Chapter - 4

Performance Management
 Performance Management System
A performance management system is defined as “proactive
system of managing employee performance for driving individuals
and organizations towards desired performance and results”.

It involves defining what effective performance looks like and includes the
development and use of tools and procedures necessary to measure
performance.

A successful performance management program helps an employer retain

talented employees, keep them engaged, enhance employee learning, build
a winning corporate culture and be a successful company.
 Organization’s long term success in meeting its strategic objectives
depends on effective employee performance management & its consistency
with organization’s needs.

Performance Evaluation / Performance Appraisal /

Performance Measurement is becoming critical strategic issue than in
the past.

An effective Performance Management System needs to be understood &

accepted by the organization’s employees & must provide them with

meaningful information.

It should be designed to fit with the organization’s strategic objectives &

with organization’s culture.

 Due to Flatter organization structure & broader job assignments,

Performance feedback taking a critical role than in the past.

Organizations can’t afford unproductive / incompetent employees.

 Performance
Review

Performance
Management

Goal Setting Performance

& Planning Planning
Objectives of PM –
To enable the employees towards achievement of superior standards of work
performance.

To help the employees in identifying the knowledge and skills required for
performing the job efficiently as this would drive their focus towards
performing the right task in the right way.

Boosting the performance of the employees by encouraging employee

empowerment, motivation and implementation of an effective reward
mechanism.
Objectives of PM –
To provide transparent performance feedback to the employees.

Identifying the barriers to effective performance and resolving those

barriers through constant monitoring, coaching and development
interventions.

Creating a basis for several administrative decisions strategic planning,

succession planning, promotions and performance based payment.

Promoting personal growth and advancement in the career of the employees

by helping them in acquiring the desired knowledge and skills.
 Performance Management
1. Develop/Review
Position Description

9. Merit Rewards 2. Establish Performance

Process Expectations

The
8. Discuss Possible 3. Identify Tools and
Professional Development
Plan
Performance Training Needed

Management
Process
4. Ongoing Feedback and
7. Formal Performance
Communication
Evaluation (no surprises!)

6. Adjust Assignments as 5. Handle Issues as

Needed they Arise.
Performance Management System
 Performance Management System
The Components of an Effective PM process:

Defining the employee’s goals and work efforts

Assign specific goals

Assign measurable goals

Assign challenging but achievable goals

Encourage participation
 Advantages of Performance Management

For Employees -

Clarify definitions of
job
success criteria
Increase motivation to perform

Increase self-esteem

Enhance self-insight and development

 Advantages of Performance Management

For Managers –

Communicate supervisors’ views of performance more clearly.

Managers gain insight about subordinates.

Better and more timely differentiation between good and poor

performers.

Employees become more competent.

 Advantages of Performance Management

For HR Department / Organization –

Clarify organizational goals

Facilitate organizational change

Fairer, more appropriate administrative actions

Better protection from lawsuits

Performance Appraisal -
.
Performance appraisal is evaluating an employee’s current and /
past performance relative to his or her performance standards.

According to Flippo “performance appraisal is the systematic,

periodic and an impartial rating of an employee’s
excellence in matters pertaining to his present job and
his potential for a better job” .

PA is a process of obtaining, analyzing and recording information about the

relative worth of an employee.

14
Performance Appraisal -
.
Appraisal play an integral part in employer’s performance management
process.
Helps to develop a plan for correcting any deficiencies the appraisal might
have unearthed.
Appraisals serve as a useful career planning purpose by providing the
opportunity to review the employee’s career plans in light of his or her
exhibited strengths and weaknesses.
The appraisal always effects the employer’s salary raise and promotional
decisions.

15
Objectives of Performance Appraisal -
.
To provide feedback to employees so that they come to know where they stand
and can improve their job performance.

To provide a valid database for personnel decisions concerning placements, pay,

promotion, transfer etc.

