CHAPTER- 1

INTRODUCTION
1.1 Overview

With the advent of science and technology, nearly all business domains have faced enormous

shifts from their traditional methods. Products and services areas have affected mainly because

of technological advancements. Apart from this social, political and environmental factors also

played vital role in modifying business processes. Companies have adopted such changes rapidly

to progress. All the internal and external factors triggered employee’s needs and wants. It turned

harder to satisfy employees than earlier. Generally, it is widely accepted that for company’s

growth and success, effective performance appraisals should be adopted. Due to increased

competition, companies are inclined towards implementing well-designed appraisal programs.

Logically, human resources are most important unit of any organization. High employee

satisfaction leads to high productivity which is ultimately beneficial for organizations. Therefore,

human resources management must be done at highest priority level. Organizations try to satisfy

and motivate employees to do their best through various methods and performance appraisal

stands among those. Performance evaluation varies from organization to organization. There are

numerous ways to carry out evaluation based on employee’s performance.

William B & Keith Davis (1992) argued that Performance appraisal is the procedure by which

organization may able to assess individual’s job performance .Basically performance appraisal is

all about the evaluation of employee performance. Performance management (2007) states that
performance appraisal system is a top secret document which includes the expectation of

employee’s performance, which is set by employer , employee’s actual performance which is

relative to his or her expectations. It ensures that an individual’s work is being gauged and

rewarded. If there are no appraisals given to employees based on performance, their motivation

level will eventually decrease. Such situation will affect overall productivity of an individual. It

is significant that employees must have idea about what is expected from them, and how their

performance will be evaluated. One cannot deny the importance of appraisal systems as they

hold fruitful results in the long-run.

In many organizations, mix of evaluation systems exists and they work concurrently such as: the

formal and the informal. Manager’s personal opinions and judgments are usually referred as

informal system. This may cause biased decisions based on manager’s experience with particular

employee. So it is not an authentic way to measure one’s performance. In contrast, a formal

performance evaluation system is a setup which allows organization to evaluate employees’

performance systematically. It is suggested to follow formal system for genuine evaluation.

Appraisal are usually least liked by managers as they are worse than terminations. After

termination, employees are no longer in company but after performance review they are still

around. The underlying purpose of appraisals is reviewing employee performance which is an

ongoing process. Many organizations implement appraisals for making valid and sound

managerial decisions. In any case, primary purpose remains the same that is to provide

performance feedback.
Already researchers have worked in the area of employee reactions towards appraisal system

(Levy, 2004). However, there is lack of knowledge about the factors affecting the satisfaction of

banks employees towards performance appraisal system. Banking sector is the most imperative

money related domain which is assumed as a crucial part throughout the world's monetary

framework. As per Chambers English Dictionary the expression "Bank" implies a "Bench" or an

establishment or a trade organization. Researchers have characterized banks as financial

intermediary to make credits. Bank can likewise be characterized as the foundation for

accumulation of assets from the group of its clients. At the end of the day, bank is caretaker of

assets, wealth and individuals put their confidence in banks to invest their money and assets

shrewdly.

For our study, we selected bank Alfalah (BAF) for determining the effect of PA on employee’s

performance. Surveys reveal facts in year 2014, the collective assets of BAF are in excess of Rs.

600 billion. It shows the bank progress and its extensive network. Economic strength of any

country hinges around well-established financial systems. There may be many factors which can

affect employee’s satisfaction being in banking sector such as pay, promotion, boss, working

conditions, peers behavior etc. however, performance appraisal appears to be the most significant

reason. Employee’s performance should be monitored as a continuous systematic process not on

yearly basis. Purang (2011) argues that, with the emergence of new variety of banks, public

banks have to be more responsive in their approach.

Here in Pakistan, the first nationalization program initiated in 1974 and stopped in 1980 due to

government structural variations. Amir et. al (2010) states that banks were dealt as employment
exchanges opposed to financial institutions before. People were inducted purely on political basis

which resulted in less trained personnel induction. The top bureaucrats were involved in overall

process of induction and performance evaluation, so fair appraisal system was not even counted.

As the private banks started operations in the country, major change has happened to banking

sector. Same banking industry was suffering from multiple issues such as over-employment,

branching and non-performing loans with bad debts, started to reform. However, the major aim

and focus of this study is to analyze that Pakistani banking industry gains benefits from proper

performance system.

