Performance Appraisal Effectiveness and Organizational Goals

Performance appraisal is a term used for evaluating the performance of employees in an organization. The purpose behind performance appraisal is, first, to rate an employee's performance on the job, and second, to determine whether employees have achieved the goals they were required to meet. Moreover, performance appraisals measure not only the achievement of individual employee goals but also the broader goals of the organization. However, it cannot be ignored that performance appraisals are highly subjective in nature, depending greatly on an individual's view of a situation, the employer-employee relationship, and related factors. It is for these reasons that performance appraisals are often avoided even by large, well-established organizations, despite appearing extremely attractive in terms of the benefits they deliver.

This research paper aims to conduct a study regarding the effectiveness of performance appraisals and the issues that accompany them.

The problems associated with conducting performance appraisals typically begin at the middle management level, where it is the job of a middle manager to appraise his or her subordinates. At every successive hierarchical level, superiors are asked to evaluate the employees working under them. This can give rise to many issues that make performance appraisals an unpleasant task, causing many managers to view the process as time-consuming and burdensome.

To begin with, performance appraisals can cause friction, resentment, and low morale. Because appraisals are rather subjective in nature, negative ones often cannot be effectively disputed. Appraisals may also be colored by the state of personal relationships in the form of prejudice. However unfair an appraisal might be, there is no straightforward way for an employee to contest a superior's view. This inevitably causes resentment. Furthermore, employers sometimes feel pressured to give a positive appraisal in order to avoid confrontation or friction in the existing work environment. In addition, appraisals require extra time and effort on the manager's part. All of these issues combine to generate an unpleasant connotation around the term "performance appraisal."

Burdensome as they may be, performance appraisals and performance appraisal systems that are properly designed and implemented serve as a reflection of the achievement of an organization's goals and objectives. Therefore, the failure to implement an effective performance appraisal system often results in no meaningful relationship between the appraisal process and the achievement of organizational goals.

The achievement of organizational goals and objectives can be measured in part by effective performance appraisals.

The research aims to determine the answers to the following questions: Do performance appraisals encourage employees to develop an increased work ethic that will ultimately affect organizational goals and objectives? Do employee performance appraisals increase or decrease job performance? Do valid performance appraisal instruments effectively measure or rate employee performance?

In order to conduct a balanced study, the following have been assumed as constants: performance appraisals will suggest that employees tend to work harder when being evaluated; effective performance appraisals increase job performance; and employees want performance appraisals to be conducted.

The primary reason behind implementing effective performance appraisals is the need to manage employee performance in order to reach organizational goals. Performance appraisal is one of the key methods of leading and managing employees within the context of their performance, which is why appraisals are given such importance when it comes to managing and enhancing employee output.

A good performance management system does not rest on any single fixed point. It is an evolving system that requires constant attention and regular updating. However, a performance management system cannot control all factors that may affect or gauge employee performance. The factors that affect employee performance can be roughly classified into two groups: internal and external. Internal factors are those over which the organization has influence and control, ranging from job descriptions and employee selection to morale issues and work environment. External factors are those over which the organization has little or no control, including funding for salaries, job classifications, and jurisdiction-wide procedures. In some cases, organizations try to minimize the impact of external factors by working on the internal factors over which they have substantial control. For instance, "the Mecklenburg County (Charlotte, North Carolina) Department of Environmental Protection (MCDEP) uses a multidirectional approach to performance appraisal and rewards, beginning with the hiring process and continuing on a day-to-day basis" (Barry, 1997).

Well before the performance appraisal itself comes the issue of determining job responsibilities. An employee's performance cannot be assessed if the job has not been adequately described, since there would be no meaningful yardstick to go by. Therefore, determining correct job responsibilities and classification is the first, and one of the most important, steps to be considered. It is also the point at which compensation in the form of an initial salary range is determined. In order for performance appraisal to be successful, each job description must reflect not only job responsibilities and required education and expertise, but also the goals and objectives of the department specifically and the organization generally.

The second step before a performance appraisal system can be established is the selection or recruitment of potential employees. In recent years, a new trend has developed whereby organizations recruit employees through a three-step process. This process begins with a written test conducted in a group setting, designed to determine whether potential candidates have the basic ability and intelligence level required to perform the skills needed for the job. The test also allows the organization insight into each candidate's individual traits. The written test is followed by an interview for candidates who pass, during which the candidate's fitness for the role is assessed by relevant superiors. Once a candidate is deemed fit, they are asked to join the organization with an initial training period.

