flowchart LR P[Plan<br/>Set goals] --> A[Act<br/>Monitor & coach] A --> R[Review<br/>Rate performance] R --> Rw[Reward<br/>Pay, bonus, recognition] Rw --> D[Develop<br/>Training & coaching] D -. Feedback .-> P style P fill:#E3F2FD,stroke:#1565C0 style A fill:#FFF3E0,stroke:#E65100 style R fill:#E8F5E9,stroke:#2E7D32 style Rw fill:#F3E5F5,stroke:#6A1B9A style D fill:#FCE4EC,stroke:#AD1457
8 Performance Management and Job Evaluation
This chapter pairs two HR practices that are often confused. Performance management asks how the person is performing. Job evaluation asks how the job itself is valued. The first feeds rewards, training and career decisions; the second feeds the wage and salary structure.
8.1 Performance Management
8.1.1 Performance Appraisal vs Performance Management
The older term — performance appraisal — describes a periodic event in which a supervisor rates a subordinate. The newer term — performance management — describes the continuous process within which appraisal sits. Modern textbooks treat appraisal as one component of performance management (armstrong2020?; dessler2020?).
TipPerformance Appraisal vs Performance Management
| Dimension | Performance Appraisal | Performance Management |
|---|---|---|
| Frequency | Annual or semi-annual event | Continuous cycle |
| Owner | HR department | Line manager + employee |
| Approach | Backward-looking — what did you do? | Forward-looking — what will we deliver, and how? |
| Focus | Individual rating | Individual goals aligned with team and firm goals |
| Output | Rating, increment, ranking | Improved performance, capability, engagement |
| Style | Top-down | Two-way dialogue |
8.1.2 The Performance Management Cycle
A working performance management system runs the same five-stage cycle every year, and ideally every quarter.
TipFive Stages of the Performance Management Cycle
| # | Stage | What it produces |
|---|---|---|
| 1 | Planning | Goals (individual and team), behaviours, development plan for the period |
| 2 | Acting / monitoring | Day-to-day execution; supervisor observes, supports, removes obstacles |
| 3 | Reviewing / appraising | Mid-year and year-end formal reviews; rating against goals |
| 4 | Rewarding | Pay, bonus, recognition, promotion linked to the review |
| 5 | Developing | Training, coaching, stretch assignments to close gaps |
8.1.3 Objectives of Performance Appraisal
A typical appraisal serves administrative purposes (decisions on pay, promotion, transfer, training, separation) and developmental purposes (feedback, coaching, career planning). The two purposes can pull in opposite directions — feedback is candid only when nothing important is at stake; ratings are inflated when consequences are severe — and good systems separate the two conversations or sequence them carefully.
8.2 Methods of Performance Appraisal
Methods divide into traditional (older, simpler) and modern (more elaborate, often more reliable). The literature lists more than twenty; the eleven below cover almost every textbook scheme.
8.2.1 Traditional Methods
TipTraditional Methods of Performance Appraisal
| Method | What it does | Strength | Limit |
|---|---|---|---|
| Ranking | Orders all employees from best to worst | Simple, cheap | Hard with large groups; gives no absolute information |
| Paired comparison | Each employee compared with every other; count of “wins” decides rank | More reliable than ranking | Rises rapidly with group size — n(n−1)/2 pairs |
| Forced distribution | Employees forced into a normal-curve distribution (e.g. 10–80–10) | Curbs inflation | Demotivates the bottom slice; assumes a normal curve |
| Graphic rating scale | A list of traits, each rated on a scale | Easy to use | Subjective; halo effect; vague trait labels |
| Checklist | Yes / no statements about behaviour | Simple | Hard to construct; weighted versions are complex |
| Forced choice | Rater picks the more descriptive of pairs of statements | Reduces bias | Rater dislikes the loss of control |
| Critical incident | Documenting especially good or poor incidents during the period | Behavioural, concrete | Time-consuming; depends on rater diligence |
| Confidential report | Free-form narrative, often used in government services | Flexible | Subjective; little employee voice |
| Essay | Open written description of the employee’s performance | Captures nuance | Hard to compare across employees |
| Field review | HR specialist interviews supervisor about each subordinate | Reduces individual rater bias | Expensive in time |
