An employee performance appraisal is a process—often combining both written and oral elements—whereby management evaluates and provides feedback on employee job performance, including steps to improve or redirect activities as needed. Documenting performance provides a basis for pay increases and promotions. Appraisals are also important to help staff members improve their performance and as an avenue by which they can be rewarded or recognized for a job well done. In addition, they can serve a host of other functions, providing a launching point from which companies can clarify and shape responsibilities in accordance with business trends, clear lines of management-employee communication, and spur re-examinations of potentially hoary business practices. Yet Joel Myers notes in Memphis Business Journal that "in many organizations, performance appraisals only occur when management is building a case to terminate someone. It's no wonder that the result is a mutual dread of the performance evaluation session—something to be avoided, if at all possible. This is no way to manage and motivate people. Performance appraisal is supposed to be a developmental experience for the employee and a 'teaching moment' for the manager."
While the term performance appraisal has meaning for most small business owners, it might be helpful to consider the goals of an appraisal system. They are as follows:
All of these goals can be more easily realized if the employer makes an effort to establish the performance appraisal process as a dialogue in which the ultimate purpose is the betterment of all parties. To create and maintain this framework, employers need to inform workers of their value, praise them for their accomplishments, establish a track record of fair and honest feedback, be consistent in their treatment of all employees, and canvas workers for their own insights into the company's processes and operations.
A small business with few employees or one that is just starting to appraise its staff may choose to use a pre-packaged appraisal system, consisting of either printed forms or software. Software packages can be customized either by using a firm's existing appraisal methods or by selecting elements from a list of attributes that describe successful employee's work habits such as effective communication, timeliness, and ability to perform work requested. Eventually, however, many companies choose to develop their own appraisal form and system in order to accurately reflect an employee's performance in light of the business's own unique goals and culture. In developing an appraisal system for a small business, an entrepreneur needs to consider the following:
SIZE OF STAFF A small business with few employees may choose to use an informal approach with employees. This entails meeting with each employee every six months or one year and discussing an individual's work performance and progress since the last discussion. Feedback can be provided verbally, without developing or using a standard appraisal form, but in many cases, legal experts counsel employers to maintain written records in order to provide themselves with greater legal protections. As a company increases its staff, a more formal system using a written appraisal form developed internally or externally should always be used, with the results of the appraisal being tied to salary increases or bonuses. Whether the appraisal is provided verbally or in writing, a small business owner needs to provide consistent feedback on a regular basis so that employees can improve their work performance.
ALTERNATIVE WORK SCHEDULES Employees working alternative work schedules—working at home, working part-time, job-sharing, etc.—will most likely need to have their performance appraised differently than regular full-time staffs in order to be fairly evaluated. An alternative work schedule may require different duties to perform a job and these new responsibilities should be incorporated into the appraisal. A small business owner should also be careful to ensure that these employees are treated fairly with regard to both the appraisal and resulting promotions.
COMPANY GOALS AND DESIRED PERFORMANCE
The performance of employees, especially in a smaller firm, is an essential factor in any company's ability to meet its goals. In a one-person business, goal-setting and achieving is a matter of transforming words into action, but moving the business towards its goals in a larger firm means that the employer has to figure out each person's role in that success, communicate that role to them, and reward or correct their performance. It also means that the appraisal should incorporate factors such as collaborative ability and sense of teamwork, not just individual performance.
MEASURING/ASSESSING PERFORMANCE Once a list of tasks and attributes is developed, a small business owner or manager needs to determine how to measure an employee's performance on these tasks. Measurement provides another objective element to the appraisal. Ideally, measurement would be taken against previous performance, whether of the individual employee, the group, or the company at large. If a company is just developing its appraisal system or does not have a baseline performance to measure against, it should develop realistic goals based on business needs or on the similar performance of competitors.
PAY INCREASES AND PROMOTIONS When developing an appraisal system, a small business owner needs to consider the connection between the appraisal and pay increases or promotions. While performance feedback for development/improvement purposes may be given verbally, a written summary of the individual's work performance must accompany a pay increase or promotion (or demotion or termination). It is crucial, therefore, that a manager or small business owner regularly document an employee's job performance.
The method of pay increases impacts the appraisal as well. If a small business uses merit-based increases, the appraisal form would include a rating of the employee on certain tasks. If skill-based pay is used, the appraisal would list skills acquired and level of competency. Appraisals and resulting salary increases that take into account group or company performance should include the individual's contributions to those goals.
