Employee Performance Appraisals: All You Need to Know to Unleash Excellence

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Performance appraisals can be more than annual evaluation rituals. The feedback you share during your appraisals can be the bridge between "job done" and "job well-done."

So, when done right, employee performance appraisals can be growth catalysts. This is what this guide is all about: running effective performance appraisals that go beyond box checking.

You will learn:

• What is a performance appraisal.
• How performance appraisals typically work in an organization.
• The various types of performance appraisals you could choose from.
• The pros & cons you should consider when setting up your appraisal process.
• the most effective in each industry;
• and why performance appraisal methods are becoming unpopular.

We will also point you to the best and most popular employee appraisal method that works for everyone. Spoiler alert: it's 360-degree feedback.

🔄 What is a performance appraisal?

A performance appraisal is a periodic measure of an employee's performance at work against specific objectives and goals. 

Also known as employee appraisal, performance review, annual review merit rating, or employee assessment, a performance appraisal's primary goal is to assess an employee's: 

• relevant job competencies; 
• achievements;
• progress (or stagnation). 

Performance appraisals review your people's job performance. You need to understand how an employee accomplishes a given task against standards such as:

• cost; 
• completeness; 
• speed;
• and accuracy. 

Performance appraisals will uncover any employee weaknesses and challenges. So they offer opportunities:

• For employees to grow in their roles. 
• For employers to determine who contributed the most to the company and who needs to course-correct and improve future performance. 

🎯 4 Essential objectives of performance appraisals

Companies use performance appraisals for a variety of reasons. But, at their core, performance appraisals are meant to benefit both the employer and the employee. 

Providing frequent feedback 

Modern performance appraisals are continuous and provide employees with constructive feedback regularly. 

Over 75% of respondents said frequent feedback is valuable to their work, according to LinkedIn. 

Tip: Quality employee appraisals help managers give employees feedback, which provides a sense of direction.

Counseling poor performers

Companies that provide frequent feedback see 14.9% fewer turnover costs. 

Of course, poor performers are inevitable in any organization but can lead to high turnover costs if left unchecked. 

Modern appraisal methods help managers engage in a two-way counseling process to:

• Identify the employee's challenges and 
• Deliver feedback that can improve performance and lessen turnover costs. 

Tip: Use Performance Improvement Plans (PIPS) to address and correct poor performance and create a supportive work culture. 

Facilitating promotion and hiring decisions 

Companies use performance appraisals to ensure that capable individuals fill important positions. 

By conducting appraisals, HR professionals can identify whether they are hiring the right people and, if not, adopt a new hiring strategy.

Driving impact-driven recognition 

Performance appraisals make it easier to identify areas where each employee is doing great and acknowledge them. 

After a formal performance appraisal, companies can reward top performers through:

• salary increases;
• monetary incentives;
• company awards;
• formal training opportunities, etc.

🏆 10 Advantages and disadvantages of performance appraisals

Like any system, employee performance appraisals have both advantages and disadvantages. 

🟢 Allowing corrective actions

Appraisals are primarily development and growth tools. They help managers to recognize points of poor performance and take corrective actions. 

Depending on the results and the company goals at a specific period, managers can

• design performance improvement plans; 
• organize counseling sessions;
• and team-building activities, etc.

🟢 Employee development

"Continuous feedback is important in how we motivate and value contribution for our people. How else do we learn if we are not giving feedback on a regular basis?" - Jo Taylor, MD of Let's Talk Talent.

We couldn't agree more. Employees not given enough responsibilities will not be motivated to improve themselves. This will prevent the company from creating a good employee development plan, resulting in mostly low-performing employees. 

🟢 Identify areas for further training

Employee appraisals help companies determine both organizational and individual training needs. 

Reviewing performance data helps the company make critical decisions and focus more on effective employee training practices. This will:

• increase chances of promotion,
• lower the need for layoffs,
• improve cross-departmental hiring,
• improve retention rates. 

🟢 Determine your company's top performers and high potential 

Performance appraisals give you an extensive view of your top performers in different job aspects, which can help managers develop these high potentials by focusing on their strengths.

This helps companies approach promotions to executive positions futuristically and improve retention rates. Not sure how to find your top performers? Check out our blog post on how to identify and develop your high-potential employees.

