UNIT 4

WHAT IS PERFORMANCE APPRAISAL?

Performance appraisal: Definition

Performance appraisal is defined as a process that systematically measures an
employees personality and performance usually by managers or immediate
supervisors against the predefined attributes like skillset, knowledge about the role,
technical know-how, attitude, punctuality and so on.

Performance appraisal has many names across organizations, some call it performance
evaluation, some prefer performance review, merit rating, annual reviews, etc.

This process is carried out to identify the inherent qualities of an employee and the
abilities and level of competency of an employee for their future growth and
development and that of the organization they are associated with. It aims at
ascertaining the value of an employee and his/her offering to the organization.

Performance appraisal helps managers and supervisors place the right employee to do
the right job, depending on the skill set they possess. Without an ounce of doubt,
every organization needs a robust performance appraisal system.

There are various methods that are used by managers and supervisors to evaluate
employees based on objective and subjective factors, however, it can get a bit tricky,
but to effectively evaluate an employee both factors are essential.

Objectives of performance appraisal

Following are the objectives to conduct performance appraisal year after year:

 This is an essential first step towards promoting an employee, based on the

subjective and objective factors- performance and competency.
 To identify the training and development needs of an employee.
 To provide confirmation to those employees who were recently hired and are
on their probation period.
 To take a concrete decision what should be the percentage of hike in the salary
of an employee based on the work done by them.
  To encourage a proper feedback system between the manager and employees.
 To help employees understand where they stand in the current year and what is
the scope of improvement.

What Is a Performance Appraisal: The Methods of Performance

Appraisals

Performance appraisals come in many forms. Managers and human resources staff responsible
for these appraisals need to choose the best methods based on the size of their organization and
what sorts of responsibilities the employees fulfill.

Methods of performance appraisals include:

 720-Degree feedback: You could say that this method doubles what you would get
from the 360-degree feedback! The 720-degree feedback method collects information
not only from within the organization but also from the outside, from customers,
investors, suppliers, and other financial-related groups.

 The Assessment Center Method: This method consists of exercises conducted at the
company's designated assessment center, including computer simulations, discussions,
role-playing, and other methods. Employees are evaluated based on communication
skills, confidence, emotional intelligence, mental alertness, and administrative
abilities. The rater observes the proceedings and then evaluates the employee's
performance at the end.

 Behaviorally Anchored Rating Scale (BARS): This appraisal measures the employee’s
performance by comparing it with specific established behavior examples. Each
example has a rating to help collect the data.

 Checklist Method: This simple method consists of a checklist with a series of

questions that have yes/no answers for different traits.

 Critical Incidents Method: Critical incidents could be good or bad. In either case, the
supervisor takes the employee’s critical behavior into account.
  Customer/Client Reviews: This method fits best for employees who offer goods and
services to customers. The manager asks clients and customers for feedback,
especially how they perceive the employee and, by extension, the business.

 Field Review Method: An HR department or corporate office representative conducts

the employee's performance evaluation.

 Forced Choice Method: This method is usually a series of prepared True/False

questions.

 General Performance Appraisal: This method involves continuous interaction between

the manager and the employee, including setting goals and seeing how they are met.

 Human Resource Accounting Method: Alternately called the “accounting method” or

“cost accounting method,” this method looks at the monetary value the employee
brings to the company. It also includes the company’s cost to retain the employee.

 Management By Objective (MBO): This process involves the employee and manager
working as a team to identify goals for the former to work on. Once the goals are
established, both parties discuss the progress the employee is making to meet those
goals. This process concludes with the manager evaluating whether the employee
achieved the goal.

 Performance Tests and Observations: This method consists of an oral test that
measures employees' skills and knowledge in their respective fields. Sometimes, the
tester poses a challenge to the employee and has them demonstrate their skills in
solving the problem.

 Project Evaluation Review: This method involves appraising team members at the end
of every project, not the end of the business year.

