11.1 Performance Evaluation Systems

Learning Objectives

  1. Define the reasons for a formal performance evaluation system.
  2. Explain the process to develop a performance review system.

A performance evaluation system is a systematic way to examine how well an employee is performing in his or her job. If you notice, the word systematic implies the performance evaluation process should be a planned system that allows feedback to be given in a formal—as opposed to informal—sense. Performance evaluations can also be called performance appraisals, performance assessments, or employee appraisals.

There are four reasons why a systematic performance evaluation system should be implemented. First, the evaluation process should encourage positive performance and behavior. Second, it is a way to satisfy employee curiosity as to how well they are performing in their job. It can also be used as a tool to develop employees. Lastly, it can provide a basis for pay raises, promotions, and legal disciplinary actions.

Designing a Performance Appraisal System

There are a number of things to consider before designing or revising an existing performance appraisal system. Some researchers suggest that the performance appraisal system is perhaps one of the most important parts of the organization (Lawrie, 1990), while others suggest that performance appraisal systems are ultimately flawed (Derven, 1990), making them worthless. For the purpose of this chapter, let’s assume we can create a performance appraisal system that will provide value to the organization and the employee. When designing this process, we should recognize that any process has its limitations, but if we plan it correctly, we can minimize some of these.

The first step in the process is to determine how often performance appraisals should be given. Please keep in mind that managers should constantly be giving feedback to employees, and this process is a more formal way of doing so. Some organizations choose to give performance evaluations once per year, while others give them twice per year, or more. The advantage to giving an evaluation twice per year, of course, is more feedback and opportunity for employee development. The downside is the time it takes for the manager to write the evaluation and discuss it with the employee. If done well, it could take several hours for just one employee. Depending on your organization’s structure, you may choose one or the other. For example, if most of your managers have five or ten people to manage (this is called span of control), it might be worthwhile to give performance evaluations more than once per year, since the time cost isn’t high. If most of your managers have twenty or more employees, it may not be feasible to perform this process more than once per year. To determine costs of your performance evaluations, see Table 11.1 “Estimating the Costs of Performance Evaluations”. Asking for feedback from managers and employees is also a good way to determine how often performance evaluations should be given.

Table 11.1 Estimating the Costs of Performance Evaluations

Narrow Span of Control
Average span of control 8
Average time to complete one written review 1 hour
Average time to discuss with employee 1 hour
Administrative time to set up meetings with employees 1/2 hour

8 employees × 2 hours per employee + 1/2 hour administrative time to set up times to meet with employees = 16.5 hours of time for one manager to complete all performance reviews

Wider Span of Control
Average span of control 25
Average time to complete one written review 1 hour
Average time to discuss with employee 1 hour
Administrative time to set up meetings with employees 1 hour

25 employees × 2 hours per employee + 1 hour administrative time to set up times to meet with employees = 51 hours

Once you have the number of hours it takes, you can multiply that by your manager’s hourly pay to get an estimated cost to the organization

16 hours × $50 per hour = $850
51 hours × $50 per hour = $2550

Should pay increases be tied to performance evaluations? This might be the second consideration before development of a performance evaluation process. There is research that shows employees have a greater acceptance of performance reviews if the review is linked to rewards (Bannister & Balkin, 1990).

The third consideration should include goal setting. In other words, what goals does the organization hope to achieve with the performance appraisal process?

Once the frequency, rewards, and goals have been determined, it is time to begin to formalize the process. First, we will need to develop the actual forms that will be used to evaluate each job within the organization. Every performance evaluation should be directly tied with that employee’s job description.

Determining who should evaluate the performance of the employee is the next decision. It could be their direct manager (most common method), subordinates, customers or clients, self, and/or peers. Table 11.2 “Advantages and Disadvantages of Each Source for Performance Evaluations” shows some of the advantages and disadvantages for each source of information for performance evaluations. Ultimately, using a variety of sources might garner the best results.

A 360-degree performance appraisal method is a way to appraise performance by using several sources to measure the employee’s effectiveness. Organizations must be careful when using peer-reviewed information. For example, in the Mathewson v. Aloha Airlines case, peer evaluations were found to be retaliatory against a pilot who had crossed picket lines during the pilot’s union strike against a different airline.

