McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

Chapter 11Chapter 11 Performance Performance AppraisalsAppraisals

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Chapter TopicsChapter TopicsRole of Performance Appraisals in Role of Performance Appraisals in

Compensation DecisionsCompensation DecisionsCommon Errors in Appraising PerformanceCommon Errors in Appraising PerformanceStrategies for Better Understanding and Strategies for Better Understanding and

Measuring Job PerformanceMeasuring Job PerformancePutting It All Together: Performance Evaluation Putting It All Together: Performance Evaluation

ProcessProcess

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Chapter Topics (cont.)Chapter Topics (cont.)EEO and Performance EvaluationEEO and Performance EvaluationTying Pay to Subjectively Appraised Tying Pay to Subjectively Appraised

PerformancePerformancePromotional Increases as a Pay-for-Performance Promotional Increases as a Pay-for-Performance

ToolTool

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The Role of Performance AppraisalsThe Role of Performance Appraisalsin Compensation Decisionsin Compensation Decisions

Used for several organizational decisionsUsed for several organizational decisions– To guide allocation of merit increases To guide allocation of merit increases

– For developmental purposesFor developmental purposes

– Two uses are often in conflictTwo uses are often in conflict

Performance ratings are influenced by:Performance ratings are influenced by:– Employee behaviors observed by ratersEmployee behaviors observed by raters

– Organization valuesOrganization values

– Competition among departmentsCompetition among departments

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The Role of Performance AppraisalsThe Role of Performance Appraisalsin Compensation Decisions (cont.)in Compensation Decisions (cont.)

Employees often frustrated about the appraisal Employees often frustrated about the appraisal processprocess– Appraisals are too subjectiveAppraisals are too subjective

– Possibility of unfair treatment by a supervisorPossibility of unfair treatment by a supervisor

Experts argue that rather than throwing out the Experts argue that rather than throwing out the entire performance appraisal process, total-entire performance appraisal process, total-quality-management principles should be quality-management principles should be applied to improving itapplied to improving it

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Exhibit 11.1: Common ErrorsExhibit 11.1: Common Errorsin the Appraisal Processin the Appraisal Process

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Factors Related to Inaccurate AppraisalsFactors Related to Inaccurate Appraisals GuiltGuilt Embarrassment about giving praiseEmbarrassment about giving praise Taking things for grantedTaking things for granted Not noticing good or poor performanceNot noticing good or poor performance The halo effectThe halo effect Dislike of confrontationDislike of confrontation Spending too little time on preparation of the Spending too little time on preparation of the

appraisalappraisal

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Exhibit 11.2: Ratings of ManagersExhibit 11.2: Ratings of Managers

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Strategies to Better Understand and Strategies to Better Understand and Measure Job PerformanceMeasure Job Performance

Clearly define job performanceClearly define job performance Recognize definition of performance and its Recognize definition of performance and its

components is expandingcomponents is expanding Improve appraisal formatsImprove appraisal formats Select the right ratersSelect the right raters Understand way raters process information and Understand way raters process information and

mistakes that may be mademistakes that may be made Train raters to improve rating skillsTrain raters to improve rating skills

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Strategy to Better Understand and Strategy to Better Understand and Measure Job PerformanceMeasure Job Performance

Strategy 1:

Improve

Appraisal

Formats

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Categories of Appraisal FormatsCategories of Appraisal Formats

Ranking - Rater compares employees against each

other

Rating - Rater evaluates employees on some absolute standard

(measured on a continuum scale)

Essay - Rater answers open-ended questions in essay form describing employee

performance

Categories

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Ranking FormatsRanking Formats

Straight rankingStraight ranking

Alternation rankingAlternation ranking

Paired-comparison Paired-comparison rankingranking

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Employee ComparisonsEmployee Comparisons Rank order/forced choice/paired comparisonRank order/forced choice/paired comparison AdvantagesAdvantages

– Distribution for decision makingDistribution for decision making

– No central tendency/leniencyNo central tendency/leniency

DisadvantagesDisadvantages– Halo error/individual errorsHalo error/individual errors

– Comparing pears to bananasComparing pears to bananas

– Feedback/justificationFeedback/justification

– Scale doesn’t provide for amount of differencesScale doesn’t provide for amount of differences

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Rating FormatsRating Formats Two common elementsTwo common elements

– Raters evaluate employees on some absolute Raters evaluate employees on some absolute standardstandard

– Each standard is measured on a scale -Each standard is measured on a scale -performance variation is described along a performance variation is described along a continuumcontinuum

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Rating Formats (cont.)Rating Formats (cont.) Types of descriptorsTypes of descriptors

– AdjectivesAdjectives Standard rating scaleStandard rating scale

– BehaviorsBehaviors Behaviorally anchored rating scalesBehaviorally anchored rating scales

– OutcomesOutcomes Management by objectivesManagement by objectives

– Essay formatEssay format

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Exhibit 11.9: Usage of PerformanceExhibit 11.9: Usage of PerformanceEvaluation FormatsEvaluation Formats

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Sample Trait ScalesSample Trait Scales

Rate each worker using the scales below.

