Performance Appraisal: The Ultimate Guide

Decisions regarding promotions, rewards, and continued training rely heavily on performance appraisals. For many companies, performance appraisals are merely seen as a necessary evil. They are conducted and tossed to the side without a second thought. However, if taken full advantage of, this process provides countless benefits to ensure you keep your employees productive and engaged.

This guide gives you the knowledge you need to conduct thorough performance appraisals and the tools to use them to their maximum potential. Let’s dive in!

Contents
What is a performance appraisal?
What is the purpose of a performance appraisal?
Why are performance appraisals important?
Performance appraisal methods
5 tips for a good performance appraisal process
How to create a performance appraisal form
Performance appraisal examples
FAQ

What is a performance appraisal?

A performance appraisal is a regularly scheduled formal process evaluating an employee’s overall performance and contribution to the company with the goal of improving that performance. It can also be referred to as the performance review, performance evaluation, or employee appraisal.

Performance appraisals are a platform to provide feedback, offer a formal moment in time to evaluate job performance, and help distribute raises and bonuses among employees. Usually, this happens once or twice a year, taking place at the start of the year and around the half-year point. These are formal sit-downs in which the direct manager or supervisor evaluates performance on the main tasks and responsibilities of the employee.

HR is typically responsible for outlining the performance appraisal process, which is then executed by managers. Employees’ active involvement creates the buy-in necessary to make the improvements that the performance appraisal is set up for in the first place. 

Identifying opportunities for improvement based on pre-determined goals and metrics is a key goal of performance appraisals. For example, employees or departments might need specific training to perform better.

What is job performance?

Job performance is the degree to which an employee fulfills the tasks of their job description. This includes achieving objectives and meeting performance criteria, and is also known as in-role performance.

Employees can also help their organization through behaviors that are not directly related to their task functions such as helping colleagues and contributing to the organization beyond job duties. This is called extra-role performance, contextual performance, or organizational citizenship behaviors.

In assessing performance, both in-role and extra-role behaviors should be considered.

What is the difference between performance management and performance appraisals?

Performance management encompasses all interactions between employees and supervisors that help improve performance. In contrast, performance appraisals are just one part of the performance management cycle. 

Performance management includes all the formal and informal meetings we listed in the table below. These can both be planned and unplanned sit-downs.

What is the purpose of a performance appraisal?

As we’ve already mentioned, the purpose of performance appraisals is to continuously improve the company’s performance and workplace culture. Let’s take a closer look at the objectives of performance appraisals. These include:

• Identifying how each employee can improve in their role – Employees may need additional skills to perform better at their job, which they can gain through targeted training. In other cases, updated equipment or software might be necessary. A performance appraisal helps determine and document these needs.
• Identifying strengths and opportunities for improvement within departments and the company – What are departments lacking? For example, do they need additional staffing, more equipment, or a larger budget to perform at an optimal level? 
• Determining how to best allocate rewards, promotions, and resources – Performance appraisals help you figure out which employees are most deserving of rewards and promotions. What’s more, an analysis of performance appraisals tells you which employees and departments would benefit from which available resources.
• Obtaining documentation on employee performance – Promotion, disciplinary action, and termination decisions are never easy. Formalized performance appraisals provide documentation for making objective and defendable future decisions based on pre-determined criteria.
• Have the tools to set future performance goals – The goals and benchmarks your company is achieving now are a good indication of what goals to set in the future and at what pace your business can achieve them.

Why are performance appraisals important?

Achieving the objectives of performance appraisals gives companies the infrastructure to grow and expand. The importance of performance appraisals can be seen in the impact they have on the organization, which includes:  

• Facilitating employee growth and advancement – Performance appraisals allow employees to identify career advancement opportunities within the company and the pathways to reach the next level.
• Strengthening employee engagement and retention – Receiving constructive feedback and seeing opportunities for growth within the organization helps keep employees engaged. It also motivates them to stay on board longer.
• Closing skills gaps and boosting organizational performance – By identifying opportunities for improvement, setting goals, and creating plans for employee growth, organizations can close skills gaps, prepare for the future, and gain a competitive advantage.
  
