Introduction and Theoretical Insight

Firms comprise human resources, physical resources and financial resources arranged in some fashion to achieve a corporate aim. The human resources - the people who bring skills, knowledge and attitudes - are probably the most important element in allowing the firm to achieve competitive advantage over its competitors. As a result, all managers want their staff to perform superbly. But most managers, if asked, would say that few members of staff really meet these expectations. Often, however, such comments come from gut feel rather from than any quantitative understanding or appraisal.

Goal theory tells us that everyone is motivated to improve themselves, to acquire new competencies and to master those already held. Individuals set themselves goals. Achievement of personal aims is important in influencing an individual’s intrinsic motivation. Anything that managers can do to facilitate goal setting and to make goal setting meaningful in the work context is therefore likely to be useful in motivating staff.

Motivation theory itself tells us that staff will want to perform well in their jobs if certain things are present in the workplace - if the work is interesting and of significance, if it involves variety, if the role played is relatively clear, if co-workers are supportive and if management lead with consistency and integrity. Thus individual performance comes from personal motivation and from the way the person is managed.

So if the individual is personally motivated and is also motivated by the manager (termed ‘context motivation’), conceivably high-performance will result. Systems thinking tells us that this is an open loop system; that is to say, we put personal motivation and context motivation in to the personal performance ‘system’ (input) and we hope that in a perfect world performance results (output). Systems thinking also tells us that for the system to come under control some measurement of performance output is essential (the output from A) and this must be fed back (through some process B) to cause corrective action where high-performance does not result. The system must operate in closed loop form (shown adjacent). We must appraise the performance of the individual and feed this back to them to effect continued performance improvement. Where the loop is effective and good performance is realised, continued feedback sustains the performance through stroking and reward.

This paper is about one central aspect of the closed loop performance management system - performance appraisal[1].

Ideas and Concepts in Performance Measurement

Our desire to measure performance in a closed loop fashion perhaps has its roots in the 1920s and scientific management and then subsequently in the 1950s with time and motion studies. Managers have become familiar with the saying “if you can't measure it, you can't manage it”.

Against this rather hard approach to management, we also understand that all staff need strokes - to be told that they are doing a good job or indeed to be told that they're not doing a good job. This feedback does however need to be based on something tangible and performance appraisal meets this need.

Managers also need to make decisions about the level of competence in the firm so they can plan the firm's evolution. We see therefore that performance appraisal has a central role in organisational development. Specifically, investment in training and development (in order to increase the firm’s competence and change the collective attitudes) needs to be based on the tangible outputs of performance measurement.
And there is enthusiasm in some firms for paying staff for their contribution over and above some base rate. Whilst research shows that money alone is not a motivator, there can be value in returning some excess profits to the workforce through bonuses. If individual performance-related pay is to be considered, there needs to be some method of measuring that individual performance such as that employed in performance appraisal.

And finally, managers set corporate objectives and flow these objectives down to individuals. Conceptually if all individual objectives are met then the corporate objectives will also be achieved. If however there is no method of setting and monitoring achievement of individual objectives, the relationship between the individual objectives and corporate objectives is broken. Some form of monitoring of individual performance is essential and with that there must be some method of applying corrective action.

For many reasons performance appraisal in every organisation makes good sense. Performance appraisal is however not simple and certainly not without issues.

Issues in Performance Measurement

Human judgement is hugely subjective. It's very difficult for a manager to avoid giving an opinion about a subordinate's performance without that opinion being open to question. Humans making judgements about others in a social environment such as a firm will inevitably be subject to bias and political influence. Research shows that if a manager likes the subordinate, a more favourable assessment will result[2]. Research also shows that the opinion of a peer about another’s performance is influenced by what reward the assessing peer might subsequently get as a result of their judgement. We might say that these failings or imperfections are just human nature.

These issues will be explored later in this paper but those simple instances cited here show that performance appraisal and the management functions of performance management and organisational development are somewhat imperfect from the outset. It would be easy at this point to agree about measurement and management and say that because we can't easily and precisely measure performance, we can't manage the people giving it. However like many things in business, difficulty or complexity are not reasons to avoid adoption. The benefits of performance management and organisational development through performance appraisal are too valuable.