Decisiveness:1 2 3 4 5 6 7Very low Moderate Very high

Reliability:1 2 3 4 5 6 7Very low Moderate Very high

Energy:1 2 3 4 5 6 7Very low Moderate Very high

Loyalty:1 2 3 4 5 6 7Very low Moderate Very high

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Trait Rating ScalesTrait Rating Scales AdvantagesAdvantages

– Easy to developEasy to develop

– InexpensiveInexpensive

– Use across different jobsUse across different jobs

DisadvantagesDisadvantages

– Subjective/subject to errorsSubjective/subject to errors

– Not job specificNot job specific

– Difficulty with feedbackDifficulty with feedback

– Potential legal problemsPotential legal problems

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Behavior-based ScalesBehavior-based Scales Behavior Expectation ScalesBehavior Expectation Scales (Behaviorally Anchored Rating Scales)(Behaviorally Anchored Rating Scales)

1. Ask managers for critical incidents – behaviors that 1. Ask managers for critical incidents – behaviors that reflect particularly effective/ineffective behaviorreflect particularly effective/ineffective behavior

2. Sort into categories and rank within each category2. Sort into categories and rank within each category 3. Ask for additional incidents to fill in categories3. Ask for additional incidents to fill in categories 4. Retranslate – ask managers to sort 4. Retranslate – ask managers to sort

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Behavior Based ScalesBehavior Based Scales AdvantagesAdvantages

– Based on samples of actual observed behaviorBased on samples of actual observed behavior

– More effective behavior identified for trainingMore effective behavior identified for training

– Instrument used by those who helped develop itInstrument used by those who helped develop it

– Spin offs – selection, training, objectivesSpin offs – selection, training, objectives

DisadvantagesDisadvantages

- C- Cost of developmentost of development

- Opportunity to observe behaviors for many- Opportunity to observe behaviors for many

employeesemployees

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Objective-based RatingsObjective-based Ratings Profits/production/quality/salesProfits/production/quality/sales AdvantagesAdvantages

– Objective/eliminate rating errorsObjective/eliminate rating errors

DisadvantagesDisadvantages– Deficient – may omit important factorsDeficient – may omit important factors

– Focus on quantifiable/observable resultsFocus on quantifiable/observable results

– Situational factorsSituational factors

– FeedbackFeedback

– Encourages results at all costsEncourages results at all costs

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Evaluating Performance Appraisal Evaluating Performance Appraisal FormatsFormats

What makes for a good appraisal format?What makes for a good appraisal format?– Employee development potential Employee development potential

– Administrative easeAdministrative ease

– Personnel research potentialPersonnel research potential

– CostCost

– ValidityValidity

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Exhibit 11.10: An Evaluation of Performance Exhibit 11.10: An Evaluation of Performance Appraisal FormatsAppraisal Formats

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Strategy 2:

Select the

Right

Raters

Strategy to Better Understand and Strategy to Better Understand and Measure Job PerformanceMeasure Job Performance

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Select the Right RatersSelect the Right Raters Focus on who might conduct the ratings and Focus on who might conduct the ratings and

which of these sources is more likely to be which of these sources is more likely to be accurateaccurate– 360-degree feedback – assesses employee 360-degree feedback – assesses employee

performance from five points of viewperformance from five points of view SupervisorSupervisor PeerPeer SelfSelf CustomerCustomer Subordinate Subordinate

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Strategy to Better Understand and Strategy to Better Understand and Measure Job PerformanceMeasure Job Performance

Strategy 3:Understand How Raters

Process Information

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The Rating ProcessThe Rating Process Rater observes behavior of a rateeRater observes behavior of a ratee Rater encodes ratee behaviorRater encodes ratee behavior Rater stores information in memoryRater stores information in memory When it is time to evaluate a ratee, rater:When it is time to evaluate a ratee, rater:

– Reviews performance dimensionsReviews performance dimensions– Retrieves stored observations to determine relevance Retrieves stored observations to determine relevance

to performance dimensionsto performance dimensions Information is reconsidered and integrated with Information is reconsidered and integrated with

other available information as rater decides on other available information as rater decides on final ratingsfinal ratings

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Errors in observation (attention)

Errors in storage and recall

Errors in actual evaluation

Types of

Errors

Errors in rating process

Understand Why Raters Make MistakesUnderstand Why Raters Make Mistakes

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Strategy to Better Understand and Strategy to Better Understand and Measure Job PerformanceMeasure Job Performance

Strategy 4:Training Raters to Rate More Accurately

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Training Raters to Rate More AccuratelyTraining Raters to Rate More Accurately Rater-error trainingRater-error training

– Goal is to reduce psychometric errors by Goal is to reduce psychometric errors by familiarizing raters with their existencefamiliarizing raters with their existence

Performance-dimension trainingPerformance-dimension training

– Exposes supervisors toExposes supervisors toperformance dimensions usedperformance dimensions used

Performance-standard trainingPerformance-standard training

– Provides raters with a standard orProvides raters with a standard orframe of reference for making appraisalframe of reference for making appraisal