Management of this process can be time-consuming for the HR professional. That’s why there are many software programs available to help administer and assess 360 review feedback. Halogen 360, for example, is used by Princess Cruises and media companies such as MSNBC (Halogen Software, 2011). This type of software allows the HR professional to set criteria and easily send links to customers, peers, or managers, who provide the information requested. Then the data are gathered and a report is automatically generated, which an employee can use for quick feedback. Other similar types of software include Carbon360 and Argos.

Performance Appraisal System Errors

Before we begin to develop our performance review process, it is important to note some of the errors that can occur during this process. First, halo effects can occur when the source or the rater feels one aspect of the performance is high and therefore rates all areas high. A mistake in rating can also occur when we compare one employee to another, as opposed to the job description’s standards. Sometimes halo effects will occur because the rater is uncomfortable rating someone low on a performance assessment item. Of course, when this occurs, it makes the performance evaluation less valuable for employee development. Proper training on how to manage a performance appraisal interview is a good way to avoid this. We discuss this in Section 11.3.4 “Performance Appraisal Interviews”.

Validity issues are the extent to which the tool measures the relevant aspects of performance. The aspects of performance should be based on the key skills and responsibilities of the job, and these should be reviewed often to make sure they are still applicable to the job analysis and description.

Reliability refers to how consistent the same measuring tool works throughout the organization (or job title). When we look at reliability in performance appraisals, we ask ourselves if two raters were to rate an employee, how close would the ratings be? If the ratings would be far apart from one another, the method may have reliability issues. To prevent this kind of issue, we can make sure that performance standards are written in a way that will make them measurable. For example, instead of “increase sales” as a performance standard, we may want to say, “increase sales by 10 percent from last year.” This performance standard is easily measured and allows us to ensure the accuracy of our performance methods.

Acceptability refers to how well members of the organization, manager and employees, accept the performance evaluation tool as a valid measure of performance. For example, let’s assume the current measurement tools of Blewett Gravel, Inc. are in place and show validity for each job function. However, managers don’t think the tool is useful because they take too much time. As a result, they spend minimal time on the evaluation. This could mean the current process is flawed because of acceptability error.

Another consideration is the specificity, which tells employees the job expectations and how they can be met. If they are not specific enough, the tool is not useful to the employee for development or to the manager to ensure the employee is meeting expectations. Finally, after we have developed our process, we need to create a time line and educate managers and employees on the process. This can be done through formal training and communicated through company blogs or e-mails. According to Robert Kent (Kent, 2011), teaching people how to receive benefit from the feedback they receive can be an important part of the process as well.

Performance Appraisal Legal Considerations

The legality of performance appraisals was questioned in 1973 in Brito v. Zia, in which an employee was terminated based on a subjective performance evaluation. Following this important case, employers began to rethink their performance evaluation system and the legality of it.

The Civil Service Reform Act of 1978 set new standards for performance evaluation. Although these standards related only to public sector employees, the Reform Act began an important trend toward making certain performance evaluations were legal. The Reform Act created the following criteria for performance appraisals in government agencies:

  1. All agencies were required to create performance review systems.
  2. Appraisal systems would encourage employee participation in establishing the performance standards they will be rated against.
  3. The critical elements of the job must be in writing.
  4. Employees must be advised of the critical elements when hired.
  5. The system must be based exclusively on the actual performance and critical elements of the job. They cannot be based on a curve, for example.
  6. They must be conducted and recorded at least once per year.
  7. Training must be offered for all persons giving performance evaluations.
  8. The appraisals must provide information that can be used for decision making, such as pay decisions and promotion decisions.

Early performance appraisal research can provide us a good example as to why we should be concerned with the legality of the performance appraisal process (Field & Holley, 1982). Holley and Field analyzed sixty-six legal cases that involved discrimination and performance evaluation. Of the cases, defendants won thirty-five of the cases. The authors of the study determined that the cases that were won by the defendant had similar characteristics:

  1. Appraisers were given written instructions on how to complete the appraisal for employees.
  2. Job analysis was used to develop the performance measures of the evaluation.
  3. The focus of the appraisal was actual behaviors instead of personality traits.
  4. Upper management reviewed the ratings before the performance appraisal interview was conducted.

