Updated June 12, 2023
What is Performance Management vs Appraisal
The terms “performance appraisal” and “performance management” are often used synonymously. But they are different. Performance management is a continuous, comprehensive, and flexible approach to managing teams, organizations, and individuals that involves the maximum possible dialogues between the sides. On the other hand, performance appraisal is a more limited approach that involves conducting top-down assessments to rate the performance of their juniors at annual appraisal meetings. It sets standards and evaluates past performance based on these standards, while performance management aims to manage real-time performance to ensure that the output reaches desired levels.
Performance Management vs Performance Appraisal Infographics
Performance management and performance appraisal are two employee evaluation methods. While the appraisal is the traditional method, the increased economic competition has forced several organizations to change from reactive to proactive to boost productivity and increase organizational performance.
Companies today are undergoing big-time transformation to cope with the changing needs in the business environment. They excel in their business by building adaptive capabilities to manage change proactively. Traditional appraisal systems failed to meet changing demands as they relied on subjective judgments by managers against predetermined standards for employee evaluation.
The key objective of a performance appraisal system is to exercise control over employee activities via disciplinary actions and management of promotions and rewards. Supervisors are tasked with rating employees based on performance parameters ranging from unsatisfactory to outstanding. But these ratings are often prone to errors like the halo effect, bias, central tendency, and others.
In the past, supervisors predominantly conducted annual performance appraisals to assess employees’ levels of accomplishment. The system was implemented top-down, with supervisors evaluating employee performance without actively involving them. These appraisals were frequently criticized for their heavy focus on employees’ flaws and deficiencies in the past year or for identifying development needs for the future. Additionally, the traditional approach to performance appraisals was bureaucratic, leading to issues such as corruption and unnecessary delays. The appraisals were usually narrowly focused and functioned standalone, sans any effect on the overall vision or goal of the organization.
The side effects of performance appraisal systems generated much skepticism among managers and employees whenever the human resource (HR) manager started it.
Under the present circumstances, organizations have shifted their focus to performance management from performance appraisal due to the globalization of business and internationalizing of HR activities. The functions of the HR manager have become far more complicated today because of the re-centering of the focus on talent management by implementing development programs that enhance employee competencies.
In performance management, the emphasis is on monitoring behaviors and achieving concrete results based on previously established SMART objectives. Techniques like Management by Objectives (MBO) rely on facts and figures. The superior takes on the role of a facilitator or coach throughout the process. Objectives are mutually agreed upon at the start of the performance season, serving as the standard for evaluation. Employees provide feedback on their contributions by completing an appraisal form.
Performance management encompasses a broader scope than performance appraisal, involving various activities beyond the traditional appraisal approach. It is a strategic system and an integrated approach to building successful organizations by fostering high-performance teams and improving individual performance. The process begins when the company defines a job, and performance management emphasizes proactive planning rather than retrospective evaluation. Unlike appraisals, performance management prioritizes ongoing dialogue over ratings and appraisal documents, making it continuous.
The primary distinction between performance management and performance appraisal is in the scope of execution. Both involve setting performance targets, reviewing their attainment, and creating strategies to enable employees to meet them. Additionally, both systems establish clear employee expectations, provide guidelines for successful job performance, and identify barriers to effective performance.
Performance management proactively manages staff performance in real-time, without the need for future reviews or corrective action. It’s a line activity that remains ingrained in an employee’s daily work.
In several organizations, performance appraisal often becomes a part of the overall performance management system. It occurs periodically and forms the basis for taking corrective action and assigning further targets.
In performance management, the supervisor or manager is a mentor or coach, while the supervisor acts as the judge in the appraisal.
Some performance appraisal systems, like MBOs, allow the employee and supervisor to set joint targets. It involves frequent reviews and hence often appears similar to performance management. But such methods often fall short in monitoring targets and real-time administration offered by performance management.
Performance appraisal systems are more structured and formal. Although most of them allow customization of the key performance areas or what comprises performance based on the employee, the system remains rigid with certain laid down rating parameters and procedures that are equally binding on all employees.
Performance management, in comparison, is a more flexible and casual method to evaluate staff performance. Like appraisal, performance management establishes guidelines on what should constitute optimal performance. But because the application is real-time, it offers considerable relaxation or scope for change to such guidelines, depending upon the circumstances and the particular job situation.
Performance management can remain customized for each individual employee’s actual work. But performance appraisal is largely standardized, depending upon the employee’s designation, or at best, the job description, rather than the individual’s actual work exigencies.