After the training has ended and the employee has spent a substantial amount of time in a role — usually at least six months — he or she is considered a candidate for performance appraisal. Performance appraisals are typically of two kinds. The first is conducted at the end of a probation period, assessing the employee based on the time spent in the role to determine fitness for continuation. A positive appraisal at this stage results in the employee becoming a permanent member of the organization's workforce. The second type is conducted at pre-determined intervals and is therefore a regular affair, measuring an employee's performance within the context of pre-set organizational goals and objectives. A performance appraisal also serves as an incentive for increasing employee job performance. Thus, an appraisal is a multi-dimensional activity affecting many aspects of organizational goals and objectives (Levinson, 1970; Locke and Latham, 1990; Mount and Thompson, 1987; Stonich, 1984). Furthermore, periodic performance evaluations are multipurpose tools for management control.

Numerous researchers have addressed the effectiveness of performance appraisal in enhancing job performance, maintaining work ethic, and measuring employee performance. It is generally agreed that if performance appraisals are accurate, objective, and free of prejudicial intent, they yield superior outcomes for individual employees as well as entire organizations (Landy and Farr, 1980; Mount and Thompson, 1987; Nathan and Alexander, 1985; Smith, 1986). Other researchers have linked the benefits of performance appraisals with various external factors (Dipboye and de Pontbriand, 1981; Fulk et al., 1985; Greenberg, 1986; Goodson and McGee, 1990), though those factors lie outside the scope of the present study.

There has been substantial study in the field of employee participation in determining personal objectives for performance appraisals. It is generally agreed that such a process is logical and should be practiced to make appraisals effective. Employee participation partly improves motivation and understanding of corporate objectives, thereby increasing job performance. Participation also helps employees accept the appraisal process and its objectives, because it improves communication between superiors and subordinates and makes goals clearer (Gehrman, 1984; Gibb, 1985; Locke et al., 1981). Several studies conducted in the 1980s and 1990s found that, in order for job performance to improve, employees should participate in the appraisal process. Buch and Spangler (1990), who studied one particular company, found that employees who participated in the appraisal process produced better job performance and received significantly better performance ratings and promotions than non-participating employees. Though these arguments carry intuitive appeal, empirical evidence on this issue is not conclusive, and further research is required to understand all the determinants that affect the value of participation.

When organizations assess employee performance, organizational goals and objectives provide the first and most logical yardstick. However, other studies point toward additional factors that determine employee performance and its relationship with appraisal. A certain expectancy theory states that the motivation behind a person's willingness to engage in certain behavior is a multiplicative function of that person's expectations about the probable results of that behavior and the degree to which the individual desires those results (Vroom, 1964). This suggests that using corporate objectives as the basis for performance appraisal can sometimes create problems rather than coordination. If an employee holds expectations about the outcomes of personal behavior that are not aligned with corporate objectives, those expectations may undermine the company's use of such objectives as performance benchmarks. Several difficulties may also arise from problems in accurately measuring goal achievement or communicating how employees are expected to reach corporate objectives (Jagacinski, 1991).

There have been relatively few studies conducted at the intersection of accounting techniques and performance appraisal. In the academic accounting literature, a body of research in budgetary control has attempted to determine the results of placing excessive emphasis on incomplete performance targets, finding that such an approach can result in undesirable consequences. The accounting-based performance measures have shown the most probable dysfunctional consequential behavior (Hopwood, 1972; Otley, 1978; Hirst, 1981). All of these studies concluded that dysfunctional outcomes may result when accounting-based measures are not fully representative of a manager's complete job responsibilities, and when these measures are the only ones used to assess performance against targets.

For the performance appraisal to be effective, an employee's job description and associated tasks and activities must be specific, for several reasons. Evidence shows that employees who know exactly what their responsibilities are and how to meet expectations are far more likely to be efficient than employees who have not been part of the appraisal process (Meyer et al., 1965; Odiorne, 1990). These studies also concluded that there is increased attention to work ethic and improved job performance when a performance appraisal is conducted properly. Participating employees can achieve increased job performance because their efforts are more likely to be focused and their tasks more clearly defined. Specific job descriptions also allow senior management to identify shortcomings and inadequacies in job responsibilities, enabling economies through changes in task sizes, procedures, or organizational structure. Furthermore, when employees have a thorough understanding of their tasks, management tends to have greater control and can prevent failures in control systems. Participative performance appraisals also result in more effective measurement of employee performance because employees understand what is required of them and that they will be assessed accordingly. Planning also benefits, and over time more effective and meaningful information and performance measurement systems can evolve. A study conducted by Schneier et al. (1991) concluded that effective performance measurement can increase job performance through enhanced ability for strategy execution; however, they also argued that beyond the clarity of corporate objectives, there must be adequate managerial accountability for these objectives if a firm is to compete in changing business environments.

