McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Milkovich/Newman: Compensation, Ninth Edition Chapter 11 Performance Appraisals

11-2 Chapter Topics Role of Performance Appraisals in Compensation Decisions Role of Performance Appraisals in Compensation Decisions Common Errors in Appraising Performance Common Errors in Appraising Performance Strategies for Better Understanding and Measuring Job Performance Strategies for Better Understanding and Measuring Job Performance Putting It All Together: Performance Evaluation Process Putting It All Together: Performance Evaluation Process

11-3 Chapter Topics (cont.) EEO and Performance Evaluation EEO and Performance Evaluation Tying Pay to Subjectively Appraised Performance Tying Pay to Subjectively Appraised Performance Promotional Increases as a Pay-for-Performance Tool Promotional Increases as a Pay-for-Performance Tool

11-4 The Role of Performance Appraisals in Compensation Decisions Used for several organizational decisions Used for several organizational decisions –To guide allocation of merit increases –For developmental purposes –Two uses are often in conflict Performance ratings are influenced by: Performance ratings are influenced by: –Employee behaviors observed by raters –Organization values –Competition among departments

11-5 The Role of Performance Appraisals in Compensation Decisions (cont.) Employees often frustrated about the appraisal process Employees often frustrated about the appraisal process –Appraisals are too subjective –Possibility of unfair treatment by a supervisor Experts argue that rather than throwing out the entire performance appraisal process, total- quality-management principles should be applied to improving it Experts argue that rather than throwing out the entire performance appraisal process, total- quality-management principles should be applied to improving it

11-6 Exhibit 11.1: Common Errors in the Appraisal Process

11-7 Factors Related to Inaccurate Appraisals Guilt Guilt Embarrassment about giving praise Embarrassment about giving praise Taking things for granted Taking things for granted Not noticing good or poor performance Not noticing good or poor performance The halo effect The halo effect Dislike of confrontation Dislike of confrontation Spending too little time on preparation of the appraisal Spending too little time on preparation of the appraisal

11-8 Exhibit 11.2: Ratings of Managers

11-9 Strategies to Better Understand and Measure Job Performance Clearly define job performance Clearly define job performance Recognize definition of performance and its components is expanding Recognize definition of performance and its components is expanding Improve appraisal formats Improve appraisal formats Select the right raters Select the right raters Understand way raters process information and mistakes that may be made Understand way raters process information and mistakes that may be made Train raters to improve rating skills Train raters to improve rating skills

11-10 Strategy to Better Understand and Measure Job Performance Strategy 1: Improve Appraisal Formats

11-11 Categories of Appraisal Formats Ranking - Rater compares employees against each other Rating - Rater evaluates employees on some absolute standard (measured on a continuum scale) Essay - Rater answers open- ended questions in essay form describing employee performance Categories

11-12 Ranking Formats Straight ranking Straight ranking Alternation ranking Alternation ranking Paired-comparison ranking Paired-comparison ranking

11-13 Employee Comparisons Rank order/forced choice/paired comparison Rank order/forced choice/paired comparison Advantages Advantages –Distribution for decision making –No central tendency/leniency Disadvantages Disadvantages –Halo error/individual errors –Comparing pears to bananas –Feedback/justification –Scale doesn’t provide for amount of differences

11-14 Rating Formats Two common elements Two common elements –Raters evaluate employees on some absolute standard –Each standard is measured on a scale - performance variation is described along a continuum

11-15 Rating Formats (cont.) Types of descriptors Types of descriptors –Adjectives  Standard rating scale –Behaviors  Behaviorally anchored rating scales –Outcomes  Management by objectives –Essay format

11-16 Exhibit 11.9: Usage of Performance Evaluation Formats

11-17 Sample Trait Scales Rate each worker using the scales below. Decisiveness: Very lowModerateVery high Reliability: Very lowModerateVery high Energy: Very lowModerateVery high Loyalty: Very lowModerateVery high

11-18 Trait Rating Scales Advantages Advantages –Easy to develop –Inexpensive –Use across different jobs Disadvantages Disadvantages –Subjective/subject to errors –Not job specific –Difficulty with feedback –Potential legal problems

11-19 Behavior-based Scales Behavior Expectation Scales Behavior Expectation Scales (Behaviorally Anchored Rating Scales) (Behaviorally Anchored Rating Scales) 1. Ask managers for critical incidents – behaviors that reflect particularly effective/ineffective behavior 1. Ask managers for critical incidents – behaviors that reflect particularly effective/ineffective behavior 2. Sort into categories and rank within each category 2. Sort into categories and rank within each category 3. Ask for additional incidents to fill in categories 3. Ask for additional incidents to fill in categories 4. Retranslate – ask managers to sort 4. Retranslate – ask managers to sort

11-20 Behavior Based Scales Advantages Advantages –Based on samples of actual observed behavior –More effective behavior identified for training –Instrument used by those who helped develop it –Spin offs – selection, training, objectives Disadvantages Disadvantages - C ost of development - Opportunity to observe behaviors for many employees employees

11-21 Objective-based Ratings Profits/production/quality/sales Profits/production/quality/sales Advantages Advantages –Objective/eliminate rating errors Disadvantages Disadvantages –Deficient – may omit important factors –Focus on quantifiable/observable results –Situational factors –Feedback –Encourages results at all costs