 Ratings Scales: These ratings measure dependability, initiative, attitude, etc., ranging
from Excellent to Poor or some similar scale. These results are used to calculate the
employee's overall performance.

Steps in the Appraisal Process

Describe the steps in the appraisal process The appraisal process consists of six steps (see
Figure 1). We’ll dive into each step below.
 Step 1: Establish performance
standards

Performance standards are set to ensure achievement of departmental goals and

objectives and the organization’s overall strategy and objectives. Standards are based
on the position, rather than an individual. In order to be clearly understood and
perceived as objective, standards should adhere to the same rules that apply to goal-
setting; that is, they should be “SMART:” specific, measurable, achievable, relevant and
timebound.

Indiana University’s Human Resource department explains that “while a list of major job
duties tells the employee what is to be done, performance standards provide the
employee with specific performance expectations for each major duty.” [1] Performance
standards include both observable behaviors—the how—and the expected results that
comprise satisfactory job performance.

Step 2: Communicate performance standards

In order to be effective, performance standards must be clearly communicated and

understood to be expectations. Performance standards assume that an individual is
competent, so initial and corrective training should be factored into the performance
management process. If there is a specific training period after which an employee is
assumed to be competent and performing to standards, that should be communicated
as well.

Step 3: Measure performance

Performance that is expressed in numeric terms—for example, cost, quantity, quality,
timeliness—is relatively easy to measure. Performance in the area of soft skills—for
example, communication, customer service and leadership—is more difficult to
evaluate. DeCenzo, Robbins and Verhulst recommend using a variety of sources of
information including personal observation, oral reports and written reports. They note,
however, that what is measured is probably more critical than how an aspect is
measured.[2] The focus should be on measuring what matters rather than measuring
what’s easy to measure.

Step 4: Compare actual performance to performance standards

In this step of the appraisal process, actual performance is compared to the

performance standards. Documentation should highlight actions and results. For
example, “Amir left confidential documents on the printer even after he had been
warned to maintain control of confidential information.” Or “Amir’s process improvement
recommendations saved the department $3,500.”

Step 5: Discuss the appraisal with the employee

This is generally the step in the process that is the most difficult for managers and
employees alike and it can be a challenge to manage emotions and expectations. Even
when performance is strong, there can be differences of opinion on the next action. A
significant difference of opinion regarding performance can create an emotionally-
charged situation. If the manager is providing feedback and coaching on a regular
basis, this shouldn’t be the case. Related point: If an employee has consistently poor
performance, the issue should be addressed—corrective action taken—in a timely
manner and not deferred to an annual review. To identify and prepare for differences of
opinion, management can ask employees to complete and submit a self-evaluation prior
to the appraisal meeting. A key point to keep in mind is that the manager’s ability to
remain calm and civil will have a significant impact on the employee’s confidence,
motivation and future performance.

Step 6: Implement personnel action

The final step in the appraisal process is the discussion and/or implementation of any
next steps: a reward of some sort—a raise, promotion or coveted development
opportunity—or corrective action—a performance plan or termination. Note, however,
that corrective action that might help an employee achieve expectations shouldn’t be
tabled until the next formal appraisal. As performance gaps are identified, supervisors
and managers should take the time to identify why performance is not meeting
expectations and determine whether the employee can meet expectations with
additional training and/or coaching. As mentioned above, if performance is such that
termination is warranted, that action should be taken in a timely manner as well.

COMPENSATION

Compensation is the remuneration received by an employee in returns

of their contribution to the organization. The compensation management
is an organized practice which is important for balancing the work and
employee relationship by providing monetary and non-monetary
compensation to employees. Compensation includes all form of pay
given to the employees which arise from the employment. The one of
the strapping feature of the organizations is compensation management
and they used it to attract and retain the most important and worthy
assets. The compensation management is considered to be a complex
process which requires accuracy and precision and if not carried out
properly may lead to employees’ dissatisfaction. An ideal compensation
policy motivates the employees to work harder and with more
determination. It also helps the organizations to set the standards for job
that it is related, realistic and measurable. Compensation policies should
have a sound integration with practices of HRM.

