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Performance appraisal is a process or practice to keep an eye over the employees' job performance and his/her benefaction to the company so that a regular review of the work can be provided to the employees. It is also known as the performance review, performance evaluation, annual review, or employee appraisal. The practice helps in the evaluation of the skills, growth, achievements, or lack of an employee. Other than this, it also provides honest picture feedback to the employees as per their work so that all the doubts related to the promotion, bonus, or termination decisions can be cleared. The companies mostly prefer to conduct performance appraisals annually, semi-annually, or quarterly.

performance appraisal


The performance appraisal helps in fulfilling several objectives, which include:

  • Maintaining the employees' record to decide the compensation packages, wage or salary structure, etc.
  • Providing feedback to the employees to make them aware of their performance and contribution to the organization.
  • Identifying the strengths and weaknesses of the employees so that the right person can be selected for the right job.
  • Running and reviewing various programs related to the employees' training and promotion.
  • Serving as a basis for motivating and generating the working habits in the employees.
  • Assessing the potential present in the employees for future growth and personality development.


Performance appraisal is an investment for a company to improve the quality of its human assets. A perfect performance appraisal provides a high rate of return which can be seen in the form of the following advantages:

  1. Promotion: With the help of performance appraisal, the employer can decide which employees are efficient and deserve to be promoted to higher posts or getting a higher salary. This will not only motivate those workers to perform well but also the others to get the promotion and reach the higher designation.
  2. Compensation: Performance appraisal is a handy tool to figure out the compensation packages for the welfare of the employees. The package includes high salary rates, bonuses, allowances, extra benefits, and prerequisites. The technique helps in finding the worth of an employee's performance and compensating him/her on that basis. For this, a merit rating is prepared that sets up the criteria for being compensated. Hence, it focuses on the performance instead of the seniority of the employee.
  3. Employees Development: By following a systematic performance appraisal procedure, the employer may figure out the need for training policies and programs. This will not only help to know the strengths and weaknesses of the employees but also generate new jobs for the efficient employees. This also opens the door for the future development programs of the employees, which are needed to compete in the dynamic environment.
  4. Selection Validation: It helps the supervisor to learn the importance and validity of the selection procedure. The supervisor can find out the weakness or loopholes and strengths or plus points of the selection procedure so that the required implementations can be done to select the best and most productive employees.
  5. Communication: It is essential for the growth and smooth running of an organization to have proper and effective communication between the employer and the employees. Even a single hurdle or miscommunication may lead to a significant loss. The performance appraisal makes the communication process effective, which can be clear from the following points:
    • It helps the subordinates to generate belief and confidence in the superiors.
    • It boosts up the employees' morale and makes them dedicated to the job and the organization.
    • It supports the understanding between both the parties, i.e., superiors and subordinates, and also helps the superiors to find out the subordinates' skills and abilities.
    • By having proper communication, a cordial and friendly labor-management relationship can also build up.
  6. Motivation: To perform any task or job, it is a must for the employer to motivate his/her employees. Performance appraisal is a key to open the door of motivation. It helps in determining the employees' performance, success rate, and efficiency while achieving a target. This makes the employees' performance graph upward sloping and increases their determination which further helps them in their future growth and betterment.


If the performance management system doesn't perform its work of preparing the report of employees' performance properly, it may create a significant loophole in performance appraisal. Such loophole gives birth to the following drawbacks:

  1. Prone to Biases: Sometimes, the process can be biased as the raters may rate an employee based on his general impression. The employee can achieve higher rates even after a bad performance. This prejudice affects the process of performance appraisal when the employees are appreciated or neglected as per their sex, religion, favoritism, race, and appearance.
  2. Creates Various Errors: If the evaluator doesn't make the merit ratings impartially and as per the standards, then different types of errors may take place, which include:
    • Contrast Error: There are specific standards that serve as a basis for performance appraisal. If these standards are ignored at the time of rating, the contrast error takes place. This error can also occur when the rater judges the employees' current performance as per their past performance.
    • Generalization Tendency Error: This error occurs when the rater keeps everyone on the same plate and rates them within a narrow range. This can happen because of the raters' tendency of putting all the employees on the same level averagely. This can demotivate
    • Sampling Error: This type of error occurs when the rater rates an employee on the basis of just a tiny portion or sample of his/her work.
    • Regency and Primary Errors: Sometimes, the employees' performance before the appraisal period and after the appraisal period can also manipulate the process. So, it is the responsibility of the rater to go through the proper analysis while giving the ratings.
  3. Stressful Workplace: The practice of performance appraisal may create a workplace environment full of stress for both the employer as well as employees. This may affect the quality of work and also can make the subordinates feel jealous.
  4. Time-Consuming: It is such a hectic and time-consuming task for the supervisor or manager to prepare the annual or semi-annual report of many employees. He/she has to prepare an appraisal form for all the employees and work down their strengths, weaknesses, achievements, and other things. Sometimes, this overall process can be a waste of time when it's not completed appropriately.
  5. Horn & Halo Effect: Horn effect refers to a situation when an evaluator gives life ratings to an employee only by overshadowing his/her negative attributes or weaknesses and ignoring his/her strengths. On the other hand, the halo effect is just the opposite of it. This effect refers to a situation when an evaluator overshadows the positive attributes and gives him/her higher ratings by ignoring the weaknesses.
  6. Stiffness or Lenience: Sometimes, the own standards, values, and physical & mental make-up at the time of appraisal of the rater can also manipulate the actual result of the performance appraisal technique. Some may report the least resistance, and some may be excessively severe. They may treat the subordinates very strictly or leniently. Due to these mindsets, no individual can be ranked high or low; they all will be ranked at the same level.


