7 Reasons Why Performance Appraisals Are Important

Employees are what drive businesses forward. But what if employee performance stagnates? How do you measure employee performance?

The answer is using employee performance appraisals.

For some companies, performance appraisals are another chore managers and employees have to endure. For others, it’s an opportunity to improve the team, the employee-manager relationship, to give employees a chance to grow.

In this article, we’ll explain what performance appraisals are and why they’re important. We’ll take a quick look at the types of appraisals companies can use and answer some frequently-asked questions about appraisals.

What is a performance appraisal?

A performance appraisal is a regular review of an employee’s performance and work in a company. It looks at employee’s skills and their achievements and growth, or lack thereof, within a specific period.

HR executives often refer to a performance appraisal as an employee evaluation, employee appraisal, performance review, performance evaluation.

Though companies may refer to it as an annual review, some companies perform employee evaluations on a more frequent basis. This can be every 3 or 6 months.

Many companies offer an annual raise as part of their compensation and benefits package. However, to ensure an employee is performing well, they conduct the performance review.

In other words, companies use performance reviews to determine the percentage of a salary increase, or justify it. Companies may also use employee performance appraisals to justify terminations.

That said, performance reviews aren’t just helpful for companies. They help employees see how they are doing in the company and as part of a team.

Managers who conduct performance reviews can also see how their different team members are performing compared to their peers.

They can take the performance review a step further by determining the training and development opportunities their team members need.

Types of performance appraisals

When it comes to employee performance reviews, there are several types that measure different aspects of an employee.

For example, companies may use the customer review for their customer-facing employees like salespeople and public relations (PR) executives.

There are over 10 types of employee performance appraisal methods or techniques:

• The negotiated appraisal
• Management by objective (MBO)
• Peer review
• Self-appraisal/self-review (self-assessment)
• Customer/client review
• 360-degree performance review
• Checklist scale method
• Critical instance method
• Ranking appraisal method
• Essay appraisal technique
• Project-based performance review
• Competency assessment
• Grading/rating appraisal method
• Behaviorally Anchored Rating Scales (BARS)

What is the process of performance appraisal?

The process involved in conducting a performance appraisal usually begins in the human resources (HR) department.

The HR team creates an employee performance review form or questionnaire. Then, they collaborate with different team leaders or department heads to understand the important skills employees need to have and the types of duties required.

The HR team, then, tailors the performance appraisal to each team or department in the company.

Depending on the type of performance appraisal used, the manager will often sit with each member of their team to review their performance, highlight milestones, discuss missteps, and discuss next steps.

With some types of appraisals, like the customer review, the manager will gather the information collected, along with their assessment, and share it with the employee.

Why are performance appraisals important?

By now you have an idea about the different types of appraisals available and their uses. Now, let’s look at why performance appraisals are important.

To start, performance appraisals aren’t just for companies to justify a pay increase, a promotion, or a demotion, or a termination. Although, these are the top reasons companies use performance reviews.

If carried out correctly, employees can also benefit from performance appraisals. They can help them understand their strengths and weaknesses and uncover areas where they need to improve.

The HR department, alongside an employee’s manager, can go a step further and direct the employee towards relevant training opportunities.

Now let’s look at the benefits of employee performance reviews.

1)     Measure employee performance & determine rewards

As their name suggests, the purpose of a performance appraisal or review is to look at an employee’s performance during a period of time.

The appraisal reviews how the employee performed during a quarter, six-month period, or a year. If the employee’s performance was in accordance with expectations, if they fulfilled their goals, then they should be rewarded.

Similarly, if the employee exceeds expectations, like a salesperson exceeding their target, they should be recognized with better benefits or a pay increase.

If the employee failed to achieve their goals, complete required tasks, or proved to be a bad team player, then the manager needs to develop a plan to help the employee get back on track.

If the employee continues to underperform, the manager should uncover the reasons behind this limited performance and determine if the employee is best-suited to their role or if they should be terminated.

2)     Offer insights into employee development

Another reason why conducting performance appraisals is important is because it can support employee development.

By uncovering employees’ performance levels, their issues, their strengths, and their weaknesses, managers can offer training and development opportunities.

