What is Performance Appraisal

What is Performance Appraisal

What is ‘‘performance appraisal’’?

Performance appraisal is a formal management system that provides for the evaluation of the quality of an individual’s performance in an organization. The appraisal is usually prepared by the employee’s immediate supervisor. The procedure typically requires the supervisor to fill out a standardized assessment form that evaluates the individual on several different dimensions and then discusses the results of the evaluation with the employee. Too often, performance appraisal is seen merely as a once-a-year drill mandated by the personnel department. But in organizations that take performance appraisal seriously and use the system well, it is used as an ongoing process and not merely as an annual event. In these companies, performance appraisal follows a four-phase model:

Phase 1: Performance Planning. At the beginning of the year, the manager and individual get together for a performance-planning meeting. In this hour-long session they discuss what the person will achieve over the next twelve months (the key responsibilities of the person’s job and the goals and projects the person will work on) and how the person will do the job (the behaviors and competencies the organization expects of its members). They typically also discuss the individual’s development plans.

Phase 2: Performance Execution. Over the course of the year the employee works to achieve the goals, objectives, and key responsibilities of the job. The manager provides coaching and feedback to the individual to increase the probability of success. He creates the conditions that motivate and resolves any performance problems that arise. Midway through the year—perhaps even more frequently—they meet to review the individual’s performance thus far against the plans and goals that they discussed in the performance-planning meeting.

Phase 3: Performance Assessment. As the time for the formal performance appraisal nears, the manager reflects on how well the subordinate has performed over the course of the year, assembles the various forms and paperwork that the organization provides to make this assessment, and fills them out. The manager may also recommend a change in the individual’s compensation based on the quality of the individual’s work. The completed assessment form is usually reviewed and approved by the appraiser’s boss. Others—perhaps the department head or the compensation manager—may also review and approve the assessment.

Phase 4: Performance Review. The manager and the subordinate meet, usually for about an hour. They review the appraisal form that the manager has written and talk about how well the person performed over the past twelve months. At the end of the review meeting they set a date to meet again to hold a performance-planning discussion for the next twelve months, at which point the performance management process starts anew. Of course there may be many individual variations on the basic theme, but most sophisticated companies generally follow this fourphase process. Figure 1-1 illustrates the basic four-phase process.

Where did performance appraisals come from?

There are early references to performance appraisal in America going back over a hundred years. The federal Civil Service Commission’s merit rating system was in place in 1887. Lord & Taylor introduced performance appraisal in 1914. Many companies were influenced by Frederick Taylor’s ‘‘scientific management’’ efforts of the early twentieth century and concocted performance appraisals. Before World War II, however, very few organizations conducted any formal performance appraisals. A handful of companies and the military were the only ones using the procedure regularly. Most appraisals that were done concentrated more on an individual’s personality and traits than on actual achievements against goals and formal analyses of the behaviors that produced those results.


Then, in the 1950s Peter Drucker’s novel idea of management by objectives (MBO) and Douglas McGregor’s book The Human Side of Enterprise, which introduced his notions of Theory X and Theory Y, gained a lot of attention. A few companies moved from a mere trait assessment to the development of a procedure that concentrated on goal setting and made the appraisal process a shared responsibility between the individual and the manager. From the work of Drucker and McGregor, the performance appraisal procedure has grown to the point where a huge majority of companies now have a formal appraisal system.

What is the purpose of performance appraisal?

Performance appraisal serves over a dozen different organizational purposes:

The Importance of Performance Appraisal

-  Providing feedback to employees about their performance

- Determining who gets promoted Facilitating layoff or downsizing decisions

- Encouraging performance improvement

- Motivating superior performance

- Setting and measuring goals

- Counseling poor performers

- Determining compensation changes

- Encouraging coaching and mentoring

- Supporting manpower planning or succession planning

- Determining individual training and development needs

- Determining organizational training and development needs

- Confirming that good hiring decisions are being made

- Providing legal defensibility for personnel decisions

- Improving overall organizational performance


Providing Feedback. Providing feedback is the most common justification for an organization to have a performance appraisal system. Through its performance appraisal process the individual learns exactly how well she did during the previous twelve months and can then use that information to improve her performance in the future. In this regard, performance appraisal serves another important purpose by making sure that the boss’s expectations are clearly communicated.