This tells us that the following considerations should be met when developing our performance appraisal process:

  1. Performance standards should be developed using the job analysis and should change as the job changes.
  2. Provide the employees with a copy of the evaluation when they begin working for the organization, and even consider having the employees sign off, saying they have received it.
  3. All raters and appraisers should be trained.
  4. When rating, examples of observable behavior (rather than personality characteristics) should be given.
  5. A formal process should be developed in the event an employee disagrees with a performance review.

Now that we have discussed some of the pitfalls of performance appraisals, we can begin to discuss how to develop the process of performance evaluations.

Table 11.2 Advantages and Disadvantages of Each Source for Performance Evaluations

Source Advantages Disadvantages
Manager/Supervisor Usually has extensive knowledge of the employee’s performance and abilities Bias
Self Self-analysis can help with employee growth In the employee’s interest to inflate his or her own ratings
Peer Works well when the supervisor doesn’t always directly observe the employee Relationships can create bias in the review
Can bring a different perspective, since peers know the job well If evaluations are tied to pay, this can put both the employee and the peer in an awkward situation
If confidential, may create mistrust within the organization
Customer/Client Customers often have the best view of employee behavior Can be expensive to obtain this feedback
Can enhance long-term relationships with the customer by asking for feedback Possible bias
Subordinate Data garnered can include how well the manager treats employees Possible retaliation if results are not favorable
Can determine if employees feel there is favoritism within their department Rating inflation
Subordinates may not understand the “big picture” and rate low as a result
Can be used as a self-development tool for managers If confidential, may create mistrust within the organization
If nothing changes despite the evaluation, could create motivational issues among employees

Human Resource Recall

What are the steps we should take when developing a performance review process?

Key Takeaways

  • A performance evaluation system is a systematic way to examine how well an employee is performing in his or her job.
  • The use of the term systematic implies the process should be planned.
  • Depending on which research you read, some believe the performance evaluation system is one of the most important to consider in HRM, but others view it as a flawed process, which makes it less valuable and therefore ineffective.
  • The first step in designing a performance appraisal process is to determine how often the appraisals will be given. Consideration of time and effort to administer the evaluation should be a deciding factor.
  • Many companies offer pay increases as part of the system, while some companies prefer to separate the process. Determine how this will be handled in the next step in the performance appraisal development process.
  • Goals of the performance evaluation should be discussed before the process is developed. In other words, what does the company hope to gain from this process? Asking managers and employees for their feedback on this is an important part of this consideration.
  • After determining how often the evaluations should be given, if pay will be tied to the evaluations and goals, you can now sit down and develop the process. First, determine what forms will be used to administer the process.
  • After you have determined what forms will be used (or developed), determine who will be the source for the information. Perhaps managers, peers, or customers would be an option. A 360 review process combines several sources for a more thorough review.
  • There are some errors that can occur in the process. These include halo effects or comparing an employee to another as opposed to rating employees only on the objectives. Other errors might include validity, reliability, acceptability, and specificity.
  • Performance evaluations should always be based on the actual job description.
  • Our last step in development of this process is to communicate the process and train employees and managers on the process. Also, training on how best to use feedback is the final and perhaps most important step of the process.


  1. Perform an Internet search on 360 review software. Compare at least two types of software and discuss advantages and disadvantages of each.
  2. Discuss the advantages and disadvantages of each type of performance evaluation source.


Bannister, B. and David Balkin, “Performance Evaluation and Compensation Feedback Messages: An Integrated Model,” Journal of Occupational Psychology 63 (June 1990): 97–111.

Derven, M., “The Paradox of Performance Appraisals,” Personnel Journal 69 (February 1990): 107–11.

Field, H. and William Holley, “The Relationship of Performance Appraisal System Characteristics to Verdicts in Selected Employment Discrimination Cases,” Academy of Management Journal 25, no. 2 (1982): 392–406.

Halogen Software, accessed March 22, 2011, http://www.halogensoftware.com.

Kent, R., “Why You Should Think Twice about 360 Performance Reviews,” ManagerWise, accessed March 22, 2011, http://www.managerwise.com/article.phtml?id=128.

Lawrie, J., “Prepare for a Performance Appraisal,” Personnel Journal 69 (April 1990): 132–36.


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