While these opportunities may vary, the bottom line is to help employees get the training and skills they need to perform their jobs better.

Doing so can greatly increase employee retention and loyalty. It may also contribute to improving a company’s employer branding. although that shouldn’t be the reason the company offers training for its employees.

3)     Uncover potential in employees

Employee reviews are a great way for managers and companies to uncover potential in their team members. As part of the performance appraisal process, managers sit with their team members to see where they stand now and where they’d like to be in the future.

Using this information, the manager and the employee, along with an HR employee if needed, can map out a growth plan. From this growth plan, the employee can create their own self-development plan as well.

4)     Find new leaders

Besides uncovering potential in employees, managers and HR professionals may uncover leadership skills in team members during performance reviews.

This can be seen when conducting peer reviews, competency-based assessments, and 360-degree appraisals.

Managers can use this information for potential promotions or rewards for team members.

5)     Decide on potential promotions

Reviewing your employees’ performance especially on an annual basis can give you insight into who deserves to be promoted.

In the past, companies promoted employees based on seniority. But this isn’t as common anymore. It’s because of this that you may find younger managers than in the past.

The reason? Some of these people performed better than their peers during performance appraisals and were promoted to higher roles accordingly.

We realize this is not always the case. But in small and medium-sized businesses and startups, you can often find employees in their late twenties taking up managerial roles.

6)     Opportunity for employees to share concerns and problems 

As mentioned, performance reviews aren’t just for companies to offer raises, bonuses, and promote employees. One of the reasons performance appraisals are important is because they offer employees the space to share their problems and concerns with their team leaders and sometimes the HR department.

Employee performance appraisals can be a two-way street, where the manager reviews the employee’s performance, and the employee provides feedback about work issues.

The employee may offer ideas on how to speed up certain processes, improve team productivity, among other ideas. All of these translate to benefits for them, their co-workers, and their manager and the company as a whole.

7)     Improve manager-employee relationships

Although performance appraisals can create friction between some employees and their managers, they can also be an opportunity to improve those relationships.

By ensuring appraisals aren’t just for justifying raises or terminations, but benefit the employee, you create a two-way conversation.

This conversation can remove grudges, friction, and other negative emotions that may be present in an employee-manager relationship.

Frequently asked questions about performance appraisals

Now that you know the benefits of conducting employee performance appraisals, let’s answer some frequently-asked questions or FAQs about them.

•   What is the best performance appraisal method?

There is no single answer for this question. The roles and duties you have in your company or organization will dictate the best-suited performance appraisal methods.

For example, if you have many sales executives, then the customer or client appraisal is a good method to use. Alternatively, you can combine the customer appraisal with the peer review to get both sides of the employee.

•   How do you write a performance appraisal? 

Performance appraisals are often in the form of a questionnaire with multiple-choice questions (MCQ) or questions that ask you to rate a certain statement or skill as true or false.

In addition, to the questionnaire, the performance appraisal report should include:

• a review of the employee’s job description and the actual duties they perform
• highlighting their current strengths and weaknesses
• reviewing areas of improvement
• creating goals (work-based goals and personal goals)
• providing constructive feedback

Part of the performance appraisal process should be giving the employee the space to voice their concerns and what they’re struggling with.

What are the most common types of appraisals? 

The most-widely used types of performance review are the competency-based review and the 360-degree performance appraisal.

When conducting a performance appraisal for a manager, the most common type is the assessment center method.

Next steps

Performance appraisals have many benefits. But to ensure they’re effective, you must first explain those benefits to your managers and team leaders.

The next step is to ensure managers allocate time every 3,6, or 12 months to performance evaluations.

In addition, employees need to feel that these evaluations are for their benefit. Not just ink on paper or time they can waste.

A major reason why some employee performance reviews fail is because companies use them as a formality but don’t really follow through with the discussions carried out.

If you believe performance appraisals don’t measure your team’s performance, then find out how you can measure that performance. And use that.

As mentioned, performance evaluations should be tailored to the role being evaluated.

If you need help evaluating your team members but don’t know where to start, get in touch with Tawzef. Our HR experts will help you create performance appraisal forms and questionnaires to suit your teams.