Performance Evaluation Methods and Reward Systems

Table of Contents Introduction Performance Evaluation Performance Evaluation Methods 3 4 5

Performance Appraisal and Reward Systems 2 Reward Systems Performance Evaluation and Reward Systems Conclusion 7 9 11

Introduction In a competitive business climate, more business owners are looking at improvements in quality while reducing costs. Meanwhile, a strong economy has resulted in a tight job market. So while small businesses need to get more from their employees, their employees are looking for

Performance Appraisal and Reward Systems 3 more out of them. Employee reward and recognition programs are one method of motivating employees to change work habits and key behaviors to benefit a small business. Although these terms are often used interchangeably, reward and recognition systems should be considered separately. Employee reward systems refer to programs set up by a company to reward performance and motivate employees on individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or otherwise have a cost to the company. While previously considered the domain of large companies, small businesses have also begun employing them as a tool to lure top employees in a competitive job market as well as to increase employee performance. As noted, although employee recognition programs are often combined with reward programs they retain a different purpose altogether. Recognition programs are generally not monetary in nature though they may have a cost to the company. Sue Glasscock and Kimberly Gram in Productivity Today differentiate the terms by noting that recognition elicits a psychological benefit whereas reward indicates a financial or physical benefit. Although many elements of designing and maintaining reward and recognition systems are the same, it is useful to keep this difference in mind, especially for small business owners interested in motivating staffs while keeping costs low. A small business owner needs to separate the salary or merit pay system from the reward system. Financial rewards, especially those given on a regular basis such as bonuses, gain sharing, etc., should be tied to an employee's or a group's accomplishments and should be considered "pay at risk" in order to distance them from salary. By doing so, a manager can avoid a sense of entitlement on the part of the employee and ensure that the reward emphasizes excellence or achievement rather than basic competency. Merit pay increases, then, are not part of an employee reward system. Normally, they are an increase for inflation with additional percentages separating employees by competency. They are

Performance Appraisal and Reward Systems 4 not particularly motivating since the distinction that is usually made between a good employee and an average one is relatively small. In addition, they increase the fixed costs of a company as opposed to variable pay increases such as bonuses, which have to be "re-earned" each year. Finally, in many small businesses teamwork is a crucial element of a successful employee's job. Merit increases generally review an individual's job performance, without adequately taking into account the performance within the context of the group or business (NAI1, 2011 par.1). Employee performance evaluation methods are defined as the techniques used to judge a particular employee's work performance in order to give him/her benefits of the job. There are many things that depend on these performance evaluation methods like an employee's appraisal, performance reviews, and career development. Recording their success, failures, strengths and weakness information and then deciding their worth to the organization analyze the employee management evaluation. The productivity of a certain employee towards the work assigned to him/her is also observed in the time period given to them to prove them. Some performance evaluation methods are also used for the purpose of performance appraisals of the employee and are the same for other objectives as well. There are three main aspects that are considered while evaluating any employee and those are, quality and quantity of work done, time in which is it done and the benefit it makes to the company in terms of cost (Jadhav, 2011). Performance Evaluation Employee performance evaluation is both an evaluative process and a communication tool. Done traditionally, employee performance evaluation is universally disliked by supervisors and employees. The question on the table now is why organizations would want to ask employees to participate in either employee performance evaluation or a performance management system. Good reasons exist for advocating the basic concept of employee

