Performance Management System

1. Performance Management and Performance Appraisal:

a. Performance appraisal is evaluating an employee’s current and/or past
performance relative to his/ her performance standards.
b. Performance Management is a process that consolidates goal setting,
performance appraisal, and development into a single, common system, the aim
of which is to ensure that the employee’s performance is supporting the
company’s strategic aims.
2. Why PM?
a. Every employee’s effort must focus like a laser on helping the company to to
achieve its strategic goals.
b. Continuous Improvement refers to a management philosophy that requires
employers to continuously set and relentlessly meet ever-higher quality, cost,
delivery, and availability goals. Continuous improvement means eradicating
wastes wherever they are, including 7 wastes of overproduction, defective
products, and unnecessary downtime, transportation, processing costs, motion,
and inventory.
c. Each employee must continuously improve his/ her own personal performance,
from one appraisal period to next.
d. W. Edwards Deming (TQM), argues that an employee’s performance is more a
function of things like training, communication, tools and supervision than his
own motivation.
3. Defining employees Goal/ Performance Planning
a. Employee’s effort should be goal directed.
b. Employee’s goals and performance standards should make sense in terms of the
company’s strategic goals.
c. Manager should appraise the employees based on how that person performed
with respect to achieving the specific standards by which the employee expected
to be measured.
d. Set measurable standards for each objective
e. Assign SMART Goals (Specific/Measurable/ Attainable/Relevant/Timely)
f. Encourage Participation
4. Why Appraise Performance
a. Appraisal is an integral part of PMS
b. It helps the supervisor and the employee to develop a plan for correcting
deficiencies and to reinforce the things which he had done correctly.
c. It provides necessary input for career planning
d. For salary raise and promotional decisions
e. For training and development purposes
5. Realistic Appraisal
a. It is not good to say someone who is doing a mediocre job that he is doing well.
Reasons for giving soft appraisal
 Fear of having to hire and train someone new
Unpleasant reaction of the appraisee
Inappropriate appraisal process

6. What to measure and how to measure

What to measure?
a. measure performance in terms of quality, quantity and timeliness
b. Competencies
c. achievement of goals
d. special contribution
How to measure?
7. Methods of Performance appraisal
Numerous methods have been designed to appraise the performance of an employee.
Strauss and Sayles have classified appraisal methods which are widely used into two
categories, viz., traditional methods and modern methods. While traditional methods lay
emphasis on the rating of the individual’s personality traits, such as initiative, dependability,
drive, creativity, integrity, intelligence, leadership potential, etc.; the modern methods, on the
other hand, place more emphasis on the evaluation of work results i.e. job achievements
than the personal traits. Modern methods tend to be more objective and worthwhile.
Traditional Methods
a. Ranking Method Explained
It is the oldest and simplest formal systematic method of performance appraisal in which
employee is compared with all others for the purpose of placing order of worth. The
employees are ranked from the highest to the lowest or from the best to the worst.
In doing this the employee who is the highest on the characteristic being measured and also
the one who is lowest, are indicated. Then, the next highest and the next lowest between
next highest and lowest until all the employees to be rated have been ranked. Thus, if there
are ten employees to be appraised, there will be ten ranks from 1 to 10.
However, the greatest limitations of this appraisal method are that:
• It does not tell that how much better or worse one is than another.
• The task of ranking individuals is difficult when a large number of employees are
rated.
• It is very difficult to compare one individual with others having varying behavioral
traits.
To remedy these defects, the paired comparison method of performance appraisal has been
evolved.
b. Paired Comparison Method
In this method, each employee is compared with every other employee, one at a time. The
number of times the employee is compared as better with others determines his or her final
ranking.
The number of times a worker is considered better makes his/her score. Such scores are
determined for each worker and he/she is ranked according to his/her score. One obvious
disadvantage of this method is that the method can become unmanageable when large
numbers of employees are being compared.
c. Grading Method
In this method, certain categories of worth are established in advance and carefully defined.
There can be three categories established for employees: outstanding, satisfactory and
unsatisfactory. There can be more than three grades. Employee performance is compared
with grade definitions. The employee is, then, allocated to the grade that best describes his or
her performance.
One of the major drawbacks of this method is that the rater may rate most of the employees
on the higher side of their performance.
Forced Distribution Method
This method was evolved to eliminate the central tendency of rating most of the employees
at a higher end or the lower end of the scale. The method assumes that employees’
performance level confirms to a normal statistical distribution – 10, 20, 40, 20 and 10%.
