LESSON 6 – APPRAISING AND REWARDING PERFORMANCE

Performance Appraisal

Performance Appraisal is the systematic evaluation of the performance of employees and to

understand the abilities of a person for further growth and development. Performance appraisal
is generally done in systematic ways which are as follows:

 The supervisors measure the pay of employees and compare it with targets and plans.
 The supervisor analyses the factors behind work performances of employees.
 The employers are in position to guide the employees for a better performance.

Objectives of Performance Appraisal

Performance Appraisal can be done with following objectives in mind:

 To maintain records in order to determine compensation packages, wage structure,

salary raises, etc.
 To identify the strengths and weaknesses of employees to place right men on right job.
 To maintain and assess the potential present in a person for further growth and
development.
 To provide feedback to employees regarding their performance and related status.
 It serves as a basis for influencing working habits of the employees.
 To review and retain the promotional and other training programs.

Advantages of Performance Appraisal

It is said that performance appraisal is an investment for the company which can be justified by
following advantages:

 Promotion: Performance Appraisal helps the supervisors to chalk out the promotion

programs for efficient employees. In this regards, inefficient workers can be dismissed or
demoted in case.
 Compensation: Performance Appraisal helps in chalking out compensation packages
for employees. Merit rating is possible through performance appraisal. Performance
Appraisal tries to give worth to a performance. Compensation packages which include
bonus, high salary rates, extra benefits, allowances and pre-requisites are dependent on
performance appraisal. The criteria should be merit rather than seniority.
 Employees Development: The systematic procedure of performance appraisal helps
the supervisors to frame training policies and programs. It helps to analyze strengths
and weaknesses of employees so that new jobs can be designed for efficient
employees. It also helps in framing future development programs.
 Selection Validation: Performance Appraisal helps the supervisors to understand the
validity and importance of the selection procedure. The supervisors come to know the
validity and thereby the strengths and weaknesses of selection procedure. Future
changes in selection methods can be made in this regard.

“THE COUNTRY’S 1st POLYTECHNICU”

  Communication: For an organization, effective communication between employees and
employers is very important. Through performance appraisal, communication can be
sought for in the following ways:

Through performance appraisal, the employers can understand and accept skills of
subordinates.

 The subordinates can also understand and create a trust and confidence in superiors.
 It also helps in maintaining cordial and congenial labor management relationship.
 It develops the spirit of work and boosts the morale of employees.

All the above factors ensure effective communication.

 Motivation: Performance appraisal serves as a motivation tool. Through evaluating

performance of employees, a person’s efficiency can be determined if the targets are
achieved. This very well motivates a person for better job and helps him to improve his
performance in the future.

Performance Appraisal Tools and Techniques

Following are the tools used by the organizations for Performance Appraisals of their
employees.

 Ranking
 Paired Comparison
 Forced Distribution
 Confidential Report
 Essay Evaluation
 Critical Incident
 Checklists
 Graphic Rating Scale
 BARS
 Forced Choice Method
 MBO
 Field Review Technique

Performance Test

We will be discussing the important performance appraisal tools and techniques in detail.

Ranking Method

 The ranking system requires the rater to rank his subordinates on overall performance.
This consists in simply putting a man in a rank order. Under this method, the ranking of
an employee in a work group is done against that of another employee. The relative
position of each employee is tested in terms of his numerical rank. It may also be done

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 by ranking a person on his job performance against another member of the competitive
group.

Advantages of Ranking Method

 Employees are ranked according to their performance levels.

 It is easier to rank the best and the worst employee.

Limitations of Ranking Method

 The “whole man” is compared with another “whole man” in this method. In practice, it is
very difficult to compare individuals possessing various individual traits.
 This method speaks only of the position where an employee stands in his group. It does
not test anything about how much better or how much worse an employee is when
compared to another employee.
 When a large number of employees are working, ranking of individuals become a difficult
issue.
 There is no systematic procedure for ranking individuals in the organization. The ranking
system does not eliminate the possibility of snap judgements.

Forced Distribution method

 This is a ranking technique where raters are required to allocate a certain percentage of
rates to certain categories (eg: superior, above average, average) or percentiles (eg: top
10 percent, bottom 20 percent etc). Both the number of categories and percentage of
employees to be allotted to each category are a function of performance appraisal
design and format. The workers of outstanding merit may be placed at top 10 percent of
the scale, the rest may be placed as 20 % good, 40 % outstanding, 20 % fair and 10 %
fair.

Advantages of Forced Distribution

 This method tends to eliminate raters’ bias

 By forcing the distribution according to pre-determined percentages, the problem of
making use of different raters with different scales is avoided.

