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7.5: Performance Appraisal

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  • Learning Objective

    1. Explain how managers evaluate employee performance and retain qualified employees.

    Employees generally want their managers to tell them three things: what they should be doing, how well they’re doing it, and how they can improve their performance. Good managers address these issues on an ongoing basis. On a semiannual or annual basis, they also conduct formal performance appraisals to discuss and evaluate employees’ work performance.

    The Basic Three-Step Process

    Appraisal systems vary both by organization and by the level of the employee being evaluated, but as you can see in Figure 7.8 “How to Do a Performance Appraisal”, it’s generally a three-step process:

    1. Before managers can measure performance, they must set goals and performance expectations and specify the criteria (such as quality of work, quantity of work, dependability, initiative) that they’ll use to measure performance.
    2. At the end of a specified time period, managers complete written evaluations that rate employee performance according to the predetermined criteria.
    3. Managers then meet with each employee to discuss the evaluation. Jointly, they suggest ways in which the employee can improve performance, which might include further training and development.

    Figure 7.8 How to Do a Performance Appraisal


    It sounds fairly simple, but why do so many managers report that, except for firing people, giving performance appraisals is their least favorite task? (Heathfield, 2011) To get some perspective on this question, we’ll look at performance appraisals from both sides, explaining the benefits and identifying potential problems with some of the most common practices.

    Among other benefits, formal appraisals provide the following:

    • An opportunity for managers and employees to discuss an employee’s performance and to set future goals and performance expectations
    • A chance to identify and discuss appropriate training and career-development opportunities for an employee
    • Formal documentation of the evaluation that can be used for salary, promotion, demotion, or dismissal purposes (Nelson & Economy, 2003)

    As for disadvantages, most stem from the fact that appraisals are often used to determine salaries for the upcoming year. Consequently, meetings to discuss performance tend to take on an entirely different dimension: the manager appears judgmental (rather than supportive), and the employee gets defensive. It’s the adversarial atmosphere that makes many managers not only uncomfortable with the task but also unlikely to give honest feedback. (They tend to give higher marks in order to avoid delving into critical evaluations.) HR professionals disagree about whether performance appraisals should be linked to pay increases. Some experts argue that the connection eliminates the manager’s opportunity to use the appraisal to improve an employee’s performance. Others maintain that it increases employee satisfaction with the process and distributes raises on the basis of effort and results (Archer North & Associates, 2011).

    360-Degree and Upward Feedback

    Instead of being evaluated by one person, how would you like to be evaluated by several people—not only those above you in the organization but those below and beside you? The approach is called 360-degree feedback, and the purpose is to ensure that employees (mostly managers) get feedback from all directions—from supervisors, reporting subordinates, coworkers, and even customers. If it’s conducted correctly, this technique furnishes managers with a range of insights into their performance in a number of roles.

    Some experts, however, regard the 360-degree approach as too cumbersome. An alternative technique, called upward feedback, requires only the manager’s subordinates to provide feedback. Computer maker Dell uses this approach as part of its manager-development plan. Every six months, forty thousand Dell employees complete a survey in which they rate their supervisors on a number of dimensions, such as practicing ethical business principles and providing support in balancing work and personal life. Like most companies using this technique, Dell uses survey results for development purposes only, not as direct input into decisions on pay increases or promotions (Dell, Inc., 2011).

    Retaining Valuable Employees

    When a valued employee quits, the loss to the employer can be serious. Not only will the firm incur substantial costs to recruit and train a replacement, but it also may suffer temporary declines in productivity and lower morale among remaining employees who have to take on heavier workloads. Given the negative impact of turnover—the permanent separation of an employee from a company—most organizations do whatever they can to retain qualified employees. Compensation plays a key role in this effort: companies that don’t offer competitive compensation packages (including benefits) tend to lose employees. But other factors come into play, some of which we discussed earlier, such as training and development, as well as helping employees achieve a satisfying work/nonwork balance. In the following sections, we’ll look at a few other strategies for reducing turnover and increasing productivity (Smith, 2011).

    Creating a Positive Work Environment

    Employees who are happy at work are more productive, provide better customer service, and are more likely to stay with the company. A study conducted by Sears, for instance, found a positive relationship between customer satisfaction and employee attitudes on ten different issues: a 5 percent improvement in employee attitudes results in a 1.3 percent increase in customer satisfaction and a 0.5 percent increase in revenue (Wall Street Journal, 1998).

    The Employee-Friendly Workplace

    What sort of things improve employee attitudes? The twelve thousand employees of software maker SAS Institute fall into the category of “happy workers.” They choose the furniture and equipment in their own (private) offices; eat subsidized meals at one of three on-site restaurants; enjoy free soft drinks, fresh fruit on Mondays, M&M’s on Wednesdays, and a healthy breakfast snack on Fridays in convenient break rooms; and swim and work out at a seventy-seven-thousand-square-foot fitness center. They set their own work hours, and they’re encouraged to stay home with sick children. They also have job security: no one’s ever been laid off because of an economic downturn. The employee-friendly work environment helps SAS employees focus on their jobs and contribute to the attainment of company goals (Safer, 2003; Fortune, 2011). Not surprisingly, it also results in very low 3 percent turnover.

    Recognizing Employee Contributions

    Thanking people for work done well is a powerful motivator. People who feel appreciated are more likely to stay with a company than those who don’t (McGarvey, 2004). While personal thank-yous are always helpful, many companies also have formal programs for identifying and rewarding good performers. The Container Store, a national storage and container retailer, rewards employee accomplishments in a variety of ways. Recently, for example, twelve employees chosen by coworkers were rewarded with a Colorado vacation with the company’s owners, and the seven winners of a sales contest got a trip to visit an important supplier—in Sweden (The Container Store, 2011). The company is known for its supportive environment and has frequently been selected as one of the top U.S. companies to work for.

    Involving Employees in Decision Making

    Companies have found that involving employees in decisions saves money, makes workers feel better about their jobs, and reduces turnover. Some have found that it pays to take their advice. When General Motors asked workers for ideas on improving manufacturing operations, management was deluged with more than forty-four thousand suggestions during one quarter. Implementing a few of them cut production time on certain vehicles by 15 percent and resulted in sizable savings (Turner, 2003).

    Similarly, in 2001, Edward Jones, a personal investment company, faced a difficult situation during the stock-market downturn. Costs had to be cut, and laying off employees was one option. Instead, however, the company turned to its workforce for solutions. As a group, employees identified cost savings of more than $38 million. At the same time, the company convinced experienced employees to stay with it by assuring them that they’d have a role in managing it (Daft & Marcic, 2006).