Definition of Compensation
According to Cascio (1995) the “Compensation includes direct cash
payments and indirect payments in form of employees benefits and
incentives to motivate employees to strive for higher levels of
productivity”.
According to Milkovitch and Newman (2005) the “Compensation is all
forms of financial returns, tangible services and benefits employees
receive as part of an employment relationship.” The phrase “financial
returns” refers to an individual's base salary, as well as short- and long-
term incentives. “Tangible services and benefits” are such things as
insurance, paid vacation and sick days, pension plans, and employee
discounts.
1.1.2. Objectives of Compensation

Bhattacharay (2009) had provided the following objectives of

compensation or wages as given below:
Equity

The first category is equity which may take several forms. It include
income distribution through narrowing of inequalities, increasing the
income of lowest paid employees, protecting real wages (purchasing
power), and the concept of equal pay for work of equal values.
Compensation management strives for internal and external equity.
Internal equity requires pay related to the worth of similar job so that
similar job gets similar pay. External equity means paying worker what
other firms in the labor market pay comparable workers. Compensation
differentials, based on differences in skills or contribution, are all to the
concept of equity.
Efficiency
The objective of efficiency are reflected in attempts to link a part of
wages to productivity or profit, group or individual performance,
acquisition and application of skills, and so
on. Arrangement to achieve efficiency may also be seen as being
equitable (if they fairly reward performance) or inequitable (if the
reward is viewed as unfair).
Macro-economic Satiability

It can be achieved through high employments level and low inflation.

For instance, an inordinately high minimum wages would have an
adverse impact on levels employment, tough at what level these
consequences would occur is a matter of debate. Although compensation
policies influence macro-economic stability and contribute to the
balanced and sustainable economic development.
Efficient Allocation of Labor

The efficiency allocation of labor in the labor market implies that

employees will move to wherever they receive a net gain. Such
movement may be form one geographical location to another or form
one job to another (within or outside an enterprise). The provision or
availability of financial incentive causes such movement.
Motivating the Employees

Employees may have talent but they will not be motivated to use their
talent unless they know that they will be rewarded duly for their
contribution towards organizational objectives or be punished for not
contributing as per the demands of the job.
Acquired Qualified Employees

Compensation needs to be high enough to attract applicants. Pay levels

must respond to supply and demand of workers in the labor market since
employers compete for workers.
Retain Current Employees

Employees may quit when compensation levels are not competitive

resulting in higher turnover. Therefore, one of the important objective of
Compensation Management is retaining the human capital or talent of
the organization.
Reward Desired Behavior

Pay should reinforce desired behavior and act as incentive for those
behaviors to occur in future.
Control Cost

A rational compensation system helps the organization obtain and retain

workers at reasonable cost.
Comply with Legal Regulations

A sound wage and salary system considers the legal challenges imposed
by the government and ensures the employers compliance.
Facilitate Understanding

The Human Resource specialists, operating managers and employees

should easily understand the compensation management.
Further Administrative Efficiency

Wages and salary programs should be designed to be managed

efficiently, making optimal use of HRIS i.e. Human Resource
Information System.
Principles of Compensation Formulation
There are following seven principles of Compensation Formulation (Jain, 2014):
i. The organization should have a unambiguous plan to determine differential pay
levels in terms of different job requirements involving varied skills, exertion,
responsibility and working conditions.
ii. An attempt should be made to keep the common level of wages and salaries of
the organization in line with that obtained in the labor market.
iii. Adequate attention should be taken to distinguish people from the jobs.
Although people are paid in terms of rate embodied in specific jobs, some
exceptions should
be allowed in the cases of professional and executive personnel by paying them in
terms of their abilities and contributions.
iv. The care should be taken irrespective of individual considerations to ensure that
equal pay for equal work.
v. There should be a plan to adapt an unbiased measure for identifying individual
differences in capacity and contribution in the form of rate ranges with in the grade
increments, wages incentive schemes and a system of job promotion.
vi. There should be proper procedure for handling the wage grievances in
organization.
vii. Adequate care should be taken to inform the employees and the union, if any,
about the procedure followed in determining wage rates. There were no
confidential wages and the employees should have a clear understanding of their
wage or salary structure. This will enhance employee satisfaction with wages.
There are certain guiding principles which provide the foundation for effective
reward management.

