Unit 4:

Performance Appraisal and Compensation

Management
CO 4: Interpret various performance appraisal techniques used by organization and role of
compensation management in organization effectiveness.

 Introduction and Purpose of Performance Appraisal, The Performance Appraisal

Process. Methods of Performance Appraisal, 360 Degree Feedback System, Problems
in Appraisal. Essential Characteristics of Performance Appraisal, Potential Appraisal,
Use of McKinsey 9 - box Matrix for Performance Management. Objectives and Nature
of compensation, Components of a pay structure, CTC. Job Evaluation, Factors
affecting compensation and choices in designing a compensation system.
 Cases: Good Samaritan or Poor Performer?
Performance Appraisal

 Introduction: Performance
appraisal is a systematic
process used by
organizations to assess and
evaluate employees' job
performance, providing
valuable feedback and
facilitating professional
development.
Purpose:

1. Feedback and Improvement: Offer

constructive feedback to employees for
continuous improvement.
2. Goal Alignment: Align individual performance
with organizational goals and objectives.
3. Recognition and Reward: Acknowledge and
reward exceptional performance.
4. Training and Development: Identify areas for
skill enhancement and employee development.
The Performance Appraisal Process
Methods of Performance Appraisal:

 Graphic Rating Scales: IBM uses graphic

rating scales to assess employees on
predefined traits, contributing to a
standardized evaluation process.
 Behaviorally Anchored Rating Scales (BARS):
Infosys incorporates BARS to link specific
behaviors to performance levels, ensuring a
detailed and behavior-focused appraisal.
A BARS is a tool for evaluating employees in a
defined set of performance dimensions by
comparing their behaviors with specific behavior
 Management by Objectives (MBO): General
Electric (GE) utilizes the MBO method,
emphasizing goal-setting and performance
alignment with organizational objectives.
360 Degree Feedback System:
 Definition: The 360-degree feedback system involves collecting performance feedback from a variety of sources, including
superiors, subordinates, peers, and even self-assessment. This multi-rater approach provides a more comprehensive and holistic
view of an individual's performance.
 Benefits:
1. Comprehensive Insight: Gathers feedback from various perspectives, offering a more complete understanding of an employee's
performance.
2. Developmental Opportunities: Identifies areas for improvement and development based on diverse feedback.
3. Enhanced Self-Awareness: Allows employees to gain insights into their strengths and areas for growth.

• Microsoft employs a 360- • GE has implemented 360- • Cognizant uses a 360-

degree feedback system, degree feedback to assess degree feedback system
gathering input from leadership competencies, to evaluate teamwork,
peers, subordinates, and fostering a holistic leadership skills, and
supervisors to provide a understanding of overall performance,
comprehensive view of an employee performance. contributing to employee
employee's performance. development.

General
Microsoft Cognizant
Electric (GE)
Essential Characteristics of Performance Appraisal:

1. Clear Criteria: Accenture emphasizes transparent and well-defined criteria for

evaluation.
2. Regular Feedback: Google promotes regular and timely feedback as a critical element
of its performance appraisal process.
3. Employee Involvement: Infosys involves employees in goal-setting and self-
assessment to ensure a collaborative approach.
Case study Activity

