Unit 11

Performance Appraisal and Reward Management

Concept of Performance appraisal
The work done by different person is known as performance. Performance of every employee differs from person to
person because of backgrounds, experiences, knowledge, skills, abilities and aptitudes. The management should
evaluate their performance. The degree of success of the organization is largely depends upon performance of
employees working within organization. Performance appraisal means evaluating an employees’ current or past
performance relative to his performance standards. Performance appraisal is used to determine the degree of
employee’s performance.
According to Dale S. Beach, “Performance appraisal is the systematic evaluation of individuals with respect to their
performance on the job and their potential for development”.

Uses of Performance Appraisal

Performance appraisal takes place in every organization. It systematically examines an employee’s current and past
performance as well as future potential. It can serve many purposes that benefit both the organization and the
employee. The common uses of performance appraisal can be classified into administrative uses and developmental
uses.
Uses of performance Appraisal

Administrative uses Developmental uses

Promotion
Transfers
Remunerations administrations
Training and development
Selection decision
supervision

Administrative uses
From the view point of administration performance appraisal programs provide input that can be used for the entire
range of HRM activities. Performance appraisals are used most widely as a basis for major HR functions such as
promotion, transfers, remunerations administration, training and development, selection decision, and supervision.

Promotions: The success or failure of a performance appraisal program depends on the attitudes and skills of those
responsible for its administration. Performance appraisal serves as a basis for promotion of employees by
communicating required skills, efficiencies and potentials of the employees. Performance appraisal helps to
promote the administration or an organization by promoting the employee and employer.
Transfers: Transfer of employees is to achieve a better fit between right men in right place at right time in a right job.
Transfer decision is concerned with the transformation of employees from one work unit to another. It is
conducted to achieve better performance in the organization. The employees should be transfer to better place
due to performance appraisal on the basis of his performance.
Remuneration administration: Performance appraisal data may also be used in HR planning to determine the relative
worth of jobs under a job evaluation program as criteria for validating selection tests. Performance appraisal serves
as a basis for administrating the remuneration of employees. Good work performer receives sound remuneration
than a low performer.
Training and development: Training is the process of teaching new employees the basic skills they need to perform their
jobs. Development is improves current performance by imparting knowledge, changing attitudes and increasing
skills. Performance appraisal indicates performance deficiencies in employees. So that it serves as a guide for
identifying training and development needs.
 Selection decision: Selection tests are used to screen the best qualified candidates. Performance appraisal helps in
selection of the best qualified employees for promotion, transfer, training and development. Performance appraisal
needs validity of selection test, which can be compared between actual performance and selection test scores.
Supervision: Performance appraisal provides a guide line for determining the supervision. Performance appraisal
encourages supervisors to observe the job performance of their subordinates. It determines that what kind of
supervision is required and helps in personnel research.

Developmental uses
From the viewpoint of individual development, performance appraisal provides the feedback essential for discussing
strengths and weaknesses as well as improving performance. The appraisal process widely provides an opportunity to
identify issues for discussion, eliminate any potential problems and set new goals for achieving high performance.
Newer approaches to performance appraisal emphasize training as well as development and growth plans for
employees. A developmental approach to appraisal recognizes that the purpose of a manager is to improve job
behavior, not simply to evaluate past performance. Having a sound basis for improving performance is one of the major
benefits of an appraisal program.

Process of Performance Appraisal

Performance appraisal is a process to identify performance deficiencies and it identifies actions to rectify such
deficiencies. The performance appraisal process begins with establishment of performance standards in accordance with
the organization’s strategic goals. It is a continuous process which consists of the following steps.
Establish performance standards

