Milkovich/Newman: Compensation, Ninth Edition

Performance
Appraisals
Chapter 11

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 The Role of Performance Appraisals
in Compensation Decisions
 Used for several organizational decisions
– To guide allocation of merit increases
 Performance ratings are influenced by:
– Employee behaviors observed by raters
– Organization values
– Competition among departments
– Differences in status between departments
– Economic conditions

11-2
 The Role of Performance Appraisals
in Compensation Decisions (cont.)
 Employees often frustrated about the appraisal
process
– Appraisals are too subjective
– Possibility of unfair treatment by a supervisor
 Experts argue that rather than throwing out the
entire performance appraisal process, total-
quality-management principles should be
applied to improving it

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Exhibit 11.1: Common Errors
in the Appraisal Process

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Factors Related to Inaccurate Appraisals
 Guilt
 Embarrassment about giving praise
 Taking things for granted
 Not noticing good or poor performance
 The halo effect
 Dislike of confrontation
 Spending too little time on preparation of the
appraisal

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Exhibit 11.2: Ratings of Managers

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 Strategies to Better Understand and
Measure Job Performance
 Clearly define job performance
 Recognize definition of performance and its
components is expanding
 Improve appraisal formats
 Select the right raters
 Understand way raters process information and
mistakes that may be made
 Train raters to improve rating skills
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Strategy to Better Understand and
Measure Job Performance

Strategy 1:
Improve
Appraisal
Formats
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 Categories of Appraisal Formats

Ranking - Rater compares

employees against each other

Rating - Rater evaluates

Categories employees on some absolute
standard (measured on a
continuum scale)

Essay - Rater answers open-

ended questions in essay form
describing employee
performance
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 Ranking Formats
 Straight ranking

 Alternation ranking

 Paired-comparison
ranking

11-10
 Rating Formats
 Two common elements
– Raters evaluate employees on some absolute
standard
– Each standard is measured on a scale
-performance variation is described along a
continuum

11-11
 Rating Formats (cont.)
 Types of descriptors
– Adjectives
 Standard rating scale
– Behaviors
 Behaviorally anchored rating scales
– Outcomes
 Management by objectives
– Essay format

11-12
Exhibit 11.9: Usage of Performance
Evaluation Formats

11-13
 Evaluating Performance Appraisal
Formats
 What makes for a good appraisal format?
– Employee development potential
– Administrative ease
– Personnel research potential
– Cost
– Validity

11-14
Exhibit 11.10: An Evaluation of Performance
Appraisal Formats

11-15
Strategy to Better Understand and
Measure Job Performance

Strategy 2:
Select the
Right Raters

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 Select the Right Raters
 Focus on who might conduct the ratings and
which of these sources is more likely to be
accurate
– 360-degree feedback – assesses employee
performance from five points of view
 Supervisor
 Peer
 Self
 Customer
 Subordinate

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Strategy to Better Understand and
Measure Job Performance

Strategy 3:
Understand How
Raters Process
Information

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 The Rating Process
 Rater observes behavior of a ratee
 Rater encodes ratee behavior
 Rater stores information in memory
 When it is time to evaluate a ratee, rater:
– Reviews performance dimensions
– Retrieves stored observations to determine relevance
to performance dimensions
 Information is reconsidered and integrated with
other available information as rater decides on
final ratings

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Understand Why Raters Make Mistakes
Errors in rating
process

Errors in observation
Types (attention)
of
Errors in storage and
Errors recall

Errors in actual
evaluation

11-20
Strategy to Better Understand and
Measure Job Performance

Strategy 4:
Training
Raters to Rate
More
Accurately

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Training Raters to Rate More Accurately
 Rater-error training
– Goal is to reduce psychometric errors by
familiarizing raters with their existence
 Performance-dimension training
– Exposes supervisors to
performance dimensions used
 Performance-standard training
– Provides raters with a standard or
frame of reference for making appraisal

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 Ways to Improve Rater Training
Straightforward lecturing to ratees is ineffective
Individualized or small group discussions more
effective
When sessions are combined with extensive
practice and feedback, rating accuracy improves
Longer training programs are generally more
successful than shorter programs
Performance-dimension and performance-
standard training more effective than rater-error
training
Success results from efforts to reduce halo errors
and improve accuracy

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 Putting it All Together: The
Performance Evaluation Process
Need a sound basis for establishing performance
appraisal dimensions and scales associated with
each dimension
Need to involve employees in every stage of
developing performance dimensions and
building scales
Need to ensure raters are trained in use of
appraisal system and that all employees
understand how system operates

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 Putting it All Together: The
Performance Evaluation Process (cont.)
Need to ensure raters are motivated to rate
accurately
Raters should maintain a diary of employee
performance
Raters should attempt a performance diagnosis
to determine if performance problems exist

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Exhibit 11.11: Tips on Appraising Employee Performance

11-26
Exhibit 11.11: Tips on Appraising Employee
Performance (con’t)

11-27
 EEO and Performance Evaluation
Key Issues: Establishing a Performance Appraisal System
Provide specific written instructions on how to complete
1 appraisal

Incorporate clear criteria for evaluating performance -

2 Performance dimensions should be written, objective, and clear

Provide a rational foundation for personnel decisions via

3 adequately developed job descriptions

Require supervisors to provide feedback about appraisal results

4 to employees

Incorporate a review of performance ratings by higher level

5 supervisors

Consistent treatment across raters, regardless of race, color,

6 religion, sex, and national origin should be evident

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Tying Pay to Subjectively Appraised
Performance

How do we get
employees to
Central issue
involving view raises as
merit pay a reward for
performance?

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 Pay Increase Guidelines with Low
Motivational Impact
 Provide equal increases to all employees
regardless of performance

– General increase

– Cost-of-living adjustments

 Pay increases based on a preset progression

pattern based on seniority

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 Requirements to Link Pay to
Performance
Define performance
– Behaviors
– Competencies
– Traits
Specify a continuum describing different levels
from low to high on performance measure
Decide how much of a merit increase is given for
different levels of performance

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Exhibit 11.12: Performance-based
Guidelines

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 Designing Merit Guidelines
Four Questions . . .
What should the poorest performer be paid as an
1 increase?

How much should average performers be paid as an

2 increase?

3 How much should top performers be paid?

What should be the size of the percentage increase

4 differential between different levels of performance?

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Exhibit 11.14: Merit Pay Grid

11-34
 Promotional Increases as a Pay-for-
Performance Tool
 Promotion should be accompanied by a salary
increase - 8 to 12%

 Characteristics of promotional pay increases

– Size of increment is approximately double a normal
merit increase

– Represent a reward to employees for commitment

and exemplary performance

11-35