8.2.2 Modern Methods
TipModern Methods of Performance Appraisal
| Method | What it does |
|---|---|
| Management by Objectives (MBO) | Manager and subordinate jointly set measurable goals; performance assessed against them. Drucker (1954) (drucker1954?) |
| Behaviourally Anchored Rating Scales (BARS) | Trait scales anchored to specific behavioural examples; reduces vagueness. Smith & Kendall (1963) (smith1963?) |
| Behaviour Observation Scale (BOS) | Rater records the frequency with which behaviours occur |
| 360-degree feedback | Inputs from supervisor, peers, subordinates, customers and self |
| 720-degree feedback | 360° plus a follow-up round after development to track change |
| Assessment / development centre | Multi-day battery of exercises evaluated by trained assessors |
| Balanced Scorecard | Performance measured on four perspectives — financial, customer, internal process, learning and growth (Kaplan & Norton, 1996) (kaplan1996?) |
| OKRs (Objectives and Key Results) | Ambitious objectives broken into measurable key results; quarterly cadence |
| Continuous performance management | Frequent check-ins replacing the annual review (Adobe, GE, Microsoft) |
8.2.3 Management by Objectives (MBO)
Peter Drucker proposed MBO in 1954 as the way to align individual performance with organisational goals. The MBO cycle has five steps — set organisational goals, set departmental goals, set individual goals jointly, monitor periodically, evaluate against goals and start the next cycle. Its strength is alignment and clarity; its weaknesses are an obsession with measurable goals (the immeasurable ones go ignored) and the time it consumes.
8.2.4 Behaviourally Anchored Rating Scales (BARS)
BARS replaces vague trait labels (“initiative — 1 to 5”) with specific behavioural anchors developed from critical incidents — for example, “would normally be expected to volunteer for a difficult project even when others have refused” sits at the top end of an “initiative” scale. The construction is laborious — anchors must be agreed by a panel — but the resulting reliability is markedly higher than ordinary rating scales.
8.2.5 360-Degree Feedback
A 360-degree appraisal collects ratings from the full circle around an employee — boss, peers, subordinates, customers and self.
TipThe 360-Degree View
| Source | What it sees uniquely |
|---|---|
| Self | Effort, intent, internal trade-offs |
| Manager | Outcomes against goals; strategic alignment |
| Peers | Collaboration, lateral influence, reliability |
| Subordinates | Leadership, fairness, communication |
| Customers / clients | Service delivery, responsiveness, expertise |
The technique is best used developmentally (feedback to the individual) and only with caution as an input to pay or promotion — when stakes are high, raters tend to inflate or settle scores.
8.3 Errors in Appraisal
Even well-designed systems suffer from rater errors. Recognising the error is half the cure.
TipCommon Rater Errors
| Error | What it is |
|---|---|
| Halo effect | One favourable trait colours every other rating |
| Horns effect | One unfavourable trait colours every other rating |
| Central tendency | All ratings cluster around the middle of the scale |
| Leniency | All ratings inflated towards the top |
| Strictness | All ratings deflated towards the bottom |
| Recency | Recent events given disproportionate weight |
| Primacy | First impressions dominate |
| Similar-to-me bias | Higher ratings for those resembling the rater |
| Stereotyping | Group attributes applied to individuals |
| Contrast effect | Rating influenced by comparison with the previously rated person |
| Personal prejudice | Rater dislikes the ratee for non-job reasons |
The well-rated organisation invests in rater training, calibration meetings across managers and behavioural anchors in its instruments.
8.4 Job Evaluation
8.4.1 What is Job Evaluation?
Job evaluation is the systematic process of determining the relative worth of jobs in an organisation — the input to a fair and rational pay structure (aswathappa2019?). The International Labour Organisation defines it as “an attempt to determine and compare the demands which the normal performance of a particular job makes on normal workers, without taking into account the individual abilities or performance of the workers concerned” — that last phrase is the hinge between job evaluation and performance appraisal.