COMMUNICATING THE SYSTEM A performance appraisal system is only effective if it is properly communicated and understood by employees. When devising an appraisal system for his or her company, an entrepreneur may want to consider involving staff in its development. Supporters contend that this promotes buy-in and understanding of the plan, as well as ensuring that the appraisal takes into account all tasks at the company. If the small business owner is unable to involve her staff, she should walk through the system with each employee or manager and have the manager do the same, requesting feedback and making adjustments as necessary.
COMMUNICATING PERFORMANCE AND PLANNING
Part of the appraisal system is the actual communication of the performance assessment. While this assessment may be written, it should always be provided verbally as well. This provides an opportunity to answer any questions the employee may have on the assessment, as well as to provide context or further detail for brief assessments. Finally, the employee and the entrepreneur or manager should make plans to meet again to develop a plan aimed at improving performance and reaching agreed-upon goals for the following review period. This planning session should relate company and/or group goals to the individual's tasks and goals for the review period and provide a basis for the next scheduled review.
TRADITIONAL In a traditional appraisal, a manager sits down with an employee and discusses performance for the previous performance period, usually one year. The discussion is based on the manager's observations of the employee's abilities and performance of tasks as noted in a job description. The performance is rated, with the ratings tied to salary percentage increases. However, as David Antonioni notes in Compensation & Benefits , "The traditional merit raise process grants even poor performers an automatic cost of living increase, thereby creating perceived inequity…. In addition, most traditional performance appraisal forms use too many rating categories and distribute ratings using a forced-distribution format." Antonioni suggests the appraisal form use just three rating categories—outstanding, fully competent, and unsatisfactory—as most managers can assess her best and worst employees, with the rest falling in between.
SELF-APPRAISAL Somewhat self-explanatory, the self-appraisal is used in the performance appraisal process to encourage staff members to take responsibility for their own performance by assessing their own achievements or failures and promoting self-management of development goals. It also prepares employees to discuss these points with their manager. It may be used in conjunction with or as a part of other appraisal processes, but does not substitute for an assessment of the employee's performance by a manager.
EMPLOYEE-INITIATED REVIEWS In an employee-initiated review system, employees are informed that they can ask for a review from their manager. However, cautions Ellyn E. Spragins in Inc. , "The on-demand appraisal isn't meant to replace a conventional semiannual review, but it promotes an attitude of self-management among workers and often makes critiques more honest." Adherents to this type of review process contend that it promotes regular communication between staff and managers. Detractors, though, note that it is dependent on the employees' initiative, making it a less than ideal alternative for some workers with quiet, retiring personalities or confidence issues.
360 DEGREE FEEDBACK 360 degree feedback in the performance appraisal process refers to feedback on an employee's performance being provided by the manager, different people or departments an employee interacts with (peer evaluation), external customers, and the employee herself. This type of feedback includes employee-generated feedback on management performance (also known as upward appraisals). As a company grows in size, a small business owner should consider using 360 degree feedback to appraise employees. Communication in a business of ten people varies wildly from that of a company of 100 persons and 360 degree feedback ensures that an employee's performance is observed by those who work most closely with her. Small business owners or managers can either include the feedback in the performance review or choose to provide it informally for development purposes.
Given that the results of a performance appraisal are often used to support a promotion, termination, salary increase, or job change, they are looked at very closely in employee discrimination suits. Besides providing a written summary of the appraisal to the employee, a small business owner would be well-advised to ensure the following with regards to the system at large:
Assistance in developing a system is available through a variety of sources including consultants, periodicals and books, and software. In addition, given the legal implications of appraisals, small business owners should have their company's performance assessment process, including training of managers and employees, reviewed by a qualified attorney.
Antonioni, David. "Improve the Performance Management Process Before Discontinuing Performance Appraisals." Compensation & Benefits , Vol. 26.
Edwards, Mark. R., and Ann J. Ewen. 360 Degree Feedback: The Powerful New Model for Employee Assessment & Performance Improvement . AMACOM, 1996.
Grote, Dick. "Performance Appraisals: Solving Tough Challenges." HR Magazine. July 2000.
Hammer, Leslie B., and Karen M. Barbera. "Toward an Integration of Alternative Work." Human Resource Planning . June 1997.
Koziel, Mark J. "Giving and Receiving Performance Evaluations." CPA Journal. December 2000.
Myers, Joel. "How to Evaluate Your Evaluation System." Memphis Business Journal. February 9, 2001.
Olson, Richard F. Performance Appraisal: A Guide to Greater Productivity . Wiley, 1991.
Spragins, Ellyn E. "Encouraging Open Communication and Motivating Employees Through Employee-Initiated Reviews." Inc. July 1991.