Communicate performance expectations to employees

Measure actual performance

Compare actual performance with standards

Discuss the appraisal with the employees

Initiate corrective action

1. Establish performance standards: The performance standards should be clear to be understood and measured.
Establish of performance standard is the starting point of performance appraisal process. It is concerned with the
establishment of predetermined performance standards that will help in comparing the actual performance of the
employees. They serve as the criteria of performance like what is to be done and where it is to be done. Generally the
standard can be determined in terms of quality, quantity, time, cost and etc.
2. Communicate performance expectation to employees: If once a performance standard is established, it is necessary
to communicated about expectations. There should not have guesswork about what is expected in terms of
performance form employees. The employees are assigned with required duties, responsibilities and authorities to do
the tasks effectively and efficiently so that the expected standard will be meet. The communication should be two
way process so that the implementation can be effective.
3. Measure actual performance: In this step, actual performance of employee is measured by using various means such
as observation, statistical report and other available written documents. For this, necessary information is collected
 on the basis of objective and relevant criteria. The actual performance of an individual is measured in terms of its
efficiency and effectiveness.
4. Compare actual performance with standards: After measuring actual performance level of employees, this is to be
compared with standard performance set by the management. It is done in order to identify performance deviation.
Deviation may be above, below or equal to standards.
5. Discuss the appraisal with the employees: After identifying deviation, in this step also identifies the cause of
deviation. Findings of performance appraisal are discussed with the related employees to find out proper solution. If
the performance is found to be above the standard, the concerned employees should be rewarded. If the
performance is equal to the standard, the manager tries to maintain and develop the employees.
6. Initiate corrective action: The final step in the performance appraisal is the identification of corrective action where
necessary. If actual performance differs with the predetermined standards, then a corrective action is initiated in
order to improve employee’s performance in future. Basic corrective action asks how and why performance deviated.
The decision is in the hands of the manager to select the way to take the corrective action.

Methods of Performance Appraisal

Performance appraisal means evaluating an employee’s current or past performance relative to his performance
standards. It is used to determine the degree of employee’s performance. Different instruments or methods can be
applied in order to measure the employee’s performance. The various methods of performance appraisal and their
categories are given below:

Performance appraisal methods

Absolute Standards Relative Standards Management by objectives

Essay appraisal Individual ranking

Critical incident Group ranking
Checklist Paired comparison
Graphic Rating scale
Forced choice
Behaviorally anchored rating scales

1. Absolute Standard
Absolute standards group is the first group of performance appraisal methods. This method means that employees are
compared to a standard, but their evaluation is independent of any other employee in a work group. This means that
subjects are not compared with any other individual. Following methods are included in this group of performance
appraisal:
1. Essay appraisal: This is very simple method of performance appraisal. In this method, the appraiser prepares a
written statement about the employee being appraised. The statement usually concentrated on describing
specific strengths and weaknesses in job performance. It also suggests courses of action to remedy the identified
problem areas. The statement may be written and edited by the appraiser alone or it be composes in
collaboration with the appraisee. If the essays are done well, they can provide detailed feedback to the
employees regarding their performance.
Advantages of essay appraisal
1. It is simple to use and doesn’t require a complex format for its completion.
2. It provides a detailed feedback to the employees regarding their performance.
3. It helps to improve HRM decision by providing qualitative data.
4. Detailed information can be collected regarding an employee’s strengths and weaknesses.
Disadvantages of essay appraisal
1. It is time consuming and difficult to administer.
2. It is difficult to compare and contrast the result of individuals.
3. Due to the lack of specific format, sometimes it will be difficult to prepare.
4. It focuses on the assimilation of qualitative data only.

2. Critical incident method: This method consists of written description of effective or ineffective worker behavior
related to performance in critical situations. The appraiser is required to record incidents of the employee’s
positive and negative actions and this forms the basis of the appraisal report. The basic assumption under this
method is that the appraisal is made on workers who can perform their jobs effectively in critical situation.
Advantages of critical incident
1. The evaluation is based on actual job behavior.
2. This method judges performance rather than personalities.
3. It provides a feedback to the employee for improving performance.
Disadvantages of critical incident
1. It is time consuming and burdensome to record incidents.
2. It focuses on the negative behavior of employees.
3. It will be difficult to make comparison of critical incidents.

3. Checklist Method: A checklist is a list of well prepared behavioral descriptions and checks of those behaviors that
supply to the employee. It is usually evaluated by HRM staff not the appraiser completing the checklist.
Therefore the rater does not actually evaluate the employee’s performance. Checklist can be two types i. e.
Simple and Weighted. Simple checklist includes only descriptive statements with yes/no responses but weighted
checklist include various types and levels of behaviors for a particular job.
Advantages of checklist
1. It is simple and easy to evaluate.
2. It reduces some bias since the rater and scorer are different.
3. It provides feedback to both rater and ratees.
Disadvantages of checklist
1. Different job needs different check list, so it is costly and time consuming.
2. It uses personality criteria.
3. It is difficult to analyze and interpret of statements about employee’s behaviours.