The purpose of performance measurement and appraisal is to help employees improve their ability to identify with their given tasks so that their overall job performance improves. If appraisals are conducted regularly, recorded for comparison with previous results, and if the results are shared and discussed, an employee's understanding of what is required increases — which is then reflected in improved performance. Such well-defined, periodic performance appraisals are used in many companies. However, there are organizations where appraisals are often conducted orally, irregularly, and casually, or where employee performance is not assessed at all. In these cases, superiors overlook the opportunity to use performance evaluation as a tool to sharpen subordinates' understanding of their jobs and responsibilities.

A study conducted in 1995 concluded that, all else being constant, performance measurement is often not effectively carried out because of the interaction between superior and subordinate — a situation labeled "impression management" in the associated literature (Wayne, 1995). The study stated that a subordinate's use of supervisor-focused impression management behaviors would have a positive effect on how much the supervisor liked the subordinate. It is generally accepted in the psychology literature that people make an extra effort to maintain positive self-images. As a result, superiors who receive compliments from their subordinates experience an elevated sense of self-image and are drawn to subordinates who make them feel good about themselves. This creates a reciprocal dynamic that can inflate the appraisal a superior gives a subordinate, reducing the effectiveness of performance measurement. The Wayne study also noted that supervisor-focused impression management behaviors would positively influence a supervisor's perceptions of similarity to the subordinate, leading to more favorable appraisals — again undermining accurate performance measurement. Self-focused behaviors, including false modesty and boasting, represent attempts by subordinates to project the image of a friendly, hard-working, model employee.

The Wayne study further stated that a subordinate's self-focused impression management behaviors could have a negative effect on a supervisor's liking of that subordinate, resulting in an unnecessarily negative assessment. It also noted that a supervisor's liking of a subordinate would be positively related to the supervisor's appraisal of that subordinate, meaning that personal affinity can distort appraisals in either direction, rendering them unrepresentative of actual performance.

Until the end of the 1980s, despite a large body of research on appraisal accuracy, employee participation, and types of performance measurement, there was no substantial research that specifically linked increased job performance and effective performance measurement with performance appraisals. Then in 1994, a study by Bruns and McKinnon examined these hypotheses directly. The first hypothesis stated that employees in organizations with well-defined, regular performance appraisal systems have more knowledge of their daily activities in more specific, precise terms than employees in organizations where this is not the case — and that these organizations experience increased employee performance as a result. The second hypothesis stated that employees in companies with well-defined and periodic appraisal systems concentrate their efforts on areas on which they are evaluated, meaning that such appraisals effectively measure employee performance. This study is used throughout the present paper as a recent advance in this evolutionary body of research, with earlier studies treated as foundational references.

The research methodology employed in conducting this study is as follows. A thorough review of literature was conducted to assemble existing findings regarding how the performance appraisal reflects the achievement of organizational goals and objectives. The focus was on both recent and older studies already conducted on the issue, rather than conducting an entirely new primary study. Therefore, the methodology was geared towards compiling all relevant studies and then reaching conclusions based on them.

The methodology employed in the Wayne (1995) study consisted of the following respondents and procedures. The study was conducted at two major universities located in the Midwest and Southeast. Data were collected from 111 pairs of subordinates and their immediate supervisors. The participants held roles including secretary, electrician, librarian, admissions counselor, research scientist, and computer programmer. The average age of the subordinates was 33 and the average age of the supervisors was 41. The subordinate group included 47 men and 64 women; the supervisor group included 51 men and 60 women. Procedures required recently hired subordinates at both sites to attend a one-day orientation session. All respondents were then asked to complete four surveys at the following times: within five days of starting employment, after two weeks, after six weeks, and after six months. Once the questionnaires were completed, subordinate-supervisor pairs were matched. The Wayne and Ferris scale was used to assess impression management behavior, covering two of its three types of tactics: supervisor-focused and self-focused impression management. Subordinates reported how often during the past six weeks they had engaged in 12 impression management behaviors on a seven-point scale (1 = never, 7 = always). Using the same response scale, supervisors also reported how often their subordinates had engaged in those same 12 behaviors over the same period.

