Performance Management Systems

Performance management systems go beyond merely reviewing an employee’s past actions.

They are designed to improve motivation and development through two-way feedback.
Without consistent feedback on how an employee’s efforts influence performance, their
motivation may decline. These systems must serve multiple purposes and often face
operational challenges. Both areas must be addressed to build an effective system.

Purposes of a Performance Management System

Performance appraisals should clearly communicate how well employees have achieved
set goals. Ideally, both the goals and performance measures should be jointly decided by the
employee and the supervisor, enabling shared responsibility and clearer expectations. Two-
way feedback is essential to maintain employee motivation. Besides feedback, development
is another critical component—it refers to areas where the employee can improve to
enhance performance. For example, a professor may be knowledgeable but can still improve
teaching methods by incorporating experiential activities, real-world applications, or case
studies.
Another key purpose is documentation. This is vital for legal reasons, such as when job-
related performance measures are used to justify employment decisions like termination. If
an employee receives a satisfactory appraisal but is later dismissed due to poor performance
without adequate documentation, the organization risks legal and ethical consequences.
Proper documentation also helps in cases of retaliation or harassment, providing evidence
of inappropriate personnel actions.
Therefore, while the system benefits the organization, it must also meet the needs of
employees and appraisers. Accurate and timely feedback serves employees, and appropriate
systems should assist appraisers by making feedback easier to give and encouraging
employee involvement. If appraisers are forced to evaluate employees using irrelevant
criteria, the system becomes ineffective. Customizing the appraisal process to the job
role and organizational goals ensures it is both useful and integrated within HR practices.

Difficulties in Performance Management Systems

Performance management involves three main parties—employees, appraisers, and
organizations—and aligning their needs can create challenges. These challenges can be
classified into two major areas: focus on the individual and focus on the process.

Focus on the Individual

Performance evaluations often stir emotions, making them one of the hardest
responsibilities for supervisors. An employee may feel they have performed exceptionally,
while their supervisor sees it as merely satisfactory. This difference in perception can lead to
emotional conflicts, especially if not managed properly. For example, if an employee
questions a professor’s grading, it might result in a defensive and unproductive exchange.
Removing emotional tension from the process is essential to increase employee satisfaction
and foster a more constructive environment for future feedback.

Focus on the Process

Performance evaluations require a structured process to enable objective documentation
and quantifiable assessment. However, HRM policies and budgeting constraints can
interfere. For instance, if pay raises are tied to appraisals and the department’s budget allows
only a 3% average raise, an outstanding performer receiving a 6% raise means others must
get less. This creates pressure on appraisers to focus on negative traits in other employees
to justify smaller increases, which can further intensify emotional conflicts.
Moreover, many appraisers lack training in proper evaluation techniques. This can lead to
judgment errors, uncertainty, and biases. HRM must take steps to train appraisers,
clarify criteria, and encourage employee participation, ensuring that developmental needs
are acknowledged. A well-understood and participatory evaluation process results in
greater satisfaction, both for employees and for the appraisers involved.

Performance Management and EEO

Performance management systems form a core part of organizational operations, playing a
critical role in aligning employee productivity with organizational goals. When designed and
implemented properly, these systems contribute significantly to employee development and
overall performance improvement. However, given the various types of performance
management systems—each with its own strengths and limitations—it is crucial to consider
the legal implications they might involve.
Organizations are required by Equal Employment Opportunity (EEO) laws to maintain
unbiased and non-discriminatory HRM practices. This means that performance
management systems must be objective, job-related, reliable, and valid. In particular, the
Americans with Disabilities Act (ADA) mandates that performance assessments must
account for what is considered "reasonable" success in the context of an employee's role
and abilities.
Two factors are especially important to ensure legal compliance and fairness in the process.
First, performance appraisals should be conducted at regular, predetermined intervals.
Second, appraisers must be properly trained in how to carry out evaluations effectively.
These aspects help ensure that any personnel decisions—such as promotions, terminations,
or transfers—are based on valid and defensible performance data. Objective
documentation becomes essential in establishing the legitimacy of such decisions and
protecting both the employee and the organization from potential legal disputes.
With a clear understanding of the legal framework, we can now move toward examining a
critical element of performance management systems: the appraisal process.
The Appraisal Process
The appraisal process begins with a series of structured steps aimed at evaluating and
improving employee performance in alignment with organizational goals. It ensures not only
individual growth but also overall productivity and legal compliance. Below are the key steps
of this process:

1. Establish Performance Standards

The first step is to set performance standards that align with the organization’s strategic
objectives. These standards should be derived from job analysis and job descriptions and
must be clear, specific, and measurable. Vague terms like “a good job” or “a full day’s
work” are unhelpful unless clearly defined. A supervisor must be able to explain these
expectations to employees and agree on specific performance measures, which will later be
used to assess performance.

