What are performance appraisals? A how-to guide for managers
A performance appraisal is the structured practice of regularly reviewing an employee's job performance. It evaluates how well an employee's work aligns with their job criteria, skills, achievements and overall growth.
Organizations commonly use performance appraisals to give employees feedback, decide on bonuses and pay increases, or consider termination.
Performance appraisals are also called performance reviews, performance evaluations or just employee evaluations.
The performance review process identifies employee strengths, areas for improvement, and their value to the organization. These reviews can also be essential for employee development, as they allow employees to discuss their plans for future growth with their managers.
Performance appraisals can be conducted at any time but are generally conducted annually, semiannually or quarterly. The most common type of appraisal is a top-down review where a manager reviews their employee, although there are many different types.
Why are performance appraisals important?
Performance appraisals are essential for both organizations and employees. They serve as a structured process for evaluating employee contributions while encouraging professional development.
For organizations, performance assessments ensure employees live up to expectations and perform their work as expected. They also determine how much the employee contributes to the organization and are suitable metrics for determining pay raises, bonuses and areas for improvement.
For employees, performance reviews open up career development and compensation growth opportunities while identifying areas where they can further improve and develop their skills. Employees can discuss long-term goals and get clarity on what is expected of them. Performance reviews also serve as a way to recognize and reward employee efforts.
Types of performance appraisal methods
HR departments typically create performance appraisals, which center around helping employees define, manage and achieve goals.
There are several ways to set up a performance review, including the following types or methods:
- Self-assessment. Employees evaluate their performance and compare their perceptions with their manager's feedback.
- Peer assessment. Team members and peers evaluate each other's performance. This is meant to foster teamwork and provide unique insights to peers who work closely together.
- 360-degree feedback. Managers gather input about an employee's performance from the employee, supervisors and peers.
- 720-degree feedback. This extends the input from the 360-degree review method outside the organization, including feedback from customers, suppliers and stakeholders.
- Negotiated appraisal. Employees and managers discuss performance openly while being facilitated by a neutral third party.
- The assessment center method. This method involves conducting exercises like simulations, role-playing or hosting a discussion where an employee is evaluated based on performance.
- Behaviorally anchored rating scale. BARS evaluates employee performance using specific behaviors as benchmarks.
- Management by objectives. MBO features set goals and employee performance is evaluated based on the achievement of each goal.
- Objectives and key results. OKRs are a goal-setting tool in which employees set measurable goals that align with individual performance and the organization's objectives.
- Checklist systems. Employees are evaluated based on a checklist of performance-related work and behaviors. Managers mark off items on the checklist that apply to the employee.
- Client- or customer-led assessments. An employee performance evaluation is based on direct feedback from either clients or customers.
- HR accounting method. Employees are evaluated based on their financial contribution to the company, accounting for revenue generation and cost savings.
- Psychological appraisal. This method evaluates employees based on psychological traits, such as leadership potential, decision-making ability and emotional intelligence.
- Continuous feedback. Feedback on performance is given continually, in real time, as opposed to waiting for yearly or quarterly reviews.
- Stacked ranking. Employees are ranked against each other in terms of performance.
Challenges and limitations of performance reviews
Performance reviews do come with several challenges, however. These can include the following:
- Differentiating performance. It might be difficult to distinguish between an individual's contributions and the contributions of a team.
- Unreasonably set goals. If an employee and manager set unrealistic goals, it could lead to that employee feeling demoralized and burnt out, affecting their overall performance.
- Potentially unfair employee evaluations. A manager's bias could affect reviews. And if employees feel that their reviews are inaccurate, it could affect employees' overall trust and engagement in the organization.
- Not every review type is the right fit. Organizations must carefully choose what appraisal method best aligns with their company structure and culture. Poorly matched approaches could negatively affect employee development.
Tips for conducting a successful performance appraisal
What an effective performance appraisal looks like will change depending on the type of performance appraisal used. However, there are a few common traits that all performance appraisals should have.
For example, every employee review session should be documented to ensure accurate records are kept for future reference. This should include discussing promotions, training needed or potential performance improvements. Likewise, using a standardized template for appraisals helps create consistency across the organization and lets employees know what they must prepare for in advance.
No matter the type of review, open dialogue is essential. Managers and employees should be able to have open discussions on the employees' progress, challenges and goals. Regular feedback in moments that aren't related to performance appraisals is also vital to ensure employees and managers are on the same page and to make any needed adjustments for appraisals.
Objectives and employee goals should also be SMART goals -- specific, measurable, achievable, realistic and time-bound.
How often should performance appraisals take place?
Performance management is a continuous process. Managers and employees should meet regularly to discuss and set goals, provide feedback and track development.
The frequency of performance appraisals also depends on the organization's goals, industry and the appraisal method used. They can be held in the following timeframes:
- Annually.
- Biannually.
- Quarterly.
- Monthly.
- Per project.
- Probationary after a set amount of time.
Performance appraisal tools and software
Performance appraisal software is important for any organization conducting performance appraisals at scale. The following is a sampling of employee performance appraisal tools:
- BambooHR. This human resources software-as-a-service tool focuses on self-assessments, manager-to-employee feedback, peer feedback and 360-degree feedback.
- Culture Amp. This suite of products features 360-degree feedback, goal setting and reporting, and performance reviews.
- Lattice. This performance appraisal system focuses on basic and peer reviews and 360-degree feedback.
- Performance Pro. This software focuses on basic and peer reviews, self-assessments and 360-degree feedback.
- PerformYard. This tool focuses on basic, value-based and 360-degree feedback appraisals.
Performance reviews are an essential employee experience tool. Learn what best practices HR leaders can follow when conducting performance reviews.