10% are placed at the top level and are given outstanding merit, 20% are given good rating,
40% satisfactory (average), 20% fair and 10% unsatisfactory. This is useful for rating a large
number of employees. This method tends to eliminate or reduce bias. It is also highly simple
to understand and easy to apply in appraising the performance of employees in organisations.

The major weakness of this method lies in the assumption that employee performance levels
always confirm to a normal distribution.
d. Forced Choice Method
In this method the rater is given a series of statements about an employee. These statements
are arranged in blocks of two or more, and the rater indicates which statement is most or
least descriptive of the employee.
A pair of positive statements may be:
• Gives good and clear instructions to the subordinates.
• Can be depended upon to complete any job assigned.
• A pair of negative statements may be:
 • Makes promises beyond his limit to keep these.
• Inclines to favour some employees.
Each statement carries a score or weight, which is not made known to the rater. The human
resource section does rating for all sets of statements— both positive and negative. The final
rating is done on the basis of all sets of statements. Thus, employee rating in this manner
makes the method more objective. In this method, the rater is forced to select statements
which are readymade.
e. Check-List Method
The basic purpose of utilizing check-list method is to ease the evaluation burden upon the
rater. In this method, a series of statements, i.e., questions with their answers in ‘yes’ or ‘no’
are prepared by the HR department. The check-list is, then, presented to the rater to tick
appropriate answers relevant to the ratee. These questions are concerned with the employee
behavior. Each question carries a weight-age in relation to their importance.
When the check-list is completed, it is sent to the HR department to prepare the final scores
for all ratees based on all questions. However, one of the disadvantages of the check-list
method is that it is difficult to assemble, analyse and weigh a number of statements about
employee characteristics and contributions. From a cost point of view, this method may be
inefficient, particularly if there are a number of job categories in the organisation because a
separate check-list of questions must be prepared for each category of job. It will involve a lot
of money, time and efforts.
f. Critical Incidents Method
This method has gained a lot of interest these days. In this method, the rater focuses his or
her attention on those key or critical behaviors that make the difference between performing
a job in a noteworthy manner (effectively or ineffectively). There are three steps involved in
appraising employees using this method.
First, a list of noteworthy (good or bad) on-the-job behavior of specific incidents is prepared.
Second, a group of experts then assigns weightage or score to these incidents, depending
upon their degree of desirability to perform a job. Third, finally a check-list indicating
incidents that describe workers as “good” or “bad” is constructed. Then, the check-list is given
to the rater for evaluating the workers.
The basic idea behind this rating is to appraise the workers who can perform their jobs
effectively in critical situations. This is so because most people work alike in normal situation.
The strength of critical incident method is that it focuses on behaviors and, thus, judge’s
performance rather than personalities.
Its drawbacks are that one has to regularly write down the critical incidents which become
time-consuming and burdensome for evaluators, i.e., managers. Generally, negative incidents
are more noticed than positive ones. It is rater’s inference that determines which incidents
are critical to job performance. Hence, the method is subject to all the limitations relating to
subjective judgments.
g. Graphic Rating Scale Method
The graphic rating scale is one of the most popular and simplest techniques for appraising
performance. It is also known as linear rating scale. In this method, the printed appraisal form
is used to appraise each employee.
The form lists traits (such as quality and reliability) and a range of job performance
characteristics (from unsatisfactory to outstanding) for each trait. The rating is done on the
basis of points on the continuum. The common practice is to follow five points scale.
The rater rates each appraisee by checking the score that best describes his or her
performance for each trait and all assigned values for the traits are then totalled.
This method is good for measuring various job behaviors of an employee. However, it is also
subjected to rater’s bias while rating employee’s behavior at job. Occurrence of ambiguity in
designing the graphic scale results in bias in appraising employee’s performance.
h. Essay Method
Essay method is the simplest one among various appraisal methods available. In this method,
the rater writes a narrative description on an employee’s strengths, weaknesses, past
performance, potential and suggestions for improvement. Its positive point is that it is simple
in use. It does not require complex formats and extensive/specific training to complete it.
However, essay method, like other methods, is not free from drawbacks. In the absence of
any prescribed structure, the essays are likely to vary widely in terms of length and content.
And, of course, the quality of appraisal depends more upon rater’s writing skill than the
employee’s actual level of performance.
Moreover, because the essays are descriptive, the method provides only qualitative
information about the employee. In the absence of quantitative data, the evaluation suffers
from subjectivity problem. Nonetheless, the essay method is a good start and is beneficial
also if used in association with other appraisal methods.
i. Field Review Method
This is an appraisal by someone outside the rater’s own department usually someone from
the corporate office or the HR department. The outsider reviews employee’s records and
holds interviews with the appraisee and his or her superior. This method is useful when
comparable information is needed from employees in different units or locations.
j. Confidential Report
It is the traditional way of appraising employees mainly in the Government Departments.