4. Graphic Rating Scale: A rating scale is the most common method of performance appraisal. This method can be
used to assess factors such as quantity and quality of work, job knowledge, cooperation dependability,
attendance, honesty, integrity, attitudes and initiative. This method offers a high degree of structure for
appraisals. The rater provides a subjective evaluation of employee’s performance and behaviors along a scale.
Advantages of rating scale
1. It is less time consuming and easy to develop and administer.
2. It helps for comparative study of two or more employees.
3. A large number of employees can be evaluated at a time.
Disadvantages of rating scale
1. The rating error may be resulted in the evaluation process.
2. It is based on individual perception.
3. This method is not free from the rater’s bias to influence evaluation process.

5. Forced Choice: The forced choice appraisal is a special type of checklist where the rater must choose between
two or more statements. Each statement may be favorable or unfavorable. The appraiser’s job is to identify
which statement is most descriptive of the individual being evaluated. The HRM department arrives at overall
scoring for each employee by applying scoring key.
Advantages of forced choice
1. It reduces bias and distortion since the rater does not know the answer.
2. It gives clear instructions to the subordinates.
3. The system is easy and simple to understand as well as apply.
Disadvantages of forced choice
1. This method is difficult and costly to develop.
2. If all employees are of high ability it will not be suitable to appraise their performance.
3. Rater’s feel frustrated to make a choice between statements which are difficult to differentiate.

6. Behaviorally Anchored Rating Scale: This method is a combination of critical incident method and rating scale
method of performance appraisal. It focuses on assessing an employee’s behavior relating to the critical areas of
performance for a job. Then the rate evaluates more effective and less effective behavior for getting results.
Advantages of behaviorally anchored rating scale
1. It specifies definite, observable and measurable job performance behavior of the employees.
2. It overcomes the errors of traditional rating system.
3. It provides feedback to employees about effective or ineffective job performance.
Disadvantages of behaviorally anchored rating scale
1. It is complex, time consuming and costly to develop.
2. The rating error may be occurred.
3. It may not be suitable in all organizations as each performance dimension requires different rating scales.
2. Relative Standards
This is the second group of performance appraisal method, compares individuals against other individuals. Under this
method, the performance of individual is measured on the basis of another person’s performance. Following methods
are included in this group of performance appraisal.
1. Individual Ranking: The individual ranking method requires the evaluator lists the employees in a rank order
from the highest to the lowest on the basis of overall performance. In this method only one employee can be
rated best, then listed all subordinates to be rated from highest to lowest.
Advantages of individual ranking
1. It is easy to understanding and less time consuming.
2. It helps to compared between employees.
Disadvantages of individual ranking
1. It is complex when the number of employees is large.
2. It does not consider differences in tasks and abilities.

2. Group ranking: The group ranking method requires the evaluation to place employee into a particular
classification. This method is often used in recommending students to graduate school. The evaluators are asked
to rank the students in group basis.
Advantages of group ranking
1. The evaluation of everyone is rated near the average.
2. It provides better performance.
Disadvantages of group ranking
1. It is disadvantages for high scorers.
2. It cannot provide better individual score, when the number of employees is large.

3. Paired Comparison: This method is comparison of each employee with every other employee on a one on one
basis in terms of overall performance. Better performer in each pair is identified. The required number of pair is
computed by using the given formula.
n(n−1)
No. of pairs =
2
Where, n = Number of employees.
Advantages of paired comparison
1. This method reflects the stronger points.
2. It tends to result in ranking of employees.
Disadvantages of paired comparison
1. It is appropriate for only 10-20 employees.
2. It does not indicate how to improve performance.
 3. Management by Objectives (MBO):
This is the third group of performance appraisal method. It is an approach of goal setting which goes beyond
setting annual objectives for organizational limits to setting performance goals for individual employees. It is a
result oriented method. They seek to measure employee performance by examining the extent to which
predetermined work objectives have been met. Usually the objectives are established jointly by the supervisor
and subordinate.
Advantages of MBO
1. It is committed towards organizational objectives.
2. It identifies each employee’s contribution to the success of the organization.
3. It provides insights about employee’s behavior.
4. Rewards can be linked to performance.
Disadvantages of MBO
1. MBO is time consuming to develop and administer.
2. Lack of training and knowledge on the part of supervisor can limit its effectiveness.
3. Comparison between employees is not possible.
4. Autocratic decision making and external controls are not suitable.