To diagnose the strengths and weaknesses of individuals so as to identify further

training needs.

To provide coaching, counseling, career planning and motivation to

subordinates.

To develop positive superior-subordinate relations and there by reduce

grievances. 16
Advantages of Performance Appraisal -
.
PA provides valuable information for personnel decisions such as increase

in pay, promotion, training, termination etc.

It helps to judge the effectiveness of recruitment, selection, placement and

orientation system of organization

It helps to improve performance through appropriate feedback

It facilitates human resource planning, career planning

It promotes competitive sprit to improve performance

Systematic appraisal of performance helps to develop confidence among

employees
17
Steps in Appraising performance :

Defining the job

Establishing performance standards / goals

Communicating the standards

Measuring performance

Comparing the actual with the standards

Discussing the appraisal

Taking corrective action

Traditional & Modern methods of Performance
Appraisal -

The traditional methods all focus more on the traits of an employee

than his performance.

In absence of pre-decided performance criteria or standards, the

personal bias or subjectivity or the evaluator affects on ratings.

In order to overcome these weaknesses some New / Modern techniques

of performance appraisal have been developed.
Different methods of Performance Appraisal
Traditional methods Modern methods

Confidential Report 1. Assessment centre

Free form or Essay method 2. Human Resource
Straight ranking Accounting
Paired comparisons
3. Behaviorally Anchored
Forced Distribution
Rating Scale
Graphic rating scale
4. MBO
Checklist method
5. 360 Degree appraisal
Critical incidents
Group appraisal
Field review
Individual Appraisal Multiple-person Other Appraisal
Methods Appraisal methods Methods
Confidential report Ranking Group appraisal

Paired comparison
method Human Resource
Essay evaluation
Accounting

Forced choice or
Critical incidents Assessment centre
distribution method

Graphic rating scale Field view

Behaviorally anchored
rating scale
Forced choice or
distribution method

Checklists

Management By Objectives

Alternative ranking
method

Paired comparison method

Who will Appraise?

Supervisor:

Peers / colleagues:

Subordinates:

Self- appraisal:

360 degree appraisal: Customers, Clients, Suppliers, Channel

Partners, Consultants, etc,.

Consultants / experts / rating committees

Confidential Reports -

Prepared by employee’s immediate boss, covers strength and weakness,

achievement and failure, personality and behavior of the employee.

It is excessively used in Govt. organizations, PSUs & some other

traditional industries.

It is descriptive appraisal used for promotions and transfer of employees.

It involves subjectivity as it is based on impression rather than on data.

Its credibility is very low therefore no feedback is provided to the

employee being appraisal.
Free form or Essay method -

Under this method, the evaluator writes a short essay on the employee’s
performance on the basis of over all impression.

The description is expected to be as factual and concrete as possible.

This can provide a good deal of information about employee and evaluator
can explain with the help of examples.

This method suffers from several drawbacks –

The appraisal may be loaded with flowery language.

The quality of appraisal depends on the writing ability of evaluator.

It is very time consuming.

Difficult to compare two essay appraisal.

Straight Ranking –
• Here evaluator assigns relative rank to the employees in the same work
unit doing the same job.

• Employees are ranked from the best to the poorest on the basis of
performance.

• The ‘whole person’ is compared with the other ‘whole person’ without
analyzing performance.

• Employee - A B C D E

• Rank - 2 1 5 4 3

• It is one of the oldest and simple methods, it has several weaknesses:

• It involves bias and snap Judgement
• Difficult to rank as having varying behavior pattern
• it indicate only how a person stands in relation to other in the
group but not how much better or worse.
Paired comparison Method:
For every trait, make a chart of all possible pairs of employees. Then indicate
who is the better employee of the pair (+ or - ). Then add up +s of any
employee.

• Each employee is compared with all the others in pairs one at a time.

• The number of times an employee is judged better than the others

determines his rank.

