Unit-II

Performance and Rewards

Management
By-Dr. Ananta Narayana
Contents
• Performance Appraisal and Review –
• Process and methods,
• Objectives, steps, Design, Types and Methods of Appraisal,
• Steps in Review,
• Effective Performance counselling,
• Performance Management Systems,
• PMS – Importance, Features, Dimensions, Performance consulting,
• Four pillars of PMS,
• Strategic Performance Management systems.
1. Performance Appraisal – Meaning
• Performance appraisal is a formal and systematic process of evaluating an
employee’s job performance over a specific period. It measures how well an
employee has carried out their responsibilities and how effectively they are
contributing to the organization’s goals.

• It is not just about judging past performance but also about identifying the
strengths, weaknesses, potential, and developmental needs of the employee.
Through this, managers can provide constructive feedback, recognize
achievements, and suggest improvements.

• Performance appraisal also serves as a decision-making tool for promotions,

salary increments, transfers, training programs, and career planning. By linking
individual performance with organizational objectives, it ensures fairness,
motivation, and continuous growth for both employees and the organization.
2. Objectives of Performance Appraisal
• To measure and improve employee performance
The primary aim is to evaluate how effectively employees perform their
duties. By identifying gaps between actual and expected performance,
managers can take corrective measures to help employees improve and
achieve higher productivity.

• To provide feedback for growth and development

Appraisals offer employees constructive feedback on their strengths and areas
needing improvement. This feedback helps them understand expectations
better and motivates them to focus on personal and professional growth.
• To identify training and development needs
Appraisals highlight specific skills or knowledge gaps. Based on this, organizations can design
suitable training programs, workshops, or coaching sessions to enhance employee capabilities.

• To assist in promotions, transfers, and succession planning

Performance appraisal serves as a reliable basis for making decisions regarding promotions,
internal transfers, or preparing employees for leadership roles in the future. It ensures fairness
and merit-based advancement.

• To establish fair reward and compensation systems

Linking pay, incentives, and bonuses with performance ensures fairness and motivates
employees to perform better. It creates a performance-driven culture where rewards are based on
results.

• To strengthen communication between employees and management

Regular appraisal discussions provide a platform for open communication. Employees can share
concerns, while managers can clarify expectations and set goals, leading to stronger workplace
relationships.
3. Process / Steps in Performance Appraisal

• Establishing performance standards: The first step is to define clear,

measurable standards for each job role. These standards specify what is
expected in terms of quality, quantity, deadlines, and behavior, ensuring a
fair basis for evaluation.
• Communicating standards: Once standards are set, they must be clearly
explained to employees. This ensures transparency and helps employees
understand what is expected of them, reducing chances of confusion or bias.
• Measuring actual performance: Managers collect data on how employees
are actually performing through reports, observation, productivity records,
and self-assessments. This provides evidence-based information for
evaluation.
• Comparing performance with standards: Actual performance is
compared against the pre-set standards to identify gaps, strengths, and
areas needing improvement. This step highlights whether goals are
achieved, exceeded, or missed.
• Discussing appraisal with employee: A review meeting is held where
feedback is shared with the employee. The discussion should be open,
constructive, and two-way, allowing the employee to express views
and understand their evaluation.
• Taking corrective action: Based on appraisal results, corrective
actions such as training, mentoring, rewards, recognition, or even
disciplinary measures are implemented to improve future performance.
• Reviewing the system: Finally, the appraisal process itself is reviewed
to check for fairness, accuracy, and relevance. Adjustments are made
to improve the system for future cycles.
4. Design of Performance Appraisal System

a) Clear and fair objectives: The system should be built on well-

defined objectives such as evaluating performance, identifying training
needs, or supporting promotions. Clear objectives ensure the appraisal is
purposeful and fair.

b) Transparent and simple design: The appraisal process must be easy

to understand and free from unnecessary complexity. A transparent
system builds trust, as employees feel the evaluation is unbiased and
open.
c) Linked with organizational goals: The appraisal system should connect
individual performance with the broader goals of the organization. This alignment
ensures that employee efforts contribute directly to organizational success.

d) Combination of qualitative and quantitative measures: A balanced approach

is essential. Quantitative measures (like sales targets, deadlines) ensure objectivity,
while qualitative measures (like teamwork, leadership, innovation) capture
important behavioral aspects.

e) Involvement of managers, employees, and HR: For effectiveness, the system

should include multiple stakeholders. Managers provide feedback, employees
engage in self-assessment, and HR ensures fairness and standardization.

f) Continuous monitoring and periodic review: The appraisal design should not
be static. It must be monitored regularly and updated based on changing
organizational needs, industry trends, and employee feedback.
 5. Types and Methods of Performance Appraisal

A. Traditional Appraisal Systems B. Modern / Contemporary Appraisal Systems

Focus on past performance and are largely top- Focus on development, potential, and 360°
down. perspectives.