2. Communicate Expectations
After standards are set, it’s important to communicate them clearly to employees.
Employees should never be left to guess what is expected of them. Often, performance
expectations are vague or set without involving employees, which leads to confusion.
Communication must be a two-way process that ensures mutual understanding between the
manager and the employee.

3. Measure Actual Performance

The next step is to measure how the employee is actually performing. This requires collecting
reliable information through different methods such as personal observation, statistical
reports, oral reports, and written reports. Each method has its pros and cons, so using a
combination ensures more accurate results. Importantly, what is measured is even more
critical than how it is measured, as it influences employee behavior. If poor criteria are
chosen, it can lead to dysfunctional outcomes.

4. Compare Actual Performance with Standards

Once actual performance is measured, it must be compared against the established standards.
This step identifies whether there are any gaps or deviations. The performance appraisal
form should list all standards and explain different performance levels along with what is
considered acceptable. This comparison serves as a foundation for providing feedback and
guiding the next steps.

5. Discuss the Appraisal with the Employee

One of the most challenging parts of the process is discussing the appraisal with the
employee. Evaluating someone’s work can be emotionally sensitive and can affect the
employee’s self-esteem and future performance. While giving positive feedback is easier,
negative feedback must be handled carefully to avoid demotivation. This discussion has
the power to either positively reinforce behavior or cause discouragement.

6. Initiate Corrective Action if Necessary

The final step involves taking corrective action, if needed. This could be immediate action,
such as fixing a process or addressing mistakes, or basic action, which involves identifying
and addressing the root cause of the performance issue. While immediate actions solve short-
term issues, basic corrective actions lead to long-term improvement through training or
development. Good managers understand that taking time to address underlying problems
now can prevent recurring issues in the future.

Appraisal Methods in Human Resource Management

Performance appraisals can be conducted using three broad approaches: absolute standards,
relative standards, and outcomes-based methods. Each approach offers distinct advantages
and disadvantages depending on organizational context and goals.

I. Appraisals Based on Absolute Standards

In this method, employees are evaluated against pre-established standards without being
compared to other individuals. It focuses on either traits or behaviors and includes various
tools:
1. Critical Incident Appraisal
This method records specific, job-related behaviors that distinguish effective from ineffective
performance. For example, handling a hostage situation calmly and effectively would be
considered a positive critical incident.
Advantages: Focuses on actual behavior; provides rich feedback for improvement.
Disadvantages: Time-consuming to maintain regularly; lacks quantification, making
comparison difficult.
2. Checklist Appraisal
The evaluator checks off a series of “yes” or “no” items describing job-related behaviors. The
checklist is later scored by the HR department, often with weights assigned to different items.
Advantages: Reduces rater bias since scoring is centralized; consistent framework.
Disadvantages: Time-consuming to develop job-specific checklists; evaluators may infer
which behaviors are rated positively, introducing bias.
3. Graphic Rating Scale
This method evaluates performance across various traits or behaviors (e.g., punctuality, job
knowledge) on a numerical scale.
Advantages: Easy to administer; allows quantification and comparison across job categories.
Disadvantages: Vulnerable to rater biases if scale points are ambiguous or traits are too
abstract.
4. Forced-Choice Appraisal
The evaluator selects the most descriptive statement(s) from a list, often without knowing
which are rated positively. The scoring is done by HR using a validated key.
Advantages: Reduces bias and intentional rating distortion.
Disadvantages: Raters may dislike the ambiguity; effort may be made to second-guess the
correct answer.
5. Behaviorally Anchored Rating Scales (BARS)
BARS combines the critical incident technique with graphic scales by anchoring each point
with a specific behavioral example. These behaviors are generated by jobholders and
supervisors, then scaled.
Advantages: Job-specific, observable behaviors improve reliability and reduce rater error;
provides clear feedback.
Disadvantages: Very time-consuming to develop properly; still prone to some rating errors.

II. Appraisals Based on Relative Standards

This approach compares employees against each other, rather than a fixed standard. These
methods rank employees in relation to peers.
1. Group Order Ranking
Employees are placed into categories (e.g., top 20%, middle 50%, bottom 30%).
Advantages: Prevents rating inflation or central tendency; encourages differentiation.
Disadvantages: Difficult with small groups; may misrepresent high-performing employees
in a strong team.
2. Individual Ranking
Employees are listed from highest to lowest performer, without ties.
Advantages: Simple to understand; highlights top and bottom performers.
Disadvantages: Ignores relative performance differences; may not reflect small performance
gaps.
3. Paired Comparison
Each employee is compared one-on-one with every other employee on a specific trait, and a
score is calculated based on how many times they are preferred.
Advantages: Thorough and ensures each employee is fairly assessed.
Disadvantages: Becomes impractical with a large number of employees; time-intensive.