TipJob Evaluation vs Performance Appraisal
| Dimension | Job Evaluation | Performance Appraisal |
|---|---|---|
| Object of analysis | The job | The job-holder |
| Aim | Set the relative worth of jobs | Assess the contribution of an individual |
| Output | Wage / salary structure, pay grades | Increments, bonuses, promotions, training plans |
| Frequency | Periodic — when jobs change materially | Annual or continuous |
| Standard | What an “average” worker doing the job demands | What this specific worker delivered |
8.4.2 Objectives of Job Evaluation
- Establish a defensible internal wage hierarchy.
- Reduce pay grievances and inequity.
- Provide a rational basis for pay negotiations and bargaining.
- Support external benchmarking against the market.
- Comply with equal pay for equal work principles.
8.4.3 Methods of Job Evaluation
Methods divide into non-analytical (which compare whole jobs to one another) and analytical (which break each job into factors and compare factor by factor).
TipFour Classical Methods of Job Evaluation
| Type | Method | What it does |
|---|---|---|
| Non-analytical | Ranking | Orders whole jobs from highest to lowest |
| Non-analytical | Job classification (grading) | Slots jobs into a predefined set of grades with grade descriptions |
| Analytical | Point-rating method | Defines compensable factors, assigns points to degrees, sums points per job |
| Analytical | Factor comparison | Ranks jobs on each compensable factor and aggregates the ranks into a money score |
8.4.4 The Point-Rating Method (Most Widely Used)
The point method, developed by Merrill R. Lott in 1925, is the analytical workhorse. Its eight steps are:
TipSteps in the Point-Rating Method
| # | Step | Output |
|---|---|---|
| 1 | Select compensable factors | Typically: skill, effort, responsibility, working conditions |
| 2 | Define each factor | Working definitions agreed across raters |
| 3 | Define degrees within each factor | E.g. five degrees of skill, from low to high |
| 4 | Assign weights to factors | Skill 50%, responsibility 30%, effort 10%, working conditions 10% |
| 5 | Allocate points to degrees | Each degree of each factor receives a point value |
| 6 | Prepare the manual | A document codifying steps 1–5 |
| 7 | Apply the manual to each job | Sum points across factors for every job |
| 8 | Convert points to pay | A point-to-rupee conversion sets the wage line |
8.4.5 The Hay Plan
The Hay Plan, developed by Edward Hay in 1951, is the most widely used proprietary point-method system globally. It evaluates managerial and professional jobs on three universal factors — Know-How, Problem-Solving and Accountability — with a fourth modifier for working conditions where relevant. The Hay Plan’s strength is its global comparability across firms and countries; the Hay Group sells the consultancy that runs the system.
8.4.6 Process of Job Evaluation
TipSteps in a Job Evaluation Programme
| # | Step | What it produces |
|---|---|---|
| 1 | Win commitment from top management and unions | Mandate to proceed |
| 2 | Define the scope — which jobs and which units | Boundaries of the exercise |
| 3 | Conduct job analysis | Job descriptions and specifications |
| 4 | Choose the method | Ranking, classification, point or factor comparison |
| 5 | Select benchmark jobs | Stable, well-understood jobs as anchors |
| 6 | Evaluate the benchmark jobs and then all others | Job grades or point scores |
| 7 | Develop the wage structure | Pay ranges by grade |
| 8 | Communicate, install, review | Acceptance and updating |
8.4.7 Limitations of Job Evaluation
- Subjective at base — even analytical methods rest on judgements about factors, weights and degrees.
- Static — jobs evolve faster than evaluations; periodic re-evaluation is essential.
- May undervalue intangibles such as innovation, mentoring, customer empathy.
- Resistance from those whose jobs are downgraded.
- Cost — full point-method exercises are expensive in consultant time.
- External pressure — market rates may pull strongly against the internal evaluation; the wage structure has to balance both.
8.5 Practice Questions
Eight questions to test the chapter. Each card hides the answer — click Show answer to reveal it.
Q1
Which of the following best distinguishes
Which of the following best distinguishes performance management from performance appraisal?