• Confidential Report System (used in • Management by Objectives (MBO)

government) • Behaviorally Anchored Rating Scales (BARS)
• Ranking Method
• 360° Feedback System
• Paired Comparison • Assessment Center Method
• Graphic Rating Scale • Human Resource Accounting
• Checklist Method
• Psychological Appraisal
• Forced Distribution Method • Balanced Scorecard Method
(a) Traditional Methods

• Confidential Reports
• Prepared by the immediate supervisor, these are secret reports on an
employee’s conduct, behavior, and performance. Commonly used in
government organizations.

• Ranking Method
• Employees are ranked from best to worst on overall performance. Simple but
may create dissatisfaction and does not show the degree of difference.
• Paired Comparison: Each employee is compared with every other
employee in pairs, and a score is given for each comparison. Suitable
for small groups but time-consuming for large teams.

• Checklist Method: A checklist of questions or statements about

employee behavior is prepared. The evaluator marks whether the
employee meets each criterion. Easy but lacks depth.

• Graphic Rating Scale: Employees are rated on a scale (e.g., 1–5) for
traits such as punctuality, teamwork, initiative, or quality of work.
Widely used because it is simple and quantitative.
(b) Modern Methods
• Management by Objectives (MBO): Employees and managers set
specific goals together, and performance is evaluated based on the
achievement of these agreed objectives. Encourages participation and
accountability.

• Behaviorally Anchored Rating Scales (BARS): Combines rating

scales with specific behavioral examples for each level. Provides
clarity by showing exactly what good, average, or poor performance
looks like.
• 360-Degree Feedback: Feedback is collected from multiple sources—supervisors,
peers, subordinates, and sometimes even customers. Gives a holistic view of
performance.

Definition: Feedback is collected from multiple sources around the employee.

Sources: Supervisor, peers, subordinates, self, and sometimes customers.
Purpose: Gives a holistic view of performance.
Use: Common in leadership and managerial roles.

• 540-Degree Appraisal

Definition: Extension of 360° appraisal that includes feedback from external

stakeholders as well.
Sources: 360° feedback + customers, suppliers, business partners.
Purpose: Useful for roles that deal heavily with clients or external stakeholders (e.g.,
sales, customer relations, supply chain).
• 720-Degree Appraisal
Definition: Considered the “double 360°.”
It means feedback is not just collected but
also reviewed and re-evaluated over a
period of time to check improvement.
Sources: All of 360° + repeated appraisal
from the same stakeholders after some
time.
Purpose: Helps in tracking progress and
development after training or
interventions.
Focus: Not only evaluation but also
continuous performance and
development monitoring.
• Assessment Center Method
Meaning: The Assessment Center Method is a systematic process used to evaluate employees’ managerial potential and competencies through multiple
techniques, exercises, and observers. It focuses on predicting future performance rather than assessing past achievements.

Process: Employees participate in simulated job-related activities such as:

• In-basket exercises (handling managerial problems)
• Group discussions
• Role plays
• Case studies
• Presentations and interviews

Key Features:
• Conducted by trained assessors or HR experts.
• Evaluates interpersonal skills, decision-making, leadership, and problem-solving.
• Provides feedback for development and succession planning.

Advantages:
• Objective and comprehensive.
• Identifies hidden potential.
• Useful for managerial and leadership development.
• Human Resource Accounting (HRA)

Meaning: Human Resource Accounting treats employees as valuable assets of the organization. It measures
their value, contribution, and cost in monetary terms to assess the organization’s human capital.

Concept: Just as physical assets are recorded in accounting books, human resources are also valued based on
their skills, experience, and potential to generate future benefits.

Approaches:
• Historical Cost Approach: Records the actual cost incurred in recruitment, training, and development.
• Replacement Cost Approach: Estimates the cost to replace existing employees.
• Present Value Approach: Calculates the present value of future earnings from employees.

Uses:
• Helps in HR planning and budgeting.
• Provides data for performance evaluation and ROI on training.
• Encourages investment in employee development.
• Psychological Appraisal

Meaning: Psychological appraisal evaluates an employee’s potential for future performance rather than their past work. It is
conducted by psychologists using standardized tests and interviews.

Focus Areas:
• Intelligence and cognitive abilities
• Motivation and emotional stability
• Personality traits
• Leadership potential and creativity

Techniques Used:
• Personality tests (e.g., MBTI, Big Five)
• Aptitude and motivation inventories
• Simulation exercises and interviews

Benefits:
• Identifies training and career development needs.
• Helps in succession planning and leadership development.
• Provides insights into employee behavior and potential.
The Myers-Briggs Type Indicator (MBTI)
• The Myers-Briggs Type Indicator (MBTI) is one of the most popular
personality assessment tools used to understand individual differences. It
was developed by Katharine Cook Briggs and Isabel Briggs Myers,
inspired by Carl Jung’s theory of psychological types. The MBTI helps
explain how people perceive the world, make decisions, and interact
with others.

