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The Power of Performance Appraisals: How to Get Them Right

4 January 2024

Performance appraisals, also known as performance reviews or development discussions, are an effective way of evaluating an employee’s performance and nurturing their talent through periodic meetings with their manager. 

However, despite their significance as a cornerstone of employee development and talent management, performance appraisals can, at some organisations, be seen as an outdated box-ticking exercise. It is little wonder then that, according to Deloitte, approximately 58% of companies view appraisals as an ineffective use of time. 

Getting performance appraisals right is crucial, both for the development of talent and the happiness of employees. In this guide, we hope to highlight some of the key benefits of doing so, and address some frequently asked questions – shedding light on the ways in which your process could be improved.

What are the benefits of effective performance appraisals?

When done right, performance appraisals can reap an extensive number of benefits that are enjoyed by both the employee and the employer. The benefits below are just a few examples of the tangible impacts of appraisals – and how they can improve the productivity and cohesion of your workplace.

Goal alignment

Your organisation’s goals and aspirations can sometimes feel quite disconnected from those of your employees. By aligning the two, or stressing that the aims of one can influence the other, you can encourage employees to ‘buy in’ to your long-term plans. As a result, the employee might feel like they are building towards something tangible – such as increased company profits (perhaps leading to higher bonuses) or reaching net zero emissions – and be motivated to work harder in order to achieve that company-wide objective.

But it’s not just individual employees that will flourish if goals are aligned; teams are more likely to pull in one direction and recognise each person’s shared responsibility when an organisation’s goal has been clearly communicated within performance appraisals.

Talent identification

An employee who quietly goes about their duties and exceeds expectations can easily fly under the radar of management, or other members of staff responsible for promotions and talent acquisition. With regular performance appraisals, you can more easily identify which members of staff are performing well, keeping their particular skill sets and achievements in mind when a more senior position opens up.

By identifying those employees who might be well suited to a promotion or role change, you can save an average of 36 days necessary to hire as part of an external process, and the significant financial cost associated with it.

Clearly defined expectations

As well as highlighting employees who are exceeding expectations, regular performance appraisals with an objective benchmark can also identify those who are not. Without these meetings in place, issues relating to performance and behaviour might go unnoticed or undealt with, and escalate into more significant challenges that can be difficult and costly to solve.

During the appraisal process, managers can spot early warning signs such as missed deadlines, poor-quality work and unexplained absences, and course-correct these behaviours. With appropriate training, they can also explore whether they might be caused by core problems that need to be addressed, be those skill deficiencies or issues such as poor mental health.

In the best-case scenario, sub-par behaviour and poor performance are addressed quickly and easily. In the worst-case, the appraisals can act as a documented attempt to give employees the time and opportunity to improve. Failure to do so may result in further verbal and written warnings or dismissal.

Providing support and increasing engagement

As we’ve previously mentioned, appraisals offer a valuable chance to spot rising stars within your organisation. Between promotions and poor performance however, there’s also space to identify opportunities for additional training and support. An employee might, for example, excel when it comes to customer service skills, but require a refresher course on the concept of upselling. 

Appraisals serve a more comprehensive purpose than pinpointing knowledge gaps, however. They can also unveil broader trends that, with the right training and support, can be corrected to enhance overall performance.

Using the appraisal process to discuss ideas and concerns can also foster more open communication and trust between employees and management. That environment is likely to encourage quieter individuals to make their voices heard, ensuring that all perspectives are valued and considered.

When all of your employees feel like they are being listened to, their achievements are being recognised, and their goals are aligned with those of their employer, they are far more likely to feel engaged while at work. As a result, their productivity is likely to be significantly higher. 

A Hay Group study found that companies with highly engaged employees enjoyed 2.5 times the revenue of companies with poorly engaged employees. An engaged workforce also tends to translate to a loyal one, both increasing retention rates and significantly reducing recruitment spend. In fact, according to a 2023 study, businesses that actively engage their employees see an 18% decrease in staff turnover.

The bottom line is that appraisals can increase employee engagement – and that this, in turn, increases both productivity and retention.

How often should performance appraisals be conducted?

The traditional approach to performance appraisals is to conduct them once per year, with annual bonuses or raises determined by the overall grade given by the manager. 

There are a few obvious drawbacks to this approach. Employee concerns can go uncommunicated and unresolved for the remaining 364 days of the year, while data showing whether an employee is meeting day-to-day expectations is lost. It can also lead to a feeling by an employee that their growth and development simply aren’t important, perhaps causing them to go elsewhere.

