Analysis of Performance Appraisal System

Analysis of Performance Appraisal System ABSTRACT This article examines the Performance Appraisal System of Opsonin Pharma Ltd. It discusses one previous format of performance appraisal and the current performance appraisal. Author has tried to find out whether performance appraisal system of the company motivates the employees to achieve the company goal. Researcher has conducted the survey in the head office people of the company to get the idea of management people. The study uses primary and secondary data to do the analysis of the research where it has searched academic literature for the theories of performance appraisal, performance management, motivation and human resource management. Result has come out through the survey that current performance appraisal system has shown positive impression but still it needs some improvement such as proper practice and introduction of performance management. Chapter 1. Introduction Survival of the fittest once advocated by famous biologist Charles Darwin in his ‘Origin of Species (1859) transcended the boundary of biological world. Now this principle has become true in areas where competition determines ultimate fate. In the realm of organization, this principle operates in the name of productivity, profitability, efficiency, effectiveness and so on. Organization theorists during classical period emphasized on structural and technological perfection for survival and growth. Such mechanistic ideas of competitiveness started fading since 1930s onwards. The rise of behavioural and industrial humanism made way to ‘human capital to be considered central in the study of competitiveness. The measurement unit of contribution of human capital is termed as ‘Performance. Performance Appraisal (PA) as a technique of measuring competitiveness of organizations or institutions is not a modern phenomena. It has started from Han Dynasty in 206 BC-220 AD where they used to use merit exam for selection and promotion (Wren, 1994). But most probably PA system started in the industry from Robert Owens textile mills of the 1800s, where he used silent monitor system with the block of woods with different colours that he put in the work station of each employee. Everyone could see the performance with each other (Wren, 1994). This gave rise to an annual assessment which was recorded in a â€Å"book of character†. The assessments were subjective, which is one of the main criticisms still leveled at performance appraisal today. In the early part of the twentieth century Owens ideas were superseded by those of ‘scientific management, devised by F.W. Taylor and popularly associated with Henry Ford. This emphasised the use of quantitative methods to measure work performance (e.g., a fair days work and differential piece rate system), and led to the development of ‘work study techniques in the inter-war period. Though today, private sector has been credited as the perfectionist of performance management techniques, the modern psychometric approach to performance appraisal has been brought by the public sector (Torrington, Weightmen and John, 1989, p.66). Due to its monopolistic and legalistic nature, public sector performance appraisal practices could not reach that standard as reached by the private sector, which took appraisal as a response to market competition. The study is based on Opsonin Pharma Limited, a leading pharmaceutical company in Bangladesh. It was incorporated as a private company in 1976. It manufactures, and markets generic medicines for both human and animal use. Its value-added products improve the quality of life of both the people and animals in Bangladesh as well as abroad and help them enjoy longer, healthier, and more productive lives. Opsonin is known for long as a provider of regular and life saving medicines at affordable price. It has long been established and recognized as one of the most leading, progressive and modern pharmaceutical company in the country with the assurance of manufacturing quality products as the company is committed to contribute much to develop national health sector. 1.1 PURPOSE OF STUDY: Purpose of the study is to identify whether the management people who are working in the head office are convinced or not with performance appraisal system of the company. 1.2 AIM AND OBJECTIVES: 1.2.1 AIM: Aim for this research is to gather knowledge about performance appraisal system in Opsonin Pharma Ltd. and to get clear idea about performance appraisal system through literature review. 1.2.2 OBJECTIVES: To provide recommendation to Opsonin Pharma Ltd how they can improve their performance appraisal system. To examine how performance appraisal system works. To analyse how Opsonin Pharma motivate the employees through performance appraisal system. To make an overview of Opsonin Pharma Limited. To make an overview of Performance Appraisal System of Opsonin Pharma Limited. To determine the interrelation between Performance Appraisal System and other Human Resource aspects. To measure the level of employee development. To determine the impact of Performance Appraisal System for motivating the employees of Opsonin Pharma Limited. 1.3 RESEARCH QUESTIONS: How effective is the performance appraisal system in Opsonin Pharma Ltd.? Do the management people think that current performance appraisal system works properly in the company? Does performance appraisal system motivate the employees at Opsonin Pharma Ltd.? Chapter 2. LITERATURE REVIEW The Performance Appraisal (PA) system is essential for maintaining high standard of human resource of any organization, both private and public sector. Performance appraisal is a part of working link that emphasizes for both bosses and subordinates their managerial responsibilities (Williams, 1972, p.8). A good performance appraisal should introduce in the company to know employees abilities and efforts to match organizational expectations. A good PA system can measure employees activities with reasonable accuracy and it can provide feedback to employees on their performance, and make a chance to employees to develop their weaknesses. There