Evaluation is made by the immediate boss or supervisor for giving effect to promotion and
transfer. Usually, a structured format is devised to collect information on employee’s strength,
weakness, intelligence, attitude, character, attendance, discipline etc. Overall grading can be
given on a five point scale (outstanding, very good, good, average, and poor). The confidential
reports, as the name suggests, are very confidential.
Modern Approach to PMS
a. Assessment centres
An assessment centre typically involves the use of multiple methods like business games,
assignment, presentations, behavioural interviews, etc being given to a group of employees to
assess their competencies to take higher responsibilities in the future. Generally, employees
are given an assignment similar to the job they would be expected to perform if promoted.
The trained evaluators observe and evaluate employees as they perform the assigned jobs
and are evaluated on job related characteristics.
The major competencies that are judged in assessment centres are interpersonal skills,
intellectual capability, planning and organizing capabilities, motivation, career orientation etc.
Assessment centres are also an effective way to determine the training and development
needs of the targeted employees.
b. Behaviorally anchored rating scales (BARS)
Behaviorally Anchored Rating Scales (BARS) is a relatively new technique which combines the
graphic rating scale and critical incidents method. It consists of predetermined critical areas of
job performance or sets of behavioral statements describing important job performance
qualities as good or bad (for example: the qualities like inter-personal relationships,
adaptability and reliability, job knowledge etc). These statements are developed from critical
incidents.
In this method, an employee’s actual job behavior is judged against the desired behavior by
recording and comparing the behavior with BARS. Developing and practicing BARS requires
expert knowledge.
c. Human resource accounting method
Human resources are valuable assets for every organization. Human resource accounting
method tries to find the relative worth of these assets in the terms of money. In this method
the performance appraisal of the employees is judged in terms of cost and contribution of the
employees. The cost of employees includes all the expenses incurred on them like their
compensation, recruitment and selection costs, induction and training costs etc. whereas
their contribution includes the total value added (in monetary terms). The difference
between the cost and the contribution will be the performance of the employees. Ideally, the
contribution of the employees should be greater than the cost incurred on them.
d. 360-degree performance appraisal
360 degree feedback, also known as “multi-rater feedback”, is the most comprehensive
appraisal where the feedback about the employees’ performance comes from all the sources
that come in contact with the employee on his job.
360-degree respondents for an employee can be his/her peers, managers (i.e. superior),
subordinates, team members, customers, suppliers/ vendors – anyone who comes into
contact with the employee and can provide valuable insights and information or feedback
regarding the “on-the-job” performance of the employee.
360-degree appraisal has four integral components:
• Self appraisal
• Superior’s appraisal
• Subordinate’s appraisal
• Peer appraisal
Self-appraisal gives a chance to the employee to look at his/her strengths and weaknesses, his
achievements, and judge his own performance. Superior’s appraisal forms the traditional part
of the 360-degree appraisal where the employees’ responsibilities and actual performance is
rated by the superior.
Subordinates’ appraisal gives a chance to judge the employee on the parameters like
communication and motivating abilities, superior’s ability to delegate the work, leadership
qualities etc. Also known as internal customers, the correct feedback given by peers can help
to find employees’ abilities to work in a team, co-operation and sensitivity towards others.
Self-assessment is an indispensable part of 360 degree appraisals and therefore 360 degree
performance appraisal has high employee involvement and also has the strongest impact on
behavior and performance. It provides a “360-degree review” of the employees’ performance
and is considered to be one of the most credible performance appraisal methods.
360-degree appraisal is also a powerful developmental tool because when conducted at
regular intervals (say yearly) it helps to keep a track of the changes of others’ perceptions
about the employees. A 360-degree appraisal is generally found more suitable for the
managers as it helps to assess their leadership and managing styles. This technique is being
effectively used across the globe for performance appraisals.
e. Management by objectives (MBO)
The concept of ‘Management by Objectives’ (MBO) was first given by Peter Drucker in 1954. It
can be defined as a process whereby the employees and the superiors come together to
identify common goals, the employees set their goals to be achieved, the standards to be
taken as the criteria for measurement of their performance and contribution and deciding the
course of action to be followed.
The essence of MBO is participative goal setting, choosing course of actions and decision
making. An important part of the MBO is the measurement and the comparison of the
employee’s actual performance with the standards set. Ideally, when employees themselves
have been involved with the goal setting and the choosing the course of action to be followed
by them, they are more likely to fulfil their responsibilities.
