Performance Appraisal Process at Larsen & Toubro

Construction
It was the summer of 2019. Sheel Mehta (Sheel) was on her first day of internship at Larsen &
Toubro (L&T) Construction. She had just come to know of her assignment and it left her with
mixed feelings of joy, curiosity, and anxiety. Even before her communication with her assigned
mentor at L&T, Sheel had come prepared, having studied the different job positions that the
company offered. In April 2018, the company had put in place a new performance appraisal
system and Sheel was given the strategic assignment of proposing improvements in it. She knew
she would have to study the existing performance appraisal process and the previous one
thoroughly before proposing any suggestions or recommendations. Sheel had butterflies in her
stomach, but she soon composed herself to focus on the task at hand. As she began, she was beset
with doubts and questions. At one point, she even considered asking her mentor for help, but she
soon decided against it as she did not want to lose the chance of impressing her mentor.

ABOUT L&T

L&T was one of the largest multinational firms and a leading construction company. The company
was founded in 1938 in Mumbai, India, as a representative of Danish manufacturers of dairy
equipment. The company grew rapidly over the years and expanded globally into more than 25
countries in Asia, Africa, North America, Oceania, and Europe. In terms of total income, L&T
grew from Rs.1 1019.75 billion in March 2016 to Rs. 1410.07 billion in March 2019. The net profit
nearly doubled from Rs.55.34 billion in March 2016 to Rs. 102.37 billion in March 2019 (See
Exhibit I).
L&T’s employees were central to its activities. The company said that it believed in delivering
value to its customers and was proud of its employees’ achievements. L&T used to give its
employees the credit for its growth and prospects. According to Group Chairman AM Naik, L&T
“believes that people are the basic building blocks of a business organisation, and places
unrelenting emphasis on nurturing, retaining and developing talent at all levels of management.”2
L&T believed in providing equal career opportunities to all and maintained the remuneration of
men to women ratio at 1:1. It was known for following legal procedures. For example, it had a
redressal system in its ‘Protection of Women’s Rights at Workplace Policy’. Similarly, training
and skill development was an important part of the company’s employee development efforts.
Employees were trained in new skills of emerging fields. L&T conducted a leadership
development program in collaboration with top business schools across the globe. Effective
implementation of policies was ensured by its Industrial Relations, Human Resource, and
Environmental Health & Safety (EHS) managers. Regional committees were in place to deal with
cases of sexual harassment at work, if any.

1
Rs. (symbol for Indian rupees or INR) is the currency of India. As of 2019, US$1 was approximately
equal to Rs.70.
2
L&T 74th Annual Report 2018-2019

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L&T believed in meritocracy. In accordance with its ‘Corporate Human Resource Policy’, it had
put in place a robust framework of people management. The company also believed in motivating
its employees with training and performance rewards (monetary and non-monetary). In its
Sustainability Report, the company wrote; “All the permanent employees go through an annual
structured performance review and career development review, and we strive to make it
transparent and engaging. This culminates in the annual compensation appraisal and insights
from this review form the foundation of our annual training calendar.”3
According to its 2018 Annual report, L&T had over 42,000 permanent employees, of whom 5.29%
were women. The company employed 260,000 people on contract basis. At L&T, after reaching a
certain grade in the managerial cadre, the employee was evaluated for the Covenancy cadre,
wherein the company entered into a three-year contract with that employee if he/she was found
suitable. This contract was renewed periodically after performance appraisal and medical tests.
The Residential Buildings and Factories Division of L&T Construction, Mumbai, had over 1,000
employees. Sheel conducted a survey of these employees to learn more about the performance
appraisal system at the company. Of these employees, 60% belonged to the non-covenanted
category and the remaining 40% to the covenanted category.

