What Is a Performance Appraisal? A Comprehensive Guide

Most businesses need to know how employees perform against set expectations to stay competitive and grow.

This is where performance appraisals come in. They enable companies to monitor and guide work behavior and give employees a clear indication of how well they’re doing at their jobs, so they can fine-tune their performances as needed.

This comprehensive guide can help you understand the value of performance appraisals, how performance is evaluated and how an appraisal is conducted, and the different methodologies and approaches used.

You’ll also discover the benefits and challenges of conducting performance appraisals and what to know to implement your own performance review process.

What is a performance appraisal?

A performance appraisal is a regularly timed review of a worker’s performance on a job, measuring how well they perform based on set criteria. It also addresses their overall contribution to the company.

Criteria can cover everything from how well a job is performed to how productive the person is and how well they get along with their colleagues and bosses. The final appraisal is presented one-on-one with the employee. It includes a written description of the performance review—often with a numerical rating to show where the employee ranks on a scale.

Besides the question of what criteria to use in the performance management process, other considerations in setting an assessment include:

• Who should administer it (such as a manager or someone from human resources)
• How often it should be applied (for example, annually, twice a year, or quarterly)
• Time of year (at the end of an organization’s fiscal year, the beginning of the new year, at the end of each quarter, etc.)

Performance reviews might be legally required in some cases, as they are for some federal and state agencies. While they aren’t usually mandatory for privately held companies, they’re widely embraced as an invaluable productivity and assessment tool.

Importance of performance appraisals for performance management

An employee performance appraisal (PA) reveals how productive an employee is—if they’re overachieving, meeting performance expectations, or underperforming. Companies can also use appraisals to guide bonuses and salary increases.

Organizations might use training and development to help high-scoring workers become even more effective in their jobs. An appraisal can trigger action to help employees fill skill set gaps, including taking professional development courses.

On the other hand, continually poor responses to constructive performance feedback documented in the PA could lead to disciplinary action, from memorandums and warnings to termination.

Performance appraisal objectives

The main purpose of a work appraisal is to provide feedback on how well an employee does their job—whether it’s demonstrated bad or good performance. Other objectives include:

• Improve future performance. Workers can improve their performance when they realize where they fall short of expectations or continue to work on their strengths.
• Determine compensation. A company usually has limited funds for bonuses and salary increases. Performance reviews can guide them on how to spend their money and provide incentives equitably, with stronger performers often receiving higher rewards.
• Plan for staffing. Reconciling performance reviews across an organization can indicate whether employees in one area of the business are overworked, triggering actions, such as additional hiring, to relieve the workload.
• Set new goals. Annual reviews can help assess workers’ past performance and allow managers to convey new goals employees should try to achieve during the next period.
• Improve communication. Regular performance assessments help keep lines of communication between management and employees open and should be part of an ongoing process of constructive feedback.

5 types of performance appraisal

Different types of performance appraisal methods can be effective based on an organization’s needs.

A particular performance management system might stress a self-appraisal process or depend on feedback from peers and managers. Performance appraisal could involve using positive feedback before critical feedback or a recognized rating scale to assess how a worker is doing.

We explain five of the main types of performance appraisal.

1. Negotiated appraisal

A negotiated appraisal often involves bringing in a mediator for an employee evaluation. This is especially useful in situations where there’s strong disagreement between the employee and manager about the performance review. A neutral mediator can provide an impartial perspective to help defuse the situation and bridge troubled work relationships.

The mediator will often take the approach of providing the good news before the bad. Constructive criticism is often easier to take if the employee feels valued in some way for what they do on the job. Whether a third-party mediator is involved, however, the process encourages the employee to provide feedback about their work situation, so a balanced decision can be made about how to improve performance and professional relationships going forward.

For example, you might have a salesperson who isn’t meeting their sales goals. A performance review assessment might open with feedback about their strong sense of teamwork, keeping other members up to date on possible new business, and providing leads to other members of the sales force.

Then, the discussion can focus on the nitty-gritty of why the employee has missed sales goals, with both parties sharing perspective on the person’s reasons for their underachievement and identifying direction on how to improve in their role.

2. Self-evaluation

Self-evaluation involves the employee evaluating their own performance in areas like job behavior, attitude, and how well they do in their work role. This practice shows how well the person evaluates their strengths and weaknesses—an important trait for employees and leaders.