Performance Appraisal and Reward Systems 5 performance evaluation. Im just not a fan of the traditional process. In some form, most organizations have an overall plan for business success. The employee performance evaluation process, including goal setting, performance measurement, regular performance feedback, employee recognition, and documentation of employee progress, ensures this success. The performance evaluation process done with care and understanding helps employees see how their jobs and expected contributions fit within the bigger picture of their organization. The more effective employee performance evaluation processes accomplish these goals and have additional benefits. Documented employee performance evaluations are communication tools that ensure the supervisor and her reporting staff members are clear about the requirements of each employees job. The employee performance evaluation also communicates the desired outcomes or outputs needed from each employees job and defines how they will be measured. While employee performance evaluation systems take many forms from organization to organization, these are the components likely to be included. Some are more effective than others. But the goals for the employee performance evaluation system, or the appraisal process, or the performance management process are similar. The differences appear in the approach and the details. And, that can make all the difference in how the system is perceived by and carried out by employees (Heathfield, 2011 par.1). Performance Evaluation Methods The main objectives of performance evaluation methods for employees is to give them a feedback for their work, record their work to give them a few organizational rewards and to provide further development opportunities for their careers. These methods of employee performance evaluation are also useful to help them improve their performance through coaching and training sessions provided by the management of the organization. No matter what field it is,

Performance Appraisal and Reward Systems 6 there are a few common assessment techniques followed by the management to improve the work experience of employees. Good communication patterns and recreation is also one of the biggest assets of an organization to help employees give better performance and increase revenue for companies. Some of the most commonly used methods are, (1) Management by Objectives Method (MBO), this is one of the best performance evaluation methods, where the managers and employees set a particular objective for employees and evaluate their performance periodically. After the goal is achieved, the employees are also rewarded according to the results. This performance appraisal method of Management by Objectives depends on accomplishing the goal rather than how it is accomplished. (2) Critical Incident Method, in this method, the manager writes down the positive and negative behavioral performance of the employees. This is done throughout the performance period and the final report is submitted as the assessment of the desired employees. This method especially helps employees in performance management and improves their quality of work. (3) Behaviorally Anchored Rating Scales (BARS), the BARS method is used to describe a rating of the employee's performance which focuses on the specific behavior as indicators of effective and ineffective performances. This method is usually a combination of two other methods like the rating scale and critical incident techniques of employee evaluation. (4) Behavioral Observation Scales Method (BOS), it is defined as the frequency rating of critical incidents that the employee has performed over a specific duration of time in the organization. It was developed because methods like graphic rating scales and behaviorally anchored rating scales (BARS) depend on vague judgments made by the supervisors about employees. (5) 360 Degree Performance Appraisal Method, the definition of this performance evaluation method is that, it is a system or process where in the employees receive some performance feedback examples, which are anonymous and confidential from co-

Performance Appraisal and Reward Systems 7 workers. This process is conducted by managers and subordinates whom through the 360 degrees, measure certain factors about the employees. These are behavior and competence, skills such as listening, planning and goal-setting, teamwork, character, and leadership effectiveness (Jadhav, 2011 par. 2). Reward Systems Every company needs a strategic reward system for employees that addresses these four areas: compensation, benefits, recognition and appreciation. The problem with reward systems in many businesses today is twofold: They're missing one or more of these elements (usually recognition and/or appreciation), and the elements that are addressed aren't properly aligned with the company's other corporate strategies. A winning system should recognize and reward two types of employee activity-performance and behavior. Performance is the easiest to address because of the direct link between the initial goals you set for your employees and the final outcomes that result. For example, you could implement an incentive plan or recognize your top salespeople for attaining periodic goals (NAI2, 2011 par.1). There are a number of different types of reward programs aimed at both individual and team performance. The first of which is variable pay or pay-for-performance is a compensation program in which a portion of a person's pay is considered "at risk." Historically, companies have utilized merit pay systems to attract, retain, and motivate employees. The goal behind merit pay was to develop a merit salary increase budget and distribute these budgeted funds equitably among employees based on a management conducted performance appraisal. Human resource professionals support this process by developing salary merit increase guidelines and objective performance measures (Hills, 1993). Variable pay is viewed as a means of aligning the interests of employees with those of employers. Pay is a powerful communicator of organizational goals and priorities and

