Motivate your employees and boost their output with these performance appraisal methods

Choosing the best performance appraisal method will ensure a healthy work environment. So let’s get an in-depth understanding of what performance appraisal actually is and the different ways you can go about it for your startup.

Motivate your employees and boost their output with these performance appraisal methods

Sunday July 28, 2019,

19 min Read

performance appraisal methods

“We all need people who will give us feedback. That’s how we improve” - Bill Gates

Employees and companies have discarded performance appraisal methods as a futile exercise. However, studies have shown that nearly 72 percent of employees believe that their performance can be enhanced through periodic appraisals.

Such a contradiction brings to light that organisations are making use of irrelevant and obsolete performance appraisal methods. In fact, when implemented correctly, it can boost the employee’s performance while addressing productivity bottlenecks.

Performance appraisal bridges the communication gap between the employee and the employers and improves their relationship.

On that note, let’s get an in-depth understanding of what performance appraisal is and explore its various types.

What is performance appraisal?

methods of performance appraisal

Performance appraisal is an annual occurrence wherein an employee’s productivity and performance is measured. These metrics are calculated against a benchmark of a set of predetermined objectives projected for that year. 

It helps organisations to systematically analyse and document the employee’s strength, skills, and areas of improvement.

Further, the performance appraisal process also evaluates the employee's attitude towards work, behaviour, personality, and stability in the position assigned to them.

Ultimately, this performance appraisal system helps in ascertaining the employee’s promotion, raise, or other career prospects and opportunities. It also helps the organisation to develop ways to enhance output, efficiency, and work quality.

Objectives of performance appraisal

360 degree performance appraisal

The importance of performance appraisal can be understood when one understands the primary objective that it serves. Thus, the main objectives of performance appraisal may be summed up as follows:

Establishes a feedback loop

A number of organisations cite feedback to rationalise the system of performance appraisals. It allows the establishment to assess the individual for the tasks carried out by them in the past 12 months. Any shortcomings can also be worked upon to improve the individual’s performance. 

Aids decisions regarding promotions

Every employee dreams of progressing in their career. But how does a company decide which ones deserve climbing up the hierarchy?

Annual performance appraisals not only help in assessing a candidate’s suitability but it also acts as a historic record of their performance throughout years. Thus, companies can refer to that and decide who is more suited for the lucrative position.

Employment termination decisions

A company may wish to rightsize its workforce due to a variety of reasons. And when it comes to layoffs, it is the performance appraisal that can act as a key determining factor.

A number of organisations are known for retaining talented employees based on their annual performance appraisals while the non-performers are dismissed.

The appraisal reports also play a crucial role in figuring out an appropriate amount of compensation for the employees who are being booted out.

Motivates employee performance

difference between performance appraisal and potential appraisal
An honest appraisal can help an employee come to terms with their weaknesses so that they can work on it. Further, it motivates them to meet the standards fixed by the company. Plus, it sets a healthy and competitive work environment where employees will go above and beyond to prove their worth. 

Sets measurable goals

Setting goals and achieving them is an evergreen managerial method of gauging someone’s performance. Thus, through the performance appraisal, the employees can set their own scalable goals and observe how many are met. Achieving these goals open avenues for rewards and recognition.

Outlines compensation

Performance appraisal acts as a scale to measure up and evaluate the work that has been done. In this regard, the company can then accordingly compensate the employee on the basis of the performance against these measures. Thus, the company can implement a fair mechanism of paying extra to those who work harder.

Supports human resources management

Companies need a workforce not only for the present but also for the future. Thus, performance appraisals allow them to identify the talent in their manpower that can reach the top brass.

Further, performance appraisals can help identify outstanding employees and match them with positions suited for their work ethics. They also help in supplying the talent drought teams with a balancing supply.

Mentoring programmes

The primary role of a manager is to act as a mentor to the employees and to help them fill the knowledge gap. Accordingly, a manager can coach the team members or sign them up for training and mentoring programmes that will add value to the employee’s skill set.

