What is Performance Appraisal? Definition, Methods, Objectives, Limitation

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What is Performance Appraisal?

Performance Appraisal is a formal structured system of measuring and evaluating an employee’s job-related behaviours and outcomes to discover how & why the employee is presently performing on the job and how the employee can perform more effectively in the future so that the employee, organization, and society all benefit.

Performance appraisal works towards measuring the performance quality of the job holder. Performance appraisal evaluates the jobholders’ performance over a period of time against these standards and targets.

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After the candidates are recruited, selected, placed and trained they are given certain standards to maintain and targets to achieve over a predetermined period of time.

Other areas in which the performance of the employees is evaluated are initiative, teamwork, dependability, integrity, judgment, decision making etc. It also provides feedback to the employee about how well is he performing a job. It further focuses on employee development and establishes a plan for improvement in the future.

Performance Appraisal Definition

According to Dale Yoder, Performance appraisal consists of all formal procedures used in working organizations to evaluate the personalities and contributions and potentials of group members.

Edwin Flippo says Instead of rating an employee on characteristics such dependability, initiative and the like, there is now a tendency towards establishing job goals and appraising the work done towards these goals.

Performance Appraisal Vs Job Evaluation

  1. Job evaluation measures the value or worth of a job whereas performance appraisal evaluates the performance quality of the job holder.

  2. Job evaluation is not done as regularly as performance appraisal. Performance appraisal is an ongoing process and repeated after a particular time period.

  3. The aim of evaluating a job is to create a pay scale for a job in comparison to other jobs in the organization. Performance appraisal is carried out to determine incentives, rewards, promotions or demotions of the employee.

  4. Job evaluation is carried out by specialists in the area while performance appraisal is mostly carried out by the supervisor.

Methods of Performance Appraisal

Methods of Performance Appraisal are:

  1. Rating Scale
  2. Checklists
  3. Forced choice Method
  4. Critical Incident Method
  5. Behaviorally Anchored Rating Scales
  6. Field Review Method
  7. Performance Test
  8. Annual Confidential Report
  9. Cost Accounting Approach
  10. Comparative Evaluation Approach
  11. Management by Objective
  12. Psychological Appraisal
  13. Assessment Centers Notes
  14. 360-degree Feedback

Past-oriented Scale

Rating Scale

The typical rating scale system consists of several numerical scales, each representing a job-related performance criterion such as dependability, initiative, output, attendance, attitude, cooperation etc., each scale ranges from excellent to poor.

The disadvantage includes the rater’s biases to influence evaluation. Furthermore, numerical scoring gives an illusion of precision that is really unfounded.


Under this method, a checklist of statements on statements on the traits of the employee and his or her job is prepared in two columns i.e., the ‘YES’ column and ‘NO’ column.

All that the rater is to do is to tick the ‘YES’ if the answer is positive and tick ‘NO’ if the answer is ‘NO’. The HR dept. gives a point for every “YES’ when points are allotted the technique becomes a weighted checklist.

  • The advantages are economy, ease of administration, limited training of rater & standardization.
  • The disadvantage includes improper weights by the HR department.

Forced choice Method

The rater is given a series of statements about the employee these are arranged in the blocks of two or more, and the rater indicates which statement is most or least descriptive of the employee.

  • Learns fast———————————————————works hard
  • Absent often——————————————others usually tardy

The HR department does actual assessment.

  • The advantage is the absence of personal bias in rating.
  • A disadvantage is that the statement may not be properly framed.

Critical Incident Method

It focuses on certain critical behaviors of an employee that make all the difference between the effective and non-effective performance of a job. Such incidents are recorded by the superiors as and when they occur.

  • One of the advantages of this is that the evaluation is based on actual job-behaviour. It also increases the chance that the subordinate will improve because they learn more precisely what is expected of them.

  • As a disadvantage, negative incidents are generally more noticeable than positive ones.

Behaviorally Anchored Rating Scales

In this, the scale represents a range of descriptive statements of behavior varying from the least to the most effective. A rater must indicate which behavior on each scale best describes an employee’s performance.

