Evolution of performance appraisal system and methods

Performance appraisal system is the process of evaluating the performance of an employee (Schermerhorn, Hunt, & Osborn, 2002). The information gathered from such evaluation is shared with employees. This critical information regarding their strengths and weaknesses helps enhance their scope for improvement. Over the last century, many performance appraisal systems have been introduced by various researchers and organisations. These systems were subject to advantages and drawbacks.

Overview of the performance appraisal system

The success of any organization depends on the quality and characteristics of its employees. A performance appraisal system lays down the strategic framework to evaluate their employees’ work performance and further improve it (Bagul, 2014). When work performance is excellent, it should be recognized. This motivates the employees to work even harder. Performance appraisal system also facilitates organizations to identify the top performers. Using such insights from the system, the organizations can then use innovative methods like pay-for-performance compensation plan to motivate employees to outperform their own performance.

Importance of performance appraisal system

Performance appraisal system facilitates saving on operational costs and related overheads related to issues like attrition in a company (Sippy & Varma, 2014). One way to lower the attrition rate is by recognizing the hard work output by the employees and compensating them appropriately. This requires the organizations to adopt and implement a robust management system.

The absence of such a system can increase the attrition rate. This increases the operational cost due to hiring and training new recruits. Moreover, with the introduction of performance appraisal system, employees are able to provide better service at a relatively lesser time (Mucha, 2010). It helps managers in evaluating and developing a fair system of promotions. Thus, performance appraisals assist the organization in recognizing the best-fit employees. It also helps the employees in understanding and following the path of their development and promotion.

Evolution of performance appraisal methods over the years

Over the course of many decades, several methods of performance appraisal system have come into existence. Organisations choose appropriate performance appraisal system on the basis of many factors such as:

  • their nature of the business,
  • the number of employees,
  • organisational goals,
  • training needs for implementing it,
  • costs involved and,
  • errors reduction (Jafari, Bourunini, & Hesamamari, 2009).

However, all the methods have certain advantages and drawbacks.

Straight ranking method

This is the oldest form of PAS. This framework compares employees to one another resulting in a systematic order of employees. Here top to bottom performers is ranked. Average performers are hard to put in order (Bhattarcharya, 2010). The drawback of this method is that it does not show job-related aspects and is suitable only for a large number of employees (Kumar, 2011). Further, it is difficult to compare two individuals having varying behavioural traits (IIBF, 2005).

Paired comparison method

The paired comparison method compares each employee with every other employee in a pair (Bogardous, 2007). According to the community for Human Resource Management, this PAS is more reliable. This is because it uses a systematic method of comparison and evaluation. The number of times a worker is considered, which contributes to their score. This method is advantageous because of its simplicity, but in case of a large number of employees, the method becomes ineffective. Moreover, it does not reveal the degree of difference between two people of the same rank (Stueart, Moran, & Morner, 2013).

Forced distribution method

Force distribution method eliminates the central tendency of rating most of the employees at a higher end of the scale (Aswathapa, 2005). Such a phenomenon occurs in the case of grading. Here, the manager conveys the appraisal to the employee. The advantage of this method is its ease of use and its ability to correct rating errors. However, it is feasible only for companies with large employees and lacks validity, which is its biggest drawback (Myers, 2004).

Grading and checklist

Checklist evaluation requires close-ended questions for the employer like, “Is an employee helpful to co-workers?”. The passing criteria, certain standards are set as per industry norms to which the responses of the employer are compared (Balachandran, 2009). Moreover, in the case of the grading system, there are A to F letter grades in different categories to rate employees like poor, satisfactory and excellent. One of the major drawbacks of this grading system is that it may rate the maximum number of employees on the higher side of their performance.

Forced choice method

Under this method, a rater has a list of statements and rates each statement telling how effectively it describes an employee. Its framework includes both negative and positive statements like “Helps co-workers”, and “do not meet deadlines” (Davis & Buskist, 2008). The drawback of the method is that the actual constructing of several evaluative statements called ‘forced-choice scales’, takes a lot of time and effort. Moreover, it involves bias in rating as the rater may be inclined towards one response interval if more than two choices are involved (Heckenlively, Arden, Nusinowitz, & Holder, 2006).