III. Appraisals Based on Outcomes: Management by Objectives (MBO)

This method evaluates employees based on their achievement of pre-agreed performance
goals. Known for its participative approach, MBO converts organizational objectives into
specific goals for departments and individuals.
Key Elements of MBO:
1. Specific Goals: Clearly defined objectives for each individual.
2. Participative Decision-Making: Employees are involved in setting their goals.
3. Defined Time Frame: Objectives are to be met within a set period.
4. Performance Feedback: Regular review of progress and results.
Advantages: Direct alignment between individual and organizational goals; fosters
accountability and motivation.
Disadvantages: Success depends on clarity of objectives and follow-through on reviews; not
ideal for jobs with unpredictable tasks

Factors That Can Distort Appraisals

Although performance appraisals aim to be objective and free of bias, in reality, they are
often influenced by various personal and organizational factors. These distortions can make
evaluations inaccurate and unfair, especially in roles where measuring performance precisely
is difficult, such as in teaching or research.
Leniency Error
Leniency error happens when an evaluator’s personal value system leads them to rate others
too leniently (positive leniency) or too harshly (negative leniency). This means two people
with the same performance might receive very different ratings simply because their
supervisors differ in strictness. This inconsistency becomes a major issue when different
supervisors evaluate similar jobs.
Halo Error
The halo error occurs when an evaluator lets one positive or negative trait overly influence
the entire evaluation. For example, if an employee is very punctual and reliable, the rater may
assume they are also excellent in all other areas, even without evidence. This happens
frequently in student evaluations of teachers, where a single likeable trait affects ratings
across all criteria. Techniques like reverse-wording questions can help reduce this error.
Similarity Error
This bias occurs when evaluators rate employees more favorably if they see similarities
between themselves and the person being appraised. For instance, a supervisor who values
assertiveness might give higher ratings to employees who are also assertive, whether or not
that trait is actually relevant to the job.
Central Tendency
Some raters avoid using the extreme ends of a rating scale and instead rate everyone as
average. This "central tendency" makes it difficult to distinguish between high and low
performers, which can undermine reward systems and fail to recognize true excellence or
address poor performance.
Low Appraiser Motivation
When appraisers fear that giving honest but negative feedback could harm an employee’s
promotion or pay prospects—or damage relationships—they may avoid being truthful. This
results in overly favorable ratings and ultimately diminishes the credibility of the entire
appraisal system.
Inflationary Pressures
Sometimes evaluations are inflated due to organizational or social pressures. For example, if
everyone in a company gets high ratings due to a culture of equality or fear of employee
backlash, the ratings become inflated. This can cause confusion, especially when someone
with a seemingly good rating is not promoted because others have even higher (but inflated)
scores.
Inappropriate Substitutes for Performance
In the absence of clear performance metrics, evaluators may use traits like enthusiasm,
neatness, or attitude as substitutes. While such traits might be important in some jobs, they
don’t always reflect actual performance. For example, enthusiasm might help in teaching but
may be irrelevant for technical roles like accounting or watch repair.
Attribution Theory
Attribution theory explains how appraisers judge performance based on whether they believe
outcomes were within the employee’s control (internal factors) or outside their control
(external factors). If failure is seen as the employee’s fault, ratings are usually harsher.
Conversely, if success is attributed to the employee’s efforts rather than external factors, the
evaluation tends to be more favorable. This theory also ties in with impression management,
where employees who build a good relationship with their supervisor may receive higher
ratings.

Creating More Effective Performance Management Systems

Though performance appraisals often pose challenges, this does not mean the system should
be abandoned. Instead, organizations can take steps to make performance management
systems more effective. Several strategies can be implemented either individually or in
combination to enhance the quality and fairness of performance evaluations.

Use Behavior-Based Measures

Research supports the use of behavior-based measures over trait-based ones. Traits like
loyalty, initiative, reliability, and self-expression, while desirable, do not consistently
correlate with actual job performance. People who score high on such traits may perform
poorly, while low scorers may excel. Furthermore, traits are subjective—definitions of
concepts like "loyalty" or "reliability" can vary significantly between evaluators, reducing
inter-rater reliability. In contrast, behavior-based measures focus on specific, observable
actions (e.g., "says good morning to customers," "offers help to coworkers") that are easier to
agree upon and more directly tied to job performance. This specificity minimizes ambiguity
and enhances rating accuracy.