Because performance appraisal is complex it does mean that researchers in psychology have found the subject of huge interest. This in turn means that there is a substantial body of knowledge from which to draw when building methods of performance appraisal to implement in firms.

The ‘Standard’ Performance Appraisal

The 1970s and 80s saw a relatively standard form of performance appraisal develop. The aims were straightforward - to improve the individual's current performance, to set and review performance objectives and to assess training and development needs. These themes persist today.

The standard form was generally run by the human resource management department within the firm and this perhaps illustrates that at this point formal performance appraisal was a large company device. The appraiser was invariably the boss or supervisor who would sit down annually with each of their direct reports. In a hierarchical structure in a firm this meant that typically the appraiser was conducting a performance appraisal for somewhere between four and twelve people and the process cascaded in this fashion from directors to shop floor. Generally only managers were trained to do performance appraisals.

Typical contents of these appraisals were review of objectives, discussion about obstacles that prevented objectives being met, the all-important performance rating and then discussions about forward-looking topics such as the employee’s need for training and development, their prospects for promotion and their long-term potential. Usually the interview lasted just ninety minutes and the outcomes would be used by the HR Department in salary review, succession planning and reporting of performance statistics about departments and the firm as a whole.

Issues in Measuring Performance

Companies are both social and political entities. Performance management is used within the production or operational system for getting work done in the firm and within support departments such as finance and HR to aid the operational processes. There are many questions: what constitutes accuracy of measurement of performance, how effective is the measurement and how can measurement be made in any case in such a social and political environment? And how can performance be measured and performance appraisal used in the modern firm where there are many different cultures?

Performance as Outputs and Results

Performance can often be split in two: task performance and contextual performance. Task performance is, as it implies, how well someone performs the tangible aspects of the job. In a hotel it would be a waitress’s performance in delivering the right food to the right table at the right time. Contextual performance on the other hand is the way in which the delivery is made - for example, did the waitress smile and as a result how did the customer feel. Contextual performance is of significant importance because it often determines whether the customer will visit the hotel again. Contextual performance is a major contributor to competitive advantage.

Contextual performance is a measure of the extra-to-role behaviours. Contextual performance is often not written down on the job description but it should be at the forefront of everyone's mind when recruiting a new member of staff. The willingness on the part of an employee to offer extra-to-role behaviour comes from their personality and motivation (remembering that motivation depends on both the individual’s personal motivation and that from management). Contextual performance has links to what is termed an individual’s emotional intelligence[4].

Some practitioners suggest that appraisal of task performance and appraisal of contextual performance should be done separately.

Performance as Counter-Productive Behaviour

So far we have talked of performance as something positive. It is also distinctly possible that individuals will engage in counter-productive behaviour and performance management will be used along with performance appraisal to effect corrective action. In this case performance appraisal aims to identify and quantify this counter-productive behaviour and all of the same issues apply as if it were a positive rather than negative contribution to the firm. Firms tend to have separate processes for managing dysfunctional behaviours.

Dysfunctional behaviours are sometimes difficult to quantify. Consider for example someone who is often rather miserable at work and has a poor general attitude towards the firm. Consider that this same person enjoys the work itself and is actually quite good at it. We might consider that the miserable nature was counter-productive and we might seek to address this at a performance appraisal meeting. This conversation would be quite difficult if the individual doesn't consider themselves miserable and if it is difficult to see any link between their demeanour and their output. Managers tackling absence of extra-to-role behaviour need to think about their own contribution to the problem before focusing on the employee.

In some dysfunctional behaviour it’s perhaps easier to identify the apparent cause but that doesn’t make them any easier to address. Consider someone abusing alcohol in the evenings, mornings and lunchtime. Many alcoholics deny their addiction and argue that what they do at these times is their own affair. Whilst the cause centres more on the employee, it's only when the dysfunctional behaviour affects some tangible aspect of performance that the issue can be addressed properly.

Over the last 15 years or so there has been significant interest in organisational citizenship behaviours (OCBs) and what encourages them - in effect OCBs are the converse of counter-productive behaviour. OCBs are those behaviours that fuel the social cohesion processes in the firm and make the group of people comprising the firm function as a team. Each member of the team has the opportunity to offer these discretionary behaviours for the general good.

High performance is therefore as much about positive behaviour (and the presence of extra-to-role behaviours) as it is about tangible positive outputs.