In many cases, this performance evaluation type involves a worker filling out a form before the one-on-one meeting with their manager, who uses the information in conducting the interview. Quite often, this self-assessment method is combined with other types of assessment, such as the Behaviorally Anchored Rating Scale (BARS) and 360-degree feedback.

3. Management by objective (MBO)

The rationale underlying the Management By Objective (MBO) methodology is that workers are more invested in achieving goals if they help set them. After a manager and employee set goals, they might get together periodically to assess progress toward the final target.

Using an MBO assessment, a company can better align an employee’s efforts with the company’s overall goals. For example, a company’s overall goal might be to increase its online revenue by 25%.

A performance assessment with a digital marketer might conclude they should try to bring in 14 new clients in the next quarter, triggering an agreed-upon reward for the achievement.

4. 360-degree feedback

To get a more accurate and complete view of an employee’s work performance, organizations sometimes use 360-degree appraisal. This might include assessments from co-workers, managers, and even external clients.

This feedback is often gathered on questionnaires and is particularly useful if the worker largely works “out of sight” from managers, perhaps spending a lot of time away from the office interacting with clients.

For example, a marketing firm might use a survey to answer questions about the employee’s:

• Communication skills
• Ability to work with other team members
• Ability to resolve conflicts
• Professional expertise
• Quality of customer service

5. Behaviorally Anchored Rating Scale (BARS)

The Behaviorally Anchored Rating Scale (BARS) evaluates a worker’s performance by comparing it to concrete behavioral examples. Each example is assigned a rating, helping the company gather qualitative and quantitative data on how well the employee does in certain tasks or relationships.

For example, in assessing a nurse’s ability to deal empathetically with patients and their families, a survey might pose a series of questions to supervisors and colleagues on how they’ve coped with difficult patients.

The BARS would rate the answers from 1 to 5, going from “often impatient,” regularly needing other nurses’ help, to “never impatient,” often helping other nurses with their difficult patients.

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The performance appraisal process

The performance appraisal process requires a number of defined steps, spelling out what the standards are, how they’ll be communicated to employees, how they’ll be measured, and how to discuss the results with the employee.  

Performance appraisal process:

1. Identify performance standards
2. Communicate those standards
3. Measure individual performance
4. Compare employee performance to standards
5. Rank/reconcile assessed performance
6. Discuss results with employee

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1. Identify performance standards

Establish your employee performance appraisal system by developing clear written standards against which you compare how individuals and teams do in their jobs. The performance standards should be easy to understand and show how you’ll rate performance.

Standards help evaluate employees objectively using job descriptions, key performance indicators (KPIs), competencies, and performance objectives. You can use these standards to create behavior anchors in BARS and objectives for other types of performance reviews, including MBO and negotiated appraisals.

You might also divide performance standards that apply to the team or workforce and those that apply to individuals. For example, in Scrum software development, you might ask a team to shorten the sprint phases of a project but ask a front-end developer to turn around code written for the project more quickly with fewer errors.

2. Communicate those standards

After setting overall and individual goals, you’ll need to explain them to employees (and the people who will assess them) so that there’s no question about job expectations.

To ensure understanding and the best performance, encourage workers to ask questions and advise management to have regular check-ins with employees to help keep them on track.

Common performance goals can be related to an individual’s professional position, helping them grow and achieve more in their role. Skills development, behavior, attitude, and productivity are among the things to cover.

For even stronger results, the company should set SMART goals:

• Specific. The goal states what needs to be accomplished.
• Measurable. The goal should be easily quantifiable.
• Attainable. The goal should be achievable.
• Relevant. The goal should be relevant to the individual’s development and the company’s overall goals.
• Time-bound. The goal must have a reasonable time frame.  

3. Measure individual performance

Of course, measuring an individual’s progress and performance shouldn’t just be an annual event. If the final performance review is held yearly, managers should have regular check-ins to ensure steady progress toward employee goals.

Companies can measure performance in different ways. For example, in a behavior-based review, a supervisor in a manufacturing plant might ensure a line worker exhibits desired behaviors (perhaps quantified on a scale of never to always), ranging from working safely and efficiently to being punctual for their shifts.