BARS the following feature:

  • Areas of performance to be evaluated are identified and defined by the people who will use the scales.

  • The scales are anchored by description of actual job behavior that supervisors agree, represent specific level of performance.

  • All dimensions of performance to be evaluated are based on observable behaviors and are relevant to the job being evaluated since BARS are tailored made.

  • Since the raters who will actually use the scale are actively involved in the development process, they are more likely to be committed to the final product.

  • Unfortunately, this also suffers from distortions inherent in most rating techniques.

Field Review Method

This is an appraisal by someone outside the assessor’s own dept., usually someone from the corporate office or HR dept.

Two disadvantages of field review method are:

  • An outsider is not familiar with conditions in an employee’s work environment.
  • He does not have an opportunity to observe employee behavior of performance over a period of time.

Performance Test

With a limited number of jobs, employee assessment may be based upon a test of knowledge and skills. The test may be paper & pencil or an actual demonstration of skills the test must be reliable & validated to be useful. Practically it may suffer if the costs of test development or administration are high.

Annual Confidential Report

ACR is mostly used in government departments, for example ITI, military organizations, etc., it has 12 items namely – attendance, self-expression, ability to work with others, leadership, initiative, technical ability, ability to reason, name, to a few.

Twelve of these are filled on a four-point grade scale (excellent, good, fair, poor). Justification is required for outstanding or poor ratings. Overall rating on a five-point scale was separately given (Outstanding, Very good, Good, Average, Poor). A recommendation for performance was also given.

Cost Accounting Approach

This method evaluates performance from the monetary returns the employee yields to his or her organization. The performance of the employee is evaluated based on the established relationship between the cost and the benefit.

Comparative Evaluation Approach

These are a collection of different methods that compare one worker’s performance with that of his/her co-workers.

They are useful in deciding merit-pay increases, promotions and organizational rewards. The usual comparative forms are ranking method and the paired comparison method.

Future-oriented Appraisal

Management by Objective

It was Peter F Drucker who gave the concept of MBO way back in 1954 when his The Practice of Management was first published. There are four steps:

  1. In some organizations, superior and subordinates work together to establish goals. These goals can then be used to evaluate employee performance.

  2. It involves setting the performance standard for the subordinates in a previously arranged time period. As subordinates perform, they know fairly well what there is to do, what has been done, and what remains to be done.

  3. The actual level of goal attainment is compared with the goals agreed upon. This step helps determine possible training needs.

  4. It involves establishing new goals and possibly, new strategies for goals not previously attained. The process is repeated.

The disadvantage is that it is not applicable to all jobs in all organizations. Jobs with little or no flexibility, such as assembly-line work, are not compatible with MBO.

Psychological Appraisal

The appraisal normally consists of in-depth interviews, psychological tests, discussions with supervisors and a review of other evaluations. The psychologist then writes about an employee’s intellectual, emotional, motivational and other- related characteristics that suggest individual potential and may predict future performance.

Since the quality of the appraisal depends largely on the skills of the psychologists, some employees object to this type of evaluation, especially if cross-cultural differences exist.

Assessment Centers Notes

This method of appraising was first applied in the German Army in 1930. In fact, it is a system or organization, where the assessment of several individuals is done by various experts using various techniques. These techniques include in-basket, role-playing, case studies, and simulation exercise, transactional analysis.

In this individuals are brought together to spend two or three days working on an individual or group assignment similar to the ones they would be handling when promoted. Observers rank the performance of each and every participant in order of merit. All assesses get an equal opportunity to show their talents and capabilities and secure promotion based on merit.

360-degree Feedback

Where multiple raters are involved in evaluating performance, the technique is called 360-degree appraisal. The 360- degree technique is understood as a systematic collection of performance data on an individual or group, derived from a number of stakeholders include immediate supervisors, team members, customers, peers, and self.