Competencies

Output and behaviour sit together to provide a view of the individual’s performance. An alternative approach to try to bring both together is the use of ‘competencies’.

A competency is something that the person has. What they have is demonstrated through their behaviour. Competencies can be thought of as attributes necessary to produce the desired behaviour and outputs. Competencies have been defined as “a repertoire of capabilities, activities, processes and responses available that enable a range of work demands to be met more effectively by some than by others”[5].

Competencies are often used in person-specifications attached to job descriptions in search and selection activities. In this case competencies are outputs and behaviours that would be desirable in any candidate for the job. Competencies are also used in competency frameworks to specify the aggregate human capability needed in a firm. Once broken down by role, it is then possible to ask about the degree to which a particular staff member meets the competencies required of their role. Again we see the idea that if each individual can be assessed as meeting the required competencies, the whole firm will then have the necessary capability to meet its strategic objectives.

Competencies can have clear application in performance appraisal. In some ways specifying the competencies necessary and seeking evidence about whether each person displays those competencies is a more tangible performance appraisal approach.

Issues in Measurement of Performance

In trying to define the parameters of performance such as output, behaviours and competencies it's clear that the manager as appraiser has to make very subjective decisions about their staff. Research over the last 20 years has addressed this problem and the subject is quite well understood. This section discusses some of the issues in making decisions about an individual’s performance.

Many performance appraisal systems involve giving what is termed a ‘rating’ of the performance. In the simplest sense this might have three factors – poor, acceptable, good. To try to gain a modicum of objectivity we might try to relate the performance to some norm and change the three factors to below average, average and above-average. Whatever happens though, the judgement is subjective and the striving for objectivity has been a constant theme of research.

Who Appraises

So far there's been an assumption that there are only two parties to the appraisal: the boss and the subordinate. Everything described so far assumes that the boss is giving an opinion on the subordinate’s performance and indeed this is the reference case against which all other possibilities are evaluated. In an effort to gain objectivity, and to generally increase the quality of performance appraisal, different forms of appraisal with different appraisers have been tried.

Researchers found that allowing employees to participate in their own appraisal may make them more aware of and committed to performance goals. There is therefore a significant argument in favour of self appraisal. Individuals are however more lenient in their opinion than others although this leniency diminishes with self-appraisal training[6]. Subordinates may also appraise. Subordinate ratings may also be somewhat lenient since they may feel they have to live with the fallout of their opinions in months to come[7]. Peers, those of a similar grade in the organisation, may also be asked for a view. Peers tend to pay more attention to the degree to which the appraisee helps them achieve their objectives rather than perhaps focusing on the appraisee’s own outputs[8]. Peers may therefore measure OCBs more often than others. And finally customers and suppliers could be asked for an opinion. In some senses the customers’ view is the real view that matters to the firm because it is an assessment of the firm's competitive advantage.

There are therefore five possible appraiser groups - self, subordinates, boss(es), peers and customers/suppliers. How then does one proceed? Each appraiser group has some bias. Some will be more lenient than others and some will be more politically influenced than others. Some such as the boss (or bosses in a matrix structure) will focus on task performance whereas others will be more interested in how the appraisee helped them achieve their goals.

One could simply take an average of all of the ratings. One could also plot the ratings and seek a median. Note that plotting the ratings can result in a complex, perhaps bimodal, distribution being realised rather than something where a single central tendency is obvious[9]. The fact that the frequency distribution of ratings might be complex shows one of the failings of taking a simple average – the single result can mask a host of issues with one or more rater group. This issue of how to process the ratings from multiple sources is one of the key problems with 360-degree or ‘multisource, multi-rater’ appraisal systems. Just because there are now a large number of judgements does not make the final rating awarded any less subjective and introduces potential for huge error with one group or other skewing results.

Measures of Quality

There are four primary measures of quality in performance appraisal.

1. Reliability: the extent to which a measure is free from error with temporal stability and internal consistency. Temporal stability is the idea that if a rating is given at one point in time, the same rating score will be given again by the same rater a few months later. In other words it is the requirement that the rating is not influenced by immediate events but is a balanced view. Internal consistency is the idea that raters will consistently apply the same criteria across all appraisees.
2. Convergent validity: that there is agreement in the views of all raters, for example between self and supervisor ratings and between self and peer ratings.
3. Bias: differences between ratings or evaluations as a result of belief or other factor. The example mentioned above is leniency. If managers like subordinates they are likely to give a more lenient rating.
4. Predictive validity: the degree to which measurement of past performance is a means of predicting future performance rather than simply recording history. This is of particular interest in succession planning and in determining training and development needs.