The methodology employed in the Bruns and McKinnon (1994) study was as follows. A sample of seventy-one managers in twelve firms across Canada and the United States was selected. Data were collected through in-person interviews. The firms were chosen not at random but based on location and accessibility, personal contacts, and apparent willingness to participate in the research. All firms in the sample were engaged in manufacturing, marketing, or distribution, and each belonged to one of three groups: heavy manufacturing of basic materials and products, high-technology manufacturing, or manufacturing of consumer-branded products. All but one had sales above $350 million, and all made a substantial contribution in their respective industries. The sample was selected on this basis to keep organizational diversity variables relatively controlled.

The research process began with a phone call to each sample firm to state the purpose of the research, describe the procedure, and request a preliminary agreement to participate. Interviews with at least five senior managers from the sales and marketing, production, and information departments (such as controllers or information officers) were then requested. Before each interview, each manager was sent a letter explaining the type and content of the questions likely to be asked and inquiring about the types of information they use in their daily activities. Although the researchers expressed interest in any particularly valuable reports, the managers were not informed in the letter that the study was specifically about performance appraisal.

Interviews were conducted on site, mostly in the interviewees' offices. Each interview was accompanied by a structured questionnaire, with managers given sufficient flexibility to answer questions subjectively. Questionnaires were given to managers to complete and return, while the interviews themselves were conducted in person. Most interviews lasted approximately one hour, with the shortest at 40 minutes and the longest at 90 minutes. Each interview was recorded for future reference, summaries, and detailed analysis.

Because the study's hypotheses centered on the relationship between daily managerial tasks and performance appraisals, managers were asked to identify approximately three of their daily or regular activities and to elaborate on the requirements of those activities. Towards the end of each interview, managers were asked to describe the bases on which they were assessed and whether they received any incentive compensation upon a positive evaluation. From these descriptions, the researchers hoped to determine the uniformity of procedures used in each periodic performance appraisal, as well as managers' views on the relationship between compensation and appraisal. Managers were not, however, asked to directly connect their performance appraisal systems with their choice of daily tasks.

The sample firms were classified according to their performance appraisal systems in the following ways. Five companies were classified as "formal," having very specific performance appraisal systems with assessments that were uniform and regular across the company, following a standard process with well-known rewards. Five other companies encouraged performance appraisals but had no standard format; these were classified as "informal." The remaining two firms had no written evaluations and were labeled "none," serving as comparison cases.

The interviewees included fourteen corporate vice-presidents, four division presidents, four plant managers, and seven chief financial officers or controllers. Twenty-one managers were involved in marketing and sales activities. Production and manufacturing managers accounted for 27 interviews. The remaining 23 people in the sample consisted of seven general managers and sixteen information and financial managers.

Throughout the study, three categories of variables were identified. Employee performance appraisals were classified as the dependent variable. Achievement of organizational goals and objectives was the independent variable. Increased employee anxiety was identified as an intervening variable.

All of the studies that form this research present results from different perspectives. There are many benefits associated with performance appraisals when they are properly conceived and executed. Levinson (1970) stated that performance appraisals accurately measure and judge employee performance. Locke and Latham (1990) ascertained that appraisals align an individual's job responsibilities and consequent job performance with organizational goals. Furthermore, performance appraisals facilitate the career growth of the employee being assessed. Mount and Thompson (1987) concluded that appraisals are also aimed at motivating the desired or required employee behavior. Appraisals are sometimes also seen as a means of improving communication between superiors and subordinates. Stonich (1984) concluded that performance appraisals not only measure performance, they also serve as an objective basis for salary and incentive compensation. Finally, performance appraisals aid in the strategic thrust of the firm (Locke and Latham, 1990). Buch and Spangler (1990) found that employees who participated in the appraisal process produced better job performance and received significantly better performance ratings and promotions than those who did not participate. Taken together, these studies confirm that effective and proper performance appraisals result in better job performance, more effective performance measurement, and enhanced care for work ethic. The Bruns and McKinnon study further confirmed the hypotheses proposed in this paper.

The Wayne study (1995) used goodness-of-fit tests and chi-square distributions to test its hypotheses and reach conclusions.