Performs organisational diagnosis

The performance appraisal of a team also helps in identifying the developmental requirements of the whole unit. As a result, the entire team could be enrolled for a training programme where they can efficiently work together.

Offers legal position for personnel decisions

Personnel decisions such as transfers, career stagnancy, and dismissal are quite sensitive matters. If any employee is to challenge these decisions, the company can justify its decision on the basis of such appraisals. This leaves no room for alleging discrimination as a documented appraisal report acts as a legal defense.

Fine tunes organisational performance

Regardless of the performance appraisal methods that a company may use, the end result is always the same - improving the company’s performance. It initiates a conversation of what a company expects and how each employee is contributing to those goals. Once each member of the team works towards reaching the small, achievable goals, the company will also grow with them.

Process of performance appraisal

performance appraisal process

The process of performance appraisal is quite simple and is carried out in a systematic manner. Different companies may outline different performance appraisal processes. However, as a whole, it is as follows:

  • The performance appraisal system starts with defining the various performance standards. The managers summarise a set of parameters that will revolve around the skills, output, and accomplishments of the employee. These criteria may be articulated clearly and objectively rather than through vague terms.

  • Once the benchmark has been established, they are communicated to the employees so that they are aware of what is expected from them. Ensure that these expectations are clearly communicated by the supervisor and understood by the employee.

  • Performance appraisal forms are circulated amongst the various employees of the organisation. Some companies make use of performance appraisal tools. Thus, rather than having to fill out a physical performance appraisal form, employees enter their details digitally.

  • Based on the information submitted on the performance appraisal forms, the supervisor will measure the actual performance of the employee. It is expected that this evaluation is carried out impartially and should be founded on facts and findings.

  • Once all the inputs have been gained the measured performance is compared with the standards laid out by the company. This will highlight the deviation between the actual performance and standard performance.

  • Once an accurate employee performance appraisal has been written, it is discussed with the concerned official. It involves discussing the strengths and weaknesses in a constructive manner. Depending on the nature of the appraisal, it is important to communicate this in a humane manner. This discussion may have a positive or negative impact on the employee’s future performance.

  • The final step serves the basic purpose of performance appraisal, that is, offering feedback. Depending on the outcome, you can either declare rewards or initiate corrective actions wherever it is necessary. Once the areas of improvement have been recognised, then measures must be taken to boost the performance or fix the performance lapses.

Traditional performance appraisal methods

Traditional performance appraisal methods make use of performance appraisal form samples for a goal-oriented strategy for evaluating performance and work results. It contains standardised performance appraisal questionnaire, checklists, ranking, and critical incidents to assess the work already done by the employee. 

A) Grading method

The grading method contains a numerical scale corresponding to various performance metrics such as reliability, output, initiative, attitude, attendance, and more.

performance appraisal system

The grading are given from poor to excellent and the corresponding numerical scores are calculated to assign an overall performance-related grade.

B) Ranking method

As the name makes it abundantly clear, the ranking method is based on comparing the performance of an employee with their peers. The ranking method may be further categorised as:

#1. Straight ranking method

Straight ranking method is one of the oldest techniques used for performance appraisal. It is also extremely simple and easy to implement. In this method, the supervisor or the appraiser ranks the employees from best to poorest on the basis of their general performance.

#2. Paired comparison method

In the paired comparison method, the performance of each employee is mapped and evaluated on a one-to-one basis. Accordingly, a rank is assigned to them through this comparative method.

#3. Forced distribution method

Forced distribution method of performance appraisal deals with categorising the employee based on a predetermined distribution scale. The evaluator is supposed to rank 10 percent of the employees in the best category, 20 percent in the above-average category, 40 percet in the average category, 20 percent in the below-average category, and 10 percent in the poor category. This distribution results in the formation of the bell curve in performance appraisal.