Objectives of Performance Appraisal

According to Lockett (1992), objectives of performance appraisal management aims at developing individuals with the required commitment and competencies for working towards shared meaningful objectives within an organizational framework. Objectives of Performance Appraisal are:

  1. Pay Rise
  2. Promotions
  3. Feedback System
  4. Training and Development Program
  5. Improves Supervision
  6. Career Planning
  7. Healthy and Productive Work Environment
  8. Improves Communication
Objectives of Performance Appraisal
Objectives of Performance Appraisal

Below are the main Objectives of Performance Appraisal:

Pay Rise

Performance appraisal can be used as a yardstick to decide upon the pay raises and other benefits to be given to an employee. It should be based on employee performance and merit rather than seniority. This keeps the employee motivated.


Since it evaluates the employees on the basis of their merit and performance quality it helps in taking decisions regarding the promotions and job change of the employees.

Feedback System

It acts as a feedback platform where the employee can be made aware of how well he is performing the job, his strengths and weaknesses can be discussed.

Training and Development Program

After performance appraisals, gaps between the standards achieved by the employees can be measured. Employees can be informed about the skills they need to develop for improving their current performance or for further promotion or pay raise.

Improves Supervision

Since performance appraisal happens periodically it becomes important for the supervisor to observe their subordinates closely and continuously so as to give clear and proper feedback at the time of performance appraisal.

Career Planning

Performance appraisal facilitates career planning for the employees. Their strengths and weaknesses are analyzed and discussed. The areas where they have the potential to grow are identified which helps the management in human resource planning.

Healthy and Productive Work Environment

Since the achievements and hard work of the employees are identified and awarded there is a sense of satisfaction amongst the workers. They are motivated to achieve higher standards and quality of output in order to gain more appreciation, incentives and bonuses, etc.

Improves Communication

Performance appraisal is a continuous process. It timely provides a format for dialogue between the supervisor and the subordinate. It gives a platform where they can freely talk about their personal goals and concerns. It helps in improving the relationship and trust between the supervisor and the subordinate.

Basis of Performance Appraisal

Basis of Performance Appraisal– The performance appraisal is based on the scrutiny of certain factors. The basis of Performance appraisal standards may include the following:

  1. Knowledge about the job
  2. Quantum of work
  3. Quality of work
  4. Ability to plan, organize, delegate and control
  5. Cost consciousness
  6. Use of discretion and judgement
  7. Initiative
  8. Leadership skills
  9. Power of expression and communication- written or verbal
  10. Personality traits
    « Integrity
    « Adaptability
    « Dependability
    « Loyalty

Problems in Performance Appraisal

There are various problems and challenges faced in Performance appraisal. Broadly, problems in performance appraisal are categorized into 4 types:

  1. Judgment Error:
    a. Halo effect
    b. Horn effect
    c. Influence of first impression
    d. Leniency
    e. Central tendency
    f. Stereotyping
    g. Recency effect
    h. Consequence of appraisal

  2. Inappropriate appraisal methods and forms
  3. Lack of training
  4. Ineffective implementation of performance appraisal

Essentials of Performance Appraisal

These are essentials of performance appraisal which given below:

  1. Reliable Measures
  2. Standardization
  3. Just and Fair
  4. Viability
  5. Clear Objective
  6. Trained Appraisers
  7. Feedback and Participation
  8. Confidential
Essentials of Performance Appraisal
Essentials of Performance Appraisal

Reliable Measures

In order to achieve consistent and valid results and information from a performance appraisal system it is important to use reliable measures to quantify all observations and reports to rate an employee’s performance.


There should be well-defined criteria, appraisal procedures and rating systems to appraise the employees.

Just and Fair

Employee performance appraisal is done on objective and subjective measures. It should be made sure that there is no bias or favouritism while ratings are decided by the supervisor.


The technique should be realistic in terms of its implementation and cost involved.

Clear Objective

The key to an effective appraisal is the establishment of appraisal objectives behind the performance appraisal being undertaken.

Trained Appraisers

An effective outcome of the performance appraisal process highly depends on how well is the evaluator or the appraiser is trained in conducting a performance appraisal in an efficient manner.

Feedback and Participation

The main purpose of performance appraisal is to make the employee aware of his performance levels, strengths and weaknesses, and areas that require improvement.


Appraisal results should be handled as private and confidential information. In order to maintain a healthy competitive atmosphere in the organization, only people with an approved need to know should have access to an employee’s performance appraisal results.