There are various techniques or tools of performance appraisal available. These methods have their pros as well as cons and are suitable for different types of organizations. A manager is entirely free to select any one of them, but it is his/her responsibility not to be biased by using different techniques to different employees.

1. Straight Ranking Appraisal: Under this type, each employee is compared with the other, and as per their performance, they get ranks from the top to the lowest. In this method, it is easy to decide the highest and the lowest rank holder, but it can be a challenging task to distribute them among the middle ranks.


  • The employees get what they perform.
  • The best and worst performer can easily be identified.


  • Due to not any systematic procedure, there can be snap judgments that make the method subjective and unfair.
  • It is not suitable for an organization with a large number of employees.
  • It compares only the rank of an individual instead of focusing on his/her strengths and weaknesses.

2. Psychological Appraisal: This technique helps to find the hidden potential of an employee. It gives more importance to the employee's future performance instead of their previous work. This method analyses seven main components, which include leadership skills, interpersonal skills, intellectual traits, personality traits, cognitive abilities, emotional quotient, and other similar skills.

Under this process, various tests are taken by qualified psychologists, such as in-depth interviews, discussions, psychological tests, etc. For instance, the employees' persuasion skills, emotional and behavioral responses can be determined while dealing with aggressive customers.


  • In comparison to other methods, it is easy to develop.
  • It provides exact measurable and objective data about the employees' potential.
  • Suitable for large enterprises and shy or introverted employees.


  • It is a time-consuming process and highly dependent on the psychologist's perspective.
  • The quality of the result can be poor.
  • It may lead to nervousness and anxiety in the employees, which can skew results.

3. Forced Distribution Method: Under this method, a certain percentage of rates is given to a specific category or percentile of employees. Performance appraisal design and format helps in deciding the number of categories and percentage of employees that are to be placed into different categories. For example, the top 10% of the scale is allotted to the employees with outstanding performance and merit, 20% for good, 10% for fair, and so on.


  • This method ends the raters' bias.
  • Using different raters with different scales can be eliminated by using the method as per the predetermined


  • In salary administration, the method can cause reduced morale and productivity and increase absenteeism among the employees.
  • The employees may feel frustrated with the job if he/she is headed lower than his/her expectations.

4. Behaviorally Anchored Rating Scale (BARS): Under this method, both qualitative and quantitative aspects of performance appraisal are measured. The anchored numerical examples are used to compare the employees' performance on the basis of behavioral examples. The multiple BARS statements are used to describe the routine behavior of the employees. These predetermined standards are perfectly applicable to the role of the individuals.


  • It removes construct-irrelevant variance and works more on concrete and observable behavior.
  • It reduces the biases and makes the process fair.


  • There is a high possibility of being subjective while evaluating.
  • Highly dependent on managers and superiors.
  • It is a time-consuming

5. Checklists and Weighted Checklists: Under this system, the manager prepared a list of a large number of statements to describe a job. These statements are placed under specific weight or scale values. During rating an employee, a manager gives that statement to the employee, which describes his/her work and behavior most closely under assessment. Then the rater averages the weight of all the statements to get the final score of the rating sheet. A checklist is made for each job. The judges categorize all these statements and weigh them as per their value.


  • This is the most commonly used method in the evaluation of the employees' performance.


  • It is a very time investment and expensive
  • To separate the positive and negative questions, the raters can show some biases.
  • Analyzing, assembling, and weighing the statements as per the employees' contributions, characteristics, and behavior can be difficult for the manager.

6. Critical Incident Techniques: Under this method, a list of statements of very effective and ineffective behavior and practices of employees is prepared by the manager. This list decides the employees' behavior, i.e., poor or outstanding, in various situations. The manager maintains the logs of each subordinate along with the critical incidents of employees' behavior. And at the time of the performance appraisal, at the end of the rating period, these incidents are used to determine the employees' performance.


  • This method eliminates the drawback of recency bias.
  • A thorough discussion of employee performance can be done.


