment in which some employees received cash and another set of employees received merchandise and other non-cash rewards. The employees receiving the non-cash incentives outperformed those receiving only cash by 46%. The study concluded that many employees like the continuing “trophy” value of merchandise rather than the short-term usage of cash.

RECOGNITION AWARDS

Another type of program recognizes individual employees for their performance or service. For instance, many organizations in service industries such as hotels, restaurants, and retailers have established “employee of the month” and “employee of the year” awards. In the hotel industry over half of the hotels surveyed have recognition awards for desk clerks, housekeepers, and other hourly employees, with the awards being triggered by favorable guest comment cards.

It is important that recognition awards be given to recognize specific efforts and activities targeted by the organization as important. While the criteria for selecting award winners may be subjectively determined in some situations, formally identified criteria provide greater objectivity and are more likely to reward performance, rather than being seen as favoritism. When giving recognition awards, organizations should use specific examples to describe clearly how those receiving the awards were selected.

SERVICE AWARDS

Another common type of reward given to individual employees is the service award. Although these awards often may be portrayed as rewarding performance over a number of years, the reality is that they are determined by length of service, and performance plays little or no role.

IDENTIFYING AND MEASURING EMPLOYEE PERFORMANCE

Performance is essentially what an employee does or does not do. Performance of employees that affects how much they contribute to the organization could include:

-Quantity of output

-Quality of output

-Timeliness of output

-Presence at work

-Cooperativeness

Obviously other dimensions of performance might be appropriate in certain jobs, but those listed are common to most. However, they are general; each job has specific job criteria or job performance dimensions that identify the elements most important in that job. For example, a college professor’s job might include the job criteria of teaching, research, and service. Job criteria are the most important factors people do in their jobs; in a sense, job criteria define what the organization is paying an employee to do. Because these criteria are important, individuals’ performance on job criteria should be measured, compared against standards, and then the results must be communicated to each employee.

Jobs almost always have more than one job criterion or dimension. For example, a baseball outfielder’s job criteria include home runs, batting average, fielding percentage, and on-base performance, to name a few. In sports and many other jobs, multiple job criteria are the rule rather than the exception, and it follows that a given employee might be better at one job criterion than at another. Some criteria might have more importance than others to the organization. Weights are a way to show the relative importance of several job criteria in one job. In some universities a college professor’s teaching might be a bigger part of the job than research or service.

1. JOB CRITERIA AND INFORMATION TYPES

The data or information that managers receive on how well employees are performing their jobs can be of three different types. Trait-based information identifies a subjective character trait—such as pleasant personality, initiative, or creativity—and may have little to do with the specific job. Traits tend to be ambiguous, and many court decisions have held that performance evaluations based on traits such as “adaptability” and “general demeanor” are too vague to use as the basis for performance-based HR decisions.

Behavior-based information focuses on specific behaviors that lead to job success. For a salesperson, the behavior of “verbal persuasion” can be observed and used as information on performance. Behavioral information is more difficult to identify, but has the advantage of clearly specifying the behaviors management wants to see. A potential problem is that there may be several behaviors, all of which can be successful in a given situation. For example, identifying exactly what “verbal persuasion” is for a salesperson might be difficult.

Results-based information considers what the employee has done or accomplished. For jobs in which measurement is easy and appropriate, a results-based approach works very well. However, that which is measured tends to be emphasized, and the equally important but unmeasurable parts of the job may be left out. For example, a car sales representative who gets paid only for sales may be unwilling to do any paperwork or other work not directly related to selling cars. Further, ethical or even legal issues may arise when only results are emphasized and not how the results were achieved.

2. RELEVANCE OF CRITERIA

When measuring performance, it is important that relevant criteria be used. Generally, criteria are relevant when they focus on the most important aspects of employees’ jobs. For example, measuring customer service representatives in an insurance claims center on their “appearance” may be less relevant than measuring the number of calls handled properly. This example stresses that the most important job criteria should be identified and be linked back to the employees’ job descriptions.

3. POTENTIAL CRITERIA PROBLEMS

Because jobs usually include several duties and tasks, if the performance measures leave out some important job duties, the measures are deficient. For example, measuring the performance of an employment interviewer only on the number of applicants hired, but not on the quality of those hires, could be deficient. If some irrelevant criteria are included, the criteria are said to be contaminated. An example of a contaminated criteria might be appearance for a telemarketing sales representative who is not seen by the customers. Managers use deficient or contaminated criteria for measuring performance much more than they should.

Performance measures also can be thought of as objective or subjective. Objective measures can be directly counted—for example, the number of cars sold or the number of invoices processed. Subjective measures are more judgmental and more difficult to measure directly. One example of a subjective measure is a supervisor’s ratings of an employee’s customer service performance. Unlike subjective measures, objective measures tend to be more narrowly focused, which may lead to the objective measures being inadequately defined. However, subjective measures may be prone to contamination or other random errors. Neither is a panacea, and both should be used carefully.

4. PERFORMANCE STANDARDS

To know that an employee produces 10 “photons” per day does not provide a complete basis for judging employee performance as satisfactory or not. A standard against which to compare the information is necessary. Maybe 15 photons is considered a sufficient day’s work. Performance standards define the expected levels of performance, and are “benchmarks,” or “goals,” or “targets”— depending on the approach taken. Realistic, measurable, clearly understood performance standards benefit both the organization and the employees. In a sense, performance standards define what satisfactory job performance is. It is important to establish standards before the work is performed, so that all involved will understand the level of accomplishment expected. 

The extent to which standards have been met often is expressed in either numerical or verbal ratings, for example, “outstanding” or “unsatisfactory.” It may sometimes be difficult for two or more people to reach agreement on exactly what the level of performance has been relative to the standard.

Figure shows terms used in evaluating employee performance on standards at one company.

Terms Used to Define Standards at One Company

Notice that each level is defined in terms of performance standards, rather than numbers, in order to minimize different interpretations of the standards. 

Sales quotas and production output standards are familiar numerical performance standards. A nonnumerical standard of performance is that a cashier in a retail store must balance the cash drawer at the end of each day.

Standards are often set by someone external to the job, such as a supervisor or a quality control inspector, but they can be written effectively by employees as well. Experienced employees usually know what constitutes satisfactory performance of tasks in their job descriptions, and so do their supervisors. Therefore, these individuals often can collaborate effectively on setting standards.