Performance Management System

Performance management system is a process for setting goals and monitoring progress toward achieving those goals. It is just like other systems where achieved results are continually measured and compared with the desired goals or outputs.

Any discrepancy or gap is recognized and fed back into changing the inputs of the process, so as to achieve the desired goals.

Simply put, performance management includes activities to ensure that goals are consistently being met in an effective and efficient manner.

Performance management focuses on the performance of the organization, a department, processes to build a product or service, employees, etc.

The performance management system comprises:

  • Identifying and stating the parameters of performance
  • Setting performance standards
  • Planning in participation with employees
  • Identifying competencies and competency gaps that contribute hinder to performance
  • Planning performance development activities.

Limitations of Performance Appraisal

Limitations of Performance Appraisal are:

  1. Judgment Errors
  2. Poor Appraisal Forms
  3. Lack of Rater Preparedness
  4. Ineffective Organizational Policies and Practices
Limitations of Performance Appraisal
Limitations of Performance Appraisal

Judgment Errors

People commit mistakes while evaluating people and their performance. Biases and judgment errors of various kinds may spoil the show. The bias here refers to the distortion of a measurement.

These are of various types:

  1. Primacy Effect: The appraiser’s first impression of a candidate may color his evaluation of all subsequent behavior. In the case of a negative primacy effect, the employee may seem to do nothing right; in the case of a positive primacy effect, the employee can do no wrong (Harris, p.192).

  2. Halo: The Halo error occurs when one aspect of the subordinate’s performance affects the rater’s evaluation of other performance dimensions. If a worker has few absences, his supervisor might give the worker a high rating in all other areas of work. Similarly, an employee might be rated high on performance simply because he has a good dress sense and comes to the office punctually!

  3. Horn effect: The rater’s bias is in the other direction, where one negative quality of the employee is being rated harshly. For example, the rates rarely smile, so he cannot get along with people!

  4. Leniency: Depending on the rater’s own mental make-up at the time of appraisal, raters may be rated very strictly or very leniently. Appraisers generally find evaluating others difficult, especially where negative ratings have to be given.

    A professor might hesitate to fail a candidate when all other students have cleared the examination. The leniency error can render an appraisal system ineffective. If everyone is to be rated high, the system has not done anything to differentiate among employees.

  5. Central tendency: An alternative to the leniency effect is the central tendency, which occurs when appraisers rate all employees as average performers. For example, a professor, with a view to playing it safe, might give class grades nearly equal to B, regardless of the differences in individual performance.

  6. Stereotyping: Stereotyping is a mental picture that an individual holds about a person because of that person’s sex, age, religion, caste, etc. By generalizing behavior on the basis of such blurred images, the rater grossly overestimates or underestimates a person’s performance.

    For example, employees from rural areas might be rated poorly by raters having a sophisticated urban background, if they view rural background negatively.

  7. Recency effect: In this case, the rater gives greater weightage to recent occurrences than earlier performance.

    For example, an excellent performance that maybe six or seven months old is conveniently forgotten while giving a poor rating to an employee’s performance which is not so good in recent weeks.

    Alternatively, the appraisal process may suffer due to a ‘spillover effect’ which takes place when past performance influences present ratings.

Poor Appraisal Forms

The appraisal process might also be influenced by the following factors relating to the forms that are used by raters:

  1. The rating scale may be quite vague and unclear.
  2. The rating form may ignore important aspects of job performance.
  3. The rating form may contain additional, irrelevant performance dimensions.
  4. The forms may be too long and complex.

Lack of Rater Preparedness

The raters may not be adequately trained to carry out performance management activities. This becomes a serious limitation when the technical competence of a rate is going to be evaluated by a rater who has limited functional specialization in that area.

Ineffective Organizational Policies and Practices

If the sincere appraisal effort put in by a rater is not suitably rewarded, the motivation to do the job thoroughly finishes off. Sometimes, low ratings given by raters are viewed negatively by management – as a sign of failure on the part of the rater or as an indication of employee discontent.