Reward Management
Generally reward means a thing given to any one because of his good work. Rewards have direct links with work
motivation. A reward is a payoff for performance which is directly concerned with the level of motivation and job
satisfaction. The main purpose of reward management is to attract and retain people in the organization to achieve its
goals. It is essential for HR mangers to encourage employees to commit themselves to a high level of performance by
managing rewards.
Types of Rewards
Reward is the total return given by an employer to the employees. It consists of package of pay, benefits, services and
job related rewards received by employees. The types of reward are as follows:
1. Intrinsic Vs Extrinsic rewards
2. Financial Vs Non financial rewards
3. Performance based Vs Membership based rewards
1. Intrinsic Vs Extrinsic rewards:
Intrinsic rewards are the personal satisfactions one derives from doing the job. These rewards consist of having a
pride on work, having a feeling of accomplishment, which are the factors of esteem and self actualization needs
of the employees.
Extrinsic rewards include pay, benefits, services and promotion. These rewards are the result of management
policies and practices. These rewards are necessary to fulfill physiological and safety needs of the employees. It
has physical existence and can be seen, touched and compared with others.
2. Financial Vs Non financial rewards:
Financial rewards mean those direct and indirect payments that enhance an employee’s well being. Whereas
direct payments are salary, wages, commission and bonuses as well as indirect payments are made in the form
of medical insurance, paid leaves and pension plans.
Non financial rewards are those employee benefits that don’t enhance an employee’s financial well being. They
make the employee’s life better on the job. Preferred office furnishing, impressive job title, desired work
assignments, business cards, owns secretary etc is some of its examples.
3. Performance based Vs Membership based rewards:
Performance based rewards are such benefits which are provided on the basis of an employee’s job
performance ability. Higher performance leads to greater rewards and the reward is directly concerned with an
employee’s job performance. Commission, bonus etc are the example of performance based reward.
Membership based rewards are paid on the basis of being a permanent member of the organization. These
rewards include profit sharing, salary increases, promotion etc. The reward goes to all employees irrespective of
their performance.
Qualities of Effective rewards
An effective reward management system is essential for high satisfaction, low absenteeism and low turnover. It should
attract, retain and motivate quality employees needed by the organization. The qualities of effective reward aer as
follows:
1. Importance
2. Equitable
3. Visibility
4. Flexibility
5. Cost effective
1. Importance: Reward should be important and valuable to employees receiving them. No reward is equally
important for all employees. The degree and forms of rewards should vary as per the individual’s needs and
wants.
2. Equitable: Reward should be distributed equitably. It is concerned with the fairness in distributing rewards to
the employees. Employees generally make comparisons between themselves and their peers with regard to the
fairness in distribution of rewards. The imbalance reward system creates job dissatisfaction, employee turnover
and absenteeism.
3. Visibility: Reward should be visible to be affective. Visibility of rewards is important to establish a link between
individuals’ desires and their performance by motivating employees to work. Mangers try to increase the
visibility of rewards through well publicized bonuses, salary increment and other visible efforts.
4. Flexibility: Rewards should be flexible to vary with changes in performance. The degree of flexibility emphasizes
that the reward will automatically increase when the level of employee performance increases. This is essential
to satisfy the employees at work.
5. Cost effective: An effective reward system should be less costly. The costs and benefits of reward should be
carefully considered to maintain organizational effectiveness. A high cost reward cannot be given very often; it
reduces organizational effectiveness as a result of its cost.
Performance Appraisal Practices in Nepalese Organization
Performance appraisal is the systematic evaluation of individuals to their performance on the job and their
potentials for development. Performance is being related to the productivity, it is crucial for the objectives. Methods
and process of performance appraisals are differ from organization to organization. The main feature of
performance appraisal in Nepalese organizations is as follows:
1. Low priority
2. Informal system
3. Promotion purpose
4. Lack of transparency
5. Lack of uniformity
1. Low priority: Nepalese organizations do not give importance to performance appraisal. It is largely used only
to appraise current performance of employee on the job but does not give adequate priority to it.
2. Informal system: Most Nepalese organizations do not have formal system of performance appraisal. In
private organizations, performance appraisal is totally depending on owners or mangers judgment. In public
organizations have systematic performance appraisal system but the implementation of the system is not
effective and objectives.
3. Promotion purpose: The main purpose of performance appraisal in Nepalese organization is the promotion
of employees. It does not use for performance feedback to employees, reward management and
identification of training and development needs.
4. Lack of transparency: There is lack of transparency of performance appraisal in Nepalese organization. It is
not discussed with the employees it remains secret within limited officials. It is not used for corrective action
or for career planning.
5. Lack of uniformity: There is lack of uniformity of performance appraisal methods and processes. There is no
any similarity in performance appraisal methods and processes in civil service and public enterprises or one
business organization to another.