Combine Absolute and Relative Standards

Absolute standards (e.g., rating scales) often lead to inflated evaluations due to positive
leniency, while relative standards (e.g., ranking employees) can be problematic when there's
minimal variability among employees. A combination of both can be more effective. For
instance, using a graphic rating scale along with individual ranking provides a more nuanced
view of performance. This method is similar to how some universities assign both a grade
(absolute) and a class rank (relative). For example, two students may receive a "B," but if one
is ranked 4th out of 33 and the other 17th out of 21, it provides a clearer distinction of their
relative standing. Such dual systems can offer a more complete and fair assessment.

Provide Ongoing Feedback

Employees should not be surprised during performance reviews. Relying solely on annual
evaluations can be problematic, especially if supervisors delay giving negative feedback or
compile issues to discuss all at once. This can lead to uncomfortable or even confrontational
review sessions. Instead, supervisors should offer continuous feedback, discussing both
successes and shortcomings regularly. This reduces anxiety during formal appraisals and
allows employees to adjust behavior proactively. Ongoing feedback is also essential for the
success of Management by Objectives (MBO) systems, as it ensures expectations and
performance remain aligned throughout the evaluation period.
Use Multiple Raters
Using multiple raters improves the accuracy and reliability of performance evaluations. When
feedback is collected from various sources, the overall evaluation is less likely to be biased
by the perspective of a single evaluator. For example, if an employee receives nine excellent
ratings and one poor one from ten supervisors, the outlier can be examined more closely.
Moving employees across teams can also diversify feedback and improve reliability.
Additionally, self-ratings—where employees evaluate their own performance—have been
found to increase satisfaction with the appraisal process.
Use Peer Evaluations
Supervisors may not witness all aspects of an employee’s performance, especially in
collaborative or team settings. Peer evaluations allow coworkers, who are familiar with the
day-to-day job tasks and behaviors, to provide performance feedback. These evaluations tend
to be constructive, specific, and focused on behavior, which can lead to group improvement.
However, if not managed carefully, peer evaluations may trigger bias, halo effects, leniency,
or anxiety. Therefore, both supervisors and employees must be properly trained to conduct
and receive peer evaluations fairly and constructively.
360-Degree Appraisals
A 360-degree appraisal collects performance feedback from a full circle of sources—
supervisors, peers, subordinates, customers, and the individual being evaluated. This holistic
approach is increasingly used, especially in large organizations, including about 90% of
Fortune 1000 companies like General Electric, Pfizer, and Nokia. Traditional evaluation
systems are becoming outdated, particularly in organizations where downsizing has increased
the span of control and reduced direct supervision. In such environments, it is impractical for
supervisors to know every detail of an employee’s performance, making 360-degree feedback
more relevant and accurate.
Moreover, the increasing use of project teams and employee involvement has shifted the
responsibility of appraisal to those who are in a better position to observe and assess actual
work behavior. For instance, team members or clients may be better able to judge
collaboration, communication, or problem-solving skills than a distant manager.
The 360-degree feedback system offers significant developmental benefits. It helps managers
understand how others perceive them, which can lead to personal and professional growth.
For example, a corporate comptroller at University Health Network discovered that the
financial controls he implemented were seen as overly bureaucratic by a colleague. This
feedback opened a conversation that led to adjustments and improved internal systems.
Research shows that 360-degree appraisals can enhance feedback accuracy, empower
employees, reduce subjectivity in evaluations, and foster leadership development. However,
if misused, they can create issues. These systems are complex to develop and analyze, and
raters might “game the system” by giving inflated or unfair ratings to influence their own
standing. To prevent such manipulation and maintain credibility, the anonymity of raters must
be preserved, and proper training must be provided to ensure ethical and accurate use of this
system.
Rate Selectively
Appraisers should only evaluate performance areas they are qualified to assess. This approach
improves inter-rater reliability and makes evaluations more accurate and meaningful.
Evaluators should be as close as possible to the employee’s organizational level to ensure
they have sufficient observation opportunities. For example, in a university setting, professors
may assess secretaries on judgment and technical skills, while fellow secretaries may
evaluate job knowledge, cooperation, and organizational ability. This method acknowledges
that different roles provide different perspectives, and it ensures appraisers rate only
dimensions they can accurately judge.

Train Appraisers
If competent appraisers are unavailable, organizations should invest in training them. Studies
show that training reduces common rating errors such as halo and leniency effects. Training
sessions, including calibration workshops, teach raters how to observe behavior, understand
performance standards, and minimize bias. Such initiatives are essential because poorly
conducted appraisals can demoralize employees, reduce productivity, and even pose legal
risks. Therefore, investing in developing accurate and fair evaluators is critical for the overall
success and credibility of the performance management system.