is a chance to make wrong personnel decisions which lead to affect organizations capacity without good performance appraisal systems. But ineffective appraisal system can bring many problems including frustration for good performers which will encourage them to leave the company, causing the organization to incur high recruitment costs (Chou, 2005 , p.42). This concern is addressed by ensuring that employees understand how their work contributes to the achievement of organizational goals, by ensuring that employees have the skills to make that contribution and, above all, by developing a climate of open discussion in which performance, achievements, and difficulties can be approached openly and supportively. A sound PA system, therefore, measures performance of employees not only to make some backwardly-linked like recruitment validity, motivation, morale, etc. and forwardly-linked like career growth, reward and sanction, employee development personnel decisions etc., but to integrate between organizational goals and personal goals of employees (Hyde, 1982, p.295). It is a really hard task for reflecting employee performance through performance appraisal system. Performance appraisal systems are not general idea that can be followed by all companies without any modification because it depends on employee and organizational characteristics and qualities (Henderson, 1984, p.54). At first glance performance appraisal appears as though it should be something relatively straightforward. Torrington, Weightman and Johns (1989, p.814) offer a working definition of appraisal as: â€Å"The process of judging a persons performance and reporting that judgment.† Alan Fowler has given very good definition about the objective of performance appraisal system. He suggested that: â€Å"Staff work best when they know what they have to do, how well they have to do it, and how well they are thought to have done, so they need to talk to their managers at least once a year about this, and their managers need to take their staffs view into account when setting work goals and deciding who needs what training.† (Fisher, 1995, p.12) Traditional performance appraisal is more of a control mechanism used to make the most of an employee. How an employee is contributing toward achievement of organizational goal is the main concern here? Based on contribution ratio of the employees, the management makes some personnel decisions such as promotion, salary increase, sanction, and training needs. This uni-dimensional concept goes more with the philosophy of personnel management. 2.1 Formal versus Informal Performance Appraisal: Formal performance appraisals usually occur at specified time periods once, twice or thrice a year. Formal performance appraisals are required by the organization or institution for the purpose of employee assessment. Informal performance appraisals can take place whenever the supervisor or manager feels communication is needed. 2.2 Purpose, Objectives Benefits of Performance Appraisal: 2.2.1 Purpose: The purpose of performance appraisal is to devlop the organizations performance throughout the improved performance of employees. 2.2.2 Objectives: Organization uses performance appraisal system to execute some objectives. The main objectives in using performance appraisal in an organization are as follows: Motivating and allocating rewards for employees Review past performance to rectifying the mistakes from management and employees (Fisher, 1995, p.11) Proper utilization of company resources. Identifying areas where training and improvement are required. Coaching and developing employees so that they can perform better to achieve the company goal. Identifying the area where developments programs need to be introduced. Giving employees feedback about their work so that they can be inspired. Improve communication between managers and subordinates. Identifying the base for pay, promotion etc.. (Yeates, 1990, p.36) 2.2.3 Benefits: The benefits of a successful appraisal system can be concluded as follows: For the organization: Improved performance all the time in the organization due to: Achieve organizations objectives and values it needs proper communication; Increase sense of group work and reliability; Establish better relationship between managers and staff; Managers have got the scope and power to use their leadership skills to motivate and improve their subordinates. Improve outline of the tasks completed by employees. Classification of thoughts for improvement. Prospect and long-term view of the company can be developed. Training and development requirements appeared more clearly. A culture of continuous progress and success can be formed and maintained. People who have got potential can be classified for career development plans to provide for future staff requirements. The message is passed to everyone that employees are valued properly. (Fisher, 1995, pp.15-16). For the appraiser: Performance appraisal is a chance to develop an overview of individual jobs and organizations. Classification of ideas for development. Improved job satisfaction. Increased sense of individual value. There is an opportunity for appraiser to associate team and individual objectives to fulfil departmental and organizational objectives. There is an opportunity to explain expectations of the contribution the manager expects from team and individuals. The opportunity to set up the targets. There is a chance to make productive relationship with subordinates based on common interest and understanding. (Fisher, 1995, p.16) For the appraisee : Boost them up to increase motivation. Enlarged their career through job satisfaction They realize that they are valued. When they will get feedback after performance appraisal then they get a clear idea of what is expected from them and what they have to do to meet expectations. Supervisors discuss with them to improve their lacking areas. They are offered for training and development for their improvement. When managers are creating scope for developing their subordinates career then it is ultimately developing relationship between them. (Fisher, 1995, pp.16-17) 2.3 