In implementing performance appraisal, management would therefore want to know that ratings:

• were reliable (and not influenced by the moment or given using varying criteria),
• were convergent (tending to a single rating),
• were not subject to undue bias, and
• were useful in predicting future performance.

These requirements are tough to achieve and may explain why there is little consistency in opinion about how performance appraisal should be done. Some believe that using all five rater groups better meets the requirement while others consider that there are so many errors introduced in multi-rater systems that the old-fashioned manager-subordinate appraisal still has greatest merit.

Evolution to Performance Management

It's been intimated above that performance appraisal is part of the bigger management activity of performance management. Performance appraisal is the measurement and evaluation part. To understand performance appraisal we need also to understand the uses to which performance appraisal is put. This section addresses how people respond to goals and the role of self-awareness in personal achievement. It ends with a discussion on how people use feedback, received during performance appraisal meetings, to affect behaviour change.

Goals and Goal Orientation

Psychology theory suggests that there are two types of goals that individuals pursue, learning goals and performance goals. People are oriented towards one or other.

A person who is learning goal oriented strives to improve their own performance by increasing their understanding of the world about them and about the tasks that form part of their role. They consider that they achieve through learning. They recognise that in order to progress they must seek genuine feedback on their performance and in turn set challenges and goals for themselves that further learning.

A person who is performance goal oriented is motivated by their own achievements and sets new goals that are likely to result in further personal reward. They only seek and respond to positive feedback, being receptive to positive strokes and hence encouraging their own personal performance.

Learning goal orientation is positively related to self-efficacy; self-efficacy is a person's belief in their ability to succeed. Self-efficacy determines how a person approaches goals. Someone with high self-efficacy believes that they are capable of performing well and they are therefore likely to view challenges as something to be mastered rather than something to be avoided. So someone with a learning goal orientation is also likely to be someone who grasps new challenges as an exciting opportunity for learning.

Performance goal orientation is found to be negatively related to self-efficacy. That is to say that someone who is performance goal oriented is not likely to have strong belief in their ability to succeed. They are unlikely to see a new challenge as an opportunity to learn but rather an opportunity for personal reward.

It's important to understand these two different orientations in people. Some people rise to challenges because they get some personal reward or gratification for achieving great things. Others rise to challenges because there is opportunity for learning and self betterment. Appraisers need to have different strategies for dealing with these two different orientations and in particular they need to understand the way feedback will be processed by people with either orientation. Understanding these two orientations is very important when using performance appraisal as part of identification of training and development needs.

Self Awareness

The previous section has illustrated that there are five different possible rater groups: self, boss(es), subordinates, peers and customers/suppliers. One of the main aims of having so many raters giving so many different points of view is to increase the appraisee’s self-awareness. Self-awareness can be defined as the degree of agreement between the appraisee’s self-assessment of their performance and the way that their performance is viewed by the other rater groups.

Research has shown that high self-awareness is associated with better performance[10]. Because management seek better performance from all staff, this gives a forceful argument for the 360-degree appraisal. Some consider this a sole reason for justifying performance appraisal as an organisational activity.

Aims of Performance Management

This argument about increasing personal performance through increased self-awareness illustrates one of the key management aims of performance management – change in a person's outputs, behaviours and competencies. As we've already discussed, setting new goals can lead to change, as can providing feedback.

But we also know that change can come about through engaging in deliberate training and development activities. If management train individuals and if that training is appropriately targeted then it is likely to lead to a change in output, behaviour or competency. Training and development is a major part of performance management and for some, performance appraisal is only about setting training and development needs.

We see here two opposing views: performance appraisal (and with that objective setting) as a directly acting mechanism for effecting change versus performance appraisal (and with that training needs analysis) as a mechanism for change through learned competency.

So the two camps desire the same outcome but differ in emphasis. This paper does not intend to take sides but it is interesting to note that most organisations adopting 360-degree appraisals with the intention of directly driving change dropped the schemes within two years[11]. Organisations adopting performance appraisal to drive training and development on the other hand have tended to sustain their activity.

