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

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.

Chapter 11Chapter 11 Performance Performance AppraisalsAppraisals

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Nature of Performance AppraisalsNature of Performance Appraisals You can’t manage what you don’t understandYou can’t manage what you don’t understand You don’t understand what you don’t measureYou don’t understand what you don’t measure What gets measured is what gets doneWhat gets measured is what gets done What gets measured is what gets rewardedWhat gets measured is what gets rewarded What gets rewarded is what gets repeatedWhat gets rewarded is what gets repeated

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

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 applied quality-management principles should be applied to improving itto improving it– Recognize part of performance influenced more by Recognize part of performance influenced more by

work environment and systems than by ee behaviorswork environment and systems than by ee behaviors

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

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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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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

See Ex. 11.3See Ex. 11.3

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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 scale (Ex. 11.4)Standard rating scale (Ex. 11.4)

– BehaviorsBehaviors Behaviorally anchored rating scales (Ex. 11.5)Behaviorally anchored rating scales (Ex. 11.5)

– OutcomesOutcomes Management by objectives (Ex. 11.7, 11.8)Management by objectives (Ex. 11.7, 11.8)

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

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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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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 Appraisal ProcessPerformance Appraisal 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 Appraisal Process (cont.)Performance Appraisal 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