PERFORMANCE MANAGEMENT & COMPENSATION

BY: DR. SHIVANGI VERMA

PERFORMANCE APPRAISAL

 Performance appraisal is the process of evaluating how well employees perform their jobs
compared to a set of standards. One important purpose of carrying out appraisals is to
measure performance for the purpose of rewarding employees in the form of benefits,
incentives, increments, or promotions.
 Under performance-oriented systems, employees receive raises based on how well they
perform their jobs. Similarly, promotion or demotion decisions may be based on
performance appraisal. Other administrative uses of performance appraisal could be in
decisions related to transfers, layoffs, and termination.
 The second important purpose of carrying out performance appraisal is development of
employees. The emphasis is on measuring performance gaps and identifying training needs in
order to design suitable training and development strategies
PERFORMANCE APPRAISAL PROCESS

 Performance appraisal typically involves a 3-step process:

 (a) setting work standards and targets- Individuals’ performance on job criteria should be
measured, compared against standards, and then the results must be communicated to
each employee. Jobs almost always have more than one job criterion or dimension. Some
criteria might have more importance than others. Weights are assigned on the basis of the
relative importance of several job criteria in one job. For instance, in most universities, a
college professor’s teaching might be more important than research or service. When
measuring performance, it is important that relevant criteria be used.
 (b) assessing the employee’s actual performance against those standards- Who
appraises,When to appraise,What to appraise, how to appraise
PERFORMANCE APPRAISAL PROCESS

 Performance appraisal typically involves a 3-step process:

 (b) assessing the employee’s actual performance against those standards- Who
appraises,When to appraise,What to appraise, how to appraise
 How to appraise:
 Category Rating Methods
Graphic Rating Scale A graphic rating scale lists traits or performance dimensions (such as
manual dexterity or interpersonal skills) and a range of performance values as in a fivepoint
Likert-type scale (such as unsatisfactory to outstanding) for each dimension. It allows the
rater or supervisor to tick a descriptor that best defines the subordinate’s performance for
each trait.The rater then totals the assigned ratings for the traits.
Checklist The checklist is composed of a list of statements or words. Raters check
statements most representative of the traits and performance of employees.
PERFORMANCE APPRAISAL PROCESS

 How to appraise:
 Comparative Methods
Ranking This method involves ranking and listing all employees from highest to lower in
performance by comparing them on a common criterion or parameter.
Paired comparison The paired comparison method involves comparing an employee with
other. For every trait, the rater compares each employee with the other employees. Then, for
each trait, the rater may indicate who the better employee in the pair is. This method is
common in organizations that rely heavily on groups or teams.
Forced distribution Forced ranking or forced distribution is a technique for distribution
ratings on a curve. With this method, raters place predetermined percentages of employees
into several performance categories. With the forced distribution method, the ratings of
employees’ performance are distributed along a bell-shaped curve.
PERFORMANCE APPRAISAL PROCESS

 How to appraise:
 Narrative Methods
Critical incident technique In the critical incident method, the manager keeps written record
of both highly favourable and unfavourable actions in an employee’s performance. When a
‘critical incident’ involving an employee occurs, the manager writes it down.
Essay The essay or free-form appraisal method requires the manager to write a short essay
describing each employee’s performance. The rater usually is given a few general headings,
like strengths and weaknesses, under which to categorize comments.
Field review The field review has as much to do with who does the evaluation as the method
used. This approach can include the HR department as a reviewer or a completely
independent reviewer outside the organization
PERFORMANCE APPRAISAL PROCESS