Appraisal as a Process

In order to move on to design appraisal systems we need to put aside our doubts about accuracy and objectivity and look at appraisal as a business process.

Performance Appraisal as a Social/Communication Process

The action of a boss sitting down with a subordinate is a social process and part of the overall social activity of the department or firm. As noted above it’s an opportunity to discuss work formally. A good manager will spend significant time with their people day-to-day (whether face-to-face or by electronic means) and whilst this informal communication is essential it must be supported by the elements of formality. The performance appraisal meeting is an opportunity to discuss past performance, agree tasks and changes to tasks and set and agree future objectives. As already noted one of its most important roles is to facilitate discussion on training and development needs.

Whilst a good boss will give feedback continually, the appraisal meeting is an opportunity to formalise that feedback and for the boss to hear what the subordinate has to say about rater views. The discussion above has already adequately covered who might be giving the feedback and how multiple sources may be aggregated. Given that everyone is setting goals and striving for something in their lives, the appraisal meeting is also important for career development.

This all supposes that the appraisee finds the appraiser credible and the feedback balanced and accurate. Part of the process must be for independent adjudicators to check for extremes and to respond to appraisee doubts and concerns. Where feedback is negative or critical, theory suggests that no more than two aspects of performance should be criticised at any one time. Managers must remember the damaging effect that whole scale criticism will have. If such criticism is justified, managers should find other ways of correcting such apparent poor performance – and certainly they should not wait for an annual appraisal meeting.

Involving the appraisee is important. There are two types of involvement: instrumental participation and value expressive participation. Instrumental participation is where the individual participates in order to influence the end result. Value expressive participation is participation for the sake of having one's voice heard. The nature and degree of involvement of the appraisee is tempered by culture (both within the firm and within external social groups such as the family).

Performance Appraisal as a Political Process

Managers should be aware that as soon as people come together in a social environment such as the firm, there will be political activities throughout with individuals trying to influence others towards their way of thinking. The performance appraisal has as its outcome both benefits and rewards and dis-benefits and sanctions for all participants. The result is that individuals will work the system to achieve what is best for them, be they appraisers or appraisees.

Appraisees expect justice and fairness from the process. Appraisals will be viewed by some as simply a way of expressing power and illustrating who the boss is. It's important that appraisees enter the process with the understanding that ratings will be balance and reasonable. Managers need to consider the motivation of raters and the likely impact on ratings in their environment. This is particularly relevant when considering multisource, multi-rater systems. In some environments these may be impractical: having a large number of raters does not avoid power politics.

Finally, as already noted, whether someone likes the appraisee or not has a significant bearing on the process and the rating.

Problems with appraisal systems can be avoided to some extent by setting clear standards for ratings and providing information on observable performance levels. Raters in this case give ratings against norms. At one extreme there is the norm suggesting that the appraisee “always…” and at the other extreme the appraisee “seldom…” and raters are invited to score on a five-point scale between the two extremes.

Performance Appraisal System Issues

There is an array of guidelines for good appraisal system design. The following lists some of these.

• Purpose: managers need to be clear as to why they are implementing performance appraisal. Performance appraisal makes use of feedback provided to the appraisee in order to effect change in outputs, behaviour and competencies. Feedback is most effective when ratings are collected for development purposes rather than pure evaluative purposes. Managers also need to be clear that the ratings will change depending on the perceived purpose for which the rating is being given. For example an appraiser will behave differently if they feel they are there to help the appraisee as opposed to evaluate the appraisee in order to set their salary for the coming year.

• Confidentiality/anonymity: ratings are affected by whether or not the appraisee will ultimately know the identity and rating of contributors. Clearly in the simple boss-subordinate appraisal all identities are known but when others are brought in to the process, there will be much speculation about who gave what rating and ratings may change with experience of the system. Some organisations allow individuals to choose who provides feedback and of course in this case friendship bias will be prevalent though it may not necessarily reduce reliability and validity.

• Averaging responses: averaging helps protect anonymity and reduces the effect of bias but as noted above it can conceal a bimodal distribution or other distortion. Aggregating ratings from various rater groups may in this way obscure very real discrepancies between them and thus give an unrealistic picture.