C) Graphic rating scale method

The graphic rating scale method is yet another simple, effective, and popular way for appraising an employee’s performance. In this method, a linear scale with different ratings is available to appraise each employee. 

It lists down personality traits and job performance parameters, which are to be graded against the printed points on the continuum. Normally, a five-point linear scale is used for the graphic rating scale method.

D) Critical incidents method

The method evaluates the employee on the basis of any critical incident and the employee’s response to it. This method covers the negative and positive takeaways from that event. 

A positive response to an event could be staying back after work hours to finish tasks. Alternatively, a negative reaction would be blaming someone else for missing a deadline for a major project. 

However, the biggest drawback of this method is that the supervisor has to be present to witness the incident and make note of it at that very moment. 

E) Checklist method

how to write annual performance appraisal report sample

As the name suggests, the checklist method makes use of a generic yet detailed checklist that contains a list of job characteristics, qualities, and personality traits of an employee. If the evaluator believes that the individual possesses the listed trait, then they will put a check mark against it.

Companies could opt for a weighted checklist method or make use of a forced checklist method.

F) Essay-based appraisal method

Essay-based appraisal method, also known as a free form method, offers the appraiser complete freedom to write the performance appraisal in an essay format. 

They could list out personalised characteristics of the employee and support the claim with examples or evidence. However, such kind of performance appraisal methods is susceptible to personal biases.

G) Field review method

In the field review method, the employee is evaluated by their superior followed by an assessment by a reviewing officer. The reviewing authority interviews the superior or appraises the superior’s assessment.

This method, albeit time-consuming, reduces the possibility of biasing during performance appraisal. 

performance appraisal methods

Modern performance appraisal methods

Modern performance appraisal methods are more focused on the futuristic aspect of the work that will be done. Modern methods of performance appraisal shift the focus from personality traits towards job achievements. 

As such, the modern performance appraisal methods were developed to keep up to date with the developments in the work culture while overcoming the flaws of the traditional methods. Modern performance appraisal methods curtail the evaluator's biases and attempt to offer an unbiased view.

A) Management By Objectives (MBO)

Peter F. Drucker proposed the concept of Management by Objectives in 1954 to overcome the seepage of the evaluator’s biases in the traditional methods. In MBO method, the performance appraisal questions and answers for employees, supervisors, and managers are drafted to set clear goals. These goals are then broken down at an individual, team, and organisational level. 

objectives of performance appraisal

The commonly decided goals are then taken as the criteria to measure an employee’s performance and contribution to the organisation. The journey to attaining the goals are periodically measured and communicated with the employees.

Therefore, MBO combines participative goal setting, deciding the course of action, and evaluation of the progress. The success of this method lies in the fact that the employees feel involved at all the stages of performance appraisal. They are more committed to fulfilling the goals that they have outlined.

B) Psychological appraisals

Psychological appraisals are seemingly the newest methods of performance appraisal. In this method, the evaluation of the individual is carried out by a highly trained psychologist. Based on psychological tests, discussions, and in-depth personal interviews, the psychologist can ascertain the employee’s potential.

forced distribution method of performance appraisal

Such an appraisal technique allows a unique insight into the individual’s identity and personality, which can help place them in the best job position. It helps in determining the emotional, motivational, intellectual, and other relevant traits that may predict the individual’s future in the company.

C) Assessment centres

German psychologists first used the idea of assessment centres to appraise the officers in the army. Assessment centres operate on the foundations of in-basket exercises, simulation, and role-playing games.

These activities may be supplemented with personal interviews, written tests, and projective tests. It makes the individual a team player while also identifying the best setting to tap into their true potential.

Experienced managers and HR specialists observe the employee in the various backdrops and accordingly prepares a summary of the individual. Multiple factors such as organisational skills, interpersonal skills, soft skills, and planning ability are assessed in this performance appraisal method. The feedback is also shared with the concerned individual. 

