Performance Reviews

This resource is performance reviews.  This resource is to help small businesses develop and apply effective ways to retain, reclaim and maintain talented individuals.  In addition, this discussion will help you understand the importance of performance reviews and how they are used to determine the worth of your employees for the business.

The sub-topics of performance reviews that will be discussed are a) purposes b) methods, c) methods: pros and cons d) frequency, e) link to compensation.  Overall, the performance review process will help you lead with the strengths and cope with the weaknesses of your staff and organization.

Purposes of Performance Reviews

The purposes of performance reviews are to tackle staff evaluation and feedback.  In the evaluation stage, the goal is to determine whether or not shortfalls exist between company standards for a role and particular individual performance. Essentially, the company is deciding, based on the performance review, if training needs to be built-in to narrow the performance gap.  Sequential to the evaluation stage, the aim of the feedback stage is to inform the individual of his/her performance. Also, it is likely the appraiser will receive feedback from the individual about job problems. Therefore, one of the best ways to appreciate the purposes of performance appraisal is to look at is from the different viewpoints of the main stakeholders: the employee and the organization.

Overall, this process allows the company to obtain, analyze and record information so they can steer an individual’s career development and strengthen company objectives.  This can only be achieved if the targets of feedback and encouragement are fulfilled.

Methods for Performance Review

Rating Scales

The rating scale method offers a high degree of structure for appraisals. Each employee trait or characteristic is rated on a bipolar scale that usually has several points ranging from "poor" to "excellent" (or some similar arrangement) with an even number of options. The traits assessed on these scales include employee attributes such as cooperation, communications ability, initiative, punctuality and technical (work skills) competence. The nature and scope of the traits selected for inclusion is limited only by the imagination of the scale's designer, or by the organization's need to know.  The major provision in selecting traits is that they should be relevant to the appraisee's actual tasks day to day. Specific traits selected by some organizations have been unwise and have resulted in legal action on the grounds of discrimination.

Essay

In the essay method, the appraiser prepares a written statement about the employee being reviewed.  The statement usually concentrates on describing specific strengths and weaknesses in job performance. It also suggests courses of action to remedy the identified problem areas.  The statement may be written and edited by the appraiser alone, or it be composed in collaboration with other colleagues or even the appraisee.

Management by Objectives (MBO)

The use of management objectives was first widely advocated in the 1950s by the noted management theorist, Peter Drucker.  MBO (management by objectives) methods of performance appraisal are results-oriented. That is, they seek to measure employee performance by examining the extent to which predetermined work objectives have been met.  Usually the objectives are established jointly by the supervisor and subordinate. An example of an objective for a sales manager might be: Increase the gross monthly sales volume to $250,000 by 30 June. Once an objective is agreed, the employee is usually expected to self-audit; that is, to identify the skills needed to achieve the objective. Typically they do not rely on others to locate and specify their strengths and weaknesses. They are expected to monitor their own development and progress.

Methods: Pros and Cons

Rating Scales Advantages

The greatest advantage of rating scales is that they are structured and standardized. This allows ratings to be easily compared and contrasted - even for entire workforces.  Each employee is subjected to the same basic appraisal process and rating criteria, with the same range of responses. This encourages equality in treatment for all appraisees and imposes standard measures of performance across all parts of the organization.  Rating scale methods are easy to use and understand. The concept of the rating scale makes obvious sense; both appraisers and appraisees have an intuitive appreciation for the simple and efficient logic of the bipolar scale. The result is widespread acceptance and popularity for this approach.

Rating Scales Disadvantages

Trait Relevance:  Are the selected rating-scale traits clearly relevant to the jobs of all the appraisees? It is inevitable that with a standardized and fixed system of appraisal that certain traits will have a greater relevance in some jobs than in others.  For example, the trait "initiative" might not be very important in a job that is tightly defined and rigidly structured. In such cases, a low appraisal rating for initiative may not mean that an employee lacks initiative. Rather, it may reflect that fact that an employee has few opportunities to use and display that particular trait. The relevance of rating scales is therefore said to be context-sensitive. Job and workplace circumstances must be taken into account.

Systemic Disadvantage: Rating scales, and the traits they purport to measure, generally attempt to encapsulate all the relevant indicators of employee performance. There is an assumption that all the true and best indicators of performance are included, and all false and irrelevant indicators are excluded.

This is an assumption very difficult to prove in practice. It is possible that an employee's performance may depend on factors that have not been included in the selected traits. Such employees may end up with ratings that do not truly or fairly reflect their effort or value to the organization. Employees in this class are systemically disadvantaged by the rating scale method. The “Likert-style” instrument requires a selection by the reviewer on an ordinal scale.  While the numbers should not be averaged, this is often done and can show the overall direction of the assessment. A magnitude scaling approach can overcome this problem.

Essay Advantages

The essay method is far less structured and confining than the rating scale method. It permits the appraiser to examine almost any relevant issue or attribute of performance. This contrasts sharply with methods where the appraisal criteria are rigidly defined.