4. Compare employee performance to standards

Compare an employee’s job performance to the various metrics for the identified performance standards. Are they in line with the standards, underperforming, or are they exceeding expectations?

For example, the factory worker might need to have their skills assessed and upgraded if they’re responsible for three line stoppages in a year (with a set goal of zero stoppages), costing a lot of time and money.

5. Rank/reconcile assessed performance

You can also use performance assessments to provide bonuses and incentives for qualifying employees. The metrics of the assessment rank or reconcile performance, often across larger groups,  to determine how you’ll distribute pay bumps or rewards.

For example, a sales rep who brings in a certain amount of new business and boasts sales above the set goals might qualify for an annual trip with their high-achieving peers.

6. Discuss results with employee

Finally, performance reviews should be on a face-to-face, one-on-one basis with an employee. Since people’s emotions may run high with critical feedback, try to provide the appraisal in constructive terms. Present an action plan so that the employee has a chance to improve.

The communication here should be a two-way street. By being open to employee feedback, you can get staff fully invested in their growth.

Generally a written review is shared by the supervisor. Often the employee is asked to write a comment in response and sign the document. Then the review is held in the employee’s personnel file.

Benefits and challenges of conducting performance appraisals

Performance appraisals can provide many benefits for organizations. Completing the write-up and conducting the PA interview can also pose some challenges. You should know the pros and cons of developing effective performance appraisals.

Benefits

A well-designed performance appraisal can help to:

• Improve communication. When the company provides set goals for workers, channels should remain open to employee feedback, providing two-way communication.
• Provide a process to identify strengths and weaknesses. The metrics of a performance assessment can help identify the strengths and shortcomings of individuals and teams so that they can make positive changes.
• Provide a process to set goals and make progress in a career. The process allows workers to strive toward clearly defined goals and helps them take steps forward in their career development.
• Facilitate fair rewards across the workforce. Since companies often have a limited amount of money for bonuses and rewards, they can use the performance assessment results to allot those resources fairly.
• Drive better organizational performance. A performance review aligns personal and team goals with corporate ones, ensuring better organizational performance.

Challenges

A poorly designed performance appraisal can result in:

• Inaccurate assessments. Goals that aren’t properly set or interpreted can skew assessments.
• An inherent lack of objectivity. By bringing their own preconceptions and standards into play, a manager may make inaccurate assessments (judging an employee for their likability instead of work performance, for example).
• A negative impact on employee morale. Goals of an assessment that are unreasonably hard to attain may harm worker morale.
• Becoming time-consuming and costly. If a performance assessment is too detailed and complicated to administer, follow, and review, its value might be undermined by the loss of time and money.
• Potential for biases. While set metrics should guide performance appraisals, it’s often up to the manager to assess how well an employee achieves a goal. This interpretation might be subject to conscious and unconscious biases.

Tips for an effective performance appraisal

An effective performance appraisal is more methodology than magic. Good guidelines to develop and administer one include:

• Avoiding surprises. Managers should clearly state goals and review employee performance regularly to avoid surprises during the final assessment.
• Training your assessment skills. Interpreting a performance assessment isn’t always an innate skill for managers. Find training or information available to help you do this.
• Encouraging two-way communication. A good assessment should involve input and feedback from the employee, encouraging them to ask questions to fully understand their review.
• Preparing well. A manager should thoroughly review the assessment before an employee meeting, so they can plan what they’ll say and how to handle the interview. If the employee or their peers must fill out appraisal forms, ensure they’re handed in on time.
• Minimizing distractions. You want to have a worker’s undivided attention. So, relay the results of an assessment in a private space without distractions.
• Being honest. A manager shouldn’t skirt uncomfortable issues with an employee but address them honestly and tactfully. They should also have a plan to address any shortcomings.

Manage performance reviews with help from Upwork

Performance appraisals are important for both employers and workers. Companies can assess how well individuals and teams are doing so that they can take steps to improve performance or promote further excellence among high-achievers.

Workers have clear goals to aim for, helping them stay focused and further their progress up the career ladder. If there’s a problem with their performance, they should have a clear indication of what they need to do to improve.

If you want help setting up, administering, or interpreting your performance assessments, this is where the talented freelancers on Upwork come in. Search through some of our best performance appraisal specialists to find the skills, experience, hourly fees, and star ratings you need to help you make your best performance appraisals.