MBO process
The principle behind Management by Objectives (MBO) is to create empowered employees
who have clarity of the roles and responsibilities expected from them, understand their
objectives to be achieved and thus help in the achievement of organizational as well as
personal goals.
Some of the important features and advantages of MBO are:
• Clarity of goals – With MBO, came the concept of SMART goals i.e. goals that are:
Specific/ Measurable/ Achievable/ Realistic, and Time bound.
• The goals thus set are clear, motivating and there is a linkage between organizational
goals and performance targets of the employees.
• The focus is on future rather than on past. Goals and standards are set for the
performance for the future with periodic reviews and feedback.
• Involving employees in the whole process of goal setting and increasing employee
empowerment enhances employee job satisfaction and commitment.
• Frequent reviews and interactions between superiors and subordinates helps to
maintain harmonious relationships within the enterprise and also solve many
problems faced during the period.
Drawbacks of appraisal techniques
Performance appraisal techniques have often failed to give a correct assessment of the
employee, the causes of such failures are.
The supervisor plays dual and conflicting role of both the judge and the helper.
Too many objectives often cause confusion.
The supervisor feels that subordinate appraisal is not rewarding.
A considerable time gap exists between two appraisal programmes.
The skills required for daily administration and employee development are in conflict.
Poor communication keeps employees in the dark about what is expected of them.
There is a difference of opinion between a supervisor and a subordinate, in regard to the
latter’s performance.
Feedback on appraisal is generally unpleasant for both supervisor and subordinate.
Unwillingness on the part of supervisors to tell employees plainly how to improve their
performance.
f. 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.
g. BSC based PMS
Balanced Scorecard is a strategy execution tool.
A balanced scorecard (BSC) is a performance management system that helps organizations
translate their strategy into action:
• What it is
A BSC is a strategic management tool that uses a mix of financial and non-financial measures
to monitor and improve an organization's performance. It provides a holistic view of an
organization by looking at different perspectives, such as:
• Financial: The perspective of shareholders
• Customer: What customers experience and perceive
• Business process: The key processes used to meet customer and shareholder
requirements
• Learning and growth: How the organization fosters ongoing change and
improvement

• Who developed it
• Robert S. Kaplan and David P. Norton developed the BSC and laid out the business
performance management framework in a 1992

The Four Performance Measures in a Balanced Scorecard

Using a balanced scorecard in strategic management measures four key areas of your
business. It provides you with a balanced look at your organization’s performance.
The key areas encourage you to take a:
• Financial perspective
• Customer perspective
• Internal process perspective
• Learning and growth perspective
Financial perspective
It’s important to consider financial perspectives when it comes to performance management.
The numbers can highlight important information. Revenue is an obvious one, as it’s tied to
the overall success of your business. That said, it isn’t the only financial metric you should pay
attention to.
You’ll want to consider costs so you can determine profitability while uncovering cost control
measures. It can help you reduce expenses by making budget management part of the
balanced scorecard you create for your business.
Customer perspective
At the end of the day, it’s your customers that keep you in business, so measuring their
satisfaction and loyalty is important.
A balanced scorecard should include ways to measure customer satisfaction and loyalty. That
could include surveys, customer interviews and repeat customers.
Based on this information, you can uncover ways to encourage customers to return to your
brand. Alternatively, you can develop ways to attract new customers.
Internal process perspective
By taking the time to focus on internal processes, you can take a mindful approach to
efficiency. Focusing on internal processes allows you to achieve outcomes aligned with
organizational objectives. You can focus on delivering more value to customers or you
increase efficiency among employees. Either way, this portion of the balanced scorecard is all
about ensuring you pay attention to internal processes.
Learning and growth perspective
Every business focuses on financials. Most businesses spend time considering customer and
internal process perspectives. Fewer businesses consider the learning and growth of their
employees, but the ones that do are more likely to achieve success. That’s why learning and
growth are included on the balanced scorecard.
It’s all about employee learning, skill development, and fostering a culture of innovation. By
focusing on employee development and their contribution to innovation, you can create an
engaged workforce. This workforce will have skills and passion to drive success in your
organization.
Step-by-step Guide to Developing a Balanced Scorecard
Developing a balanced scorecard is broken down into three steps that include:
1. Identifying strategic objectives and goals
2. Defining performance measures and targets
3. Aligning scorecard measures with organizational strategy
1. Identifying strategic objectives and goals
Start by creating strategic objectives for your company. These objectives should outline
what's important to your company. Take inspiration from each of the four measures of a
balanced scorecard. This is the perfect time to dream big about your business, so feel free to
list any objectives that come to mind.