 How to appraise:
 Behavioural Methods
Behaviourally anchored rating scale (BARS) A BARS is an appraisal tool that anchors a numerical rating
scale with specific illustrative examples of good or poor performance. BARS match descriptions of
possible behaviours with the employee’s most commonly exhibited behaviours. It involves identifying
critical incidents or behaviours expected in a job, developing performance dimensions, such as
negotiation skills, placing the critical incidents on a scale to rate behaviours.
Behavioural observation scales (BOS) BOS are a variation of the BARS approach in that they add
graphic rating scales to the observable behaviours that are developed from critical incidents as in
BARS. BOS are used to count the number of times certain behaviours are exhibited.
Behavioural expectation scales (BES) BES show order of behaviours on a continuum to define
outstanding, average, and unacceptable performance.
PERFORMANCE APPRAISAL PROCESS
 How to appraise:
 Management by Objectives (MBO)
The technique was first championed by management expert Peter Drucker and became
commonly used in the 1960s. MBO generally refers to a comprehensive and formal
organization-wide goal setting and appraisal programme. MBO is a management practice that
aims to increase organizational performance by aligning goals and subordinate objectives
throughout the organization.
In MBO, managers and employees work together to set goals with the intent of helping
employees to achieve continuous improvement through an ongoing process of goal setting,
feedback, and correction. The objectives that each manager sets are derived from the overall
goals and objectives of the organization. As a result of their input, employees are much more
likely to be motivated to accomplish their goals and to be responsive to criticism that arises
from subsequent objective measurements of performance. Rewards are based on goal
achievement.
PERFORMANCE APPRAISAL PROCESS

 Performance appraisal typically involves a 3-step process:

 (c) Preparing Appraisal Report- Once appraisals have been completed, it is important to
communicate it to employees so that they have a clear understanding of how they have
been assessed through what is called as the appraisal report. The appraisal feedback
interview enables the employee and supervisor to have a discussion related to
performance. The purpose of the interview is to let the employee and manager work
together to identify performance gaps, training needs, and future goals.
PERFORMANCE APPRAISAL VERSUS PERFORMANCE MANAGEMENT

PERFORMANCE APPRAISAL PERFORMANCE MANAGEMENT

Not linked to strategic goals Linked to strategic goals
Top-down assessment 360-degree assessment
Annual appraisal Continuous review
Use of ratings Ratings less common
Owned by HR department Owned by managers
Often not linked to pay Linked to pay and development
Focus on quantified objectives Focus on behaviours as well as objectives
Bureaucratic- complex paperwork Minimum documentation, use of IT
Confidential reports Feedback and counselling
360 DEGREE APPRAISAL
 360-degree feedback or multi-source feedback is an appraisal or performance assessment tool that incorporates
feedback from all who observe and are affected by the performance of a candidate. 360-degree appraisal has five integral
components:
 1. Self-appraisal gives a chance to the employee to look at his/her strengths, weaknesses, and achievements, and judge
his/her own performance.
 2. Appraisal by senior The manager’s perception of an employee’s performance is still an important part of the
evaluation process. It gives a chance to judge employees on parameters such as communication and motivating abilities,
superior’s ability to delegate the work, and leadership qualities.
 3. Appraisal by subordinate It is the concept of having supervisors and managers rated by juniors or subordinates. It
is analogous to the type of rating used in colleges and universities, where students evaluate the performance of
professors.This type of rating makes managers more responsive to employees.
 4. Peer or team appraisal The use of peer groups as raters is beneficial for organizations that rely heavily on teams.
Peer ratings are especially useful when supervisors do not have the opportunity to observe each employee’s
performance, but other work group members do.
 5. Outsider appraisal Rating also may be done by outsiders. The customers or clients of an organization are obvious
sources for outside appraisals. For salespeople and other service personnel, customers may be a good source of
feedback. For people in purchase departments, reviews from suppliers or vendors may help.
COMPETENCY BASED APPRAISAL
 Some organizations appraise employees based on the competencies and skills the job requires. A competency-
based employee appraisal process focuses on the skills and competencies necessary to be successful and appraises
employees on the basis of actual and desired competencies.
 BP uses its skill matrix for a number of HR activities, such as job analysis, recruitment, appraisal, training, and
rewards. This matrix shows the basic skills or competencies required to do a job and the minimum level of each
skill that the job requires.
 Competency-based appraisal systems allow managers and supervisors to identify gaps in competencies and deploy
remedial measures. Developing competency-based performance management systems typically involves creating
comprehensive competency models for all jobs and assessing employees against those models during performance
reviews.
 Assessment centres are an important tool for competency-based appraisal.
 An assessment centre is a mechanism to evaluate an individual’s potential and performance. This method tests a
candidate in different social situations using a number of assessor and procedures. An assessment centre typically
involves the use of methods such as social events, tests, exercises, and assignments to assess different
competencies. Techniques such as business games, role playing, and in-basket exercises are also used in this
method.
POTENTIAL APPRAISAL