• This method is easier and simpler than ranking method but it is subjective
because appraisal is not based on specific job related performance.

• Secondly, it becomes very cumbersome when the number of employees to

be rated is large.
Forced Distribution method :
• The rater is required to distribute his rating in the form of a normal
frequency distribution as in fig.
• It is similar to grading on a curve. Firm decide on distribution.
• The purpose is to eliminate the rater’s bias or central tendency.
• This method is highly simple to understand and easy to apply.
• Secondly it helps to reduce bias involved in straight ranking and paired
compared.
• But in this method employees are placed in a certain category and not
ranked within a category.
• The method is based on same distribution of good and poor performance.
• The rater does not explain why an employee is placed in a particular
category. Specific job related criteria is not used in rating .
Forced Distribution method :
Checklist Method :
• It is list of statement that describes the characteristics and performance of
employees on the job.
• The rater checks to indicate if the behavior of an employee is positive or
negative to each statement.
• The performance of employee is rated on the basis of number of positive
checks.
• There are simple, forced choice and weighted checklists
• This method is descriptive technique and provides concrete examples of
evaluation
Drawbacks:
• Time consuming and expensive
• Difficult to assemble, analyze and weigh several statement properly
Critical Incident Method :
• In this method the supervisor keeps a written record of critical events
(good/ bad) and how different employee depends upon on his positive /
negative behaviors during these events.

• These critical incidents are identified after thorough study of the job and
discussion with the staff e.g. a fire, a sudden breakdown of machinery, a
serious accidents etc. may be identified as critical incidents for the working
of a factory

• This method helps to avoid vague impression and general remark as the
rating is based on actual records of behavior performance. The feedback
from actual events can be discussed with the employee to allow
improvements.
Management by objectives (MBO):
Involves setting measurable goals with each employee and then
periodically reviewing the progress made.
Six steps –
Set the organisation’s goals
Set departmental goals
Discuss departmental goals
Define expected results (Set individual goals)
Performance reviews
Provide feedback
MBO method require clear objectives, require more time, and
result in conflicts while setting goals
 Group Appraisal
Under this method a group of evaluators assess employees.

This group consists of the immediate supervisor of the employee,

other supervisors having close contact with the employees work,
head of the department and personnel expert.

The group determines the standard of performance for the job,

measures actual performance of an employee, analyzes the cause of
poor performance and offers suggestion for improvement in future.

The advantage of this method is that it is simple yet more thorough.

Due to multiple evaluators personal bias is minimise but it is very

time consuming process.
 Human Resource Accounting
H R is a valuable asset of any organization.

This asset can be valued in terms of money.

When competent and well trained employee leaves an organization, the

human asset of the organization get decreased.

Under this method performance is judged in terms of costs and

contributions of employees.

Costs of human resources consists of expenditure on HRP, recruitment,

selection, induction, training, compensation etc.

Contribution of HR is the money value of labour productivity or value added

by HR.

Difference between cost and contribution will be the performance of

employee
Potential Problems / Challenges in Appraisal process:

Unclear standards:

Hallo effect: When a supervisor’s rating of a subordinate on one trait

biases the rating of that person on other traits

Central tendency: Some supervisors stick to middle when filling in

rating scales

Leniency or Strictness: supervisor has a tendency to rate all

subordinates either too high or low

Personal Bias: The tendency to allow individual differences such as

age, race, and gender affect the appraisal.

Prejudice :
Essential characteristics of an Effective Appraisal
System :

Reliability and validity: Consistent, reliable and valid information.

Job relatedness: Measure job related performance.

Standardisation: of forms, procedures, techniques, standards.

Practical viability: to administer.

Legal sanction: To be within the laws of land.

Open communication: Between appraiser and appraise.

Employee access to results: Feedback to employees.

Due process: Process to address the grievances of employees.

 Key Result Areas(KRA)

Key Result Area can be described as the major areas, that requires
exceptional performance, so as to survive and obtain a competitive position
in the market.