After brainstorming, narrow down your objectives and align them with organizational goals.
They might pertain to existing goals, but you may also discover that you need new goals to
cover all of your strategic objectives.
2. Defining performance measures and targets
Goals can only be achieved through strategic objectives that are specific and measurable.
That way you know if you’re on the right track and you can course correct if you aren’t.
Because they focus on numbers, measuring finances is easy, but that doesn't mean you can't
find ways to measure the other items on your scorecard.
For example, you might measure how many repeat customers you have, or you might start
tracking the time it takes to secure a deal with a new client. The trick is to select the
measurements that are appropriate to your goals so you can set targets for improvement.
Don’t forget to include timelines in your measurements! That way you’ve got a built-in time
frame for revisiting goals. This increases your likelihood of reaching them, but it also has the
benefit of keeping important goals top-of-mind
3. Aligning scorecard measures with organizational strategy
All of these goals and performance measures should serve your organizational strategy.
It's important to understand exactly how your business is currently allocating its resources.
You have to be willing to change resource allocation based on what you uncover through the
objectives in your scorecard.
Make sure your scorecard makes sense within your overall organizational strategy. If
something isn’t properly aligned, you can adjust or scrap it. Do so before employees and
managers waste their time trying to achieve what turns out to be an ineffective goal.
Cascading the balanced scorecard across the organization
Once you’ve got your balanced scorecard outlined and it’s ready to go, you have to
implement it. The best way to do that is to cascade it across your organization by including it
in the performance appraisal process.
When it is part of a performance management system, it can drive accountability and
performance improvement. It also involves employees in the process and encourages
communication.
For example, employees may create their own goals that align with one or more of the
company’s goals on the scorecard. Information could also be captured that pertains to data
from the scorecard so it can be discussed at the next review meeting.
What is Balanced Scorecard Performance Management?
Balanced Scorecard in Performance Management is an approach to aligning employees to a
company’s strategic plan. Alignment is a challenge that every organisation needs to do well.
With large numbers of employees it’s easy for individuals to spend time working hard on what
seems important to them, but may not be directed toward the company’s strategic plan. To
succeed in any endeavour it’s necessary to get people moving in the same direction. In other
words aligning them.
Organisations typically use one of two approaches to goal alignment:
1. Top down functional model
2. Balanced scorecard model
The top down functional model has traditionally been the most widely used. This is primarily
because of its ease of use in paper based processes. Using this model goals are simply
cascaded through the reporting lines of a company. An employee’s goals are cascaded from
their manager and those employee’s goals are then cascaded to their subordinates and so on.
The balanced scorecard model is more robust. It balances employees across the four factors
(financial, customers, internal process, learning & growth) and aligns them with the
company’s strategic plan.
What Are the 7 Main Elements of the Balanced Scorecard?
Traditionally, a balanced scorecard is made up of four perspectives. That number can be
expanded to take into account three more to drive an organization's improvement and
success from a strategic management perspective. Here are the seven main elements:
• Financial performance
• Customer satisfaction
• Internal processes
• Learning and growth
• Strategy and vision alignment, ensuring that scorecard activities support the
organization's goals
• Governance and accountability, which create trust and transparency
• Communication and feedback mechanisms, including regular performance reviews, to
keep improvements on track
In a performance management system, KPI, KPA, and KRA are terms that help determine the
effectiveness of organizational strategies:
• KPI
Key Performance Indicator is a quantifiable measure of performance over time for a specific
objective. KPIs provide targets for teams to aim for, milestones to measure progress, and
insights to help people make better decisions.
 • KPA
Key Performance Area is a sub-section of a Key Result Area (KRA). KRAs are large areas that
are broken into manageable areas for managing and evaluation.
• KRA
Key Result Area is a comprehensive description of the roles and responsibilities of employees
at their workplace. KRAs are both qualitative and quantitative and outline the scope of the job
in achieving organizational goals.
Key Result Areas (KRA) and Key Performance Indicators (KPI) help companies set goals for
their employees and measure performance based on those objectives.
Successful companies split the overall organization’s goals into various KRAs. KPIs are then
created and mapped against the KRAs.
Management needs both KRA and KPI for a fair evaluation of their employee’s work. A
successful KRA & KPI framework also helps an employee understand where their work and
performance fit into the overall scheme of things in the organization.
Please read PRIDE and PAR after the above
.