PERFORMANCE APPRAISAL AT L&T

The performance appraisal processes at L&T Construction were called FAIR – an acronym for
‘Framework for linking Appraisal with Incentives and Rewards’. According to the company’s
guidelines, the performance appraisal before April 2018 required the employees to discuss their
key value drivers (KVDs) with their supervisors and to seek help from them in finalizing the
KVDs. It was necessary for the supervisors to incorporate the KVDs for the year in the company
portal for staff members in Tier-I, II, & III to enable formalization of the KVDs and to also to
track, monitor, and support the achievement of the KVDs of their subordinates.
From the year 2018 to 2019, the company had emphasized the important factors to be taken into
account while finalizing the value drivers. As of 2019, setting up of individual performance
goals/objectives aligned to the organization’s objectives were the foundation for the new
performance measurement system to ensure objectivity in the appraisal process. This and various
other factors were believed to ensure fairness in the performance ranking.
The Enterprise Information Portal (EIP) was the dashboard all the employees at L&T used for
various purposes such as making leave requests, knowledge management, etc. It was also used for
the purpose of performance appraisal. Before the new performance appraisal system came into
force in April 2019, the system was different for covenanted and non-covenanted employees (See
Exhibits II and III).
Where covenanted employees were concerned, they were expected to set their KVDs in April. In
all, they had to set KVDs of 100% weightage. After the completion of every task, the employees
were supposed to update the EIP with the information. Later on, the Immediate Supervisor (IS)
would review the KVDs and approve them. Only after the KVDs were approved was the employee
eligible for the Mid-Term Review. Later, in September, the employee had to fill in a Mid-Term
Review form with details about his/her progress. The IS then reviewed the form and the progress
of the employee in the EIP and wrote his/her comments about these. However, this feedback could
not be viewed by the employee. During the final review, carried out in March of the subsequent
year, the employee had to fill in a Final Review Form consisting of his/her performance and
updates on the goals achieved. The IS then reviewed these and gave feedback about the employee
on the basis of these, along with his or her own observations about the employee. After the
approval of the IS, the Next Supervisor (NS) viewed the progress of the employee throughout the

3
http://sustainabilityreport.larsentoubro.com/PeoplePerformance.asp

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year and approved the final review for further processing. After the approval of the NS, the next
stage was approval by the Direct Head (DH), following which the evaluation of the employee’s
performance was discussed in the Moderate group at the headquarters. Changes in rating, if any,
were made there. Later, the core committee led by the group HR head reviewed the evaluation and
finalized the decision. These decisions included promotion, termination, appraisal, and transfer.
After the core committee’s decision, the employee received the renewal papers which included
his/her renewed salary, renewed contract period, and details about changes, if any, made to his/her
contract.
In case of non-covenanted employees, the initial level was called ‘Self-Review’. This took place at
the end of the financial year. Under this process, the employees were expected to review their own
performance in the EIP based on qualitative as well as the quantitative aspects. The employees
rated themselves based on how well they thought they had performed in terms of how much work
they had done throughout the year and how well the work had been done. After the self-review, the
next level was review by the IS. At this level, the IS rated the employee based on his/her
performance against parameters set in the EIP. The IS was also supposed to rate the employee
based on the employee’s rating of himself/herself. The IS was supposed to see whether the
employee’s review about himself/herself was in line with what the IS had observed and take a
rational decision. After this, the process would move forward to a review by the NS. The NS
would review the performance of the employee in the EIP and would approve the rating given by
the IS for moving further along the process. Next, the Direct Head (DH) reviewed and approved
the rating in the EIP. Based on the rating, important decisions such as promotion, termination,
transfer, etc. would be taken. Later, the evaluation of the employee’s performance would be
discussed in the moderate group. Changes in the rating, if any, were made here. Post discussing in
the moderate group, the core committee reviewed the evaluation and finalized the decision. The
employees then received their renewal papers which included their renewed salary, renewed
contract periods, and details about changes, if any, made to their contracts.
Sheel observed that not all employees had a Next Supervisor (NS).

NEW PERFORMANCE APPRAISAL SYSTEM

From April 2018, the Performance Management System (PMS) at L&T was no longer conducted
using the traditional EIP method. A new PMS was introduced which was the same for all the
employees irrespective of their cadre. According to the company, this was done to rule out bias
and to give all employees fair and equal opportunities for performance review. The PMS used
‘Myzone’, an app of SAP Successfactor 4. Myzone was specifically designed for the purpose of
PMS and had several levels.
To begin with, the employees were supposed to set their goals in Myzone after having discussed
them with their IS. All the goals held certain weightage and they were supposed to be SMART. In
other words, the goals were supposed to be:
 Specific
 Measurable
 Achievable
 Relevant
 Time-bound

4
SAP SuccessFactors is an American multinational company that provided cloud-based software for
human capital management using the Software as a service model.