What should be appraised? Managers should consider four things when they are going to do the performance appraisal. Inputs Appraisers will see how job holders have implemented their knowledge and skills to perform their job effectively. Process Job holders outcome will indicate the implementation of knowledge and skills for their activities. These are sometimes called to as competences. These illustrate the performance required of people to complete their job effectively. This kind of performance can make a difference between highly effective and less effective performers in a given role such as personal drive, analytical power, team management and leadership and ability to communicate. Outputs Measurable or observable results of the performer will be expressed by jobholders. Outcomes- Result will show the ultimate impact of the jobholders and their teams or departments and their overall activities to achieve the objectives of the organizations. (Fisher, 1995, p.25) 2.4 When appraisals should take place: Formal performance appraisal are usually held annually but some of the fast moving companies prefer to do it twice a year or even more frequently, it could be quarterly. Those who are working in projects under a consultancy firm, their performance evaluation could happen after each assignment but there would still be an overall review at the end of the year. Some of the organizations conduct progress meetings at specific time to review progress towards achiev ­ing objectives, work plans or projects. Some of them are doing two or three times a year, the main purpose of which is to review and update objectives. (Fisher, 1995, p.27) There are some reasons behind failure of appraisals. Reasons are as follows: Employees dont know about the time frame and what exactly they need to do in terms of good performance; Others fail because of problems with the measures used to actually appraise the performance; An easygoing supervisor might rate as high, for instance, subordinates who are actually substandard Other problems, like arguing and poor communication, undermine the interview feedback session. Storey and Sisson (1993) have suggested that performance appraisal system actually have three steps: objective setting, feedback, and evaluation. The first step of an appraisal system is to give the guidance to the employee on how to apply their efforts for the benefit of the organization. The second step is to ensure employees work toward the achievement of their objectives through a process of positive communication with their supervisor. The final step involves the supervisor making an appraisal of the employees performance over the entire assessment cycle. (Brown Benson, 2005, p.101) 2.5 Popular Appraisal Methods: Managers usually conduct the appraisal using a predetermined and formal method one or more of the followings: 2.5.1 Graphic rating scale (GRS): The Graphic Rating Scale is the simplest and most popular technique for appraising performance. GRS measures personality traits and performance along with a point continuum scale or anchored scale. It lists traits such as quality and reliability and a range of performance values from unsatisfactory to outstanding for each trait. The manager or supervisor rates each subordinate by circling or checking the score that best describes his or her performance for each trait. In the end of marking manager or supervisor do the totals of the assigned values for the traits. (Dessler, 1999, p.156) The rater is given wide freedom in choosing a point, which is a threat to reliability and workability. 2.5.2 Alternation Ranking Method: Positioning employees from best to worst on a trait or traits is another appraisal option. Since it is usually easier to distinguish between the worst and best employees, an alternation ranking method is most popular. First, list all subordinates to be rated, and then cross out the names of any not known well enough to rank. Then, indicate the employee who is the highest on the characteristic being measured and also the one who is the lowest. Then choose the next highest and the next lowest, alternating between highest and lowest until all employees have been ranked. (Dessler, 1999, p.158) 2.5.3 Paired Comparison Method: The paired comparison method helps make the ranking method more precise. For every trait such as quantity of work, quality of work, and so on will be considered for appraisal for instant, top performer of quantity of work and top performer of quality of work will be pared. (Dessler, 1999, PP. 158-159) 2.5.4 Forced Choice Method (FCM): FCM intends to mitigate reliability problem of GRS by making scaling unknown to the rater. Here, the rater is served with some statements about a particular trait or performance factor. The rater is to choose a statement that best describes the employee. The rating is done by someone else. This is unworkable in larger organization. Both the rater and the ratee feel uncomfortable with FCM (Anderson, 1993, p.24) 2.5.5 Forced Distribution Method (FDM): The forced distribution method is similar to grading on a curve. With this method, manager places predetermined percentages of ratees into performance categories. FDM is a GRS or BARS scaling with a population distribution requirement. Usually it requires a normal distribution i.e. the lowest and the highest grade contain 10% of population each. The remaining 80% is distributed among others with highest distribution reserved for the mid-grade. FDM intends to minimize overrating. Yet it carries high probability of inequality in case of heterogeneous population. (Dessler, 1999, p.159) 2.5.6 Critical Incident Method: With this method, the supervisor keeps a log of positive and negative example (critical incidents) of a subordinates work-related behaviour. Every six months or so, supervisor and subordinate meet to discuss the latters performance, using the incidents as examples. There are several advantages of this method of which are as follows: It provides actual examples of good and poor performance the supervisor can use to explain the persons rating. It ensures that the manager or supervisor thinks about the