In a team of three to four people, discuss each of the

situations and determine if you think the employee should
receive immediate termination or a progressive discipline
process, and provide justification for your responses:
1. The employee stole one pack of office paper, stating he
would be using it at home to perform his job.
2. An employee posted how boring her job is on a Facebook
status update. You know she is Facebook friends with
several clients.
3. The employee groped a colleague in the break room.
4. You saw the employee’s résumé posted on LinkedIn, stating
she was looking for a new job.
5. The manager has told you the employee is difficult to work
with and not liked by his colleagues.
Potential Appraisal: IBM focuses on potential
appraisal to identify
employees with the
capability to assume
 Definition: Potential appraisal assesses an leadership roles, aligning
with its emphasis on talent
employee's capability and suitability for development.
assuming higher responsibilities and leadership
roles within the organization in the future.
 Purpose: McKinsey applies potential
appraisal to groom high-
1. Succession Planning: Identifying individuals potential employees for
leadership positions,
with the potential to assume key leadership aligning with its
positions. commitment to strategic
workforce planning.
2. Talent Development: Formulating targeted
development plans for high-potential employees.
3. Strategic Workforce Planning: Aligning future P&G incorporates potential
organizational needs with the capabilities of appraisal in its talent
management strategy,
potential leaders. identifying future leaders
and aligning them with
organizational goals.
McKinsey 9-Box Matrix for Performance
Management
GE utilizes the McKinsey 9-
 Definition: The McKinsey 9-Box Matrix is a performance Box Matrix to assess and
manage talent, aligning
management tool that assesses employees based on two key individual potential with
dimensions: performance and potential. It classifies organizational needs.
employees into nine categories, guiding decisions on talent
development, succession planning, and strategic workforce
management. Johnson & Johnson
 Benefits: employs the 9-Box Matrix
for strategic workforce
1. Talent Identification: Helps identify high-potential planning, identifying high-
employees for future leadership roles. potential individuals for
key roles..
2. Succession Planning: Guides succession planning efforts by
highlighting individuals with both high performance and
high potential. Cisco applies the McKinsey
9-Box Matrix to support
3. Strategic Workforce Planning: Supports strategic decision- performance management
making by aligning talent with organizational goals. decisions, ensuring a
strategic approach to
talent development.
 Compensation management
employee compensation: All forms of pay or rewards going
to employees and arising from their employment.
direct financial payments: Pay in the form of wages, salaries,
incentives, commissions, and bonuses.
indirect financial payments: Pay in the form of financial benefits
such as insurance.
Objectives:
•Attract and recruit talent
•Motivate your people
•Maintain morale
•Adhere to government regulations and company compensation philosophy
•Reflect the current job-market
 Compensation management is a critical part of human resource management. It
involves creating and implementing pay systems, policies and programs that attract,
motivate and retain staff. An effective compensation system helps fulfil an alliance's
strategic human resource and firm goals.
Case let Discussion
Components of pay structure
Components of pay structure
CTC

 Cost to company (CTC) is defined as the total cost of

employment for an individual employee.

 While issuing the letter of appointment to a new hire

companies detail the CTC, which apart from the
gross compensation payable also factors for several
benefits, both monetary and non-monetary.

 In absence of any structured guideline and legal

connotation, CTC calculation varies from company to
company. In many organizations, particularly IT and
ITeS, difference between CTC and net pay may be as
high as 50 per cent, which often leads to the
confusion
Factors affecting compensation structure
Organizational Strategy

Market Conditions

Job Roles and Responsibilities

Internal Equity

Employee Performance

Legal and Regulatory Requirements

Organizational Culture

Cost of Living

Employee Preferences

Budgetary Constraints
Design A Compensation System

1. Align the
compensation 2. Analyse the job 3. Decide on the type
system with the market of compensation
organisation's values

6. Design the salary 5. Determine pay 4. Understand the

structure equity job requirements
Class activity: CTC calculation
Objective:
1. To help students understand the components involved in calculating the Cost to Company
(CTC) for employees.
2. To demonstrate how different components contribute to the total compensation package
offered by an organization.
 Introduction:
 Begin by explaining the concept of Cost to Company (CTC) to the students. Define
CTC as the total amount of money spent by the employer on an employee in a year,
including salary, benefits, and any other perks or allowances.
 Explanation of Components:
 Discuss the various components that make up an employee's CTC, such as:
Basic Salary, Dearness Allowance (DA), House Rent Allowance (HRA),
Conveyance Allowance, Medical Allowance, Provident Fund (PF), Gratuity,
Bonus, Leave Encashment
 Calculation Examples:
 Provide students with examples of different salary structures and ask them to
calculate the CTC for each employee based on the given components.
 Use real-world scenarios or hypothetical situations to make the examples more
relatable.
 Encourage students to work in pairs or small groups to solve the calculations.
 Group Discussion:
 After completing the calculations, facilitate a group discussion to review the answers
and compare different approaches.
 Ask students to share their calculations and explain how they arrived at the final CTC
figure.
 Reflection and Conclusion:
 Wrap up the activity by asking students to reflect on what they learned about CTC
calculations and the importance of understanding employee compensation packages.
 Emphasize the significance of considering all components of CTC when evaluating
job offers or negotiating salaries in the future.
 Job Evaluation