🟢 Further clarify job roles 

Employee appraisals allow companies to communicate their expectations for each role and adequately define them, which can help prevent managers and employees from getting carried away with targets and team goals, preventing problems down the line.

So, suppose you've noticed team conflicts about who should have performed a task, or some jobs are neglected when not explicitly assigned. In that case, employee appraisals can help improve role clarity. 

🟢 Feedback culture

Feedback is the most common and direct advantage of employee appraisals. 

After appraisals, managers communicate performance results based on predetermined success metrics. Plus, they use current results as a baseline for setting new targets. 

When employees get this feedback, they can: 

• better understand their manager's expectations;
• improve their future performance;
• be encouraged to engage with the organization.

Your employees, managers, and the organization will benefit from an effective feedback culture focused on learning and improving. 

But performance appraisals are not only rainbows and sunshine. 

95% of HR managers were unhappy with traditional performance reviews, according to Gartner. 

How about the shortcomings of traditional performance review methods?

❌ Ambiguous performance standards

Performance appraisals are only as valuable as their performance management systems. If a business doesn't have clear performance standards tied to specific goals, appraisals will be a waste of time. 

❌ Rater bias

Most human assessments are subject to natural biases, which can lead to errors in judgment. 

In fact, managers often have subconscious biases, which can result in feedback bias:

• Halo effect: a single positive attribute influences a manager to rate an employee high on any other attribute. 
• Leniency error: the manager is biased toward a team member and lenient with the ratings. 
• Recency error: the manager rates an employee based on their most recent performance instead of considering the full-time frame of an appraisal. 
• Central tendency error: the manager gives all team members mid-ratings—for example, 3 out of 5 in most areas. 
• First impression error: the manager rates based on the first impression of an employee rather than their general performance. 
• Similar-to-me error: a manager favors employees with whom they share some similar characteristics. For example, a white male manager may rate white male employees higher. 

❌ Lengthy process of form-filling and documenting

Performance appraisals are time-consuming and stressful for both employees and managers. 

Managers spend an average of 210 hours a year in performance management activities. Most of that time goes into filling out forms and documenting on excel sheets. 

Not only is this data hard to access, but it is also redundant - definitely not the most practical and user-friendly process. 

❌ Wrong selection of performance criteria

Sometimes, managers and HR may have neither the experience nor training to conduct performance appraisals. This often leads to them selecting the wrong performance criteria, which in turn leads to unsatisfactory performance appraisal results and bad company decisions.

🔍 How performance appraisals work

Performance appraisals usually happen across different departments and levels. 

Traditionally, HR design the processes to give feedback on employee performance. Depending on the appraisal method, HR professionals often work closely with managers in different departments.

In most companies, performance appraisals take place once or twice a year. 

Some companies use the hire date as a reference point for carrying out appraisals. So they would schedule yearly reviews one year after hiring, two years after hiring, and so on.

But more recently, companies now hold weekly conversations and quarterly appraisals. These are less intimidating and provide more correction and alignment. 

So, what should employees and managers discuss during an appraisal?

Managers should:

• Explain the purpose of the appraisal is to improve performance.
• Ask for the employee's perspective on the performance evaluation.
• Provide a summary of performance and avoid comparison.
• Ask employees to contribute goals and objectives for the following evaluation timeline.
• Ask if there are questions, ideas, or concerns. 

⚙️ 8 Performance appraisal tools and methods

HR professionals continue to revamp the traditional employee appraisal method to suit their companies and internalize performance results. 

We have selected 8 of the most common performance appraisal techniques.

Employee-initiated reviews

Employee-initiated reviews are an informal appraisal method where employees request an appraisal from their managers.

This method has some key advantages: 

• promoting self-reflection, accountability, and communication between managers and subordinates;
• encouraging employee engagement; 
• building upward structures.

Management by objectives (MBO)

Management by objectives is a method where managers and employees work together to identify, organize, and communicate goals. They focus on these goals for a specific period and meet periodically to discuss them and address their feasibility.

This method is great because it allows employees to see:

• How their performance affects the set objectives. 
• How their objectives tie to the overarching organizational goals.

MBO works for any company size. However, it is ideal for companies with several management positions, like retail giants. It measures the results of managers, directors, and other executives. 

Behavior-based appraisals & Behaviorally anchored rating scale (BARS) 

Behavior-based appraisals anchor specific behavioral examples to numerical scales to determine employee performance. 