If the sincere appraisal effort put in by a rater is not suitably rewarded, the motivation to do the job thoroughly finishes off. Sometimes, low ratings given by raters are viewed negatively by management – as a sign of failure on the part of the rater or as an indication of employee discontent.

So, most employees receive satisfactory ratings, despite poor performance. Normally, the rater’s immediate supervisor must approve the ratings. However, in actual practice, this does not happen. As a result, the rater ‘goes off the hook’ and causes considerable damage to the rating process.

Challenges of Performance Appraisal

In present-day organizations, the twin principles of motivating employees are common at all levels: acknowledge unique contributions and alleviate personal concerns that impact professional performance.

To get the best out of people, the CEOs should:

  • Create a culture of excellence that motivates employees at all levels.

  • Match organizational objectives with individual aspirations.

  • Equip people with requisite skills to discharge their duties well.

  • Clear growth paths for talented employees.

  • Provide new challenges to rejuvenate flattening corners.

  • Empower employees to make decisions without fear of failing.

  • Encourage teamwork and team spirit and open communication.

Performance Appraisal Process

Below are the performance appraisal process steps that are generally followed which results in an effective performance appraisal.

  1. Objectives of performance appraisal
  2. Job analysis and Job description
  3. Communicate performance standards to the employees
  4. Measuring actual performance
  5. Discussing the appraisal
  6. Taking Corrective Actions

Approaches of Performance Appraisal

George Odiorne has identified four basic approaches to performance appraisal which can be defined as follows:

Approaches of Performance Appraisal
Approaches of Performance Appraisal

Personality Based Systems

In personality-based systems the appraisal form consists of a list of personality traits that presumably are significant in the jobs of the individuals being appraised. Such traits as initiative, drive, intelligence, ingenuity, creativity, loyalty and trustworthiness appear on most such lists.

Generalized Descriptive Systems

It is similar to a personality-based system but they differ in the type of descriptive term used. Often they include qualities or actions of presumably good managers: “organizes, plans, controls, motivate others, delegates, communicates, makes things happen,” and so on.

Such a system, like the personality-based system, might be useful if meticulous care were taken to define the meaning of each term in respect to actual results.

Behavioural descriptive systems

The key feature of this system is detailed job analysis and job descriptions, including specific statements of the actual behaviour required from successful employees.

Result Centered systems

These appraisal systems (sometimes called work centred or job-centred systems) are directly job-related which requires that manager and subordinate sit down at the start of each work evaluation period and determine the work to be done in all areas of responsibility and functions, and the specific standards of performance to be used in each area.

When introducing performance appraisal in the system, a job description in the form of a questionnaire has to be preferred. A typical questionnaire addressed to an individual would cover the following points which are mentioned below:

  • What is your job title?

  • To whom are you responsible?

  • Who is responsible to you?

  • What is the main purpose?

  • What are your main areas of responsibility?

  • What is the size of your job in such terms of output or sales targets, number of items processed, number of people managed, number of customers?

  • What targets or standards of performance have been assigned for your job?

  • Are there any other ways in which it would be possible to measure the effectiveness with which you carry out your job?

  • Is there any other information you can provide about your job?

Newer Rating Methods

There are several inadequacies in the traditional rating scale; therefore, attempts have been made to devise new procedures which are less susceptible to the above weaknesses. Among all these included rank orders, paired comparison forced distribution forced choice, critical incident and field review.

These methods are discussed below for proper understanding:

Newer Rating Methods
Newer Rating Methods

Rank-order Procedure

This method is effective where ten or lesser number of individuals are to be evaluated. According to this procedure, each individual is assigned such ranks as first, second, third and so on and if the evaluation process involves several traits, the ranking is made separately for each trait.

This method is simple to understand and easy to apply but this technique becomes cumbersome and difficult when a large number of employees are to be evaluated in the organization. For smaller organizations, it would be relevant.

Paired-comparison System

Under this system, each individual is compared with every other individual and the appraiser is required to put a tick-mark against the name of the individual whom he considers better on the trait in question.

The final ranking is determined by the number of times he is judged better than the other but this method becomes complicated when the number of individuals for evaluation is large.