Job evaluation is a systematic

process used by organizations to
determine the relative worth of
different jobs within the company. It
helps establish a fair and equitable
compensation structure by assessing
the value of each job based on factors
such as its responsibilities, required
skills and qualifications, working
conditions, and contribution to
organizational objectives. Here's an
overview of the job evaluation
process
 Features of Job Evaluation

 It tries to assess jobs, not people.

 The standards of job evaluation are relative, not absolute.

 The basic information on which job evaluations are made is obtained

from job analysis.

 Job evaluations are carried out for group of jobs, not for individuals.

 Some degree of subjectivity is always present in job evaluation.

 Job evaluation does not fix pay scales, but merely provides a basis for
evaluating a rational wage structure.
Process of Job Evaluation
Case study (will be shared)

Performance appraisals have been around almost as long as business itself. But smart executives are beginning to realize that this dated process is actually
hindering employees performance, even as it attempts to evaluate it.
In March 2012, Donna Morris, then senior vice president of human resources at Adobe Systems, had just arrived in India to spend time at the company's offices
there when she agreed to an interview with a reporter from India’s Economic Times. During the interview, Morris was asked what she could do to disrupt HR.
Sleep-deprived from the long flight, Morris answered back quickly, “We plan to abolish the annual performance review format.” Although she had already been
pondering this idea Morris had yet to discuss anything with Adobe’s CEO. However, the reporter ran with the quote, and the next day Morris’s comments were
public record on the front page in an article headlined “Adobe Systems Set to Scrap Annual Appraisals, to Rely on Regular Feedback to Reward Staff.” In an
effort to get ahead of the story, Morris engaged the communications team, and within a few days of her return to the U.S. she published an article on the
company intranet calling on everyone to engage in an assessment of Adobe’s current methods for evaluating performance. Before Morris’s fateful trip to India,
Adobe’s annual review was pretty standard.
Once a year, managers would collect examples of past performance, conduct 360-degree evaluations for each employee, and draw up a report on each
employee’s performance for the year. Then the manager would assign an overall rating to each employee from four categories: high performer, strong performer,
solid performer or low performer. These ratings followed what is often called a "stack ranking" system: Employee ratings had to fit into a forced ranking
distribution. "High performer," for example, could be assigned to no more than 15% of a manager’s team. Doing these rankings properly was in many ways a
costly process. Adobe estimated that a total of 80,000 hours of its managers’ time was required each year to conduct all of the reviews, the equivalent of nearly
forty full-time employees working year-round. In addition, Adobe saw a spike in voluntary attrition every year in the months following the 15 CO3 review,
which could only be attributed to disappointed employees deciding to leave after receiving ratings below their expectations. Reasons such as these added fuel to
the fire of discussion that Morris called for in her intranet article. Stating her thesis, Morris wrote that, “ultimately, we need to accomplish three things: review
contributions, reward accomplishments, and give and receive feedback. Do they need to be conflated into a cumbersome process? I don’t think so. It’s time to
think radically differently. If we did away with our ‘annual review,’ what would you like to see in its place? What would it look like to inspire, motivate, and
value contributions more effectively?” As Morris began interacting with employees and collecting feedback, one thing became clear: the annual performance
review was getting a failing grade. By the fall of 2012, Adobe had totally redesigned its performance management system to eliminate the yearly performance
review.
 Q1. What are the drawbacks of using forced distribution method for performance appraisal?