Currently banking industry comprises of four categories such as large banks, medium sized

banks, small banks and Islamic banks based on their total assets. As the industry has revived

from fall down state, so it required high attention. Due to banking sector’s nationalization in

Pakistan and high influence of bureaucrats, overall performance management system remained

ineffective. Nowadays, banks have introduced a systematic performance evaluation system to

ensure transparent appraisals. There are many obstacles while introducing and implementing new

systems in a developing country such as Pakistan. For this reason, it is required to analyze the

impacts of such performance appraisal systems. Our study will examine the impact of appraisal

systems on employee’s performance.

Once such performance management systems are in right place, they will definitely create

effectiveness. Thus, banks will emerge as financial backbone for the country. In annual report,

BAF claims that they have encountered progress through manageable development, while

keeping up officially set evaluating discipline.

1.2 Banking Sector in Pakistan

Preceding pre-partition of Indo-Pak, banking sector was overwhelmed by the Hindus. This made

an incredible banking sector vacuum when Muslims moved from India. Quaid-e-Azam

Muhammad Ali Jinnah, the leader of Pakistan, at that time, faced this test with high confidence

and faith on Almighty Allah. He moved on with the mission to re-establish banking industry with

great zeal. In order to proceed with his aims and objectives, he asked some of his faithful friends

and few Muslim business groups to share his responsibilities. These companions accordingly

indicated extraordinary patriotism and offered services ethically and morally as were required for

the economic reform of the new formed Muslim State. After that, over last few decades, banking

sector has progressed eminently in Pakistan. Many factors brought major loss for HR practices

and performance appraisal.

Bashir and Khattak (2008) discuss that Pakistani business choices are laid upon previous

successful case studies. This is additionally one reason that HR practices in Pakistan are still at

immature level and are not much beneficial for business success. Throughout the world,

companies rely on modern HR techniques to get benefit but here this area is still underdeveloped.

Moreover, PA practices in Pakistani companies prevail as easygoing methodology. This is the

reason these procedures can't accomplish the anticipated hypothetical goals. Hence, PA requires

to be adjusted to organizational strategies to make future contributions.

The banking sector faced generally higher development in residential advances at 11 percent

when contrasted with 5.6 percent a year ago. This study has been readied by a prestigious

association, KPMG Taseer Hadi & Co.1: They summarized the execution of various business

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banks in Pakistan for most recent years. As specified before keeping money area in Pakistan is

extensively isolated into four classifications, for example,

I. Assets > Rs. 600 billion = Large banks

II. Assets > Rs. 125 billion and < Rs. 600 billion = Medium size

III. Assets < Rs. 125 billion = Small banks

IV. Islamic banking activities only = Islamic banks

Along these lines, take note of this overview has been gotten from distributed united money

related explanations of the banks, factual releases distributed by State Bank of Pakistan (SBP).

The report obviously expresses that the dangers to the execution of banks to a great extent radiate

from their capacity to produce ease reserves.

This section additionally covers the credible data being distributed in magazines and daily

papers. Moreover, where solidified budgetary explanations were required and were not

accessible, standalone money related articulations have been utilized. For large banks, the details

of assets, liabilities and income statements for the year 2014 are listed as2:

Table 1. 1: Summarized financial information (assets) of large banks for the year 2014

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Source: “KPMG Taseer Hadi & Co. a Partnership firm registered in Pakistan (2014)”.

Also the details of liabilities for the year 2014 are:

Table 1. 2: Summarized financial information (liabilities and equity) of large banks for the year
2014

Source: “KPMG Taseer Hadi & Co. a Partnership firm registered in Pakistan (2014)”.

The survey has also published details of income statement as:

Table 1. 3: Summarized financial information (income statement) of large banks for the year
2014

Source: “KPMG Taseer Hadi & Co. a Partnership firm registered in Pakistan (2014)”.

All large banks have reported significant increase in profits during year 2014.
Figure 1. 1: Profitability during year 2013 and 2014.

Source: “KPMG Taseer Hadi & Co”

Figure 1. 2: Average spread of large banks in 2013 and 2014.

Source: “KPMG Taseer Hadi & Co."

As we are mainly concerned about staff costs that includes salaries, allowances and retirement

benefits, staff costs averaged approximately 51.4% of total operating expenses in 2014 (2013:

50.7%).

Table 1. 4: Staff costs for the year 2013 and year 2014.