Elements of Employees Rewards in India

Base pay or basic pay is the level of pay (the fixed salary or wages) that constitutes the rate for the
job. It is a platform for determining additional payment associated with performance, competence or
skills. (Bhattacharyya 2009).

What is supplemental compensation?

‍
Supplemental wages are payments paid to employees in addition to their normal pay.
Overtime, bonuses, commissions, and other benefits are among them. An employer
may be compelled to withhold taxes from supplemental wages if they are provided.
Employees who earn supplemental pay receive money in addition to their normal pay.

Addition to Base Pay

Additional financial rewards were related to performance, skill, competence or
experience. Special allowances may also be paid. The main type of additional pay
are- individual performance related pay, bonus, incentives, commission etc.
Service-related Pay: It increases by fixed increments on a scale or pay spin depending on service in
job. There is sometimes being scopes for varying the rate of progress up the scale according to
performance.
Skill-base Pay: Also known as knowledge base pay, it varies according to the level of skill the
individual achieves.
Competence-related Pay: It varies according to the level of competence achived by individual.
Career Development Pay: When employees were taking the additional responsibilities as their
career develops laterally within a broad grade they were rewarded.
Allowances: The pay in the form of money for overtime, shift work or call-outs.
Employees Benefits: These benefits are also known as indirect pay. These include pensions, sick
pay, insurance cover and company car. Benefits comprises elements of remuneration in additional to
the various forms of cash pay and also include provisions for employees that are not strictly
remuneration such as annual pay.
Total Remuneration: It is value of all cash payments (total earning) and benefit receives by
employees.
Non-financial Rewards: It includes any reward that focuses on the need people have in varying
degrees for achievement, recognition, responsibility, and influence and personnel growth

Individual Performance-related Pay: It is also known as merit pay, it increases

the base pay or cash bonus are after determining the performance assessment and
ratings.
Bonus: It refers to rewards for good performance which are paid as cash and is
related to the organization.
Incentive: Payments linked with achievements of previously set targets, which are
designed to motivate people to achieve higher levels of performance. The targets
are usually quantified in such terms as output or sales.
Commissions: A special perform incentive in which sales representative are paid
on basis of a percentage of sales value they generate.

Employee Stock Options

Stock options are common in executive compensation. In the organization, it even

represents over half of the total compensation particularly for senior managerial
level employees. By offering stock option to employees companies may dilute
their ownership but they can retain their talent and may move ahead of the
competition.

The term employee stock option (ESO) refers to a type of equity

compensation granted by companies to their employees and executives.
Rather than granting shares of stock directly, the company gives derivative
options on the stock instead. These options come in the form of regular
call options and give the employee the right to buy the company's stock at
a specified price for a finite period of time. Terms of ESOs will be fully
spelled out for an employee in an employee stock options agreement.In
general, the greatest benefits of a stock option are realized if a company's
stock rises above the exercise price.

For employees, the key benefits of any type of equity compensation plan are:

 An opportunity to share directly in the company’s success through stock

holdings
 Pride of ownership; employees may feel motivated to be fully
productive because they own a stake in the company
 Provides a tangible representation of how much their contribution is
worth to the employer
 Depending on the plan, it may offer the potential for tax savings upon
sale or disposal of the shares

The benefits of an equity compensation plan to employers are:

 It is a key tool to recruit the best and the brightest in an increasingly

integrated global economy where there is worldwide competition for top
talent
 Boosts employee job satisfaction and financial wellbeing by providing
lucrative financial incentives
 Incentivizes employees to help the company grow and succeed
because they can share in its success.