• Core Idea: According to the MBTI framework, personality is composed of

four pairs of opposing preferences, also known as dichotomies. Each
person naturally leans toward one side of each pair, forming a unique
combination of four preferences, which results in 16 distinct personality
types.
16 Distinct MBTI
Personality Types
• The MBTI framework combines four
dichotomies—Extroversion (E) vs
Introversion (I), Sensing (S) vs
Intuition (N), Thinking (T) vs Feeling
(F), Judging (J) vs Perceiving (P)—to
form 16 distinct personality types.
Each type represents a unique
combination of preferences.
The Big Five Personality Traits
• Balanced Scorecard Method
Meaning: Developed by Robert Kaplan and David Norton, the Balanced Scorecard is a strategic
performance management tool that evaluates employees or organizational units from multiple perspectives—
not just financial results.

Four Perspectives:
• Financial Perspective – Profitability, cost control, revenue growth.
• Customer Perspective – Customer satisfaction, retention, service quality.
• Internal Business Processes – Efficiency, innovation, process improvements.
• Learning and Growth – Employee development, training, knowledge sharing.

Purpose: To link individual performance with organizational strategy and goals, providing a balanced view of
success.

Advantages:
• Aligns day-to-day activities with strategic vision.
• Encourages continuous improvement.
• Integrates quantitative and qualitative performance indicators.
6. Steps in Performance Review
1. Preparation
• Review past records, feedback, and self-appraisal forms.
• Identify strengths, weaknesses, and specific issues.
2. Conducting the Review Meeting
• Create an open and non-threatening environment.
• Discuss performance objectively using examples.
• Listen actively to employee perspectives.
3. Feedback and Goal Setting
• Provide constructive, forward-looking feedback.
• Set SMART goals for the next appraisal cycle.
4. Documentation and Follow-up
• Record outcomes and agreed action plans.
• Monitor progress through interim reviews.
7. Effective Performance Counselling
Meaning
• Performance counselling is a process where the manager and employee discuss performance issues, career development, and improvement plans in a supportive manner.

Objectives
• Identify reasons for poor performance.
• Develop a mutual understanding of expectations.
• Motivate employees towards better performance.

Qualities of an Effective Counsellor

• Empathy and listening skills
• Objectivity and patience
• Ability to provide constructive feedback
• Non-judgmental attitude

Steps in Counselling
• Identify the issue
• Prepare for the session
• Conduct discussion – explore causes and possible solutions
• Agree on an action plan
• Follow-up and support
8. Performance Management System (PMS)
• Meaning: Performance Management System is a continuous process of
identifying, measuring, developing, and managing performance to improve
individual and organizational effectiveness.
• It is broader than appraisal — PMS = Planning + Appraisal + Feedback +
Development.

Importance of PMS
• Aligns individual goals with organizational vision.
• Enhances employee accountability and motivation.
• Provides data for HR decisions (pay, promotion, training).
• Encourages a culture of continuous improvement.
• Links performance to business outcomes.
Features of an Effective PMS

• Strategic Alignment – Supports the organization’s mission and goals.

• Continuity – Ongoing process, not just annual reviews.
• Transparency – Clear criteria and communication.
• Objectivity – Based on measurable results.
• Development Orientation – Focus on growth, not punishment.
• Technology-Driven – Use of HRIS and e-PMS tools.
• Integration with HR Functions – Tied to compensation, learning,
and succession.
 Dimension Description

Links performance with long-term

Strategic
organizational goals.

Dimensions Administrative
Provides data for HR decisions
(salary, promotion).
of PMS Identifies training and coaching
Developmental
needs.

Promotes accountability and a

Cultural
performance-oriented culture.
Performance Consulting
Meaning
• Performance consulting is a diagnostic approach that identifies performance gaps and
provides solutions to enhance productivity.

Focus
• Understanding why performance issues exist rather than simply measuring them.
• Suggesting training, coaching, process redesign, or technological tools to close gaps.

Process
• Identify performance gaps.
• Analyze causes (skill, motivation, system).
• Design interventions.
• Implement and monitor results.
 Four Pillars of PMS

Planning – Setting Monitoring – Continuous Developing – Enhancing Rewarding – Recognizing

performance goals and tracking and coaching. capabilities through and compensating
standards. training and feedback. performance outcomes.
Strategic Performance Management System (SPMS)
Meaning: A Strategic PMS aligns employee performance directly with the
organization’s strategic objectives. It integrates strategic planning, goal-setting,
and continuous feedback to ensure organizational competitiveness.

Key Features
• Based on Balanced Scorecard framework.
• Integrates KPI (Key Performance Indicators) and KRA (Key Result Areas).
• Promotes organizational agility and accountability.
• Encourages data-driven performance decisions.

Benefits
• Improved alignment between strategy and execution.
• Enhanced organizational learning and adaptability.
• Facilitates high performance and employee engagement.