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Only if the set goals fulfilled these criteria was the goal setting process said to be complete. The IS
approved the goals on Myzone and the employees then started working toward achieving these
goals. The Mid-Term Review took place in September. The employees had to fill in a Mid-term
Review Form with details about their progress against the goals. The IS then reviewed the
performance of the employees and gave feedback in Myzone. The new system allowed the
employees to read the feedback given by their IS and work on improving their performance.
The final review, which took place in March, required the employees to fill a final review form
with all the details of their progress, performance, and status of the achieved goals. The IS then
reviewed this and provided feedback based on his/her own observations.
After the IS’s review, the evaluation of the employee’s performance was discussed in the moderate
group. Changes in the rating, if any, were made here. Later, the core committee reviewed the
evaluation and finalized the decision, and the employees received their renewal papers.

SHEEL’S PREDICAMENT

Sheel had just one week to go before she had to submit her report to her company mentor. She felt
she had learnt a lot about the performance management process since she had started working on
the assignment. While doing her assignment, Sheel also observed that L&T used the bell curve to
assess the performance of its employees. She had been studying other commonly used assessment
tools such as 9 Box Grid and Power Law Curve (See Exhibit IV). Sheel knew that it was inevitable
that her mentor would ask her whether the new performance system was an improvement over the
previous system and in what way. She would also be expecting recommendations from Sheel
about how to improve the new performance system. “Am I ready with all the answers?” Sheel
wondered aloud.

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 Exhibit I:
Key Financials of Larsen & Toubro (2016-2019)
(in Rs. Billions) Mar ‘19 Mar ‘18 Mar ‘17 Mar ‘16
Net Sales/Income from operations 1410.07 1196.83 1100.11 1019.75
Total Income From Operations 1410.07 1196.83 1100.11 1019.75
Consumption of Raw Materials 480.62 394.34 164.11 155.64
Purchase of Traded Goods 18.00 13.57 16.10 13.33
Increase/Decrease in Stocks -8.67 -12.30 0.84 -5.14
Employees Cost 181.00 152.92 138.53 133.30
Depreciation 20.84 19.28 23.69 17.86
Admin. And Selling Expenses 73.00 76.92 70.44 57.72
Other Expenses 502.86 375.44 545.71 510.59
P/L Before Other Inc., Int., Excpt.
142.40 176.62 140.66 136.43
Items & Tax
Other Income 18.51 14.12 14.01 904
P/L Before Int., Excpt. Items & Tax 160.92 190.74 154.67 145.47
Interest 18.06 75.58 67.01 66.22
P/L Before Exceptional Items & Tax 142.86 115.16 87.65 79.25
Exceptional Items 2.94 1.23 1.21 0.94
P/L Before Tax 145.80 116.39 88.87 80.19
Tax 43.43 31.98 20.06 24.84
Net Profit/(Loss) For the Period 102.37 84.40 68.80 55.34
Adapted from https://www.moneycontrol.com/financials/larsen/results/consolidated-yearly/LT

Exhibit II:
Covenanted Employees
Cadre Designation
M1-A Assistant Manager
M1-B Manager
M1-C Manager
M2-A Sr. Manager
M2-B Sr. Manager/ Project Head/Cluster EHS Manager
M2-C DGM
M3-A DGM/ Chief Engineering Manager/ Project Manager/Head
M3-B Sr. DGM/ Chief Project Manager/Head
M3-C Cluster Project Manager/ Cluster Quality Manager/ Head
M4-A Head/ General Manager
M4-B Head
Source: Company