Appraisers may place whatever degree of emphasis on issues or attributes that they feel appropriate. Thus the process is open-ended and very flexible. The appraiser is not locked into an appraisal system the limits expression or assumes that employee traits can be neatly dissected and scaled.

Essay Disadvantages 

Essay methods are time-consuming and difficult to administer. Appraisers often find the essay technique more demanding than methods such as rating scales.  The techniques greatest advantage - freedom of expression - is also its greatest handicap. The varying writing skills of appraisers can upset and distort the whole process. The process is subjective and, in consequence, it is difficult to compare and contrast the results of individuals or to draw any broad conclusions about organizational needs.

Managing by Objectives (MBO) Advantages

The MBO approach overcomes some of the problems that arise as a result of assuming that the employee traits needed for job success can be reliably identified and measured.  Instead of assuming traits, the MBO method concentrates on actual outcomes. If the employee meets or exceeds the set objectives, then he or she has demonstrated an acceptable level of job performance. Employees are judged according to real outcomes, and not on their potential for success, or on someone's subjective opinion of their abilities.  The guiding principle of the MBO approach is that direct results can be observed, whereas the traits and attributes of employees (which may or may not contribute to performance) must be guessed at or inferred. The MBO method recognizes the fact that it is difficult to neatly dissect all the complex and varied elements that go to make up employee performance.  MBO advocates claim that the performance of employees cannot be broken up into so many constituent parts - as one might take apart an engine to study it. But put all the parts together and the performance may be directly observed and measured.

Managing by Objectives (MBO) Disadvantages

MBO methods of performance appraisal can give employees a satisfying sense of autonomy and achievement. But on the downside, they can lead to unrealistic expectations about what can and cannot be reasonably accomplished. Supervisors and subordinates must have very good "reality checking" skills to use MBO appraisal methods. They will need these skills during the initial stage of objective setting, and for the purposes of self-auditing and self-monitoring. Unfortunately, research studies have shown repeatedly that human beings tend to lack the skills needed to do their own "reality checking". Nor are these skills easily conveyed by training. Reality itself is an intensely personal experience, prone to all forms of perceptual bias.  One of the strengths of the MBO method is the clarity of purpose that flows from a set of well-articulated objectives. But this can be a source of weakness also. It has become very apparent that the modern organization must be flexible to survive. Objectives, by their very nature, tend to impose certain rigidity.  Of course, the obvious answer is to make the objectives more fluid and yielding. But the penalty for fluidity is loss of clarity. Variable objectives may cause employee confusion. It is also possible that fluid objectives may be distorted to disguise or justify failures in performance.

Frequency of Performance Reviews

Performance reviews should be ongoing but done formally twice a year to be most effective. Regular reviews make everyone more comfortable with the process. Seasonal reviews change the focus from an annual salary review to an organized way of providing regular feedback, and a chance to let employees know that their contributions are making a difference.  Reviews are especially important to help with changes in job tasks and responsibilities. It's a good opportunity to talk about new job demands and assess training needs. Always begin the review with the positive, and then move on to areas that need improvement. Create written, measurable goals with your employees. Use the acronym, SMARTS (Specific, Measureable, Agreed-upon, Realistic, Timed, Steps.) Invite them to help chart their own journey to success.  End on a positive note as well. Remember, consistent and constructive communication is the foundation of a successful, rewarding employer-employee relationship.

Linking Performance to Compensation

Although performance related pay has always been a topic of discussions and controversies with many arguments against it, it has also been proved that performance based pay motivates employees to perform better, but also encourages learning and innovation, creativity, problem solving and empowerment which can be facilitated through proper performance measurement and reviews.  We recommended a salary based on the connection of the role to the revenue of the company and relevant to the prices for labor in the local marketplace.

Common types of performance pay methods:

• Merit pay: The first step to performance pay, merit pay means setting some basic salary according to the position and the rank of the employee and the variable part of the salary is based on the periodic performance reviews.
• Profit Sharing: Sharing the profits of the enterprise with the employees as bonus.
• Incentives and Performance Bonus: Rewards for special accomplishments or fulfillment of the targets set such as sales commission.
• Gain sharing: Sharing of gains as a result of the increased performance of the employees with them.

Articles for Further Reading

1. “Performance Appraisal Methods” http://www.humanresources.hrvinet.com/performance-appraisal-methods/
2. “How To Respond to a Bad Review” http://careerplanning.about.com/cs/performancereview/ht/bad_review.htm
3. “Get Rid of the Performance Review!” http://online.wsj.com/article/SB122426318874844933.html
4. “Is Your Performance Review System Outdated” http://www.leadersinstitute.com/teambuilding/articles/performancereview.html
5. Buckingham, Marcus. (2007). Go Put Your Strengths to Work: 6 Powerful Steps to Achieve Outstanding Performance.  New York: Free Press.
6. Lodge, Milton (1984). Magnitude Scaling: Quantitative Measurement of Opinions (Quantitative Applications in the Social Sciences Series) Beverly Hills, CA: Sage Publications.

For more information, please visit the Giersch Group at www.gierschgroup.com or contact us at prosper@gierschgroup.com.