What is expatriate in HRM?

Expatriate in Human Resource Management (HRM), commonly shortened to

expat, is someone living in a country different to their own for the purposes of
undertaking a short or long-term overseas work assignment. This can include
employees sent to manage a new office or set up a new location.
How do you manage an expatriate employee?

Managing an expatriate employee is a multi-stage process, where each stage can be

crucial to the overall success of an overseas assignment for both your business and
the individual assignee. Effective expatriate management should run throughout
the lifecycle of an assignment, from pre-deployment preparation through to
repatriation when the employee returns back home.
How do you manage expatriate failure?
In instances where an expatriate is inadequately prepared for a short or long-term
overseas assignment, or where the language and cultural differences cannot be
overcome, this can often lead to early repatriation. By providing support on a
personal and professional level both prior to, during and after the assignment, the
risk of expatriate failure can be minimised.

What is HR audit?
A human resource (HR) audit is an evaluation of an organisation's
current HR position and practices. . A HR audit should involve an
objective and systematic analysis of HR's written documents, policies and
procedures, as well as the systems and processes behind HR functions.
The aim of a HR audit is generally to evaluate whether the ‘current state’ of HR is legal,
efficient and effective.

A HR audit can, and should, be used as a diagnostic tool to determine, assess and
address gaps between the current state and the desired state of HR, with a view of
continually improving HR functions and associated activities.

To effectively do so a HR audit should aim to cover three aspects:

 Systems: a review of data and information, as well as HR procedures, processes

and practices. This includes policies, procedures, forms, templates, HR
information systems and the advice and guidance provided by the HR team to
other members of the organisation.
 Behaviours: how well systems are understood and used by the HR team,
managers, employees and other stakeholders. This includes employee
commitment, accountability, acceptance of HR systems.
 Attitudes: how systems are perceived by the HR team, managers, employees
and other stakeholders. This includes perceived fairness, efficiency and
effectiveness of the HR systems.

IMPORTANCE:

Human Recourses audit is very important for any organization. Some of its noteworthy roles
are as follows:

 Promoting Critical Business Plans: Every organization follows certain strategic plans
in order to achieve organizational goals. HR auditor’s responsibility is to convince
management to disclose these plans to employees of the organization so that they can
participate comfortably in the decision-making process of the company. The aim is for
employees to contribute their point of view about these plans and involve themselves
completely.
  Role Clarity of HR Functions: People working in HR department must be very clear
about their roles and responsibilities. They should have a clear understanding that their
priority should be in the interest of the organization says HR audit. The role
transparency function is performed by HR audit to ensure they understand their role.
 Improving Organizational Competency: An HR audit helps in identifying the
strength and weaknesses of the present administrative system. If there is any drawback
in the functioning of the system, the HR audit tries to develop techniques by which
productivity can be increased. These positive impacts are also visible in HRIS, working
procedures, delegation and clarification of roles and responsibilities.
 Analysis of HR Functions: An HR audit plays a very crucial role in analyzing the
functioning of the HR department. It helps in evaluating the performance of the
employees and developing their leadership qualities. If necessary, the HR audit also
helps in re-designing the development system of the HR department.

Pay Band
Pay Band is a pay scale according to the pay grades. It is a part of the salary
process as it is used to rank different jobs by education, responsibility, location,
and other multiple factors. ‘Pay’ in the pay band means the pay drawn in the
running pay bands. The pay band structure is based on multiple factors and
assigned pay grades should correlate with the salary range for the position with a
minimum and maximum. Pay Band is used to define the compensation range for
certain job profiles for example in the government sector, different pay grades are
depending on the work profiles and positions.