Limitations of Forced Distribution

 The limitation of using this method in salary administration, however, is that it may lead
low morale, low productivity and high absenteeism.
 Employees who feel that they are productive, but find themselves in lower grade (than
expected) feel frustrated and exhibit over a period of time reluctance to work.

Critical Incident techniques

 Under this method, the manager prepares lists of statements of very effective and
ineffective behavior of an employee. These critical incidents or events represent the

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 outstanding or poor behavior of employees or the job. The manager maintains logs of
each employee, whereby he periodically records critical incidents of the workers
behavior. At the end of the rating period, these recorded critical incidents are used in the
evaluation of the worker’s performance. Example of a good critical incident of a
Customer Relations Officer is: March 12 - The Officer patiently attended to a customer’s
complaint. He was very polite and prompt in attending the customers problem.

Advantages of Critical Incident techniques

 This method provides an objective basis for conducting a thorough discussion of an

employee’s performance.
 This method avoids recency bias (most recent incidents are too much emphasized)

Limitations of Critical Incident techniques

 Negative incidents may be more noticeable than positive incidents.

 The supervisors have a tendency to unload a series of complaints about the incidents
during an annual performance review session.
 It results in very close supervision which may not be liked by an employee.
 The recording of incidents may be a chore for the manager concerned, who may be too
busy or may forget to do it.

Checklists and Weighted Checklists

 In this system, a large number of statements that describe a specific job are given. Each
statement has a weight or scale value attached to it. While rating an employee the
supervisor checks all those statements that most closely describe the behavior of the
individual under assessment. The rating sheet is then scored by averaging the weights
of all the statements checked by the rater. A checklist is constructed for each job by
having persons who are quite familiar with the jobs. These statements are then
categorized by the judges and weights are assigned to the statements in accordance
with the value attached by the judges.

Advantages of Checklists and Weighted Checklists

 Most frequently used method in evaluation of the employee’s performance.

 Limitations of Checklists and Weighted Checklists
 This method is very expensive and time consuming
 Rater may be biased in distinguishing the positive and negative questions.
 It becomes difficult for the manager to assemble, analyze and weigh a number of
statements about the employee’s characteristics, contributions and behaviors.

Performance Appraisal Biases

Managers commit mistakes while evaluating employees and their performance. Biases and
judgment errors of various kinds may spoil the performance appraisal process. Bias here refers
to inaccurate distortion of a measurement. These are:

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  First Impression (primacy effect): Raters form an overall impression about the ratee
on the basis of some particular characteristics of the ratee identified by them. The
identified qualities and features may not provide adequate base for appraisal.
 Halo Effect: The individual’s performance is completely appraised on the basis of a
perceived positive quality, feature or trait. In other words, this is the tendency to rate a
man uniformly high or low in other traits if he is extra-ordinarily high or low in one
particular trait. If a worker has few absences, his supervisor might give him a high rating
in all other areas of work.
 Horn Effect: The individual’s performance is completely appraised on the basis of a
negative quality or feature perceived. This results in an overall lower rating than may be
warranted. “He is not formally dressed up in the office. He may be casual at work too!”.
 Excessive Stiffness or Lenience: Depending upon the rater’s own standards, values
and physical and mental makeup at the time of appraisal, ratees may be rated very
strictly or leniently. Some of the managers are likely to take the line of least resistance
and rate people high, whereas others, by nature, believe in the tyranny of exact
assessment, considering more particularly the drawbacks of the individual and thus
making the assessment excessively severe. The leniency error can render a system
ineffective. If everyone is to be rated high, the system has not done anything to
differentiate among the employees.
 Central Tendency: Appraisers rate all employees as average performers. That is, it is
an attitude to rate people as neither high nor low and follow the middle path. For
example, a professor, with a view to play it safe, might give a class grade near the equal
to B, regardless of the differences in individual performances.
 Personal Biases: The way a supervisor feels about each of the individuals working
under him - whether he likes or dislikes them - as a tremendous effect on the rating of
their performances. Personal Bias can stem from various sources as a result of
information obtained from colleagues, considerations of faith and thinking, social and
family background and so on.
 Spillover Effect: The present performance is evaluated much on the basis of past
performance. “The person who was a good performer in distant past is assured to be
okay at present also”.
 Recency Effect: Rating is influenced by the most recent behavior ignoring the
commonly demonstrated behaviors during the entire appraisal period.

Therefore, while appraising performances, all the above biases should be avoided.

Employee Reward and Recognition Systems

 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 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.