  “It is important that managers understand the connection between high-quality performance data and regular feedback to both individual and organizational success,” notes Grace Ewles, Manager of HR Research & Advisory Services at McLean & Company.
• Improving communication – This is an opportunity to routinely discuss performance, goals, and expectations, which ensures employees and managers are on the same page and aligned with the company’s goals.  
• Creating accountability – Setting clear expectations for employees in a formalized setting helps create accountability to meet those expectations. 
• Fair and transparent decision-making – A well-structured performance appraisal process provides a standardized and consistent approach to evaluating employee performance, which can support fair decision-making and reduce bias.

Performance appraisal methods

There are many types of performance appraisal methods you can base your employee evaluations on. The one best suited for your company depends on the size of your company, goals, and organizational culture. Let’s take a look at 6 of the most common performance appraisal methods.

1. Management by Objectives (MBO) 

Managers and employees work together to establish objectives and goals. Periodically, they discuss progress and identify areas where the employee needs to improve.

• Pros: Employees appreciate being a part of the process, goals are more realistic because collaboration between managers and employees takes place, and it is easier to measure quantitative and qualitative data.
• Cons: A strong focus on the objectives might translate into ignoring other parts of work, like employee conduct and organizational culture. It’s also time-consuming to implement and execute.

2. 360-degree feedback

360-degree feedback involves receiving performance ratings and feedback from coworkers, managers, vendors, and even customers. Managers then use this information to assess employee performance.

• Pros: Helps improve communication and performance and is an excellent leadership development tool.
• Cons: Obtaining feedback may be difficult. There’s often a lack of follow-up and insufficient alignment with the company strategy.

3. Peer review 

The peer review method relies on the feedback of fellow coworkers to measure performance. Team members who work closely with the employee and know their strengths and weaknesses usually provide the feedback. 

• Pros: Peers best understand an employee’s strengths and weaknesses
• Cons: Personal feelings may interfere with objective feedback

4. Behaviorally Anchored Rating Scale (BARS)

The Behaviorally Anchored Rating Scale (BARS) method uses a predefined set of performance standards with specific behaviors describing each level of performance. Employee performance is then rated compared to the standards.

• Pros: Clear standards, consistent, impartial, and easy-to-use once implemented.
• Cons: Expensive, time-consuming, and complex to develop and implement.

5. Graphic Rating Scale

The Graphic Rating Scale method uses a list of desired behaviors for each role and rates employees on each trait. Examples of traits include teamwork, time management, accountability, and job skills.

• Pros: Easy-to-use, quantifiable, and cost-effective.
• Cons: Subjective, difficult to weigh which traits are worth more than others.

5 tips for a good performance appraisal process

Since no two companies are the same, each one will have a different process for conducting performance appraisals that work best in their specific environment. However, there are several best practices that every HR department should follow to set up an effective appraisal process at their organization.

1. Create a clear outline for the performance appraisal meetings

Understandably, both managers and employees may feel uncomfortable during the performance appraisal. This is common since the future of the employee depends on the outcome of the evaluation. 

HR can alleviate some of this discomfort by developing a form or outline to use for performance appraisals. Using a job performance evaluation form or another appraisal outline will be helpful for both the preparation of the meeting and doing the performance review itself.

Every type of role will have a slightly different form, tailored to each position’s specific duties. It is crucial to create a clear and easy-to-use outline that managers follow to keep things moving smoothly throughout the appraisal. We discuss how to create a performance appraisal form below.

“Another reason performance appraisals feel so stressful is because they may be explicitly linked to pay increases and other incentives. In my view, this is a mistake. Psychologically, tying the appraisal to money can destroy the employee’s intrinsic motivation to perform at a high level. It may also create feelings of unfairness, as the manager’s vague perceptions are used to justify granting or denial of an incentive,” notes Joel Trammell, Founder and CEO of Manager360, a manager development and software company.

“A better approach is to use performance appraisals to discuss the outcomes of the employee’s goals, offer feedback, and coach them on topics they care about. Separately, the manager can discuss pay raises and bonuses, which should be tied to fair market rates for the role being performed.”

HR should also set up the process in a way that helps reduce different types of bias in performance appraisals and educate managers on these biases.

“Biases like the halo effect should be approached head-on by showing team members what constructive feedback looks and sounds like. This type of fairness blocker can also be overcome by involving more team members in the review process and getting multiple viewpoints on their performance,” says Matthew Meadows, CEO and co-founder of the performance review software WorkStory.