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 Exhibit III:
Non-covenanted Employees
Cadre Designation
CA-1 Chartered Accountant
CMA Cost Management Accountant Contract
DET Diploma Engineer Trainee
GET Graduate Engineer Trainee
O-1 Sr. Engineer/ Executive
O-2 Assistant Manager
S-1 Engineer/ Supervisor
S-2 Engineer/ Assistant Officer
PGET Post Graduate Engineer Trainee
TC-2 Junior Chargehand
TC-3 Junior Chargehand
TC-4 Assistant Chargehand
TC-5 Chargehand
TC-6 Sr. Chargehand
TC-7 Foreman/ Draughtsperson
TC-8 General Foreman
TC-9 General Foreman
TC-10 General Foreman
Source: Company

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 Exhibit IV:
Some Performance Assessment Tools
Sheel looked at the bell curve performance appraisal as well as the 9 Box Grid, and Power Law
Curve. She researched each of these and came up with the details as mentioned in the
subsequent paragraphs.
Bell Curve Performance Appraisal
The Bell curve performance appraisal system was used at L&T for mapping the performance of
its employees. The bell curve was used when an organization wished to link the employee’s
performance with the reward. Here, the performance of the employees decided their ranking.
The employees were split into three categories: low performer, average performer, and top
performer. The bell curve not only served as a systematic method to identify star performers and
link their performance with a suitable reward, but it also helped the HR department to recognize
the low performers and train them to enhance their performances.
It was very important to correctly recognize a star performer so that they could be motivated to
achieve the organizational goal. Despite that, there were occasions when due to an error in the
performance appraisal system, an employee was identified as a star performer in spite of not
being one. The bell curve worked on the assumption that only a few employees could perform
extraordinarily to qualify as a star performer and that the performance of only a limited number
of people exceeded the expectations of the organization. The bell curve also helped in deciding
on layoffs by identifying the weaker employees. Besides, it assisted in taking rational decisions.
Since there were fixed categories for employees, it made their ranking easy. The bell curve
made it easy to decide who the top/ bottom performers were. It helped to keep the performance
levels of the employees ‘in check’.
Efforts had be made to let the employees know what was expected of them once they were
categorized as low, average, or top performers. When the employees were ranked based on the
various activities carried out by them, the bell curve’s ranking was used by aggregating the
numbers. It helped the HR to gain insights into the areas in which the employees lagged and
what could be done for improving their performance. In the bell curve method, the performance
appraisal scores were generated after plotting the performance scores on a bell-shaped graph.
Generally, employees’ scores were distributed under various levels of performance, such as:
 Top 20% – Top performers
 Middle 70% - Average performers
 Bottom 10% – Low performers
Employees who fell in the top 20% category, were rewarded with a bonus to keep them
motivated. These employees were considered for leadership roles in the organization.
Employees in the middle category usually received monetary rewards which motivated them to
perform well. Employees in the bottom category either did not receive any rewards or received
minimal rewards. An action plan was usually designed for improving their performance. If their
performance was very poor, the company showed such employees the door.
9 Box Grid
The 9 box grid helps in evaluating an employee’s past performance with respect to his current
and future potential. The columns refer to the potential growth of the individual and the rows
refer to the performance of the individual. The point where these two meet helps in determining
the current position of the employee in the organization and in identifying the areas in which
he/she requires training.
Contd…

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 Contd…

High Underperformer
Most likely to get
with high Efficient worker
promoted
potential

Too good for the

Underperformer Moderately
Potential organization.
who is assigned a efficient. Requires
Needs difficult
wrong role training
targets

Average level Overperformer

Underperformer
employee with no
who is most likely who is satisfied
motivation to
to get fired
move forward with who they are
Low

High
Performance

This matrix consists of various areas determining the employee’s performance and their potential.
Each employee is placed in a box on the basis of their potential and performance. One of the
complexities here is to figure out how an employee would progress from one box to another. The
progress could take place horizontally or vertically based on the individual. On the bright side, this
grid helps the organization to identify the quality of its employees. For example, the more the number
of employees on the left side of the grid, the more the need for training these employees. Or, the more
the number of employees in the bottom of the grid, the more will be the need for improving staff
engagement.

Power Law Curve

Power law curve or the Pareto law refers to a significantly small number of employees
contributing to a large amount of output. The 80/20 rule states that 80% of output comes from 20%
of employees. While using forced ranking distribution under the bell curve, good performers are
often underestimated and poor performers are overestimated.