Performance Appraisal and Reward Systems 8 companies that expect to be successful must make employees become partners in their success (Shuster & Zingheim, 1993). Research has provided supporting evidence that variable pay succeeds at motivating people. Variable pay creates a belief among employees that good performance will: 1) lead to higher pay, 2) minimize the perceived negative consequences of performing well, and 3) create conditions such that positive outcomes other than pay will be seen to be related to good performance (Lawler, 1971). Variable pay for performance is not a new concept, nor is it without its variable pay can be tied to the performance of the company, the results of a business unit, an individual's accomplishments, or any combination of these. It can take many forms, including bonus programs, stock options, and one-time awards for significant accomplishments. Some companies choose to pay their employees less than competitors but attempt to motivate and reward employees using a variable pay program instead. According to Shawn Tully in Fortune, "The test of a good pay-for-performance plan is simple: It must motivate managers to produce earnings growth that far exceeds the extra cost of [the program]. Though employees should be made to stretch, the goals must be within reach." There is Bonus programs have been used in American business for some time. They usually reward individual accomplishment and are frequently used in sales organizations to encourage salespersons to generate additional business or higher profits. They can also be used, however, to recognize group accomplishments. Indeed, increasing numbers of businesses have switched from individual bonus programs to one which reward contributions to corporate performance at group, departmental, or company-wide levels. According to some experts, small businesses interested in long-term benefits should probably consider another type of reward. Bonuses are generally shortterm motivators. By rewarding an employee's performance for the previous year, say critics, they encourage a short-term perspective rather than future-oriented accomplishments. In addition,

Performance Appraisal and Reward Systems 9 these programs need to be carefully structured to ensure they are rewarding accomplishments above and beyond an individual or group's basic functions. Otherwise, they run the risk of being perceived as entitlements or regular merit pay, rather than a reward for outstanding work. Proponents, however, contend that bonuses are a perfectly legitimate means of rewarding outstanding performance, and they argue that such compensation can actually be a powerful tool to encourage future top-level efforts. The next is Profit-sharing, which refers to the strategy of creating a pool of monies to be disbursed to employees by taking a stated percentage of a company's profits. The amount given to an employee is usually equal to a percentage of the employee's salary and is disbursed after a business closes its books for the year. The benefits can be provided either in actual cash or via contributions to employee's 401(k) plans. A benefit for a company offering this type of reward is that it can keep fixed costs low. Many organizations offer stock options, previously the territory of upper management and large companies, stock options have become an increasingly popular method in recent years of rewarding middle management and other employees in both mature companies and start-ups. Employee stockoption programs give employees the right to buy a specified number of a company's shares at a fixed price for a specified period of time (usually around ten years). They are generally authorized by a company's board of directors and approved by its shareholders. As more small businesses use team structures to reach their goals, many entrepreneurs look for ways to reward cooperation between departments and individuals. Bonuses, profit sharing, and stock options can all be used to reward team and group accomplishments. An entrepreneur can choose to reward individual or group contributions or a combination of the two. Group-based reward systems are based on a measurement of team performance, with individual rewards received on the basis of this performance. While these systems encourage individual efforts toward common business

Performance Appraisal and Reward Systems 10 goals, they also tend to reward underperforming employees along with average and aboveaverage employees. Both reward and recognition programs have their place in small business. Small business owners should first determine desired employee behaviors, skills, and accomplishments that will support their business goals. By rewarding and recognizing outstanding performance, entrepreneurs will have an edge in a competitive corporate climate (NAI1, 2011 p.1). Performance Evaluation and Reward Systems Employee recognition programs can boost the morale of employees and positively change the health of a organization. By instituting performance appraisal and reward systems, an employer lets its workers know that their hard work pays off and is appreciated. Performance appraisals and rewards are designed to show recognition to employees. Those who exemplify outstanding abilities in the workplace are celebrated through an appraisal and reward system. Managers may offer employee praise in a one-on-one setting, such as a performance evaluation, or in a group setting among peers. Archer North, a company that designs and develops employee performance appraisal and corporate evaluation systems, says that social recognition is powerful and is an effective forum for showing value in employees. Besides verbal appreciation, employers can show their gratitude by furnishing employees with tokens of appreciation, or rewards. These may be in the form of award trophies, framed certificates, special parking spaces, gift cards, pens or a free day off. According to Archer North, when employers praise their employees performance it is almost always a beneficial and positive experience for both the manager and the employee. Appraisal enhances motivation, keeps employees goal-oriented and morale high. With high morale and a feeling of worth, employees will want to exceed in the workplace (Sheahan, 2011 par. 1).