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REWARD VS. RECOGNITION

 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 rewards
programs they retain a different purpose altogether. They are intended to provide a
psychological—rewards a financial—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.

DIFFERENTIATING REWARDS FROM MERIT PAY AND THE PERFORMANCE APPRAISAL

 In designing a reward program, 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, profit 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 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.

DESIGNING A REWARD PROGRAM

 The keys to developing a reward program are as follows:

 Identification of company or group goals that the reward program will support

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  Identification of the desired employee performance or behaviors that will reinforce the
company's goals
 Determination of key measurements of the performance or behavior, based on the
individual or group's previous achievements
 Determination of appropriate rewards

Communication of program to employees

 In order to reap benefits such as increased productivity, the entrepreneur designing a

reward program must identify company or group goals to be reached and the behaviors
or performance that will contribute to this. While this may seem obvious, companies
frequently make the mistake of rewarding behaviors or achievements that either fail to
further business goals or actually sabotage them. If teamwork is a business goal, a
bonus system rewarding individuals who improve their productivity by themselves or at
the expense of another does not make sense. Likewise, if quality is an important issue
for an entrepreneur, the reward system that he or she designs should not emphasize
rewarding the quantity of work accomplished by a business unit.
 Properly measuring performance ensures the program pays off in terms of business
goals. Since rewards have a real cost in terms of time or money, small business owners
need to confirm that performance has actually improved before rewarding it. Often this
requires measuring something other than financial returns: reduced defects, happier
customers, more rapid deliveries, etc.
 When developing a rewards program, an entrepreneur should consider matching
rewards to the end result for the company. Perfect attendance might merit a different
reward than saving the company Php 500,000 through improved contract negotiation. It
is also important to consider rewarding both individual and group accomplishments in
order to promote both individual initiative and group cooperation and performance.
 Lastly, in order for a rewards program to be successful, the specifics need to be clearly
spelled out for every employee. Motivation depends on the individual's ability to
understand what is being asked of her. Once this has been done, reinforce the original
communication with regular meetings or memos promoting the program. Keep your
communications simple but frequent to ensure staff members are kept abreast of
changes to the system.

TYPES OF REWARD PROGRAMS

There are a number of different types of reward programs aimed at both individual and team
performance.

Variable Pay

 Variable pay or pay-for-performance is a compensation program in which a portion of a

person's pay is considered "at risk." 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

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 their employees less than competitors but attempt to motivate and reward employees
using a variable pay program instead. Good incentive pay packages provide an optimal
challenge, one that stretches employees but remains in reach. If too much is required to
reach the goal, the program will be ignored.

Bonuses

 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 short-term motivators.
By rewarding an employee's performance for the previous year, they encourage a short-
term perspective rather than future-oriented accomplishments. In addition, 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 of 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.

Profit Sharing

 Profit sharing 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.
 The idea behind profit sharing is to reward employees for their contributions to a
company's achieved profit goal. It encourages employees to stay put because it is
usually structured to reward employees who stay with the company; most profit sharing
programs require an employee to be vested in the program over a number of years
before receiving any money. Unless well managed, profit sharing may not properly
motivate individuals if all receive the share anyway. A team spirit (everyone pulling
together to achieve that profit) can counter this—especially if it arises from the
employees and is not just management propaganda.

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

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 stock-option 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. The number of options a company can award to employees is
usually equal to a certain percentage of the company's shares outstanding.
 Like profit sharing plans, stock options usually reward employees for sticking around,
serving as a long-term motivator. Once an employee has been with a company for a
certain period of time (usually around four years), he or she is fully vested in the
program. If the employee leaves the company prior to being fully vested, those options
are canceled. After an employee becomes fully vested in the program, he or she can
purchase from the company an allotted number of shares at the strike price (or the fixed
price originally agreed to). This purchase is known as "exercising" stock options. After
purchasing the stock, the employee can either retain it or sell it on the open market with
the difference in strike price and market price being the employee's gain in the value of
the shares.
 Offering additional stock in this manner presents risks for both the company and the
employee. If the option's strike price is higher than the market price of the stock, the
employee's option is worthless. When an employee exercises an option, the company is
required to issue a new share of stock that can be publicly traded. The company's
market capitalization grows by the market price of the share, rather than the strike price
that the employee purchases the stock for. The possibility of reduction of company
earnings (impacting both the company and shareholders) arises when the company has
a greater number of shares outstanding. To keep ahead of this possibility, earnings must
increase at a rate equal to the rate at which outstanding shares increase. Otherwise, the
company must repurchase shares on the open market to reduce the number of
outstanding shares.
 One benefit to offering stock options is a company's ability to take a tax deduction for
compensation expense when it issues shares to employees who are exercising their
options. Another benefit to offering options is that while they could be considered a
portion of compensation, current accounting methods do not require businesses to show
options as an expense on their books. This tends to inflate the value of a company.
Companies should think carefully about this as a benefit, however. If accounting rules
were to become more conservative, corporate earnings could be impacted as a result.