subordinates appraisal all during the year. The rating does not just reflect the employees most recent performance. The list hopefully provides examples of what specifically the subordinate can do to eliminate any deficiencies. However, without some numerical rating, this method is not too useful for comparing employees or making salary decisions. (Baird, Beatty Schneier, 1982, pp.45-46) 2.5.7 Behaviorally Anchored Rating Scale (BARS): A behaviourally anchored rating scale combines the benefits of narratives, critical incidents, and quantified scales, by anchoring a rating scale with specific examples of behavioural activities for good or bad performance. Its supporters say it gives more equitable appraisal than do the other tools we discussed. Although BARS scales still present performance on a continuum; they provide specific behavioral anchors to help clarify the meaning of the performance dimensions and help calibrate the raters definitions of what constitutes good and poor performance. Some supporters of behaviorally focused scales also claimed that they would remove unnecessary subjectivity (Latham Wexley, 1977). BARS is judged from a set of scales- one scale describes each job dimension, or broad types of duties, responsibilities, or activities of a job. Placed on a scale are a set of statements clarifying of worker behaviour on the particular job dimension. (Baird, Beatty Schneier, 1982, p.61). Rating dimension would vary according to the nature of the job- between six and nine seems quite common. For example one British study identified seven: Supervision of operators, scheduling and planning, technical troubleshooting, handling men, communications, administrative problems of wiring wire and dealing with other departments. BARC system has got substantial advantage it has some draw back as well such as time consuming and expensive. Some of them have identified ten dimension of performance. They are interpersonal relationships, organizing and planning, reactions to problems, reliability, communicating, adaptability, growth, productivity, quality of work and teaching. (Fletcher Williams, 1985, pp. 42-44) 2.5.8 Computerised and web-based performance appraisal: Many people who have got the charged for performance appraisal for their subordinates may not be able to do so particularly newly appointed supervisors. As they will take over new responsibilities so they may not be efficient in expressing themselves in writing about employee performance. Eventhough some of them have got the strength to do perfectly but still they may need some format for developing effective, useful employee performance appraisals. Computer software programs are making the performance appraisal system easier from many aspects such as writing a difficult employee performance appraisal. Management software that is commonly called MBA-ware, offers expert guidance in management issues that would cover from creating a business plan to writing employee policy manuals (Sprout, 1995). Some managers are looking for a develop technology to solve the problems that they are facing during performance appraisal. Current computer software programs allow the managers to make performance appraisal documents that are in complete format, professional in appearance, and easy to use in the performance appraisal system. Additionally, this software programs provide classification of job performances that will be counted for appraising and offer various pre-written descriptions of behaviors for each criteria. There are three leading programs for employee evaluation software that are Review Writer 1.0, Performance Now! 2.03, and Employee Appraiser 2.0 (Stewart, 1994; Robinson, 1994). There are some similar software programs in the market but it do not do the evaluation process that way the other three software work (D.W. Pratt, personal communication, July 24, 1996). These three leading software programs work step-by-step to evaluate employees performance. Managers input the employees information into the system, mark the job description and/or categories to be used, choose the correct written evaluations, and print it. (Spinks, Wells Meche, 1999, p.94) 2.5.9 Mixed Standard Scales: These scales are made to make the evaluation system reliable through confirming each individual rates, each scales rate and each rater rates and to minimize halo and leniency errors (Blanz Ghiselli, 1972). The idea of mixed standard scale has come from the logic of forced choice method. Halo and leniency errors could reduce if ratings are not made on a scale where statements come in an obvious order of merit hierarchy. Practical findings provide support to these hypotheses (Saal Landy, 1977). This scale is choosing three items for each performance dimension which are good, average and poor. 2.5.10 Management By Objectives (MBO) More than half of the organizations regularly used performance appraisals in the beginning of 1950s, compared with only 15 per cent immediately after World War II (Spriegel, 1962). They had ordinary, numerical system which was trait rating system. This system focuses on past actions to appraise people on the basis of a previously established set of dimensions (DeVries et al., 1981). Lots of employees who were being apprised by the manager were not happy due to the way of performance measuring system. Trait rating system did not develop the employees performance rather than there was clear indication for being sacked for low performers (Van Riper, 1958). It is mentionable that this rating system gave chance to managers to play the role of judge instead of employee development for achieving both the employees and the organizations goals (McGregor, 1957). Out come of the performance appraisal system was conflicting with present roles of managers and the achievement of organizational goa l thats why new thought was introduced after World War II to update performance appraisal systems (DeVries et al., 1981). Due to the limitations of performance appraisal systems in the 1950s which led to the development of new systems based on management by objectives (MBO) In theory, at least, Management by Objectives provided a clear and unambiguous framework for specifying and measuring employee performance. Labovitz and Baird have given some ideas about MBO that is: â€Å"MBO approach to managing people is a process of continually structuring expectations through mutual goal setting with subordinates, establishing action plans and target dates, reaching objectives and providing feedback. This is a way of managing subordinates that permits them to meet their personal needs for responsibility, freedom of action and recognition. At the same time the MBO approach provides a supervisor with an element of control, and change his or her role from police officer to colleague or coach.