Uses of Performance Appraisal

Whilst the performance appraisal meeting may have many purposes, there are four clear uses to which performance appraisal as an evaluative activity may be put.

Behaviour change: research suggests that despite the years of appraisal of performance within the firms, there are very few examples of objective measures of performance change. This is not to say that the provision of feedback is not valuable but simply to say that researchers have yet to find a way of usefully linking performance appraisal to performance change. Further, although multisource feedback is often given as an appropriate method of bringing about changed attitudes and culture change, researchers have found no direct evidence to support this in practice[12].

Identification of training needs: before training and development can be identified for any one person, the current performance and current knowledge, skills and attitudes need to be described. In many ways this is a very low risk use of performance appraisal. The worst that could happen to any appraisee is that it could be determined that they need development in some area or other. Many organisations introduce performance appraisal and all its benefits with this objective in mind initially. At the same time of course discussion will inevitably drift to centre on outputs, behaviours and competencies. Many organisations focus on identification of training needs whilst encouraging other discussions.

Setting pay: readers will by now have understood that the performance appraisal can be a very political activity with parties seeking to influence to their benefit. Whilst some organisations do use performance appraisal to set pay, TimelessTime does not advocate this directly. Our other publications discuss how pay should be built and performance appraisal may indeed have some role to play.

Identifying future potential: succession planning in all organisations is essential. Small firms in particular face huge problems when the boss wants to move on and due effort has not been given to a replacement. Performance appraisal is a historic look at an individual's performance and whilst it has been noted above that past performance can be an indication of future performance, there is more to it than this. One must consider that the future context will be different from that under which assessment has been made.

Links to Other Management Systems

As noted performance appraisal meetings are an opportunity to discuss past objectives met and not met and to set future objectives. The performance appraisal meeting and its objective setting therefore links to corporate objective setting and the firm’s strategy.

Corporate objectives flow to individual objectives and into the performance appraisal system which measures the match between individual objectives and tasks performance.

Performance appraisal can be linked to performance related pay though above we caution making this link too strong. A direct link between the two risks destroying other benefits of performance appraisal. Performance appraisal can (and in TimelessTime’s view, should) be linked to personal development and the setting of personal development plans. Personal development plans are of course simply a form of objective.

Finally one fad which is currently prevalent in some firms is the use of the balanced scorecard[13]. Here corporate objectives are set in a number of business areas seen as important by management.

The balanced scorecard is then used at an individual level to see not just if an employee has met objectives but in which business area they have performed. This again is another area where performance appraisal links corporate and individual performance.

Designing and Implementing Appraisal Systems

The first thing to identify is that performance appraisal is a complex activity. Generally firms expect too much from it. It doesn't take much to see that implementing a 360-degree appraisal system across 50 or 100 members of staff will take significant management time. If not designed carefully it may prove to be divisive and damaging, rather than be realised as an important management tool. The following gives some guidelines.

Requirements of Performance Appraisal Systems

Like most management activities, it is essential that managers have a clear view of their requirements for performance appraisal and the benefits that they expect from the performance appraisal system. It would be unwise for a firm that has no appraisal system to go straight in to implement a multisource, multi-rater system with the objective of effecting behaviour change. Organisations need to build experience in performance appraisal.

Performance appraisal systems should have:
clear aims,

• measurable success criteria,
• employee involvement,
• links to performance goals,
• focus on performance improvement
• links to training and development to effect that improvement,
• links to non-financial rewards,
• continuous review against success.

Managers should avoid fad-surfing. Just because one firm introduces one type of performance appraisal does not mean that others should follow suit.

Technology as an Aid to Appraisal

The simplest performance appraisal is where the boss sits with their subordinates to discuss performance and training needs. In this case the only technology needed is a sheet of paper and a pencil, perhaps with some structure to achieve all of the objectives set out above. Modern firms, staff locations and reporting lines do however complicate data collection. With a computer however the collection of a large amount of data from several raters on many aspects of the appraisee’s work becomes relatively simple. With the Internet, managers can seek input from multiple sources regardless of where they are located.

On the one hand technology makes the data collection easier and perhaps removes excessive emotion from the process (because appraisers talk to a computer, not the appraisee) whilst on the other hand technology risks destroying the whole ethos of the activity. Technology should be used to facilitate the process and not intervene in the process.