GROUP-BASED REWARD SYSTEMS

 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 goals, they also tend to reward under-performing employees along with
average and above-average employees. A reward program which recognizes individual

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 achievements in addition to team performance can provide extra incentive for
employees.

RECOGNITION PROGRAMS

 For small business owners and other managers, a recognition program may appear to
be merely extra effort on their part with few tangible returns in terms of employee
performance. While most employees certainly appreciate monetary awards for a job well
done, many people merely seek recognition of their hard work. For an entrepreneur with
more ingenuity than cash available, this presents an opportunity to motivate employees.
 Nor will the entrepreneur be far off the mark. As Patricia Odell reported, writing
for Promo, "Cash is no longer the ultimate motivator." Odell cited data from the Forum
for People Performance Management and Measurement at Northwester University—
which had discovered that non-cash awards tend to be more effective; the exception
was rewarding increasing sales. "The study found," Odell wrote, "that non-cash awards
programs would work better than cash in such cases as reinforcing organizational values
and cultures, improving teamwork, increasing customer satisfaction and motivating
specific behaviors among other programs."
 In order to develop an effective recognition program, a small business owner must be
sure to separate the program from the company's system of rewarding employees. This
ensures a focus on recognizing the efforts of employees. To this end, although the
recognition may have a monetary value (such as a luncheon, gift certificates, or
plaques), money itself is not given to recognize performance.
 Recognition has a timing element: it must occur so that the performance recognized is
still fresh in the mind. If high performance continues, recognition should be frequent but
cautiously timed so that it doesn't become automatic. Furthermore, like rewards, the
method of recognition needs to be appropriate for the achievement. This also ensures
that those actions which go farthest in supporting corporate goals receive the most
attention. However, an entrepreneur should remain flexible in the methods of
recognition, as different employees are motivated by different forms of recognition.
Finally, employees need to clearly understand the behavior or action being recognized.
A small business owner can ensure this by being specific in what actions will be
recognized and then reinforcing this by communicating exactly what an employee did to
be recognized.
 Recognition can take a variety of forms. Structured programs can include regular
recognition events such as banquets or breakfasts, employee of the month or year
recognition, an annual report or yearbook which features the accomplishments of
employees, and department or company recognition boards. Informal or spontaneous
recognition can take the form of privileges such as working at home, starting late/leaving
early, or long lunch breaks. A job well done can also be recognized by providing
additional support or empowering the employee in ways such as greater choice of
assignments, increased authority, or naming the employee as an internal consultant to
other staff. Symbolic recognition such as plaques or coffee mugs with inscriptions can
also be effective, provided they reflect sincere appreciation for hard work. These latter
expressions of thanks, however, are far more likely to be received positively if the source

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 is a small business owner with limited financial resources. Employees will look less
kindly on owners of thriving businesses who use such inexpensive items as centerpieces
of their reward programs.
 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.

SUPPLEMENTAL READINGS/REFERENCES:

• Bauer, T. & Berrin, E. 2012. An Introduction to Organizational Behavior. Creative

Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/
3.0/) license.

• Ditan, Carol D. 2016. Understanding and Managing Organizational Behavior. Anvil

Publishing, Inc.

• Inc. (n.d.). Employee Reward and Recognition Systems.

https://www.inc.com/encyclopedia/employee-reward-and-recognition-
systems.html

• Management Study Guide. (n.d.). Performance Appraisal.

https://www.managementstudyguide.com/performance-appraisal.htm

• Newstrom, John W. 2011. Organizational Behavior: Human Behavior at Work 13th

Edition. Boston, McGraw-Hill

ACTIVITIES/ASSESSMENTS: (Group Work)

Question for Discussion:

1. Explain how money can both be an economic and a social medium of exchange? As a
student, how do you use money as a social medium of exchange?
2. Think of a time when you assessed, either formally or informally, someone else’s level of
performance and found it deficient by your standards. To what did you attribute the
reasons for the inadequate performance? Were you engaging in any attributional
tendencies? How could you avoid doing so?

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Human Behavior in Organizations/ Compiled by: Minera Laiza C. Acosta 12