Source: KPMG Taseer Hadi & Co

Table 1. 5: Advances and loans for the year 2013 and year 2014

Source: KPMG Taseer Hadi & Co

Figure 1. 3: Annualized Increase (2012-14)

Source: KPMG Taseer Hadi & Co

Table 1. 6: Market Share of Loans and Advances

Source: KPMG Taseer Hadi & Co

Figure 1. 4: Market shares of loans and advances

Source: KPMG Taseer Hadi & Co

According to previously provided survey results, it is evident that Bank Alfalah Limited (BAF)

has progressed during last few years. It has also opened its branches in multiple cities. Our study

is mainly focused on studying employee’s performance in accordance with performance

appraisal practices. Our research is based on BAF branches being operating in Khyber

Pakhtunkhwa (KPK) province. Research supports that already there is no such study has been

conducted in this geographical location. Yearly report (2014) claims that more than 580 ATMs

covering more than 150 urban areas nationwide, BAF's system is the fifth biggest in the country.
1.3 Problem Statement

As stated above, banking sector was not developed in Pakistan. Last few decades brought

limitless changes. Due to privatization of banks, corporate settings got affected hugely. It is

evident that banks are significant element for raising GDP of a country.

Although, performance appraisals in banking sector depends on the prevalent variables like

current appraisal system, appraisal tools, employees’ performance and other job-related

intricacies. With a major shift in conventional banking, employee’s responsibilities have also

changed.

Therefore, it is vital to look at the effect of appraisal system frameworks on employee’s

performance. Thus, “this worries the procedures of enrollment, arrangement, preparing,

advancement and evaluation, so as to guarantee that the right staff with suitable limits is

accessible at the ideal time and for the right places” (Kalyan, 1971). This is the primary reason

that appraisals have ended up a standout amongst the most broadly explored research areas

(Fletcher, 2002).

Like many other organizations, they measure performance of employees through rating

procedure. The employee’s performance is measured from both angles; such as his/her personal ,

individual and overall branch performance. The research study will add meaningful literature in

research domain. Moreover, “studying the impact of performance appraisals on employees will

definitely improve individual employee performance which may stimulate organizational

performance ultimately” (Macky and Johnson, 2000).

 BAF plainly expresses that human asset is their most grounded and most vital resource. They

have invested in human capital by putting in place an experienced leadership team and keep on

concentrating on drawing in and adding to the best ability. Throughout the years, the said bank

has effectively attracted rich talented human resources. Proceeded with spotlight on recognizing

individuals with high aptitudes and on making learning and improvement chances to cultivate

ability has helped the bank in building an expert and drew in group that works in accordance

with the bank's strategies. Leadership team have built up an examination framework that

establishes target, execution based measures, and expects to reward performance at all levels.

This study will stress on concentrating on its endeavors for realignment of better administration

conveyance and proficient resources administration.

1.4 Research Objectives

The current study is not only an effort to succeed for PhD degree in Business Administration but

also takes account of other underlying objectives. The major objectives behind our study are:

1. To measure impact of performance appraisal on employee’s performance.

2. To understand the application of “Performance Appraisal” in banking sector.

3. To add to a model connecting appraisal systems and execution of banks employee’s

performance.

4. To find out what appraisal styles are being adopted by the appraisers in evaluating job

performance.

5. To determine whether the employees of bank Alfalah are satisfied with the current appraisal

system or not?
6. To decide the decency of the performance appraisal framework from employee’s perspective.

7. To socket out innumerable disputes of performance appraisal in Banks.

8. To recommend viable and sustainable solutions for identified problems.

9. To distinguish the natural lacunas in the current appraisal system of Bank Alfalah with the point

of spotlighting the downsides in the current arrangement.

1.5 Significance of the Study

Every stakeholder investigates the current financial position of a company in order to seek out

the profitable areas for future. For this reason, the analysis of banks should be carried out by

utilizing the appropriate elucidation of available ratios. It is trusted that findings of the study will

enhance the performance of BAF. Other banks may also take advantage from this study. The

effective fulfillment of this study will be more useful in comprehension the understanding the

comparison of both public and private areas. The research significance of this study will

primarily be confirmed by the research objectives, cited above however, implication of this can

be described as under:

1. It is exceptional as far as area. There has not been any investigation of the kind about bank

Employees performance in KPK.

2. The research findings will uncover the relative significance of performance related issues

there by, suggesting solution of the identified problems.