BARS is a qualitative and quantitative approach: the company formulates a unique bar scale based on the behaviors employees routinely exhibit. 

To develop a good BARS appraisal, you should:

• Generate a critical incident to depict workplace behavior;
• Edit the critical incidents into a standard format;
• Remove any redundancy;
• Randomize the critical incidents;
• Conduct an effectiveness assessment.

BARS is ideal for conducting all-encompassing appraisals. They can assess all employees, from entry-level roles to senior managers. 

Psychological appraisals

Psychological appraisals are professionally conducted reviews to analyze an employee's future performance.

‍These appraisals usually have about seven components, which are:

• interpersonal skills
• personality traits
• cognitive abilities
• leadership skills
• intellectual traits
• emotional quotient, etc.

The company hires qualified psychologists to conduct a variety of tests on employees. The problem is that this method is usually complex, expensive, and slow, and employees may even tense up under such intense observation. 

This method is ideal for large organizations trying to:

• develop their leadership pipeline; 
• make promotional decisions; 
• resolve workplace conflicts; 
• and embark on team building. 

Trait-based appraisal

Trait-based appraisals involve ranking employees based on the qualities they possess. Managers create a checklist and give employees scores on the company's focal traits. 

This method is ideal for customer service departments. 

Paired comparison

Paired comparison is a method where managers pitch employees against each other on a team, where the highest performing employee remains in the company, and the lowest has to leave the company.

This method received criticism as it causes tension, reduces productivity, and leads to unhealthy competition. As a result, it is highly discouraged as a method for employee performance appraisals.

Assessment center method 

The assessment center method is training and appraisal rolled into one. Employees take part in social simulation exercises such as:

• fact-finding exercises;
• in-basket exercises;
• decision-making processes;
• role play; 
• informal discussions, etc. 

This method is highly engaging, improves employees' knowledge, and offers insight into their personalities.

It's great for sectors that require a high level of human interaction, such as educational institutions, service-based industries, and consulting firms. 

360-degree feedback

360-degree feedback is a multi-dimensional appraisal technique. It evaluates performance using data collected from an employee's influence circle. This typically includes colleagues, subordinates, supervisors, managers, and clients.

This method helps to:

• eliminate bias
• get multiple viewpoints
• analyze all strengths and weaknesses

360 feedback was popularized in the 90s and has become the most popular employee appraisal technique. 

It has five key components:

Self-appraisal: the employee looks back at their performance to analyze strengths and weaknesses within a formal and transparent framework. 

Managerial reviews: the manager offers traditional appraisal based on an employee's performance.

Peer reviews: colleagues use their unique perspectives to evaluate teamwork, reliability, initiatives, etc.

Subordinate appraisal: subordinates offer a unique upward review of their supervisor's managerial skills.

Client reviews: internal or product users offer reviews or drop testimonies based on their interaction with an employee, which the company factors in for the appraisal. 

360 feedback is essential for improving performance management. It is ideal for any type of company, including startups. But this must not be confused with employee appraisal.

💡 7 Tips for effective performance reviews 

1. Track performance with accurate metrics 

The success of a performance review is subject to whether the metrics for tracking performance are right in the first place. 

There are several metrics to consider, such as targeting skill sets, basing performance on organization goals, or using the Objectives, Key Results + Actions (OKRA) formula, etc. 

 2. Provide regular, informal feedback

Members of managers who provide weekly feedback instead of annual are 5.2 times more likely to agree that they receive meaningful feedback, according to Gallup.

Tip: You must ensure that you provide regular, informal feedback. This puts employees at ease and helps them take immediate action. ‍

💡 Here are some constructive feedback examples you can look at. 

3. Include employee self-appraisals

Self-appraisals are usually surprisingly honest when done right. They are a moment of self-reflection for employees, and they can identify what they did right and wrong and their strengths and weaknesses. 

Employee self-evaluation increases employee engagement and produces quick results. 

4. Be honest

Share your understanding of a good appraisal, and give honest but objective feedback.

Tip: You should be genuine and direct but cautious with language. 

5. Use tangible, pertinent examples

Avoid any subjective feedback. Instead, approach appraisals with rich employee data from different sources.

You should also collect examples from:

• talent review ratings,
• hiring documents,
• strengths and workstyle tests,
• examples of recognition, etc.