Performance Appraisal and Reward Systems 11 Conclusion The role of performance appraisal and reward systems in enhancing employee performance is discussed. A model is presented which argues that feedback is a powerful instrument in performance enhancement. Performance appraisal should provide a clear and realistic indication of the work that must be accomplished, performance expectations, and feedback on performance against expectations. The key dimensions that must be taken into account when designing such a system are outlined (Gomez-Meja, 1990 par. 1). In todays especially difficult economic climate, finding unique, clever ways to motivate employees to prevent turnover can be a challenge. Instituting a system of rewards is a smart option, as is integrating performance management and performance standards into the strategic planning and each individual job description and employee performance evaluation. Salary is still a prime motivator for most employees, practically speaking. But it is not the sole motivator. When is a reward warranted? It should not be simply because employees are showing up and doing their jobs. That is why they were hired. At what point does their work go over and above established measures? Document expectations and develop standards for the issuance of rewards. Typically, accomplishing a project on time, raising productivity, lowering costs, lowering inventory, and using cost saving measures are results that qualify for the receipt of a reward. Guidelines will vary from position to position, department to department, and company to company. Be clear with employees about the reward system so there are no misunderstandings or failed expectations. Receive buy-in and understanding from those potentially receiving the rewards, as well as those disseminating them. Thinking creatively and outside the traditional box can help your company develop a system of non-monetary rewards that help motivate employees and thank them for their efforts. If feasible, time off in the form of an hour, a few hours or an

Performance Appraisal and Reward Systems 12 entire day can be issued as rewards. Some other examples are low-cost discounts and tickets to restaurants, parks, museums, and gas cards, or extremely low cost awards certificates for major or minor accomplishments. Awards, ceremonies, and gatherings where employees are thanked publicly are typical methods of recognition used. Be certain to honor special actions or activities and be specific as to the nature of the recognition, or other employees could feel offended (NAI3, 2011 par.1).

References NAI1 (2011) Employee Reward and Recognition Systems retrieved from http://www.enotes.com/small-business-encyclopedia/employee-reward-recognition-systems NAI, 2011 The Best Ways to Reward Employees retrieved from http://www.entrepreneur.com/article/75340

Performance Appraisal and Reward Systems 13 NAI3, 2011 Reward Systems and Measurement retrieved from http://www.mrdashboard.com/RewardsSystem.html Heathfield, Susan H. (2011) Employee Evaluation- Why Organizations Do Employee Performance Evaluations retrieved from http://humanresources.about.com/od/performancemanagement/qt/employee_evaluation.htm Jadhav, Adparna (2011) Performance Evaluation Methods retrieved from http://www.buzzle.com/articles/performance-evaluation-methods.html Lawler, Edward E. (1971). Pay and Organizational Effectiveness: A Psychological View. New York: McGraw-Hill. Schuster, J. R. and Zingheim, P.K. (March-April, 1993). The New Variable Pay: Key Design Issues, Compensation and Benefits Review. 27-34. Hill, R. B. (May, 1993). A Two-component Approach to Compensation, Personnel Journal. 154-161. Sheahan, Kyra (2011) Performance Appraisal and Reward System retrieved from http://www.ehow.com/facts_6855672_performance-appraisal-reward-system.html Luis R. Gomez-Mejia, (1990) "Increasing Productivity: Performance Appraisal and Reward Systems", Personnel Review, Vol. 19 Iss: 2, pp.21 - 26