Facilitating Promotion Decisions. Almost everyone in an organization wants to get ahead. How should the company decide who gets the brass rings? Performance appraisal makes it easier for the organization to make good decisions about making sure that the most important positions are filled by the most capable individuals.

Facilitating Layoff or Downsizing Decisions. If promotions are what everybody wants, layoffs are what everybody wishes to avoid. But when economic realities force an organization to downsize, performance appraisal helps make sure that the most talented individuals are retained and that only the organization’s marginal performers are cut loose.

Encouraging Performance Improvement. How can anyone improve if he doesn’t know how he’s doing right now? A good performance appraisal points out areas where individuals need to improve their performance.  

Motivating Superior Performance. This is another classic reason for having a performance appraisal system. Performance appraisal helps motivate people to deliver superior performance in several ways. First, the appraisal process helps them learn just what it is that the organization considers to be ‘‘superior.’’ Second, since most people want to be seen as superior performers, a performance appraisal process provides them with a means to demonstrate that they actually are. Finally, performance appraisal encourages employees to avoid being stigmatized as inferior performers (or, often worse, as merely ‘‘average’’).

Setting and Measuring Goals. Goal setting has consistently been demonstrated as a management process that generates superior performance. The performance appraisal process is commonly used to make sure that every member of the organization sets and achieves effective goals.

Counseling Poor Performers. Not everyone meets the organization’s standards. Performance appraisal forces managers to confront those whose performance is not meeting the company’s expectations.

Determining Compensation Changes. This is another classic use of performance appraisal. Almost every organization believes in pay for performance. But how can pay decisions be made if there is no measure of performance? Performance appraisal provides the mechanism to make sure that those who do better work receive more pay.

Encouraging Coaching and Mentoring. Managers are expected to be good coaches to their team members. Performance appraisal identifies the areas where coaching is necessary and encourages managers to take an active coaching role.

Supporting Manpower Planning. Well-managed organizations regularly assess their bench strength to make sure that they have the talent in their ranks that they will need for the future. Companies need to determine who and where their most talented members are. They need to identify the departments that are rich with talent and the ones that are suffering a talent drought. Performance appraisal gives companies the tool they need to make sure they have the intellectual horsepower required for the future.

Determining Individual Training and Development Needs. If the performance appraisal procedure includes a requirement that individual development plans be determined and discussed, individuals can then make good decisions about the skills and competencies they need to acquire to make a greater contribution to the company. As a result, they increase their chances of promotion and lower their odds of layoff.

Determining Organizational Training and Development Needs. Would the organization be better off sending all of its managers and professionals through a customer service training program or one on effective decision making? By reviewing the data from performance appraisals, training and development professionals can make good decisions about where the organization should concentrate company-wide training efforts.

Validating Hiring Decisions. Is the company hiring stars, or is it filling itself with trolls? Only when the performance of newly hired individuals is assessed can the company learn whether it is hiring the right people.

Providing Legal Defensibility for Personnel Decisions. Almost any personnel decision—termination, denial of a promotion, transfer to another department—can be subjected to legal scrutiny. If one of these is challenged, the company must be able to demonstrate that the decision it made was not based on the individual’s race or handicap or any other protected aspect. A solid record of performance appraisals greatly facilitates legal defensibility when a complaint about discrimination is made.

Improving Overall Organizational Performance. This is the most important reason for an organization to have a performance appraisal system. A performance appraisal procedure allows the organization to communicate performance expectations to every member of the team and assess exactly how well each person is doing. When everyone is clear on the expectations and knows exactly how he is performing against them, this will result in an overall improvement in organizational success.