A Guide to Performance Appraisal Methods (With Types)

By Indeed Editorial Team

Published 24 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

An organisation's growth may depend on the efforts of its employees. Performance appraisal can help managers and business owners evaluate employees' performance to predict and enhance company growth. Learning about performance evaluation strategies can help you identify factors to consider when selecting an effective model for an organisation. In this article, we discuss performance appraisal, describe the various appraisal methods and outline their benefits to employees and an organisation.

What is performance appraisal?

Performance appraisal refers to a strategic evaluation of an employee's performance in an organisation. Understanding the employee's capabilities can provide insight into an organisation's potential for productivity and the value each employee may bring to a company. Many organisations use performance appraisal to provide feedback on areas requiring improvement, reward hard work and justify pay increases and bonuses.

Traditionally, performance appraisal uses a hierarchical approach, whereby an employee's supervisor provides feedback concerning their performance. Organisations can also collect feedback from colleagues and other company staff to determine the technical and interpersonal skills of the employee. Companies conduct these appraisals annually, but the frequency may vary depending on their policies. This can ensure continuous improvement.

Related: How to Conduct an Effective Staff Appraisal (Plus Benefits)

Types of performance appraisal methods

You can use various performance appraisal methods depending on the organisation's structure and size. It's important to perform an internal audit to understand the organisation's structure, so you can select the most appropriate method. These methods include the following:

Self-assessment

Self-assessment allows employees to review their performance and rate it against fixed criteria. They can use this to determine whether they meet their personal and company expectations. They can note their greatest achievements at work and the challenges they faced. This can give you an idea of their strengths and areas where they may improve.

Determining a performance metric relevant to your job description is important. Sometimes, employees may struggle to conduct a subjective self-evaluation, making it challenging to rate themselves too high or low. It's important that you make an honest self-assessment to provide accurate feedback.

Related: How to Assess Yourself (With Self-Evaluation Examples)

Peer assessment

Peer assessment is when colleagues critique and provide feedback about each other's performance. This can provide a less biased and more subjective performance evaluation than self-assessment. Anonymous feedback is among the common peer review methods. You can issue anonymous surveys and questionnaires among colleagues, either physically or online.

Anonymity can encourage honesty and provide accurate results. You can also use open peer review methods among employees who have good relationships and are receptive to positive criticism. It's important that you're respectful when giving peer analysis feedback, as it shows that you value their efforts.

Related: What Is an Evaluation Form? (With Explanation and Examples)

360-degree feedback

This can include feedback from supervisors, peers, self-evaluation and occasionally from customers. It provides diverse opinions that may give you a better perspective of an individual's performance. Using this method, you can assess their technical performance by providing tasks and assignments to complete and reviewing interpersonal relationships with colleagues and customer relationships.

Related: How to Give 360 Feedback To Your Boss (Steps and Benefits)

Negotiated appraisal

Consider this method in cases of conflict between employees and supervisors. It introduces a mediator to evaluate the employee's performance. The appraisals typically start by highlighting good performance before discussing more contentious issues.

Management by objectives

This method allows managers and employees to work together in identifying, planning and setting objectives. This outlines the employee's responsibilities and the goals they can aim to achieve. You can use SMART analysis when creating these objectives. SMART is an acronym for specific, measurable, achievable, reliable and time-bound. This allows you to create clear objectives with an appropriate metric to measure progress.

It can also help you set manageable objectives with realistic deadlines, depending on the employee's abilities. It can also provide direction and guide members towards working to achieve the same goals. You can assess the employee's performance based on these objectives at the end of a specified period. This appraisal method enhances communication and builds organisational structure among employees, which can improve their productivity.

Related: Objectives for Managers: Definition, Examples and Tips

Behaviourally anchored rating scale (BARS)

This is an assessment technique that many organisations use, especially during their recruitment processes, to assess employee performance based on their behaviour patterns. It provides a qualitative and quantitative approach to performance appraisal. The first step involves creating a critical incident technique. This set of procedures for observing human behaviour may allow you to determine their potential usefulness in problem-solving and critical analysis at work. You can use this to compare specific behaviour patterns tied to a numerical rating, allowing you to rank their behaviour patterns.

Human resource cost accounting

Human resource cost accounting uses the monetary benefits employees bring to an organisation to assess their performance. This involves comparing the monetary benefits with their salaries and other overhead costs incurred by the company. It can help a company determine whether employees are worth retaining. A company could also use this method to reward hard-working employees with promotions.

Related: What Does a Cost Accountant Do? (With Skills and Salary)

Benefits of performance appraisal

Performance evaluation can provide several benefits to employees and organisations. Monitoring the performance of employees can provide a company with information on their overall well-being. Here are some benefits of performance evaluation:

Enhances employee engagement

Many performance appraisal methods require employee input. Involving employees in appraisals may help improve their relationship with employers. A company could use an employee's input when creating its objectives. It may receive diverse perspectives, which could help it make effective decisions. Appraisals can also give employees a sense of ownership of company projects, motivating them to put more effort into their tasks. They can set manageable and realistic objectives. This can lead to a conducive work environment where employees have manageable tasks, and can maintain a balance between work and their personal lives.

Related: How to Motivate Employees: 12 Effective Ways to Boost Morale

Identifies training needs

Performance appraisal can help you identify areas requiring improvement within a company. It can help you determine training needs and enable you to organise a training plan that can improve productivity and the organisation's overall well-being. Consider monitoring the performance before and after training to determine whether it was worth it.

Related: The Importance of Training Employees (With 11 Benefits)

Outlines company expectations

Performance appraisals can help a company clearly define its expectations from each employee. This can include the number of tasks to complete within specific periods or the financial goals the company aims to achieve. You can compare the organisation's previous performance records to determine its performance trajectory and establish goals. This can give employees direction and guide them towards achieving set goals.

Related: Common Responsibilities and Expectations of Managers

Provides career growth opportunities

Evaluating the performance of employees can help them access opportunities for career growth. Companies may use this analysis to identify valuable employees who deserve promotions and bonuses. Employees can also use this to quantify their achievements, improve their CVs or renegotiate their contracts. Companies may also use performance appraisals to motivate employees.

Consider rewarding outstanding performance within a specified period. This can include an employee of the month award that may have financial benefits, recognition or other rewards based on employee preferences. Companies can also have group awards for departments or the whole organisation when they meet performance expectations. This can include office parties or dinners to celebrate their accomplishments.

Related: How to Make a Career Plan and Set Career Goals (With Benefits)

Determine a suitable management approach

You can evaluate employee performance to determine whether a company's management strategies work. This can help you identify areas for improvement so that the company may adjust its strategies to meet its needs. The company may also decide to implement an entirely new strategy, depending on the appraisal results. Management strategies can include implementing an open office model whereby employees work in a communal environment with a shared workspace rather than segregated offices. This can enhance collaboration among members, encouraging them to work together towards common goals.

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