“Additionally, recency bias can cause issues with regard to fairness and accuracy of performance appraisal. We would encourage organizations to implement a more continuous review process to help overcome this issue.”

2. Involve the employees as much as possible

Employees who play an active part in the performance appraisal process appreciate having the chance to speak for themselves and are, therefore, much more satisfied with the outcome. Human Resources departments should design a process that maximizes employee involvement by allowing for the opportunity to answer questions, explain actions, and provide insight on how they could perform their jobs better. 

Research by Cawly, Keeping & Levy (1998) shows that there is a strong correlation between employee participation and a positive reaction to the performance appraisal process. The analysis showed that employees who participated were much more likely to rate the session as fair and useful. They were also more motivated to improve their performance.

A second study conducted in 2012 by Kim & Holzer reinforced that employees respond better to performance appraisal outcomes when they are actively involved in the process.

3. Encourage managers to adapt their communication style

It is crucial for managers to adapt their communication style to ensure that employees receive feedback without having their motivation crushed at the same time. Everyone has different preferences on how to receive negative feedback. Some prefer managers to be straightforward, while others prefer a subtle approach. It is crucial for HR to educate managers on the best practices for delivering negative feedback in various styles to their employees. 

Traditionally, the bad news is saved until the last part of a performance appraisal. This means employees and managers are nervously anticipating the negative part of the session. Daniel Pink (2018) found that employees are most satisfied when bad news is addressed early on in the interview. 

Addressing areas of improvement first means both parties can relax for the remainder of the session. Implementing this strategy in your process makes for a more productive session and ensures the evaluation ends on a positive note.

According to the HR consultant Jana Tulloch, HR can also teach managers to give better feedback through mock-feedback sessions. “In such sessions, managers can practice giving positive and constructive feedback. The goal is to help managers provide specific and actionable feedback to their team,” says Tulloch.

Joel Trammell from Manager360 also advises focusing on “feedforward”.

“Performance appraisals are significantly more effective when they focus on what the employee can do in the future rather than doing a full postmortem on their shortcomings in the past. If you pick apart a lackluster presentation they gave, for example, you leave them feeling helpless. What can they do about it now?” says Trammell.

“Instead, discuss what changes you would like to see going forward. This “feedforward” approach takes some stress out of hard conversations and shows the employee a positive path forward.”

4. Ensure more feedback to drive performance

63% of employees want more immediate “in the moment” feedback on their work performance. They want to know what they are doing right and how they can improve.

Besides increasing the frequency of performance appraisals from once a year to twice a year or quarterly, organizations can explore more ways to help managers to stay more in touch with their teams. Let’s look at a few different ways feedback can be provided outside of annual performance appraisals: 

• 1-on-1 conversations – In this approach, managers commit to checking in with employees at least weekly to provide (and receive) feedback.
• Department meetings – Managers hold weekly or monthly meetings to discuss the performance of the team and provide constructive feedback.
• Emails – Although less personal, weekly or monthly emails can be sent to the team as a whole or to individual employees detailing their strengths and areas of needed improvement.
• Performance appraisal apps – Performance appraisal apps are an excellent way for managers to easily conduct performance appraisals and provide feedback to their employees. There are standalone appraisal systems, as well as platforms that are part of bigger, cloud-based, performance management solutions.

“The performance appraisal process, as most employees know it, needs to shift from evaluating past performance to guiding future career opportunities. Preparing managers to become excellent career coaches is the best way HR can support the performance appraisal process.

If the process is well designed, the performance appraisal should be about helping employees find the career pathways that best aligned with their personals interests and with what the company needs.”
Cecilia Laube, Organizational Development, Design, and Effectiveness Expert

5. Meticulously document your employee performance appraisal sessions

The point of performance appraisals is to gather information that will be used to make decisions later. These decisions may be made weeks or months down the road, and it will be difficult to remember every detail of performance appraisal sessions.

Be sure to implement a process that requires meticulous documentation in a standardized way so that the information can be easily accessed when needed. As we’ve mentioned above, you may choose to use a performance appraisal app or a talent management system for continuous feedback strategies.

A paper from the NeuroLeadership Institute found that 91% of companies that have adopted continuous performance management report better data for people decisions. These companies also report making major progress in removing bias in promotion and advancement.

How to create a performance appraisal form

Designing a thorough job performance evaluation form lays the groundwork for collecting valuable information. A comprehensive job performance evaluation form includes several elements.

