Performance Appraisal System Compensation Management Prepared by: Mr. Zaheed Husein Mohammad Al-Din, Sr. Lecturer, BBS Adapted from: Compensation, Ninth Edition (By: George T. Milkovich, Jerry M. Newman)

Topics for Discussion Role of Performance Appraisals in Compensation Decisions Common Errors in Appraising Performance Strategies for Better Understanding and Measuring Job Performance Putting It All Together: Performance Evaluation Process EEO and Performance Evaluation Tying Pay to Subjectively Appraised Performance Promotional Increases as a Pay-for-Performance Tool

The Role of Performance Appraisals in Compensation Decisions Used for several organizational decisions ◦ To guide allocation of merit increases ◦ For developmental purposes ◦ Two uses are often in conflict Performance ratings are influenced by: ◦ Employee behaviors observed by raters ◦ Organization values ◦ Competition among departments

The Role of Performance Appraisals in Compensation Decisions (cont.) Employees often frustrated about the appraisal process ◦ Appraisals are too subjective ◦ Possibility of unfair treatment by a supervisor Experts argue that rather than throwing out the entire performance appraisal process, total-quality-management principles should be applied to improving it

Factors Related to Inaccurate Appraisals Guilt Embarrassment about giving praise Taking things for granted Not noticing good or poor performance The halo effect Dislike of confrontation Spending too little time on preparation of the appraisal

Strategies to Better Understand and Measure Job Performance Clearly define job performance Recognize definition of performance and its components is expanding Improve appraisal formats Select the right raters Understand way raters process information and mistakes that may be made Train raters to improve rating skills

Strategy to Better Understand and Measure Job Performance Strategy 1: Improve Appraisal Formats

Categories 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

Ranking Formats Straight ranking Alternation ranking Paired-comparison ranking

Employee Comparisons Rank order/forced choice/paired comparison Advantages ◦ Distribution for decision making ◦ No central tendency/leniency Disadvantages ◦ Halo error/individual errors ◦ Comparing pears to bananas ◦ Feedback/justification ◦ Scale doesn’t provide for amount of differences

Rating Formats Two common elements ◦ Raters evaluate employees on some absolute standard ◦ Each standard is measured on a scale - performance variation is described along a continuum

Rating Formats (cont.) Types of descriptors ◦ Adjectives  Standard rating scale ◦ Behaviors  Behaviorally anchored rating scales ◦ Outcomes  Management by objectives ◦ Essay format

Behavior-based Scales Behavior Expectation Scales (Behaviorally Anchored Rating Scales) 1. Ask managers for critical incidents – behaviors that reflect particularly effective/ineffective behavior 2. Sort into categories and rank within each category 3. Ask for additional incidents to fill in categories 4. Retranslate – ask managers to sort

Behavior Based Scales Advantages ◦ Based on samples of actual observed behavior ◦ More effective behavior identified for training ◦ Instrument used by those who helped develop it ◦ Spin offs – selection, training, objectives Disadvantages - C ost of development - Opportunity to observe behaviors for many employees

Objective-based Ratings Profits/production/quality/sales Advantages ◦ Objective/eliminate rating errors Disadvantages ◦ Deficient – may omit important factors ◦ Focus on quantifiable/observable results ◦ Situational factors ◦ Feedback ◦ Encourages results at all costs

Evaluating Performance Appraisal Formats What makes for a good appraisal format? ◦ Employee development potential ◦ Administrative ease ◦ Personnel research potential ◦ Cost ◦ Validity

Strategy 2: Select the Right Raters Strategy to Better Understand and Measure Job Performance

Select the Right Raters Focus on who might conduct the ratings and which of these sources is more likely to be accurate ◦ 360-degree feedback – assesses employee performance from five points of view  Supervisor  Peer  Self  Customer  Subordinate

Strategy to Better Understand and Measure Job Performance Strategy 3: Understand How Raters Process Information

The Rating Process Rater observes behavior of a ratee Rater encodes ratee behavior Rater stores information in memory When it is time to evaluate a ratee, rater: ◦ Reviews performance dimensions ◦ Retrieves stored observations to determine relevance to performance dimensions Information is reconsidered and integrated with other available information as rater decides on final ratings

Errors in observation (attention) Errors in storage and recall Errors in actual evaluation Types of Errors Errors in rating process Understand Why Raters Make Mistakes

Strategy to Better Understand and Measure Job Performance Strategy 4: Training Raters to Rate More Accurately

Rater-error training ◦ Goal is to reduce psychometric errors by familiarizing raters with their existence Performance-dimension training ◦ Exposes supervisors to performance dimensions used Performance-standard training ◦ Provides raters with a standard or frame of reference for making appraisal

Provide equal increases to all employees regardless of performance ◦ General increase ◦ Cost-of-living adjustments Pay increases based on a preset progression pattern based on seniority Pay Increase Guidelines with Low Motivational Impact

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