3. The study will help to reveal the inherent flaws of the stereo typed performance appraisals

currently in practice.

4. Emphasis has been laid investigate the impact on banking sector employees. So, efforts will

be made to find out the correlation of independent variables (length of service, age, gender)
 and dependent variables (performance appraisals/ employee performance) of the employees

of bank Alfalah Limited (BAF).

1.6 Research Hypothesis

The research hypothesis is basically a specific declaration which is planned for exploratory

testing. Many researchers stated that there is positive relationship between performance appraisal

and employee performance. Already a research done by Moses and Wanyama Wanjala (2015)

clearly states that there is relationship between performance appraisal and employees’

performance. Also Nadeem et. al (2013) states, “there is relationship between performance

appraisal and employees performance”. We will test our hypothesis in later sections with the

help of Pearson correlation coefficient. Hypothesis list is as next:

HYPOTHESIS-I: All variables are significantly correlated.

Null Hypothesis
H0: p = 0

There is no direct relationship between variables.

Alternative Hypothesis

H1: p ≠ 0

All variables are significantly correlated.

HYPOTHESIS-II

Performance appraisal system rating has a relation with employee’s satisfaction with appraisal

system.

Null Hypothesis
H0: p = 0

Performance appraisal system rating and employee’s satisfaction are not related.

Alternative Hypothesis

H1: p ≠ 0

Performance appraisal system rating and employee’s satisfaction are related.

HYPOTHESIS-III: Current performance appraisal system measure employee’s effectiveness

appropriately.

Null Hypothesis
H0: p = 0

No relationship exists between current performance appraisal system and employee’s

effectiveness.

Alternative Hypothesis

H1: p ≠ 0

There is a strong relationship between current performance appraisal system and employee’s

effectiveness.

HYPOTHESIS-IV

Current appraisal system enhances responsiveness of employees.

Null Hypothesis
H0: p = 0

Current appraisal system does not enhance responsiveness of employees.

Alternative Hypothesis

H1: p ≠ 0

Current appraisal system is related to responsiveness.

HYPOTHESIS-V

Current appraisal system directly affects efficiency of employees.

Null Hypothesis
H0: p = 0

Current appraisal system does not affect efficiency of employees.

Alternative Hypothesis

H1: p ≠ 0

Current appraisal system is directly affective on employee’s efficiency.

HYPOTHESIS-VI

Current appraisal system triggers innovativeness in working employees.

Null Hypothesis
H0: p = 0

Current appraisal system does not affect innovativeness of employees.

Alternative Hypothesis

H1: p ≠ 0

Current appraisal system triggers innovativeness of employees.

HYPOTHESIS-VII

Tools used for appraisals impacts employee’s performance.

Null Hypothesis
H0: p = 0

Tools used for appraisals have no impact on employee’s performance.

Alternative Hypothesis

H1: p ≠ 0

Appraisal tools significantly affect employee’s performance.

HYPOTHESIS-VIII

Age has direct impact on employee’s performance.

Null Hypothesis
H0: p = 0

Age has no impact on employee’s performance.

Alternative Hypothesis

H1: p ≠ 0

Age factor affects employee’s performance.

HYPOTHESIS-IX

Income level determines employee’s performance level.

Null Hypothesis
H0: p = 0

There is no relationship between Income level and employee’s performance.

Alternative Hypothesis

H1: p ≠ 0

There is strong link between Income level and employee’s performance.

HYPOTHESIS-X

Education has impact on employee’s performance level.

Null Hypothesis
H0: p = 0

There is no relationship between education and employee’s performance.

Alternative Hypothesis

H1: p ≠ 0

There is relationship between education and employee’s performance.

1.7 Organization of the Study

Our research study is organized in the sequence as:

Chapter-1 Introduces the literature of banks in Pakistan with problem identification, primary

research objectives and significance of the study along with hypothesis.

Chapter-2 Covers existing research and literature review. It includes the empirical literature

with a view to identify methodological issues.

Chapter-3 Discusses the research methodology and sources of data.

Chapter-4 Covers the findings of empirical study and hypothesis testing.

Chapter-5 Elaborates conclusions, limitations and recommendations.

It may be illustrated as:

 Figure 1. 5: Roadmap-Organization of Study

Chapter-I: Introduction

Chapter-II: Literature Review

Chapter-III: Research Design

Chapter-IV: Findings of the Study

Chapter-V: Conclusion

Source: Developed for this research study.