 Potential appraisal refers to the identification of the hidden talents and skills of a person. The
person might or might not be aware of them. It is different from performance appraisal as it
refers to the abilities of the employees that are not being used at the time of appraisal.
 It searches for the latent abilities of the employee in discharging higher responsibilities in
future. The potential of the employees is judged on the basis of his present performance,
personality traits, past experience, qualifications, and so on. It also looks at the hidden skills
and knowledge of an employee.
 It aims at informing the employee their future prospects and helps the organization in
drawing their successions plan.
 Potential appraisal is a future-oriented appraisal whose main objective is to identify and
evaluate the potential of the employees to assume higher positions and responsibilities in the
organizational hierarchy.
POTENTIAL APPRAISAL

 Potential appraisal could be done with the help of 360-degree appraisal reports. MBOs, psychological
and psychometric tests, management games such as role playing, and assessment centres for
competency-based appraisals are all used for assessing future potential apart from assessing current
performance.
 The potential for improving performance (PIP) measures the performance of the average worker versus
the best person performing a particular task. Large differences suggest that performance can be
improved by bringing average performance up closer to the best performance.
 Small differences suggest little potential for improvement.
 The fundamental goal of performance management is to improve employee effectiveness.
 It is a continuous process where managers and employees work together to monitor and review an
employee’s performance and his or her overall contribution to the organization. The establishment of
an effective performance management system requires time and resources and, therefore, the support
of top management.
COMPENSATION AND REWARDS
 The goals of compensation management are to design a pay structure that will attract, motivate, and retain
competent employees.
 The objective of the compensation function is to create a system of rewards that is equitable to the employer and
employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good
job for the employer.
 Direct compensation The pay that a worker receives, such as wages, salaries, commissions, and bonuses
 Indirect compensation All rewards that are not included in direct compensation (for example, benefits like
vacations, housing subsidy, and medical allowance)
 Another way to classify rewards is to consider it as monetary or non-monetary. As the name implies, a monetary
incentive is a money-based reward given when an employee meets or exceeds expectations. Monetary incentives
can include cash bonuses, stock options, profit sharing, and any other type of reward that increases an employee’s
compensation.
 Non-monetary rewards may include anything, ranging from restaurant coupons, movie tickets, supermarket
discounts, paid sabbaticals, free cellphone or wifi, gym membership, spa services, healthcare benefits, life insurance,
daycare and childcare benefits, and recognition certificates or awards.
TRADITIONAL COMPENSATION SYSTEM
 Traditional compensation systems typically involve the use of job analysis to determine the knowledge, skills, and abilities
(KSAs) required to perform jobs. Job analysis information is then used for job evaluation, which determines the relative
standing of each job in the salary or wage hierarchy of an organization.
 Job evaluation is a process to determine the monetary worth of a job based on job analysis data. Essentially, the process
of job evaluation involves a review of each job to determine the extent to which compensable factors are present.
 Various types of traditional compensation methods are:
 Job classification system Jobs are classified into a grade structure or hierarchy. Each level in the grade/category
structure has a description and job titles. Each job is assigned to the grade/category providing the closest match to the
job. To ensure equity in grading and wages, a common set of grading standards are used. Due to differences in duties,
skills, and knowledge, grading standards are developed mainly along occupational lines.
 Point system A variation of the classification system, it involves assigning points to each job on the basis of
compensable factors, such as position in hierarchy, accountability, and number of tasks performed.
 Factor comparison system or ranking system It involves comparing jobs to determine differences in the presence
of compensable factors. Jobs are compared to each other based on the overall position of the job to the organization.
The ‘position’ of a job is usually based on hierarchy/level, designation, number of hours, responsibility (supervisory and
fiscal), and working conditions.
STRATEGIC COMPENSATION

One of the most important ways by which organizations implement their strategies is to reward employees for
behaviours that lead to fulfilment of strategic goals. Strategically aligned rewards help reinforce desired behaviours
repeatedly.
The purpose of strategic compensation is to:
 Align compensation with company strategy
 Attract and retain employees
 Reinforce positive behaviours
 Motivate desirable performance
 Link individual performance to company performance
The compensation plan should help advance the firm’s strategic goals. Management should produce a reward strategy
that is aligned with the corporate strategy. This means creating a compensation package that produces the desired
employee behaviours that help the firm achieve its competitive strategy.
APPROACHES TO STRATEGIC COMPENSATION