Critical incident method

This method involves the collection of anecdotes which represent effective and ineffective behaviour of employees (Pedersen, 2005). The anecdotes are related to critical incidents. The observer describes the event that led to the incident, how effectively or ineffectively the employee handled it, and what was the outcome of it. It is closely related to the case-study method. The advantage of this method is that it focuses on observable behaviour. However, the drawback of this method is that it is time-consuming and burdensome for evaluators and managers who have to list down the critical traits of the employees every day (Allen, 2017).

Graphic rating scale method

This method is the most popular method of employee performance appraisal system. In this method, the rating is done by a hard copy of the appraisal form for each employee. A form contains traits and a range of job performance degree (Likert scale) for each trait. In the end, all the scores of the employee are added up for final evaluation (Bohlander & Snell, 2010). Furthermore, this method is generally subject to the bias of the rater which leads to leniency or too much strictness (Chiu & Alliger, 1990).

Essay method

It is the simplest form of appraisal method. Under this method, a manager writes a narrative description of the employee’s strengths, weaknesses, potential, past performance and suggestion for improvement. It is in the form of an essay, rather than a rating scale. Therefore it is often used in addition to a rating scale rather than as a standalone method of grading an employee. The major advantage of this method is that it offers a comprehensive look at every employee’s strengths and weaknesses. However, like other methods, this method too has its own disadvantages. Since it is a descriptive method it does not considers the quantitative aspect and also it can go to any length (Bohlander & Snell, 2010).

Confidential method

This is a traditional way of appraising an employee used in government departments. Under this method, the immediate boss or a manager evaluates the performance of an employee for promotion. This is done on the basis of the manager’s personal judgment and perception. The report is kept confidential and contains attributes of the employees such as strengths, weaknesses, sincerity, attitude towards work, attendance, punctuality, behaviour and character, etc. The major drawback of this method is that it involves a lot of bias and prejudice (Giri, 2008).

Management by objective

Modern evaluation methods try to remove some of the subjectivity and bias inherent in traditional methods. Management by objective is a performance appraisal method which helps to measure an employee’s contribution to the organisation’s goals and outcomes. The process relies on goal setting and constructive feedback to be successful. Under this program, a supervisor-subordinate joint meeting to discuss the goals and agreeing upon what needs to be accomplished, and how this will be measured. Then, objective feedback needs to be given by the management to employees regarding progress towards achievement of these goals. The disadvantage of this method is that it requires heavy involvement and support of the top management, and the time involved in negotiations and re-negotiations of the goals (Murphy & Cleveland, 1995).

Behavior-focused performance appraisal

The problem of judgmental performance evaluation inherent in the traditional methods of performance evaluation led to some organizations to go for the objective evaluation. This was done by developing a technique known as “Behaviorally Anchored Rating Scales” around the 1960s. Behaviorally anchored rating system judges the behaviour based on the actions of the employees using the rating scale. There are generally five to ten vertical rating scales (Bohlander & Snell, 2010). Each of these scales represent a dimension of the job performance. These scales are typically developed by the managers and subordinates jointly.

A major advantage of this method is that people outside the HR department can also participate in creating it. Greater participation leads to the greater success of the scale. However, the disadvantage is that it takes an enormous amount of time and effort to develop (Schermerhorn, 2010).

360-Degree feedback

The 30-degree feedback system is useful for employees at the middle and senior level, as their role requires data from all stakeholders for a meaningful evaluation. Under this method, the employer conducts a primary survey incorporating the responses of co-workers, supervisors, subordinates and sometimes clients also. 360-degree feedback provides multiple feedback channels offering the objective perspective of behavioural actions. Such feedback allows employees to set goals for self-development. Therefore, this further improves their career and also benefits the organization. However, there are some disadvantages to this method. It is subject to suffer from the subjectivity on the part of the appraiser. Moreover, the exchange of confidential perception may lead to tensions between senior level management and the lower level employees (Schneier, Shaw, Beatty, & Baird, 1995).

Evolution of performance appraisal system
Timeline framework: Evolution of performance appraisal system


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Priya Chetty

Partner at Project Guru
Priya is a master in business administration with majors in marketing and finance. She is fluent with data modelling, time series analysis, various regression models, forecasting and interpretation of the data. She has assisted data scientists, corporates, scholars in the field of finance, banking, economics and marketing.

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