Forced Distribution Procedure

It is a form of comparative evaluation of an employee’s performance. In this, an evaluator rate subordinates according to a specified distribution. Here in this method, judgments are made on a relative basis i.e., a person is assessed relative to his performance in the group he works with. This procedure can be used for numerous traits if required by evaluating the individuals separately on each trait.

The forced distribution method is primarily used to eliminate rating errors such as leniency and central tendency due to which result is not justifying the purpose.

Forced Choice Technique

Under this method, it forces to select from a series of several statements or traits, the one which best fits the individual and one which least fits, and each of these statements is assigned a score.

In this, the appraiser does not know the score value of statements; this method prevents the rater from deliberately checking only the most favourable trait. Moreover, the appraiser is unable to introduce personal bias into the evaluation process.

The reason is he does not know which of the statements is indicative of effective performance which enhances the overall objectivity of this procedure.

Critical Incident Method

This technique of performance appraisal was developed by Flanagan and Burns and under this procedure; attempts are made to devise for each job a list of critical job requirements. The superiors are trained to be on the lookout for critical incidents on the part of the subordinates in accomplishing the job requirements.

The superiors enlist the incidents as they happen and in the process. It tends to build up a record of each subordinate with debit on the minus side and credit on the plus side. The merit of this procedure is that all evaluations are based on objective evidence instead of subjective rating which presents real picture.

Field Review

It is an appraisal by someone outside the employee’s own department. It is usually someone form the corporate office or form the employee’s own human resources department. This process involves a review of employee records, an interview with the employee, and sometimes with the employee’s superior.

Field review as an appraisal method is used primarily in making promotion decisions at the managerial level; and is also useful when comparable information is needed from employees in the different units or locations.

Common Rating Errors

When there is a difference in perception and value systems, it influences evaluations. For instance, if two raters observe an employee disagreeing with a supervisor and then one perceives this as insubordination, but the other sees it as a willingness to stand up to for what he believes in. Some of the common syndromes are:

Common Rating Errors
Common Rating Errors

Halo Effect

This is a tendency of the rater in which the assessment of a single trait influences the evaluation of the individual on other traits too.

Horns Effect

This is a tendency to allow one negative trait of the employee to color the entire appraisal which results in an overall lower rating than may be warranted.

Leniency or Constant Error

It is completely depending upon the appraiser’s own value system which acts as standard, employees may be rated leniently or strictly. Such a rating does not carry any reference to actual performance of the employees because some appraisers consistently assign high values to all employees, regardless of merit and this is a leniency error.

The strictness tendency is a reverse situation, where all individuals are rated too severely and performance is understated.

Central Tendency

This is the most common error that occurs when a rater assigns most middle range scores or values to all individuals under appraisal that is extremely high or extremely low evaluations are avoided by assigning ‘average ratings’ to all.

Spill-over Effect

This refers to allowing past performance to influence the evaluation of present performance and this is again a bias.

Personal Bias

Perhaps the most important error of all arises from the fact that, very few people are capable of objective judgments. It is entirely independent of their values and prejudices.

The above errors have suggested concerns about performance appraisal and in this regard McGregor (1960), with his concern for the human side of the enterprise; appraisal represented a judgment and demotivating process. Similar Deming (1982) also suggested that appraisal was ‘a deadly disease which blamed individuals for problems systematic to organizations.


Performance appraisal solves many purposes and can be used for deciding compensation, pay rise, training and development needs, results in better supervision and career planning of the employees etc. It is based on the factors like the quantum and quality of work by the employee and his personal traits like reliability, dependability, loyalty etc.


  1. T. V. Rao, “Appraising and Developing Managerial Performance“, Excel Books, New Delhi, 1999.
  2. D. Grote, “Performance Appraisal Reappraised,’’ Harvard Business Review, Jan- Feb 2000.
  3. K. R. Murphy, J. Cleveland, “Performance Appraisal”, Boston, M. A: Allyn & Bacon, 1991.
  4. Scott Snell and G. Bohlander, “Human Resource Management”, Cenpager, New Delhi, 2007.

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