Compensation for Individual Performance:

 Merit pay
 Competency-based pay
 Broadbanding
Compensation for Team Performance:
 Team-based pay
 Gainsharing
 Team awards and bonus
Compensation for Organizational Performance:
 Variable pay plan (VPP)
 Performance bonus
 Profit sharing
 Employee stock option plan (ESOP)
NON-MONETARY INCENTIVES AND BENEFITS

 The purpose of non-monetary incentives is to reward employees for job performance through opportunities. This
may include restaurant coupons, movie tickets, supermarket discounts, gym or spa memberships, healthcare
benefits, childcare, day care, flexible work hours, sabbaticals, and recognition certificates or awards.
 Recognition programmes are one of several types of non-financial rewards. Recognizing an employee’s
contribution is a powerful motivation tool. Motivational theories like those of Maslow and Herzberg show that
recognition has a positive impact on performance. The term ‘recognition programme’ usually refers to formal
programmes, such as employee-of-the-month programmes. Social recognition programme generally refers to
informal manager–employee exchanges such as praise, approval, or expressions of appreciation for a job well
done.
EXECUTIVE COMPENSATION
 Compensation or remuneration for senior executives is different from compensation for other employees
in most organizations. Executive compensation refers to compensation for employees that include presidents of
the company, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, directors of the
company, and other upper-level managers.
 Executive compensation packages are designed by a company’s board of directors, typically by the
compensation committee consisting of independent directors, with the purpose of incentivizing the executive
team. The executives’ total reward package must align with each other and with the goal of achieving the
company’s strategies.
At the heart of most executive compensation plans is the idea that executives should be rewarded if the organization
grows in profitability and value over a period of years. Therefore, their total compensation packages are more
significant than their base pay.The key elements are:
 Salaries of executives vary by type of job, size of organization, region of the country, and industry. On average,
salaries make up about 40–60 per cent of the typical top executive’s annual compensation total.
 Executive bonus plans Bonuses for executives can be determined in several ways. A system whereby bonuses
are awarded based on the judgement of the CEO and the board of directors is one way.
EXECUTIVE COMPENSATION

The key elements are:

 Performance incentives attempt to tie executive compensation to the growth and success of the
organization. For instance, a stock option gives an individual the right to buy stock in a company,
usually at an advantageous price.
 Benefits and perquisites- Executive benefits may take several forms, including traditional
retirement, health insurance, and vacations. It may include additional benefit items that other
employees do not receive. Executives also receive benefits called perquisites or perks. Whether it is a
house or car, it is the status enhancement value of perks that is important to many executives.
Executive pay is determined using multiple, strategy-based performance criteria. Three main factors,
namely job complexity (span of control, the number of functional divisions over which the executive
has direct responsibility, and management level), the employer’s ability to pay (company performance,
profitability, and rate of return), and the executive’s human capital (educational level, field of study,
and work experience) account for most of executive compensation variance.
 DESIGNING AN EFFECTIVE COMPENSATION STRATEGY

Strategic compensation involves a focus on performance and contribution. As discussed above, it may apply at various
levels: individual, team, or organization. Often the distinction may not be so categorical. For instance, skill-based pay
may apply to individuals as well as teams. A performance bonus may sometimes be a team intervention, while in
certain companies, it may be an organization-wide incentive plan.
Three basic issues need to be addressed while designing a strategic pay plan:
 What are the organization’s strategic goals?
 What employee behaviours and skills does the organization need to achieve its strategic goals?
 What compensation policies and practices will help to produce the desired employee behaviours?
Management should design a compensation plan that is aligned to its overall strategy. This means creating a
compensation package that produces the employee behaviours the firm needs to achieve its competitive strategy.
Many organizations focus on formulating a total rewards strategy.
Total rewards encompass the traditional pay, incentives, and benefits, as well as additional motivational elements as
part of rewards, such as more challenging jobs, career progression, promotions, awards, and recognition.