11-22 Evaluating Performance Appraisal Formats What makes for a good appraisal format? What makes for a good appraisal format? –Employee development potential –Administrative ease –Personnel research potential –Cost –Validity

11-23 Exhibit 11.10: An Evaluation of Performance Appraisal Formats

11-24 Strategy 2: Select the Right Raters Strategy to Better Understand and Measure Job Performance

11-25 Select the Right Raters Focus on who might conduct the ratings and which of these sources is more likely to be accurate Focus on who might conduct the ratings and which of these sources is more likely to be accurate –360-degree feedback – assesses employee performance from five points of view  Supervisor  Peer  Self  Customer  Subordinate

11-26 Strategy to Better Understand and Measure Job Performance Strategy 3: Understand How Raters Process Information

11-27 The Rating Process Rater observes behavior of a ratee Rater observes behavior of a ratee Rater encodes ratee behavior Rater encodes ratee behavior Rater stores information in memory Rater stores information in memory When it is time to evaluate a ratee, rater: When it is time to evaluate a ratee, rater: –Reviews performance dimensions –Retrieves stored observations to determine relevance to performance dimensions Information is reconsidered and integrated with other available information as rater decides on final ratings Information is reconsidered and integrated with other available information as rater decides on final ratings

11-28 Errors in observation (attention) Errors in storage and recall Errors in actual evaluation Types of Errors Errors in rating process Understand Why Raters Make Mistakes

11-29 Strategy to Better Understand and Measure Job Performance Strategy 4: Training Raters to Rate More Accurately

11-30 Rater-error training Rater-error training –Goal is to reduce psychometric errors by familiarizing raters with their existence Performance-dimension training Performance-dimension training –Exposes supervisors to performance dimensions used Performance-standard training Performance-standard training –Provides raters with a standard or frame of reference for making appraisal

11-31 Ways to Improve Rater Training Straightforward lecturing to ratees is ineffective Straightforward lecturing to ratees is ineffective Individualized or small group discussions more effective Individualized or small group discussions more effective When sessions are combined with extensive practice and feedback, rating accuracy improves When sessions are combined with extensive practice and feedback, rating accuracy improves Longer training programs are generally more successful than shorter programs Longer training programs are generally more successful than shorter programs Performance-dimension and performance- standard training more effective than rater-error training Performance-dimension and performance- standard training more effective than rater-error training Success results from efforts to reduce halo errors and improve accuracy Success results from efforts to reduce halo errors and improve accuracy

11-32 Putting it All Together: The Performance Evaluation Process Need a sound basis for establishing performance appraisal dimensions and scales associated with each dimension Need a sound basis for establishing performance appraisal dimensions and scales associated with each dimension Need to involve employees in every stage of developing performance dimensions and building scales Need to involve employees in every stage of developing performance dimensions and building scales Need to ensure raters are trained in use of appraisal system and that all employees understand how system operates Need to ensure raters are trained in use of appraisal system and that all employees understand how system operates

11-33 Putting it All Together: The Performance Evaluation Process (cont.) Need to ensure raters are motivated to rate accurately Need to ensure raters are motivated to rate accurately Raters should maintain a diary of employee performance Raters should maintain a diary of employee performance Raters should attempt a performance diagnosis to determine if performance problems exist Raters should attempt a performance diagnosis to determine if performance problems exist

11-34 Exhibit 11.11: Tips on Appraising Employee Performance

11-35 Exhibit 11.11: Tips on Appraising Employee Performance (con’t)

11-36 EEO and Performance Evaluation 1 1 Provide specific written instructions on how to complete appraisal 2 2 Incorporate clear criteria for evaluating performance - Performance dimensions should be written, objective, and clear 3 3 Provide a rational foundation for personnel decisions via adequately developed job descriptions 4 4 Require supervisors to provide feedback about appraisal results to employees 5 5 Incorporate a review of performance ratings by higher level supervisors 6 6 Consistent treatment across raters, regardless of race, color, religion, sex, and national origin should be evident Key Issues: Establishing a Performance Appraisal System

11-37 Tying Pay to Subjectively Appraised Performance How do we get employees to view raises as a reward for performance? Central issue involving merit pay

11-38 Provide equal increases to all employees regardless of performance Provide equal increases to all employees regardless of performance –General increase –Cost-of-living adjustments Pay increases based on a preset progression pattern based on seniority Pay increases based on a preset progression pattern based on seniority Pay Increase Guidelines with Low Motivational Impact

11-39 Requirements to Link Pay to Performance Define performance Define performance –Behaviors –Competencies –Traits Specify a continuum describing different levels from low to high on performance measure Specify a continuum describing different levels from low to high on performance measure Decide how much of a merit increase is given for different levels of performance Decide how much of a merit increase is given for different levels of performance

11-40 Exhibit 11.12: Performance-based Guidelines

11-41 Designing Merit Guidelines 1 1 What should the poorest performer be paid as an increase? 2 2 How much should average performers be paid as an increase? 3 3 How much should top performers be paid? 4 4 What should be the size of the percentage increase differential between different levels of performance? Four Questions...

11-42 Exhibit 11.14: Merit Pay Grid

11-43 Promotional Increases as a Pay-for- Performance Tool Promotion should be accompanied by a salary increase - 8 to 12% Promotion should be accompanied by a salary increase - 8 to 12% Characteristics of promotional pay increases Characteristics of promotional pay increases –Size of increment is approximately double a normal merit increase –Represent a reward to employees for commitment and exemplary performance