  • Positive attributes overlook negative attributes.
  • Very close supervision takes place in this method which may make any employee uncomfortable.
  • This close supervision can also fill the annual report with complaints.
  • It can be a difficult task for the manager to record a large number of incidents.

7. 360-Degree Appraisal: Under this multidimensional method, the evaluation is done by getting feedback from the managers, customers, peers, and direct reports. This method eliminates the biases in performance appraisal and gives a clear image of the employees' competence. There are five integral components of 360-degree appraisal:

  • Self Appraisal: This method helps the employees to go through their performance, strengths, and weaknesses. In this manner, it boosts the confidence and motivation of the employees. But a significant drawback of self Appraisal is that it doesn't follow a formal procedure which may lead to leniency, biasness, and fickleness.
  • Managerial Reviews: This is a primary and widely used appraisal type under which the manager gives performance reviews. These reviews are based on the evaluation of a team by the senior manager and the ratings awarded by the supervisor to the employees.
  • Peer Reviews: Co-workers are the most relevant evaluator of an employee. The reviews given by the colleagues of a subordinate helps in determining his skills of cooperation, leadership, teamwork, harmony, etc. But sometimes, the peers can be partial for their friendship or animosity. This is a significant drawback of this method as it can distort the final result.
  • Subordinates Appraising Manager (SAM): This appraisal system moves in the upward direction. This is a dedicated step under which the reporters use a unique perspective from a manager's perspective. However, the method can be pretty inefficient due to fear or reluctance of retribution in the subordinates.
  • Customer or Client Reviews: Under this review system, two types of customers are included: internal and external. Internal customers include the product users within the organization, and external customers include those who are not part of the company but interact with employees regularly. The customer review shows an accurate picture of the output of an employee's work.


  • Make the employees aware of the standard of their performance and encourage them to invest in self-development.
  • It promotes counseling, initiates coaching and career development activities.
  • Helps the subordinates to get proper feedback on their work.


  • Some of the significant disadvantages of the 360-degree method are leniency in review, ineffective planning, cultural difference, misguided feedback, and competitiveness.


  1. Human-Resource (Cost) Accounting Method: Under this method, the employees' performance is decided based on the company's monetary benefits from his/her work. For this purpose, the cost of retreating an employee (cost to the company) is compared with the monetary benefits (contribution) yielded by him/her.
    During the evaluation by this method, various factors like quality, interpersonal relationships, unit-wise average service value, overhead cost, etc., are used. One of the significant disadvantages of this method is that it is highly dependent on the cost and benefit analysis and the memory of the reviewer. The method is suitable for small or new businesses. Because in such businesses, a single employee can affect success.
  2. Assessment Centre Method: The German Army first introduced the assessment center method, but many amendments were made to adapt it to the current environment. This method helps the employees to see an actual image of the others' observation and impact. It assesses the existing as well as future performance of the employees.
    The employees do many social-simulation exercises during the assessment, which decides the success in a role. These exercises include basket exercises, role play, informal discussions, decision-making problems, fact-finding exercises, etc. One of the significant drawbacks of this method is that it consumes a lot of time and money.
  3. Grading: This method helps the employer to identify the level of various skills of an employee. These skills include teamwork, communication, attention to detail, etc. It can be measured using a scale of 1-5, A-F, or even from unacceptable to excellent. However, this method is not always suitable because it is subjective. This may affect the result and can be unreliable if used alone.
  4. Management by Objective: Under this method, managers and employees together make plans, communicate objectives, identify, and organize to focus on during the period of appraisal. After planning the goal, the managers and subordinates discuss the progress and feasibility of achieving the goal. This method validates objectives with the help of SMART, which stands for specific, measurable, achievable, realistic, and time-sensitive. Other than this, the subordinates' goals are also matched with organizational goals. In the end, employees' performance is judged by their results.
    The incorporation of MBO in the performance appraisal process improves employee's commitment, makes their thinking futuristic, and helps in achieving goals. This method is suitable for a business of any size. It helps in analyzing the qualitative and quantitative output of managers, directors, and executives. But apart from this, a significant limitation of the method is that it has inadequate corporate objectives. There is also a lack of top management's involvement in the process.
  5. Appraisal Based on Trait and Behavior: Trait-based appraisals focus on the employees' characteristics that contribute to their personality. They include creativity, confidence, and extroverts. For example, how an employee who is working as a customer service provider deals with the customers. Sometimes, this type can be highly subjective and ignore the equally important characteristics. Some character traits are developing, so it becomes challenging to set goals around them.
    On the other hand, behavior-based appraisals are focused on finding the employees' ability to perform a particular task. This helps in deciding the performance on quantitative tasks and also finding the best employees who are to be promoted or rewarded as per their competence. The behavioral appraisal provides the standards and relatively objective way to assess the performance.

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