Merits and demerits
Comparing performance management with appraisal lead to enhanced organizational productivity. But the former offers real-time changes for boosting output. Real-time monitoring and taking corrective action in performance management help improve employee output compared to the conventional appraisal system.
Performance management enables linking performance to both short-term and long-term organizational goals. For instance, if the company has a short-term target for increasing profit margins by 10% in a particular quarter, such a link will come only in the following year’s appraisal. It may not come at all.
In most cases, employees receive bonuses and favorable reviews, even if the organization fails to reach its short-term goals.
- Performance management, which focuses on the real result and on-job performance, fosters teamwork. Most performance appraisal systems target individual achievement and focus on results instead of the methods, encouraging the staff to put individual goals over team goals.
- Performance management helps to implement initiatives like total quality management successfully.
- Performance management eliminates the rater bias, a major drawback of a performance appraisal system. In the latter, the employee’s future depends on performance and the supervisor’s goodwill.
- Performance management is concerned with the actual performance rather than records of past performance. Hence, it removes distortions from an evaluation that may have helped to perform the job better in special situations, impeding the performance.
- Performance management also eliminates the stress that crops up from upcoming appraisals.
- Performance management concentrates on the most relevant and immediate concerns. In contrast, the appraisal forces us to look into the past, which in many cases remains irrelevant and takes the time away from the more pressing concerns.
Common Outcomes of performance appraisal
Many recent researches suggest that employees and managers view annual performance appraisals as difficult. The CEO’s and the employee’s intent mostly differ. The typical outcomes are as follows.
- Emotionally charged: Appraisals involve high-stress levels for both employees and their managers. Both parties are aware that they will be evaluated based on the outcome of the appraisal, which often has a more negative than positive impact. The reason is the lack of predefined objectives or measures, and any evaluation criteria do not guide the employee review. The future of the employee is often at stake, which leads to high stress.
- Poor understanding of expectations: The manager and employee enter discussions with low confidence if the appraisal is poorly communicated. The discussion is dominated by employee content instead of what the manager needs in the next year. Besides, the manager and the staff find it difficult to recall what happened in the year.
- Bad timing: The annual appraisal is usually executed a few days before the employee’s anniversary of joining the company. Assuming even distribution of job start dates, only half the staff may align with company objectives. With most appraisals not automated, there’s poor reporting and low visibility of who did and didn’t do their job.
- Poor development opportunities: Most appraisals don’t have any competency assessment or an active development plan that the manager and the employee have agreed to. If employees cannot perceive any development prospects, they may become disillusioned and choose to leave the company.
Common outcomes of performance management
Organizational performance can increase dramatically when implemented correctly with the specific objectives tied to operational and strategic plans. Some of the other outcomes are as follows.
- Improved communication: The manager and employee communicate more frequently and agree on the changed objectives to suit current priorities and conditions. This is a collaborative and inclusive process that ensures employee input.
- Everyone knows rules: An effectively communicated and well-structured performance management system allows the manager and the employee to have better confidence levels because of the “rules” that lay down what is being assessed. Both sides can forge an informed discussion and focus on achieving business and personal objectives.
- Reduces stress: Performance management reviews take place more frequently, with the focus of the discussion centered on achieving performance objectives rather than being dominated solely by employer needs. Both the manager and employee can achieve better outcomes. A business-focused discussion to achieve objective outcomes typically displaces an emotionally charged discussion.
- Relevant appraisals: Frequent reviews lead to the modification and adjustment that suits the changing business conditions. It increases the probability of objectives retaining their relevance during the performance tenure. Also, non-performing areas get more attention and focus, and the problems can be quickly addressed.
- Employee learning and development: Most performance management systems require employees and managers to commit to a development plan. Employees undergo real personal development and get more engaged with the company. They get a sense of belonging to the organization. Most of the systems provide a graphical compliance report. Thus, the setting up of development plans and objectives for employees can’t be ignored.
Each organization has its own structure and culture. Furthermore, each industry is located in a unique environment with its own distinct characteristics. So there’s unlikely to be a perfect system that fits all. HR experts believe there will be concerns about performance appraisals or performance management systems because it’s based on a mutual agreement of added value between the management and the employee. The relation between the two is never constant. For instance, development versus rewards is a cause of concern.
In the words of management guru Kent D Miller, “Organizations must think in terms of total rewards and not just financial rewards if they are to enhance employee involvement, commitment, job satisfaction—and performance.”
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