Many companies use performance appraisals to assess the performance of their employees. While performance appraisals provide some notable benefits, they are not without challenges. In this lesson, we'll explore these benefits and challenges.
Performance Appraisal Benefits
Mark is 'celebrating' his first year anniversary as a junior executive with his company with a performance review. He's not looking forward to it and is complaining to Alan, a friend of his that works in human resource management. Mark asks Alan what the heck they're good for except to make his life miserable.
Alan explains that the overarching benefit of performance appraisals is that they help an organization and its members become more effective. Performance appraisals do this by providing a sound basis for many employee-related administrative decisions and by making important contributions to employee and organizational development. Performance appraisals help companies identify good performers and poor performers. A company can use performance appraisals to determine who should be rewarded with raises and promotions, which employees need more training and who should be terminated.
Alan explains that the difference between profit and loss is grounded in the effectiveness of an organization in reaching its goals, and performance appraisals can help ensure organizational effectiveness. If you analyze performance appraisals as a group, you can often see patterns that show where performance is good and where performance is poor across an organization. This information will drive decision-making regarding personnel planning and applicant selecting as well as training and development.
Performance Appraisal Challenges
Mark is not convinced that performance appraisals are a benefit. He thinks that Alan is assuming that performance appraisals actually do a good job of judging performance. Alan admits that implementing a sound performance appraisal does pose some challenges.
The overarching challenge of performance appraisals is accuracy. Alan acknowledges that if an appraisal doesn't accurately distinguish between effective performance and ineffective performance, the appraisal may actually be counterproductive. Alan explains that it's necessary to carefully develop performance criteria or standards that accurately describe or predict good performance.
Alan also admits that even if the standards used are accurate, rater error is possible. A rater is the person performing the performance appraisal. Mark asks Alan to provide some examples, thinking he may need the ammunition if his review goes bad. Alan is happy to comply:
- Central tendency error occurs when the rater doesn't give high or low scores. Instead, all employees are rated about the same, which is average.
- Raters may also commit leniency errors and strictness errors. A rater is being too lenient if he rates everyone as excellent and is strict when rating everyone as poor.
- The recency effect can create errors and is where you remember recent events better than earlier events. For example, a supervisor rating an employee's performance may unduly focus on the most recent performance success or failure rather than looking at performance during the entire review period. This may lead to a wrong conclusion.
- Raters are also subject to contrast error. This type of error results when an employee rating is either biased up or down based upon the performance of another employee that has been rated. For example, an employee that objectively should be rated average may get rated very good if a very poor employee was just reviewed. On the other hand, the same average performer may be incorrectly rated a poor performer if his review follows a great performer.
- Similar-to-me errors occur when a rater makes an upward biased rating of an employee with whom the rater has something in common. For example, a manager may give a higher rating to executives who are alumni of his business school.
Alan explains that all of these challenges can be overcome with proper design of appraisal systems and proper training in their use.
Let's review what we've learned. Performance appraisals offer some very important benefits to organizations. Performance appraisals can provide organizations the information they need to distinguish between good performers and poor performers as well as gauge the overall performance of the organization. It can also help guide employment decisions, individual and organizational development efforts and help with personnel planning.
Performance appraisals also present challenges, which relate to accuracy concerns. If the criteria or standards utilized to assess performance do not accurately distinguish between effective and ineffective performance, then the appraisal will be useless if not counterproductive. Organizations must also be wary of rating errors, including central tendency errors, leniency and strictness errors, the recency effect, contrast errors, and similar-to-me errors.
After you have completed this lesson you should be able to:
- State the purpose of performance appraisals
- Explain how performance appraisals can be useful for an organization
- Discuss some of the challenges with performance appraisals