Arguments Against Performance Appraisal

This paper may so far have done nothing other than illustrate that performance appraisal is a complicated activity. Most large firms do however believe in its benefits and around 85% of employees in large firms and in the public sector in the UK have annual appraisals. It would however come as no surprise to see that there are those who would argue that performance appraisal is unnecessary, ineffective and even dangerous.

Firstly there is significant argument that performance appraisal is only effective with so-called white-collar staff. The assumption is that because performance appraisal is a complex cognitive process, it is inappropriate for those outside administrative and managerial groups. The argument is that staff that clean, service and sell need supervision day by day or even hour by hour and that development is not a major part of these jobs.

Many such jobs are held by part-timers and temps and part-time and temporary employment is on the increase, further reducing the support for appraisal. Managers should remember that there are statutes now in place in the UK to ensure equality across all employees. As noted above, managers need to understand the needs of the jobs in their organisations, understand the culture and be clear about the aims and benefits sought. There is no reason why performance appraisal should only be applied to white-collar staff. And there is every benefit from extending performance appraisal to all.

Secondly, when asked, most organisations expressed dissatisfaction with their appraisal processes[15]. The argument is of course that because many (large) firms have not implemented useful performance appraisal and have not continually reviewed and changed the processes, all firms are likely to likewise express dissatisfaction upon implementing performance appraisal. In applying performance appraisal to all firms, large and small, this argument is weak because the success of performance appraisal is likely to be greater in smaller firms. In this case the complexity reduces, making the process easier to run and more likely to realise benefits.

Finally, the application of bias and politics in the appraisal process is argued to render it ineffective. Managers who challenge the status quo and encourage subordinates to act independently and strive for success will potentially be rated low by their bosses but of course because responsibility is a motivator, they will be rated high by their subordinates. Some argue that such processes that give dramatically different views cannot in any way yield an objective appraisal result. Errors must therefore render multisource, multi-rater performance appraisal useless, if not question all performance appraisal types.

Arguments in Providing Feedback on Performance

One of the big arguments in favour of performance appraisal is that providing feedback to staff on their performance will cause a change in output, behaviour and competence. As noted above this is rather more a belief than anything supported by tangible evidence. Also as noted above, feedback of the wrong type can demotivate and hence have a negative effect on performance.

In general, research does not support the assertion that feedback, and in particular feedback from multiple sources, will motivate individuals to improve their performance. Traditional motivation theories stating that motivation is considered to come from factors of the job such as autonomy and responsibility do however still stand. Overall the actual amount of evidence is small in support of 360-degree feedback and its positive impact on performance.

The way in which feedback is consumed and processed by individuals depends on several personality factors such as high self-esteem and the feeling of ability to control events. Managers should be aware that the benefits of feedback are therefore somewhat unique to the individual. This illustrates that performance appraisal should not be a ‘one size fits all’ solution with the same expected outcome for all staff.

Conclusions and Recommendations on How to Proceed

As noted at the start of this paper, the intended audience is the SME manager looking to begin performance appraisal or to evolve an existing appraisal system. For those in large firms, already implementing massive appraisal machines, this paper might inform but these conclusions are not for you. The conclusions emerge from the text. The intention is to take the good from the discussions and reject the bad, or rather reject the as-yet unproven:

• Managers should keep initial implementations simple. The value is in the journey of performance appraisal and in managers sitting with their staff to celebrate good performance and set objectives for improvement. Don’t implement 360-degree appraisals but do get appraisers to seek evidence of performance from third parties to enrich any feedback given.
• Do base the appraisal on competency. Remember that competency is “a repertoire of capabilities, activities, processes and responses available that enable a range of work demands to be met”. Score each person for their tendency to exhibit the desired competencies.
• Self-assessment works. But it works better if staff are trained. Train staff and invite each appraisee to conduct a self-appraisal. Then conduct the appraisal meeting and discuss the appraisee’s findings. Use evidence to agree changes as needed. Don’t rate staff; centre on their tendency to perform the competency. That way you can avoid all the traps of statistics and regression to means and you are then able to see the individuality of the folk that work for you. Accept ambiguity.
• Like so much in management, performance appraisal only works if both the manager leading the appraisal and the staff member being appraised are trained. At the very least, invest in meeting facilitation for managers and in self-appraisal for subordinates.
• If appraisal seeks to identify training needs, managers must be prepared to put money for development behind the rhetoric of improvement. Every time an appraisee intimates that some form of learning could aid their improvement, managers must be prepared to invest. See our other publications on training for ideas here.
• The firm will develop and change as the performance appraisal system takes effect. It is therefore essential that the appraisal system evolves to suit the changing needs of the firm. The performance appraisal system should be reviewed annually and appropriate changes made.
• Remember that the value of the performance appraisal system to the firm is manager and subordinate sitting together to discuss past performance, issues that precluded performance and things that could be done to enable performance.