Define competencies

Every job position has a predefined set of competencies required to do them successfully. Competencies fall into categories: 

1. Core competencies
2. Job-specific competencies

Core competencies are those that everyone in the organization regardless of job title needs. They are set by the company board, and the more senior the position, the higher the required competency level.

An example of this could be being commercial for a consulting firm, where associates and partners all need to work to generate more revenue from new and existing customers. All positions require being commercial but to different degrees.

Job-specific competencies are defined by HR and the direct manager. These are the competencies that are required for each position. For example, a graphics designer needs to be proficient in graphic designing software. Employees are then ranked for each competency with a selected type of ranking, such as BARS or Graphic Rating Scale we discussed above.

An example is included below, coming from the SHRM special report on performance management. As you can see here, they use a five-point scale mapped on three competency levels.

Job performance & job behavior scales

When studying individual performance, it is impossible to create a custom-made assessment for all functions. Instead, researchers looked for one way to assess them all. This can be helpful in developing your own performance appraisal form.

Researchers use an instrument that measures two things: in-role and extra-role behavior.

In-role behavior involves all the activities relevant to the employee’s job description. Questions include the following statements, and having these questions answered by a direct supervisor is a quick way of assessing one’s performance.

• Employee achieves the objectives of the job
• Employee meets the criteria for performance
• Employee fulfills all the requirements of the job

The second element is extra-role behavior. Extra-role behaviors are all the behaviors that go above and beyond the job description. This involves helping out colleagues, organizing a team event, and more.

• Employee helps other employees with their work when they have been absent.
• Employee helps others when their workload increases (assists others until they get over the hurdles)
• Employee volunteers to do things not formally required by the job

Based on the scores on these behaviors, the supervisor can assess the performance of the employee on both elements.

A final element that’s often added is an item on the potential of the employee. Is the employee ready for a direct promotion, or do they still have to learn a lot?

“Performance management processes should be based on the job role, not the person. And how the person is meeting the requirements of the job – not how the manager feels about the person. Clarifying the purpose and criteria of the performance management process from its inception helps develop trust in the process.”
Eric Mochnacz, Director of Operations at Red Clover HR

We attached an example job performance appraisal form (PDF) under the link. For more information about this, read our article on the employee performance review template. In this article, we go into more depth and also provide an editable competency-based example template.

Performance appraisal examples

Let’s take a look at a few different positive and negative performance appraisal examples. 

Punctuality

• Positive: Employee consistently arrives to work on time, turns in all projects before or on the deadline, and attends all required meetings promptly. 
• Negative: Employee is often late arriving to work and often turns in projects past the deadline.

Accountability

• Positive: Whether the outcome is good or bad, the employee always steps up and accepts responsibility for their part in the project. 
• Negative: Employee fails to take responsibility for their actions. They tend to place blame elsewhere.

Communication

• Positive: Employee has excellent communication skills. They always ensure everyone is on the same page before leaving a conversation.
• Negative: Employee has poor communication skills. Fellow peers and customers often have trouble understanding the intended message, and confusion ensues.

A leadership growth coach Joanna Kemper says that when managers are giving feedback, they need to ensure that feedback is rooted in specific examples and a continued pattern of behavior. “Lastly, performance appraisals should not contain surprises – all of it should be an ongoing conversation throughout the year,” concludes Kemper.

To sum up

Performance appraisals are more than just formalities. They provide valuable information about employee performance that allows decision-makers to decide how to allocate resources, bonuses, raises, and promotions. This information is also crucial for understanding areas that are working well and those that need improvement.

HR departments should create and design comprehensive performance appraisal processes that allow companies to make optimal use of the information obtained. That way, they’re helping companies to facilitate employee growth, make better decisions, and ultimately, boost organizational performance.

FAQ

Learn more:

• What Is Performance Management? The Complete Guide
• A Guide to the Performance Management Cycle
• Agile Performance Management: An HR’s Guide
• 5 Tips to Ace Your Employee Performance Management Process
• Talent Management: 10 Tips for a Successful Strategy

Erik van Vulpen

Erik van Vulpen is the founder and Dean of AIHR. He is an expert in shaping modern HR practices by bringing technological innovations into the HR context. He receives global recognition as an HR thought leader and regularly speaks on topics like People Analytics, Digital HR, and the Future of Work.

Learn more

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