Performance Appraisal Methods: 7 Modern Best Practices for 2023
Have you ever walked away from a performance review feeling misunderstood, discouraged, or angry? Unfortunately, these feelings are all too common. An Adobe poll revealed that after a bad performance review, 25% of men and 18% of women cry. Additionally, 43% of men and 31% of women start to look for another job.
Many employees perceive their company’s performance review process as an unfair black box. This partiality leaves employees unappreciated and burnt out. And this demotivation is expensive. Stanford researchers found that workplace stress accounted for 8% of national healthcare outlays, equating to $190 billion.
A good performance appraisal method, on the other hand, can increase employee engagement, satisfaction, and retention. With clear benchmarks for wage increases and title changes, useful feedback, and input from peers and customers, employee performance appraisals make reviews more thorough, impartial, and motivational.
What is employee performance appraisal?
Employee performance appraisal is a method employers use to measure employees’ contributions to an organization. Often, employee appraisal comes in the form of written and oral feedback that outlines where employees struggled and excelled in their work. Employee performance appraisal differs from company to company, but in general, occur at least once per year and is tied to bonuses, pay increases, or promotions.
While employee performance appraisal has a simple definition, putting it into practice isn’t so straightforward. Many performance review processes are not objective, nor geared towards improving performance, and many managers aren’t trained in providing actionable feedback. For these reasons, it’s easy to fall into the trap of conflating individual and organizational performance.
For instance, let’s say an employee did an incredible job last year, taking on the work of five people and excelling at every task. But at the same time, the rest of her team flailed, and overall, the team didn’t meet their goals. Because of this discrepancy, a manager may approach that employee’s annual evaluation with major blind spots. Overlooking the employee’s hard work, the manager tells her she’s only met — not exceeded — expectations. To get a better review, she might adopt unreasonable or even unethical behaviors. Or, she might default to activities that solely please her boss, rather than pushing herself and/or the status quo. Worse, she might consider quitting, like 85% of workers would in this situation.
Enabling managers, employees, and even partners or clients to participate in the appraisal process increases the likelihood of unbiased compensation, promotion, and termination decisions. Thoughtful, equitable reviews signal to employees that they’ll be rewarded for doing their best work.
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7 Major performance appraisal methods
While there are definite challenges in the performance appraisal process, there are several tried-and-true approaches you can use as inspiration. Below, we cover the pros and cons of seven major performance appraisal methods.
1 – Objective-based
Objective-based appraisal, otherwise known as Management By Objectives (MBO), is based on mutually agreed-upon goals for a specific period. Typically, these goals mirror those of the broader organization and are designed to be ambitious but attainable. Employees brainstorm 5 – 10 goals with measurable terms and then review them with their manager. Once objectives are set, managers and direct reports meet weekly or monthly to gauge progress towards those targets. If any conflicts or roadblocks arise, the two parties talk about the feasibility of achieving objectives within the allotted time frame.
At the end of the quarter or year, managers rate employees based on how close they got to fulfilling their objectives. Going beyond objectives might entitle employees to promotions or salary hikes. Failure to meet objectives might be met with additional training, a transfer to a different department, or a performance improvement plan (PIP). The main benefit of an objective-based appraisal method is its transparency. Employees work with their managers to delineate tangible goals and talk about their growth regularly.
The downside to MBO is that managers can lose sight of soft skills. Objective-based appraisal puts less focus on how an employee interacts with other peers or clients, how committed they are to the organization, and how often they take initiative. And objectives-based appraisal only works with consistent communication between managers and employees, which can be a significant time commitment.
2 – Self-appraisal
With self-appraisal, employees set aside time at several points throughout the year to examine their progress towards goals, noting successes and failures along the way. At the end of the year, they do a more comprehensive evaluation, determining how many goals they achieved and identifying areas for growth. Employees discuss their self-assessment with their manager, who combines employee’s feedback with other forms of appraisal and come to a conclusion regarding a promotion or bonus.
Self-appraisal gives employees autonomy, encourages them to develop self-management skills, and forces them to take responsibility for their performance. It also helps employees advocate for themselves. Managers may not always remember or even be aware of everything an employee has accomplished, so self-appraisal is a way to highlight those wins. But because self-appraisal is inherently subjective, it’s often a subcomponent of other appraisal methods.
3 – Employee-initiated
In a company that uses employee-initiated appraisal, it’s up to the employee to ask for a review. HR (or People Operations) explains this method to employees when they join the company and reminds employees that they can contact their manager for a review at any point in time. Like self-appraisal, an employee-initiated appraisal isn’t a standalone form of performance management. It’s designed to complement other types of appraisal.
Employee-initiated appraisal promotes regular conversation between managers and direct reports, fostering trust between the two parties and limiting the chances of end-of-year surprises. Of course, there are downsides to employee-initiated appraisals. Some employees are shy, introverted, or close to retirement, making them less likely to request appraisals. It also takes more work on the part of managers. On-demand appraisals can be distracting, taking time away from a manager’s daily tasks.