1. Much of the empirical research cited here is from Fletcher, C (2001) Performance appraisal and management: The developing research agenda. Journal of Occupational and Organizational Psychology, 74(4), 473 – 487 and from Fletcher, C and Baldry, C (1999) Multi-source feedback systems: A research perspective. In C L Cooper and I T Robertson (Eds) International Review of Industrial and Organizational Psychology, Vol 14. Chichester: Wiley.
2. Lefkowitz J (2000) The role of interpersonal affective regard in supervisory performance ratings: a literature review and proposed causal model, Journal of Occupational and Organisational Psychology, Vol.73, 67-85
3. The psychological contract is a psychological concept used to describe all the beliefs and expectations on the part of both manager and subordinate that remain tacit, unwritten and in the minds of the two parties. The psychological contract is bolstered by action such as management participation and weakened by such as perceived breach of promise.
4. Emotional intelligence is an individual’s ability to monitor their own and others’ emotions and to use the information concluded to guide their own actions and thoughts.
5. Kurz R & Bartram D (2002), Competency and individual performance: modelling the world. In IT Robinson, M Callinan and D Bartram (Eds.) Organisational Effectiveness: the role of psychology, Chichester, Wiley.
6. Self-assessment despite being prone to leniency can still be a reliable measure of behaviour (Nilsen D & Campbell DP (1993) Self-observer rating discrepancies – once an overrater, always an overrater? Human Resource Management, No.32(2-3), 265-281). There is moderate correlation between self and supervisor ratings and between self and peer ratings and there is a significant correlation between self-assessment and co-worker ratings. The quality of self-assessment is therefore reasonable. Self ratings do predict future performance. Leniency bias is consistent over time and with different behaviours.
7. The reliability of a single subordinate rating is low. Reliability of subordinate ratings increases with the number of subordinates providing the ratings. There is moderate correlation between boss and subordinate ratings. Subordinate ratings are in greater agreement with supervisor ratings than with self ratings. Behaviours that subordinates think important are different from those which superiors think important. Bias is affected by liking and political processes and managers focus on pleasing subordinates just before appraisal time.
8. Peers tend to be more aware of the constraints that the appraisee finds blocking their performance and hence are more forgiving. Peer ratings are more likely to differentiate effort from performance. Research suggests that they are potentially the most accurate judgement of employee behaviour. There is a moderate to high correlation between peer and supervisor ratings. Peer ratings are a valid predictor of performance. Many organisations worry about extreme bias and do not include the peer group in appraisal systems.
9. Bimodal describes the idea that when all the ratings are plotted on a graph, two peaks are visible with not one but two descriptions of central tendency or mean. A good example of this is where peers may score very differently compared with subordinates (for one reason or another) resulting in a mean for the peers and another different mean for the subordinates.
10. Alimo-Metcalfe B (1998) An investigation of male and female constructs of leadership and empowerment, Women in Management Review, No.10(2), 3-8.
11. Fletcher C (1998) Circular Argument, People Management, 1 October, pp.46-49.
12. Timmreck CW (1995) Upward feedback in the trenches: Challenges and realities, in WW Tornow (Chair), Upward feedback: the ups and downs of it. Symposium conducted at the Tenth Annual Conference of the Society for industrial and Organisational Psychology, Orlando, FL.
13. Kaplan RS and Norton DP (2000), The Strategy Focused Organization, HBS Press, USA.
14. Power-distance describes the effective ‘distance’ that is considered to exist between those at the bottom of the society ‘tree’ and those at the top - see Hofstede G (1980) Culture’s consequences: international differences in work-related values, Beverly Hills, CA, Sage.
15. Fletcher (1997), op.cit.