In the Bruns and McKinnon study, each manager was asked to describe in his or her own words the three job activities performed daily or regularly. The number of tasks described ranged from two to four, with 57 managers describing exactly three. Tasks were rated according to the following classification: 1 for a very vague description with no specific focus; 2 for a more specific description that was nonetheless imprecise; and 3 for a very specific description supported by additional information. To illustrate: a vice president of operations at Kappa Company described three activities — supervising machine downtime, checking progress on long-term projects, and handling corporate responsibilities. The first task was scored 3 because the manager specified data sources and monitoring procedures. The second was scored 2 because it was not a routine task and its sources were informal communications. The third was scored 1 because no specific sources were given. The average specificity score for this manager was therefore 2. This score was then combined with those of remaining managers in the firm to produce a corporate score, and median calculations were repeated with no difference in results.

Data collected from the five managers at Alpha Company were excluded from further analysis because their job functions had recently shifted from product-specific to customer-specific roles. Although they had provided adequate descriptions for the performance evaluation system used previously, the new functional structure had changed those requirements. This was reflected in the fact that all of their described tasks focused on a restructuring project, making their descriptions of routine tasks unclear and incomplete. All subsequent analysis is therefore based on data from 66 managers across the eleven remaining corporations.

The data were used to test the study's hypotheses. Groups 1 and 2 were compared using a t-test for two samples with unequal variances (t-statistic = 0.435; 0.05 alpha critical value = 2.07).

The interview data provided limited support for the hypothesis that performance appraisals help managers describe their activities more specifically, which in turn affects daily job performance. Managers in eight of the nine corporations with performance appraisal systems were more specific in describing their activities than managers in the two corporations with no apparent performance assessment plan.

The second hypothesis in the Bruns and McKinnon study is congruent with this paper's hypothesis that performance appraisals effectively measure employee performance. This hypothesis was tested by analyzing data focused on the nine firms with performance appraisal plans, specifically examining whether managers concentrated on activities directly related to the metrics on which they were assessed.

For every participant, each task description was compared to the set of goals or objectives the participant had identified as the basis for his or her evaluation. The relationship between each task and the stated goals was classified as high, medium, or low. For example, a distribution manager who stated "decreasing truck turnaround time" as a goal and listed "tracking statistics on fill-rates" as a main task was classified as a high relationship. If the main activity had been stated as "monitoring daily operations at the warehouse," the relationship would be classified as medium, since the link was apparent but not exact. Conversely, if an activity such as "acting as liaison between sales and production" was not connected to any stated evaluation objective, it was placed in the low category — which was ultimately excluded from further analysis.

The data were entered into a statistical software program to test the hypothesis. A chi-square test of differences between two independent samples rejected the null hypothesis that the two groups came from the same population at the 0.01 alpha level, with a test statistic of 10.78 and two degrees of freedom. This indicates a substantially high relationship between employee performance measurement and the tasks on which employees are evaluated. Although the association cannot be determined in exact quantifiable terms, it is nevertheless clearly present.

This confirms the first research hypothesis: that employee appraisals affect job performance. Because performance appraisals are conducted, employees focus on their daily tasks, and their performance on those tasks improves given the positive relationship between appraisal clarity and task execution. The second hypothesis — that performance appraisals effectively measure employee performance — is also supported: employees tend to have greater knowledge of evaluated tasks and perform them better as a result of the appraisal process. Therefore, it can be concluded that performance appraisals effectively measure employee performance when intervening factors are held constant.

The findings of all studies collected for this paper tend to support the hypotheses that performance appraisal systems increase work ethic, enhance job performance, and effectively measure employee performance. This occurs because an individual performance evaluation plan increases the employee's specific understanding of the job and the specific tasks that comprise it, which in turn improves job performance. However, the Wayne study identifies hindrances to effective performance measurement. That study concluded that demographic similarity and subordinate impression management behavior influenced supervisory performance ratings through their impact on supervisors' perceptions of similarity to subordinates. Supervisor-focused impression management was found to be positively related to a supervisor's perceived similarity to a subordinate. Conversely, self-focused impression management was negatively related to perceptions of similarity. The hypotheses of a negative relation between self-focused impression management and liking, and of a relation between liking and performance ratings, were not supported. The results indicated that supervisor-focused strategies resulted in performance measurements that were more favorable than the employee actually deserved, as supervisors appeared not to suspect that subordinates had ulterior motives. Additional longitudinal studies on impression management are required in order to determine its effects more fully.

The hypotheses of this paper are supported by the Bruns and McKinnon study, in which ten of the twelve corporations in the sample stated that performance appraisal plans generate benefits that exceed the cost of developing, maintaining, and using them.