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Performance Appraisal Systems: Everything You Need to Know

Claire Beveridge

What is a performance appraisal system?

A performance appraisal system is a structured, managed process that businesses use to assess and evaluate employee performance. The goal is to provide clear, actionable feedback to employees on their strengths and areas for improvement while supporting decisions related to compensation, promotions, training, and development.

Performance appraisal systems include goal setting, performance evaluation (e.g., competencies, responsibilities, and behaviors), constructive feedback, development and career planning, and documentation to ensure alignment between leadership and employees.

Performance appraisal systems are sometimes called a performance review or an evaluation system.

What are the benefits of performance appraisals?

Performance appraisal systems are crucial in driving employee performance, development, and organizational success. 

By providing constructive feedback, setting goals that align with wider business objectives, identifying development needs, and recognizing achievements, performance appraisal systems contribute to a company culture that puts continuous improvement and engagement at the center. 

Performance appraisal data is analyzed to identify trends, patterns, and areas for improvement across the company. These valuable insights encourage data-driven and informed decision-making and continuous efforts toward improvement.

5 different types of performance appraisal systems

Let’s look at five of the most common performance appraisal systems and explore their benefits, downfalls, and how to implement them in your organization. Many organizations use a combination of these systems. 

1. 360-degree feedback

360-degree feedback collects feedback from multiple sources, including coworkers, peers, leaders, customers, and clients, to paint a comprehensive picture of employee performance.

For example, Sarah works on a team with Andrew and Gavin, which is managed by Rashida, who uses a performance management tool to gather feedback from Andrew and Gavin on Sarah’s performance. 

Benefits: 360 feedback can lead to an insightful, well-rounded employee evaluation and help identify areas for improvement.

Drawbacks: 360 feedback can be time-consuming and complex to administer without the support of a performance management system. If not appropriately managed, there’s also a risk of bias, inaccurate feedback, and confidentiality.

Implementation: Businesses can implement 360-degree feedback systems by designing clear evaluation criteria, training participants on how to give constructive feedback, and ensuring anonymity to encourage honesty. Using specialized performance software helps streamline the process while ensuring privacy and confidentiality.

2. OKR method

OKR stands for “objectives and key results” and is a framework for defining goals and tracking business objectives and outcomes. 

The objective is what the business or employee wants to achieve, and the key results are measurable metrics that show how well the business or individual is accomplishing the objectives.

Here’s a quick example of an OKR for a marketing department:

Objective: Increase conversion rates across all channels

Key results:

  • Increase the conversion rate of key landing pages from 10% to 20% 
  • Improve email conversion rate from 2%-4% 
  • Conduct A/B testing on product pages with the goal of running two statistically significant improvements

Benefits: OKRs provide clear and specific objectives that prioritize outcomes and results while ensuring employees are accountable for their actions and performance. OKRs also encourage flexibility and adaptability in goal setting.

Drawbacks: OKRs are time-consuming to set up, and if executed poorly, there’s a risk of misalignment, which leads to conflicting objectives and organizational inefficiencies.

Implementation: Ensure that a business has set clear, well-defined objectives, then cascade these down to teams and individuals and encourage them to set their OKRs that directly contribute to achieving the higher-level organizational objectives. Involving employees in setting OKRs helps buy-in, accountability, and ownership of the objectives. 

3. Management by Objective (MBO)

MBO is when an employee and manager work together to identify and set clear, measurable, and achievable goals that support wider business objectives. This helps employees feel engaged and motivated in the workplace.

Both parties discuss how employees will meet the goals while the manager monitors, measures, and evaluates how the employee is achieving the goal and provides feedback to help them understand their performance strengths and weaknesses.

Benefits: Sets clear, measurable goals for employees and aligns individual objectives with broader organizational goals, which provides accountability and empowers employees to perform at their best.

Drawbacks: MBO can be rigid and might not capture the full scope of an employee’s contributions. There’s also a risk of tunnel vision, where employees prioritize achieving their objectives at the expense of other important tasks.

Implementation: Companies can implement MBO by establishing SMART (Specific, Measurable, Achievable, Relevant, Timely) goals collaboratively between leaders and employees. Regular check-ins and performance reviews help track progress, provide an opportunity to deliver feedback, and adjust goals as needed.

Further reading: OKRs vs. SMART Goals: How They Differ and When to Use Each

4. Behaviorally anchored rating scale (BARS)

BARS is a scale that assesses employee performance based on predefined behavioral statements and patterns directly tied to job performance. 

For example, the behavior indicator is active listening, and the rating scale is from 1-5 as follows:

  • Level 1 – Needs improvement: interrupts customers, demonstrates poor listening skills
  • Level 2 – Below expectations: occasionally interrupts customers, listens but misses important details
  • Level 3 – Meets expectations: demonstrates some active listening skills, asks questions to clarify customer needs
  • Level 4 – Exceeds expectations: actively listens to customers, demonstrates empathy and understanding while paraphrasing and providing appropriate responses
  • Level 5 – Outstanding: exceptional active listening skills, demonstrates deep empathy, anticipates custom needs, provides proactive solutions

Benefits: Combines qualitative and quantitative elements by defining specific behavioral indicators for each performance level, which produces objective evaluations and clear expectations.

Drawbacks: Developing BARS can be time-intensive, and creating universally applicable scales for all positions may be challenging. There’s also a risk of subjectivity or bias in interpreting behaviors.

Implementation: Organizations can implement BARS by involving subject matter experts and experienced professionals to identify behaviors for success in each role. Training managers on using the scale consistently and providing examples can enhance reliability.

5. Forced ranking

Forced ranking is a performance appraisal system where employees are ranked based on their performance in relation to their peers. Employees are divided into predetermined categories, such as high performers, middle performers, and low performers, based on their performance ratings.

Benefits: Forces differentiation among employees by categorizing them into performance tiers, which can facilitate talent management decisions such as promotions, compensation, rewards, and terminations.

Drawbacks: Forced ranking can foster a competitive rather than collaborative work environment, leading to employee morale issues and resentment. It can also discourage risk-taking and innovation.

Implementation: Companies can implement forced ranking by establishing clear performance criteria and using objective metrics to evaluate employees. However, it’s crucial to balance accountability with fairness and avoid demoralizing top performers who fall in lower-ranked groups.

How to implement a performance appraisal system

Start by evaluating your current processes and identify needs and objectives. For example, what’s the goal of implementing a new performance appraisal system? Consider areas like transparency, improving employee feedback, and ensuring better alignment with wider business goals. 

Then, choose a performance appraisal system that aligns with your company culture, goals, and resources. Evaluate potential systems’ scalability, flexibility, and compatibility with existing processes, technologies, and budgets.

Once you’ve chosen and onboarded your new appraisal platform, define clear performance criteria and evaluation metrics that align with organizational goals and expectations. Then, tailor the appraisal system to reflect your business’s unique needs and priorities. 

For example, create standardized appraisal forms, rating scales, and guidelines for managers and employees. Provide training and resources to ensure understanding and consistency in the appraisal process.

Continuously monitor the use and effectiveness of the performance appraisal system. Track key metrics, such as completion rates, feedback quality, and employee satisfaction, to assess performance and identify areas for improvement. Adjust where necessary.

Build a performance appraisal system with 15Five

It’s time to take the stress and dread out of performance evaluations. Sign up for a free trial of 15Five to hold effective, growth-oriented performance evaluations that managers and employees will embrace.