This paves the way for honest conversations, and employees will feel satisfied with the results. 

6. Be constructive and offer actionable insights

It's essential to share employee-centered constructive criticism. The purpose of employee appraisals is to provide feedback to improve employee development and show regard for their career goals. 

Tip: Ensure you clarify what employees need to work on and offer resources to work on them. This will eventually increase employee engagement and retention rates. 

 7. Document your employee performance appraisal sessions

It's crucial to document your employee performance appraisal sessions. This allows you to build a transparent system on which you, the employees, and other managers can follow up.

➡️ Run employee performance appraisals like clockwork with Zavvy

Performance appraisals are an important part of the employee lifecycle. They help you to identify areas where your team members need improvement and determine whether or not your employees are meeting or surpassing performance expectations. 

However, performance appraisals can be complex processes. 

A future-proof method to support your appraisal efforts is essential to make your employee appraisals as smooth as possible.

Zavvy's 360 feedback software is the perfect tool for making performance appraisals more efficient and effective.

Our 360 performance review software helps you:

• Save time and money through automated performance appraisals.
• Keep all data/feedback in one place and easily accessible.
• Easily see user activity with our dashboards.
• See a rich and actionable picture of how your employees are performing through skills matrices, competency profiles, 9-box grids.
• Collect feedback using our sample questions.
• Be on top of your game with administrative tasks through integrations (such as Slack and MS Teams). 

Create a future-proof performance appraisal method today! Get in touch for a free 30 minutes demo! 

❓FAQs

What's the difference between performance management and performance appraisal?

Performance management refers to an all-year collaboration between a supervisor and an employee. It means constant communication intended to meet specific company objectives. 

On the other hand, performance appraisal is more of an HR function. It refers to office surveys to ensure employees have feedback on the quality of their performance. It's a way to acknowledge high-performers and improve low-performers. 

Why is job analysis important in performance appraisal?

Job analysis defines all aspects of a job. It details the specific activities required of a position, how to execute those activities, and how the job helps to meet organizational goals. 

A comprehensive job analysis makes it easier to:

• Evaluate employee behavior during performance appraisal;
• Understand a job's specific behaviors; 
• Know what employees are doing right or wrong. 

HR can identify strong and weak points. They can also organize the proper training in line with each job's required behaviors to improve performance. 

Can performance appraisals be a motivational factor in the workplace? 

Yes, performance appraisals can be a motivational factor in the workplace. 

Research shows that performance appraisals are more effective when companies tie them to the specific reward systems of the organization. 

For example, if an employee receives a high-performance rating, they may be eligible for a bonus. Conversely, employees who get a low-performance rating may be at risk of termination or demotion. This can be a powerful motivator for employees to do their best work.

However, it is essential to note that not all employees will be motivated by performance appraisals. Some may view them as unfair or inaccurate if the performance appraisal rating is not objective and backed by data. 

So, you must create a transparent process that provides detailed and constructive feedback and demonstrates empathy. 

Most importantly, don't use methods that drive aggressive competition. Instead, create an individual-centered plan that supports each employee. 

How is performance appraisal linked with training in an organization? 

Performance appraisal helps employers determine training needs. 

Plus, the insights from appraisals are also relevant when updating a company's training materials.

Moreover, performance appraisals help managers identify each employee's blind spot, making it easier to design training that addresses these weaknesses effectively.

Is performance appraisal really necessary? 

Yes, performance appraisal is necessary as it can help identify areas where employees need improvement and identify training or development opportunities.

Performance appraisals provide insights into employee behavior and help study behavioral patterns.

Which performance appraisal method is most frequently criticized?

The most criticized appraisal method is the rating-scale method because it is too quantitative and mathematical. Supervisors often rate employees on a single graph, even with different roles. This leads to a failure to consider the intricacies of each position, which employees find unfair. 

When feeling like they are being treated unfairly, employees can get discouraged, leading to a risk of turnover. 

Can performance appraisal reduce bias?

People often worry about bias and human errors when performing employee appraisals. However, the 360 feedback appraisal method significantly reduces these possibilities. 

The 360 feedback evaluates an employee in all possible areas. One can be sure that each employee's strong suits and weak points are considered. Also, conflict with an individual isn't likely to reflect in the results. 

Automating your 360 feedback method further reduces the possibility of bias.