Performance appraisals that are conducted quarterly, if not monthly, will provide plenty of opportunities for clear, honest communication, allowing both the employee and employer to grow together towards their shared goals. In fact, a recent study found that companies that adopted continuous performance feedback significantly outperformed their competition at a 24% higher rate.

How to improve the performance appraisal process

There’s an art to performance appraisals, and the various ways people handle them mean it is very difficult to perfect the performance appraisal process. That being said, there are always ways that it can be improved:

Provide managers with training to enhance their appraisals

Because performance appraisals have such a sizable impact on the engagement and performance of your employees, guidance on their effective delivery should be a key part of management training. That training might include role-playing exercises to simulate difficult conversations, such as when an employee is underperforming. It might also include methods of ensuring the appraisals are objectively graded; uninfluenced by the manager’s personal relationship to the employee; and take into account long-term performance, rather than focusing only on recent results.

Your management team might be effective leaders who can engage with their teams, but it’s important that they can also undertake accurate and fair appraisals, and navigate potentially difficult conversations with employees. Doing so can inspire honesty from the employee, and make them feel valued.

Ensure the grading system is comprehensive

The grading system you use should be comprehensive and nuanced, avoiding the limitations of a simplistic three-tiered approach. Relying solely on ‘A’ for excellent, ‘B’ for average, and ‘C’ for unsatisfactory may not accurately capture an employee’s true performance, and could inadvertently demotivate your staff.

In practical terms, a manager might be reluctant to assign many ‘A’ grades as it implies an unattainable level of perfection, potentially leading to complacency among employees. On the other hand, those who consistently go above and beyond and receive only a ‘B’ for their efforts may feel underappreciated, and disinclined to sustain their exceptional performance if they don’t receive the recognition they deserve.

To achieve a more accurate and motivating grading system, it’s essential to strike a balance between simplicity and comprehensiveness. There should be enough grades to represent a range of performance levels, without overwhelming the process with excessive complexity.

Above all, each grade within the system should be clearly defined and differentiated from other grades, with managers scoring an employee’s performance according to clear criteria. Being able to apply a grade and justify its allocation might form a key part of management training in relation to performance appraisals.

Make the appraisal a two-way street

A performance appraisal is not simply a way for managers to get more from their employees, encourage them to work harder, and award achievements for hard work. It is also an opportunity for employees to express their long-term goals, any concerns that they might have, and the training or development opportunities that they might like to pursue. By making the appraisal a two-way street, your employees are far more likely to feel heard, increasing their engagement and perhaps even raising their level of performance.

To achieve this, encourage your managers to focus less on official grading sheets and question prompts, and more on having an honest, candid conversation. Often, these appraisals are the first opportunity for employees to express issues that might not arise in day-to-day communications, or be able to be shared in the office. Far from a box-ticking process, appraisals are a chance for you to really listen to your team, and reveal issues you may not otherwise have been aware of.

Introduce 360-degree feedback

360-degree feedback is an inclusive approach to gathering feedback that goes beyond the conventional methods employed by most managers. It incorporates insights from colleagues and other relevant parties who have worked closely with the employee since the previous appraisal to get a more complete view of their performance.

Colleagues who have collaborated with the employee can offer valuable insights into their teamwork, communication, and collaboration skills, while input from clients or stakeholders can shed light on their interactions with external parties, including their customer service abilities.

The key benefit of introducing 360-degree feedback is its ability to provide a more comprehensive and objective assessment of an employee’s performance. By collecting feedback from various perspectives, a 360-degree assessment can identify trends in the employee’s behaviour that might have otherwise been overlooked, allowing for a more well-rounded and accurate evaluation.

Document the appraisal meetings

Keeping a written record of your appraisal meetings – including any topics of conversation and agreed-upon actions – is a crucial part of performance appraisals.. It not only allows managers to spot trends over time, but also ensures continuity whenever one appraiser is replaced by another, and ensures accountability to promises and targets.

If those promises are not kept – for example, if an employee consistently fails to arrive on time despite assurances that they would do so – the written records from the appraisal meetings can contribute towards disciplinary proceedings, and support your organisation in the event of legal action being taken against it.

Making notes and filling out the relevant appraisal forms are easy to overlook and neglect, especially if the conversation requires your full attention, but we cannot stress enough how important they are. With written documentation, you’re not only better equipped to make decisions, but also to evidence those choices, backing you up in difficult situations.

Performance appraisals benefit both employers and employees alike. Those that are being assessed can make their voices heard, allowing them to chase development opportunities and chances to progress, while those that are overseeing the assessment can track long-term trends and address issues before they become problems. 

Far from being an old-fashioned box-ticking exercise, when done right appraisals can boost engagement and performance – transforming your organisation from ‘requires improvement’ to ‘A++’.

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