Finally, the management and administration pore over these reports and take decisions in line with the summary.

Assessment centres leave no scope for personal biases to creep in. It also ensures that employees are assigned work that is best for them, thereby introducing promotional avenues too. 

However, the greatest drawback of this method is that it involves an inordinate amount of time. Further, it will be a drain on the financial resources as it can be rather expensive.

D) 360-degree performance appraisal

At present, 360-degree performance appraisal methods are much in vogue. Naturally, it would make one wonder what 360-degree performance appraisals actually are. To put it in simpler words, 360-degree performance appraisal is a form of feedback appraisal where the employee gains feedback from all possible channels. Since it offers a holistic 360-degree perspective of your performance, hence the name 360-degree feedback appraisal.  

360 degree performance appraisal
It is also known as ‘multi-rater feedback’ and can be given by anyone who comes in contact with the employee. The sources could include the superiors, peers, subordinates, team members, staff, customer, and the employee itself. 

The self-appraisal component allows the employee to view what they perceive as their strength and weaknesses.

It also allows them to list their achievements and judge their performance. The self-appraisal can then be weighed by the inputs obtained from all other individuals who interact with the employee. It assesses the individual’s leadership qualities, work ethics, team spirit, and communication. 

E) Cost accounting method

Here, the performance of the employee is assessed on the basis of the cost and benefits analysis. It factors in the cost of retaining the employee, the benefits resulting to their retention, financial yield, and any other monetary liabilities.

Therefore, the performance of the employee is assessed by estimating the cost of the employee, which is calculated by considering:

  • Average unit-wise value of product or service
  • Quality of goods or service
  • Overhead costs
  • Accidents, errors, wastage, spoilage, damage, or wear and tear
  • Interpersonal relationships
  • Time spent in appraising the individual

The difference calculated between the cost of the employee and their contribution indicates their performance.

F) BARS method

Behaviorally Anchored Rating Scales (BARS) method of performance appraisal records behaviour-based evaluation in a qualitative and quantitative manner. The scale could be based on a behavioural or work-related trait.

Most often, it is heavily dependent on the characteristic trait. The assessment is carried out by assigning a numerical value with 1 being poor and 5 being outstanding. Once the values have been assigned, it may be plotted on a graph.

Quite often, the BARS method of performance appraisal lays emphasis on the traits of the individual.

However, the traits that are being evaluated may not be directly related to the nature of work being carried out at their post. Thus, a behaviourally anchored performance appraisal method may not prove reliable. Further, such a method may get diluted by office politics, which reduces its trustworthiness.

G) Balanced scorecard method

Robert Kaplan and David Norton developed the method of balanced scorecard in the 1990s. It gives a modern twist to the traditional performance appraisal methods. However, it overcomes the restrictive nature of traditional methods.

Through a balanced scorecard, companies can ensure a balanced and complete view of the performance of an employee.

This method has two primary stages:

1. Creating a balanced scorecard on the basis of parameters mentioned in four measurable quantities like:

  • Financial (which could be ROI, profits, or market share)
  • Customer (which may involve the acquisition of new clients, retention of old customers, and brand loyalty)
  • Internal business measures like human resources, infrastructure, and organisational processes; and
  • Innovation and learning perspective

2. Linking these parameters to measure the employee’s performance

performance appraisal process

Difference Between Traditional and Modern Appraisal Systems

The difference between the traditional and modern appraisal systems are highlighted below:

performance appraisal process

Advantages of performance appraisal

Performance appraisal offers the following advantages:

  • Allows documentation of the employee’s performance that can be stored in the service record
  • Acts as a bridge between the employee and the manager to discuss performance outputs and expectations
  • Helps in clearly communicating the goals and achievements expected from the employee
  • Offers the manager the opportunity to communicate honest feedback, which can lead to the betterment of the employee
  • Gives the employees a chance to set goals, plan and review their entire year
  • Motivates the employee by rewarding their quantifiable efforts through an appropriate compensation
  • Promotes healthy merit-based competition with an attractive compensation system
  • Identifies the underperformers and perform diagnostics to make them more efficient