APerformance management is conducted only by the HR department
BPerformance management is a continuous process; performance appraisal is a periodic event within it
CPerformance management uses only modern methods, never traditional ones
DPerformance management is backward-looking; performance appraisal is forward-looking
Show answer
Correct answer
B. Performance management is the broader, continuous cycle; appraisal is the periodic rating event inside it.
Q2
Match the appraisal method with its
Match the appraisal method with its key feature:
| Method | Feature | ||
|---|---|---|---|
| (i) | MBO | (a) | Anchored to specific behavioural examples |
| (ii) | BARS | (b) | Joint goal-setting between manager and subordinate |
| (iii) | 360-degree | (c) | Inputs from supervisor, peers, subordinates and self |
| (iv) | Forced distribution | (d) | Employees fitted to a normal-curve distribution |
A(i)-(b), (ii)-(a), (iii)-(c), (iv)-(d)
B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
C(i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)
D(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
Show answer
Correct answer
A. (i)-(b), (ii)-(a), (iii)-(c), (iv)-(d)
Q3
A rater gives every subordinate a
A rater gives every subordinate a "3" on a 5-point scale to avoid difficult conversations. The error is:
AHalo effect
BLeniency
CCentral tendency
DRecency
Show answer
Correct answer
C. Central tendency clusters all ratings around the middle.
Q4
The Hay Plan evaluates jobs primarily
The Hay Plan evaluates jobs primarily on three factors. They are:
AEffort, Skill, Working Conditions
BKnow-How, Problem-Solving, Accountability
CEducation, Experience, Initiative
DResponsibility, Authority, Output
Show answer
Correct answer
B. The three universal factors of the Hay Plan, with a fourth modifier for working conditions where relevant.
Q5
Which method of job evaluation breaks
Which method of job evaluation breaks each job into compensable factors and assigns points to degrees of each factor?
ARanking
BClassification (grading)
CPoint method
DFactor comparison
Show answer
Correct answer
C. The point method.
Q6
"Determining the relative worth of jobs
"Determining the relative worth of jobs without taking into account the abilities of the individual job-holder" is the standard ILO definition of:
APerformance appraisal
BJob evaluation
CWage administration
DManpower planning
Show answer
Correct answer
B. Job evaluation evaluates the job, not the job-holder.
Q7
A behaviourally anchored rating scale (BARS)
A behaviourally anchored rating scale (BARS) typically combines:
AForced choice and graphic rating
BCritical incident and graphic rating
CRanking and paired comparison
DEssay and confidential report
Show answer
Correct answer
B. Critical incidents supply the behavioural anchors that turn a graphic rating scale into a BARS.
Q8
Arrange the typical steps of the
Arrange the typical steps of the performance management cycle in order:
(i) Reward
(ii) Plan
(iii) Review
(iv) Act / monitor
(v) Develop
A(ii), (iv), (iii), (i), (v)
B(ii), (iii), (iv), (i), (v)
C(iii), (ii), (iv), (v), (i)
D(i), (ii), (iii), (iv), (v)
Show answer
Correct answer
A. Plan → Act → Review → Reward → Develop.
ImportantQuick recall
- Performance management is continuous; performance appraisal is the periodic event within it.
- Five-stage cycle: Plan → Act → Review → Reward → Develop.
- Traditional methods: ranking, paired comparison, forced distribution, graphic rating, checklist, forced choice, critical incident, confidential report, essay, field review.
- Modern methods: MBO (Drucker), BARS (Smith & Kendall), BOS, 360°, 720°, assessment centre, Balanced Scorecard (Kaplan & Norton), OKRs, continuous PM.
- Common rater errors: halo, horns, central tendency, leniency, strictness, recency, primacy, similar-to-me, stereotyping, contrast, prejudice.
- Job evaluation evaluates the job; performance appraisal evaluates the job-holder.
- Four classical methods of job evaluation: ranking, classification, point method, factor comparison. Non-analytical: ranking and classification; analytical: point method and factor comparison.
- Point-method workhorse factors: skill, effort, responsibility, working conditions.
- Hay Plan factors: Know-How, Problem-Solving, Accountability (+ working conditions).
- Process: commitment → scope → job analysis → choose method → benchmark jobs → evaluate → wage structure → communicate / review.