Key Result Area can be understood as the fundamental areas of the outcome,
for which a department is accountable.

Result areas are also referred to ‘critical success factors’ or ‘key drivers
of success’.

KRA implies the metrics set by the organization for a specific role.
KRA is a strategic area where excellent performance is required in order to
outperform competitors.

Key result area (KRA) is a critical success factor either internal or external to
the organization where superior performance must be achieved for the
organization to achieve its strategic goals, and ultimately the mission and
vision.

To manage each KRA, a set of KPA / KPI are set.

 Need for KRA
Identifying KRAs helps individuals -

Clarify their roles.

Set goals and objectives.

Focus on results rather than activities.

Align their roles to the organization’s business or strategic plan.

Prioritize their activities, and therefore improve their time/work

management

Communicate their role’s purposes to others

Make value-added decisions

 Key Performance Areas(KPA)

These are the areas within the ORGANIZATION FUNCTIONS, where an

individual or group, is logically responsible / accountable for the results.

KPI is a performance metric, used by the organization to ascertain how

effectively the firm is performing.

Key performance indicator measures the success of the organization towards

goals at various levels.

KRA is qualitative in nature, in the sense that it determines the areas that can
help in attaining high value for the organization.
 Eg. of KPA & KRA
Example: 1

KRA = Recruitment / Selection

KPA 1 = Recruitment

KPA 2= Selection

Example: 2

KRA = Employee Benefits

KPA = providing all statutory benefits (ESI, PF…)

KPA = providing all other benefits provided by company.

Differentiate b/w KPA & KRA
KPA's are those broad areas where an employee is expected to perform in, e.g
Accounts Finalization, Audit, HR Recruitment, Performance Management,
Payroll etc

Once KPA's are fixed for an employee, you need to decide the KRA's. These
should ideally linked to Organizational and Departmental Goals.

You then need to arrive at KPI's or Key Performance Indicators, which will
decide with precision if the KRA is achieved or not and if not to what
extent.

Example : Position HR Excecutive

KPA – Recruitment
KRA - Ensure Selection and Recruitment of Project Team in Q I
 Potential Appraisal
Potential appraisal is concerned with identifying the potential of an
employee for future development and promotion in the
organisation.

It aimed at identifying the potential of a given employee to occupy higher

positions in the organisational hierarchy and undertake higher responsibility.

Performance Appraisal is an past performance measurement

process whereas Potential Appraisal is an future potential
forecasting process.
 Why Potential Appraisal System is needed?
It attempts to generate
- Data about employees
- Their potential for occupying higher positions from a variety of
sources and helps the top management to make decisions.

To advise employees about their overall career development and

future prospects

Help the organization to chalk out succession plans

Motivate the employees to further develop their skills and

competencies.

To identify the training needs.

Techniques of potential appraisal :

Self – appraisals

Peer appraisals

Superior appraisals

MBO

Psychological and psychometric tests

Management games like role playing

Leadership exercises etc.

 POTENTIAL ATTRIBUTES

Analytical power
Creative imagination
Sense of reality
Capability of taking holistic view from a detached position
Effective leadership
Conceptual skills
Technical skills
Commercial skill
Planning and organizing ability
Willingness to take additional responsibilities
Initiative
Result orientation
Team work and team building
Subordinate development and negotiation skills
Problem solving and decision making
Process orientation
Linkage between Potential Appraisal
with other HR Functions -

 Feedback and Counseling

 Training

 Job Rotation

 Data Storage

 Manpower Planning
Appraisal Interview & Feedback :

Post appraisal interview is an essential part of PM. Objectives are –

To let employees know where they stand.

To help employees do a better job by clarifying what is expected of them.

To plan opportunities for development and growth.

To strengthen the superior-subordinate working relationship by developing

mutual agreement of goals.

To provide an opportunity for employees to express themselves on

performance-related issues.