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Ways to Improve Rater TrainingWays to Improve Rater TrainingStraightforward lecturing to ratees is ineffectiveStraightforward lecturing to ratees is ineffectiveIndividualized or small group discussions more Individualized or small group discussions more

effectiveeffectiveWhen sessions are combined with extensive When sessions are combined with extensive

practice and feedback, rating accuracy improvespractice and feedback, rating accuracy improvesLonger training programs are generally more Longer training programs are generally more

successful than shorter programssuccessful than shorter programsPerformance-dimension and performance-Performance-dimension and performance-

standard training more effective than rater-error standard training more effective than rater-error trainingtraining

Success results from efforts to reduce halo errors Success results from efforts to reduce halo errors and improve accuracyand improve accuracy

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Putting it All Together: The Putting it All Together: The Performance Evaluation ProcessPerformance Evaluation Process

Need a sound basis for establishing performance Need a sound basis for establishing performance appraisal dimensions and scales associated with appraisal dimensions and scales associated with each dimension each dimension

Need to involve employees in every stage of Need to involve employees in every stage of developing performance dimensions and developing performance dimensions and building scalesbuilding scales

Need to ensure raters are trained in use of Need to ensure raters are trained in use of appraisal system and that all employees appraisal system and that all employees understand how system operatesunderstand how system operates

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Putting it All Together: The Putting it All Together: The Performance Evaluation Process (cont.)Performance Evaluation Process (cont.)

Need to ensure raters are motivated to rate Need to ensure raters are motivated to rate accuratelyaccurately

Raters should maintain a diary of employee Raters should maintain a diary of employee performanceperformance

Raters should attempt a performance diagnosis Raters should attempt a performance diagnosis to determine if performance problems existto determine if performance problems exist

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Exhibit 11.11: Tips on Appraising Employee PerformanceExhibit 11.11: Tips on Appraising Employee Performance

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Exhibit 11.11: Tips on Appraising Employee Exhibit 11.11: Tips on Appraising Employee Performance (con’t)Performance (con’t)

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EEO and Performance EvaluationEEO and Performance Evaluation

11 Provide specific written instructions on how to complete appraisalProvide specific written instructions on how to complete appraisal

22Incorporate clear criteria for evaluating performance - Performance dimensions should be written, objective, and clear

Incorporate clear criteria for evaluating performance - Performance dimensions should be written, objective, and clear

33 Provide a rational foundation for personnel decisions via adequately developed job descriptionsProvide a rational foundation for personnel decisions via adequately developed job descriptions

44 Require supervisors to provide feedback about appraisal results to employeesRequire supervisors to provide feedback about appraisal results to employees

55 Incorporate a review of performance ratings by higher level supervisors Incorporate a review of performance ratings by higher level supervisors

66 Consistent treatment across raters, regardless of race, color, religion, sex, and national origin should be evidentConsistent treatment across raters, regardless of race, color, religion, sex, and national origin should be evident

Key Issues: Establishing a Performance Appraisal System

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Tying Pay to Subjectively Appraised Tying Pay to Subjectively Appraised PerformancePerformanceHow do we

get

employees to

view raises

as a reward

for

performance

?

Central issue

involving merit pay

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Provide equal increases to all employees Provide equal increases to all employees regardless of performanceregardless of performance

– General increaseGeneral increase

– Cost-of-living adjustmentsCost-of-living adjustments

Pay increases based on a preset progression Pay increases based on a preset progression pattern based on senioritypattern based on seniority

Pay Increase Guidelines with Low Pay Increase Guidelines with Low Motivational ImpactMotivational Impact

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Requirements to Link Pay to Requirements to Link Pay to PerformancePerformance

Define performanceDefine performance– BehaviorsBehaviors

– CompetenciesCompetencies

– TraitsTraits

Specify a continuum describing different levels Specify a continuum describing different levels from low to high on performance measurefrom low to high on performance measure

Decide how much of a merit increase is given Decide how much of a merit increase is given for different levels of performancefor different levels of performance

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Exhibit 11.12: Performance-based Exhibit 11.12: Performance-based GuidelinesGuidelines

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Designing Merit GuidelinesDesigning Merit Guidelines

11 What should the poorest performer be paid as an increase?What should the poorest performer be paid as an increase?

22 How much should average performers be paid as an increase?How much should average performers be paid as an increase?

33 How much should top performers be paid?How much should top performers be paid?

44What should be the size of the percentage increase differential between different levels of performance?

What should be the size of the percentage increase differential between different levels of performance?

Four Questions . . .

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Exhibit 11.14: Merit Pay GridExhibit 11.14: Merit Pay Grid

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Promotional Increases as a Pay-for-Promotional Increases as a Pay-for-Performance ToolPerformance Tool

Promotion should be accompanied by a salary Promotion should be accompanied by a salary increase - 8 to 12%increase - 8 to 12%

Characteristics of promotional pay increasesCharacteristics of promotional pay increases

– Size of increment is approximately double a normal Size of increment is approximately double a normal merit increasemerit increase

– Represent a reward to employees for commitment Represent a reward to employees for commitment and exemplary performanceand exemplary performance