Benefits of pay band

 The pay band system helps to ensure that employees are paid fairly. By standardizing
compensation levels within job grades, the pay band system ensures that employees with
similar qualifications and experience levels are paid according to their worth. This
promotes equity and fairness within the organization, boosting morale and employee
satisfaction.
 The pay band system can help attract and retain top talent. By offering competitive
compensation rates, employers can entice high-quality candidates to apply for open
positions. Additionally, the pay band system can help retain valued employees who may
consider leaving the organization.

CHALLENGES FACED BY HUMAN RESOURCE

MANAGEMENT
Due to the fluctuating economy as well as local and global advancements,
there are many changes occurring rapidly that affect HR in a wide range of
issues. In the Survey of Global HR Challenges: Yesterday, Today and
Tomorrow, conducted by PricewaterhouseCoopers on behalf of the World
Federation of Personnel Management Associations (WFPMA), several
challenges for human resource management were revealed. This survey, which
concluded that “despite national and regional differences, there was
remarkable unanimity,” disclosed the following top 10 human resource
management challenges:

Change Management
Since this is generally not a focal point for HR professional training and
development, change management represents a particular challenge for
personnel management. The WFPMA finds that “This may also be the reason
why it is cited as the foremost issue as HR continues to attempt to help
businesses move forward. An intensified focus on training may be needed to
develop added competencies to deal with change management.”
Leadership Development
As the second of the biggest challenges for human resource management,
leadership development needs to be a critical strategic initiative. HR
professionals are faced with being expected to provide the essential
structures, processes, tools, and points of view to make the best selection and
develop the future leaders of the organization. The WFPMA reports that
“Across the globe leadership development has been identified as a critical
strategic initiative in ensuring that the right employees are retained, that the
culture of the organization supports performance from within to gain market
position, and that managers are equipped to take on leadership roles of the
future so that the organization is viable in the long term.”
HR Effectiveness Measurement

How can improvement happen without the right tools to measure HR

effectiveness? As with many other areas of business, this profession also needs
to be able to measure results in terms of transaction management, as well as
in terms of the positive influence on business. “Utilizing metrics to determine
effectiveness is the beginning of a shift from perceiving HR’s role as purely an
administrative function to viewing the HR team as a true strategic partner
within the organization,” the WFPMA says. “In fact, the next section reports
that survey participants believe a critical future issue for HR will be
organizational effectiveness – again supporting HR’s critical role as a strategic
partner to management.”

Recruitment & selection

Finding a suitable candidate for the job from a large number of
applicants is a basic problem for the human resource manager. They
have to make suitable changes from time to time in the selection pro-
cedure and see to it that the candidate is up to the mark fulfilling the
job requirements. If required, the candidate should be provided with
training to get quality results.

Emotional and Physical Stability of Employees:

Providing with wages and salaries to employees is not sufficient in

today’s world. The human resource manager should maintain proper
emotional balance of employees. They should try to understand the
attitude, requirements and feelings of employees, and motivate them
whenever and wherever required.

Balance Between Management and Employees:

The human resource manager has a responsibility to balance the

interest of management and employees. Profits, commitment,
cooperation, loyalty, and sincerely are the factors expected by
management, whereas better salaries and wages, safety and security,
healthy working conditions, career development, and participative
working are the factors expected by employees from management.
Training, Development and Compensation:

A planned execution of training programmes and managerial

development programmes is required to be undertaken to sharpen and
enhance the skills, and to develop knowledge of employees.
Compensation in the form of salary, bonus, allowances, incentives and
perquisites is to be paid according to the performance of people. A
word or letter of appreciation is also to be given, if some of them have
done their jobs beyond expectations to keep their morale up.

Performance Appraisal:

This activity should not be considered a routine process by the human

resource manager. If employees are not getting proper feedback from
them, it may affect their future work. A scientific appraisal technique
according to changing needs should be applied and the quality of it
should be checked from time to time.

Dealing with Trade Union:

Union members are to be handled skillfully as they are usually the

people who oppose the company policies and procedures. Demands of
the union and interests of the management should be matched
properly.
DISADVANTAGES OF PERFORMANCE LINKED
COMPENSATION