† (Baird, Beatty Schneier, 1982, pp.51-52). MBO is introduced in the management for improving performance, reducing role vagueness and redirecting effort to important organizational target. MBO system could be fit and work with any types of organization for planning process, a control technique and a form of individual performance appraisal. (Baird, Beatty Schneier, 1982, p.57). MBO has many positive sides but it has some limitations that we need to consider. The main issue that a company should consider first to implement MBO is the high level of management commitment and time frame to reorient the thinking of employees (Patten, 1977). Communication is the key to get a good out come and to prevent the complexity of the system from primary excitement that will lead into confusion and disillusionment, bring the result to an end with disinterest and failure. The purpose for the new system needs to be clearly recognized also, because while MBO is a useful tool for performance planning and feedback, it is not easily used for administrative decisions (DeVries et al., 1981). A high standard of job assessment and implication skills are needed to determine which performance dimensions to measure and the goal achievement standards to use. Primarily, the goals and objectives which are set likely to be easily quantified, easily achieved and not necessarily central to the job (Murphy Cleveland, 1995). Levinson (1970) found out an inclination for objective-setting measures such as sales dollars or number of units produced result in a lack of attention for less calculative aspects of job performance such as customer service and quality work. As a result this method will be ineffective if objectives are activity focused instead of output centered. There is also an inclination for managers to overlook the factors which are out of employees control, but which frequently affect goal fulfillment, leaving the employee responsible for goal completion inspite of external influences (Goodale, 1977). Managerial jobs are frequently measured in terms of unit, rather than i ndividual, an objective, which requires that individuals be held accountable for outcomes requiring interdependent employee efforts (Levinson, 1970; Schneier Beatty, 1978). These are some common errors associated with MBO (Kleber, 1972), but they help to illustrate the complexity of this performance appraisal method. Longenecker (1989) points to the common assumption that appraisals are often ‘political in nature, that their mechanisms for justifying decisions which have already been taken and disregard individual merit. This is particularly the case when performance related pay (PRP) is involved. As a student of International Human Resource Management, researcher wants to discuss about international perspective of performance appraisal system. Hofstede (1980) found that national culture is a factor to vary on value dimension between managers and employees. One of the value dimensions is individualism against collectivism. Individualism is such a thing where people show their action according to their individual preferences whereas collectivism is such a thing where people behaving as a member of a group. We can see the individualistic culture in western part and collective culture in eastern part of the world. (Taormina Gao, 2009, p.103) The inception of Human Resource Management (HRM) made the Human Capital as the most important strategic resource of an organization and thereby linked it with strategic vision, mission, values, and other processes of organization. Performance Management (PM) thus replaced traditional PA under HRM philosophy. Here, both the organization and employees are of equal concern. Performance management is seen by Armstrong and Baron (1998, p.37) as: â€Å"a means of aligning organizational and individual objectives to achieve organizational effectiveness.† Mohrman and Mohrman define PM as: â€Å"The practices through which work is defined and reviewed; through which capabilities are developed and through which rewards are distributed in an organization. Performance management may involve goal setting, employee selection and placement, compensation, performance appraisal, training and development and career management† (Mohrman and Mohrman, 1995, p.2). From above two definitions we can draw following generic features of PM: It integrates between individual and organizational goals and thereby creates a sense of belongingness in the employees; It views performance as a function of organizational environment i.e. culture, climate, flow of resource, critical external environmental factors, etc; It contributes towards a climate of open discussion between management and workers about all organizational aspects. It enables employees to identify their weaknesses as well as strengths and motivates them for superior performance. 2.6 Motivation and Performance Management: Motivation has multiplier effect on performance. A sound and legitimate appraisal system is a precondition of having a highly motivated workforce. Conversely, a flawed system might demotivate and demoralize the employees in a way that appraisal becomes a ritual and sometimes counterproductive. Milkovich Wigdor (1991, p.34) identify two essential functions of PM linking to motivation: a) it provides the basis for individuals to form beliefs about causal connections between their performance and pay; b) it indicates degree of association between individuals effort and performance. 2.7 Selection of