Limitations of performance appraisal

Performance appraisal experiences the following setbacks:

  • It may leave behind a negative experience for the employee or the manager
  • Can be rather time-consuming and complex
  • Is vulnerable to natural biases and lack of objectivity

Tips to improve the performance appraisal methods

By now, you may have realised the importance of performance appraisal and how it can boost the employee’s performance. To make it more streamlined for your organisation, here are some useful tips that will improve the performance appraisal method:

  1. Ensure that the goals attributed to an individual are in line with the organisational goals
  2. Draft a structure of the components that will be discussed with the employees so that they can improve accordingly
  3. Gather the performance appraisals well in advance
  4. Introduce digital and automation tools to collect employee appraisal forms

What is potential appraisal?

A potential appraisal is a form of performance appraisal that is centred around discovering latent but unrealised qualities. These projected deliverables may enhance the employee’s performance at different official posts. 

Identifying these talents in the early stages allow companies to nurture their talent and elevate their position in the company. The main objective of potential appraisal is to ensure that there is no power vacuum.

The indicators of potential include:

  1. A pragmatic approach devoid of emotions while addressing problems
  2. Imaginative and out-of-the-box thought processes of getting things done
  3. Ability to analyse complex entities by breaking them down into smaller, manageable bits
  4. Capacity to observe the larger picture 
  5. Leadership attitude and the ability to motivate others
  6. A persuasive personal influence over other people

The appraiser, in this case, is often an experienced evaluator, who has in-depth knowledge and understanding of the organisational structure. Thus, the moment a position of significance lies vacant, the appraiser can recommend a suitable candidate.

Advantages of potential appraisal

The advantages of potential appraisal include:

  • Ability to identify talented individuals, who can take on the responsibilities of a higher post
  • Offers the attractive idea of career growth in the future through stellar promotions
  • Drafts a management succession system where organisational needs are met without any recruitment processes
  • Encourages other employees to explore additional skill sets and serve the organisation

Potential appraisal vs performance appraisal

The potential appraisal is a part of performance appraisal that deals in identifying hidden talents and potentials of the employee. On the other hand, performance appraisal is the systematic assessment of an individual’s performance for a given period.

The primary difference between performance appraisal and potential appraisal rests in the fact that the former analyses the past while the latter predicts the future.

Performance appraisal evaluates how well you are doing in the current position whereas potential appraisal estimates how well you may do. Similarly, performance appraisal is about the actual behaviour and results and potential appraisal is gathered from the employee’s competency. 

Finally, performance appraisal is linked to incentives, compensation, and increments while a potential appraisal is linked with promotions.


Performance appraisals serve the following purposes:

  • Human resource development
  • Administrative decision moulding
  • Organisational maintenance
  • Documentation of performance

Therefore, performance appraisal helps in boosting the individual’s productivity while enhancing organisational health. 

Although traditional methods of performance appraisal were simpler, they were vulnerable to partiality. The modern methods of performance appraisal have managed to reduce the impact of personal biases of the evaluator. With the introduction of technology and innovation in the performance appraisal systems, the process has gotten much more streamlined.

Choosing the best performance appraisal method will ensure a healthy work environment. It can guarantee greater employee satisfaction, higher engagement while suppressing the employee turnover rates, and absenteeism. The ROI on your human resource will also significantly increase. 

There are a number of performance appraisal methods available, each of which serves a different purpose. Depending on the size, culture, strategy, and nature of your organisation, you need to choose an appropriate method that will strike the perfect employee-employer benefit balance. You can combine two or three different types of performance appraisal methods to customise a technique that is best for your company. 

Feel free to share the performance appraisal method that is being used by your company in the comments below.

(Edited by Evelyn Ratnakumar)