4 – 360-Degree feedback
Instead of putting the onus of reviews on employees or their managers, 360-degree feedback spreads appraisal across those groups and more. Besides manager and self-input, employees who undergo 360-degree reviews are rated by their peers and any external customers or partners they work with frequently. Another hallmark of 360-degree feedback is that employees give upward feedback to their managers.
To execute 360-degree feedback effectively, leadership picks a cadence for collecting appraisals and publicizes a range of combined scores that warrant promotions and/or interventions. Once all appraisals are gathered for an employee, they are combined into an overall rating and released to the employee and their manager. Sometimes 360-degree feedback is anonymous, inviting stakeholders to share their honest opinion of an employee’s work and giving other colleagues the chance to share their views as well. With this extra detail, employees are better equipped to tackle career development hurdles and bring up any issues with their boss’s management style.
That said, additional feedback isn’t always helpful. 360-degree feedback can foster competitiveness that results in nasty or misguided feedback. Some parties might also be more lenient in their review, while others are stricter. Plus, not every reviewer has the same level of context about an employee. A customer or partner may not know about other internal activities an employee was juggling outside of their projects.
5 – Human resource accounting
Human resource accounting weighs the cost of hiring, training, and nurturing an employee against the revenue they generate for the company. Not all roles are tied to revenue, but value can be measured in non-monetary ways as well. Perhaps someone on the marketing team increased a newsletter subscriber count by a certain percentage or a product team member was instrumental in launching a new release. Both of these examples will turn into revenue-generating activities in the future.
At every review cycle, managers note an employee’s various contributions to the company net their total expenses (recruitment, compensation, professional development). The difference between those two figures influences promotion and salary decisions and helps maintain a more cost-effective organization. Companies that conduct HR accounting appraisals have a better understanding of the cost to acquire, develop, and allocate resources, along with the benefits they will likely get from these investments. This method is particularly well-suited to sales or finance departments since it’s easy to calculate the exact dollar amount they contributed to or saved the organization.
The disadvantage of using this appraisal method is that estimating contributions is far more nebulous for roles that aren’t directly associated with money. HR accounting also assumes that the total value incurred is a direct result of hard work, strategic decisions, and interpersonal relationships. But there are often things outside of an employee’s control that affect the potential revenue they can bring in — a global pandemic, for instance.
6 – Assessment center
The assessment center appraisal method consists of several standardized tests and exercises. Examples include role play, social events, psychological examinations, and other interviews. These simulations are meant to evaluate employees on competencies deemed essential for excelling in their next role. During an appraisal, a company appoints trained judges to observe, record, and score employee performance against named criteria, such as intellectual capacity, public speaking, and people skills.
Assessment centers aren’t normally used for annual or quarterly reviews. Rather, they are meant to determine whether or not employees are ready for a senior-level position. Assessments give leadership an inkling as to how well employees would perform under more pressure, scrutiny, and responsibility, and give an in-depth analysis of an employee’s personality. If employees are close to meeting requirements for a higher role but aren’t quite there yet, their boss might recommend further training and development prior to promotion.
One drawback to assessment centers is that they are expensive to run and manage. They necessitate hiring a third-party company to conduct the tests and tabulate the results. Due to this expense, assessment centers are ideal for organizations with larger budgets and more tenured employees, like manufacturing companies, consulting firms, or higher-education institutions.
7 – Behaviorally anchored rating scale
Behaviorally anchored rating scales (BARS) is a series of standardized data points that managers use to appraise their employees. Each anchor characterizes a behavior trait of employees at each level in the company, and each rating scale gives the appraiser a way to measure that dimension of performance. During review periods, appraisers compare an employee’s performance to the anchored rating for their role. To use BARS, companies must create behavior criteria for every function along with a corresponding scale.
Let’s take a software developer example. To excel at a job, a developer must demonstrate the ability to use multiple coding languages. In this case, “ability to use multiple coding languages effectively” would be the anchor, while 1 – 5 (with associated statements) would be the rating scale. To graduate to a senior software developer role, developers must have high ratings for their role and display evidence of behaviors for the more senior position.
With defined standards for every role, employees clearly understand what’s expected of them today and in the future. BARS are rooted in concrete, observable behaviors, making this method less prone to bias or variance. Be that as it may, BARS can still be unreliable. Ratings are subjective and depend on how well the BARS is written. Creating BARS is time-consuming, as is the process of executing the process.
Use Pipefy for better performance appraisals methods
No matter which appraisal method(s) you choose, a comprehensive performance evaluation defines clear paths to promotion and explains what it means to go above and beyond. With a clearer sense of how they are performing, employees are empowered to do their best work and collaborate better with one another. The tricky part is establishing a performance appraisal process that is simple and scalable.
HR automation software is the answer. Pipefy is a no-code BPM software designed to standardize and automate workflows. With tons of useful, pre-built templates, you can standardize your employee performance appraisal processes and centralize your employee data. You can even help employees visualize how they are growing in their careers and make it easy for everyone to send and receive feedback regularly.
And when executed well, employee performance appraisal methods strengthen company culture, retain key talent, and enhance employee productivity.