Intro To Acctg

The Performance Appraisal Process:

Three Key Aspects and Company Examples

Joey Deleon

University of Phoenix

MGT/431

Instructor Name

February 1, 2005

The Performance Appraisal Process:

Three Key Aspects and Company Examples

In most organizations, periodic performance appraisals are a formal method of evaluating employee work and determining merit increases. Noe, Hollenbeck, Gerhart and Wright (2003) suggest there are three key aspects of the performance appraisal process: (1) establishing mutual goals and objectives, (2) using a valid and objective measurement method, and (3) linking employee performance to compensation. This case study will define these three aspects of performance appraisals, discuss their importance, and illustrate their general impact upon the organization. Finally, specific company examples will be offered to demonstrate how these appraisal steps are practiced at Hewlett-Packard, New York Life Insurance, and IBM.

Establishing Mutual Goals and Objectives at Hewlett-Packard

According to Noe et al. (2003), many companies establish goals and objectives as a means of communicating desired employee performance targets. The authors suggest that company interests can only be achieved when those interests are aligned with the skills and energies of the individual employee. A process of negotiation and compromise must occur between management and the employee in order to define specific standards of performance that match both corporate goals and individual abilities and interests. Noe et al. go on to report that mutual goal setting is an essential first step in the performance appraisal process and is required to provide a foundation for assessing both past and future employee performance. To quote Drucker (2005), "A person's strengths and the way that person performs rarely conflict; the two are complementary" (p. 105).

An assessment by Business Week suggests that a major factor in Hewlett-Packard's success is the thoroughness and care management takes in working with the employee to establish mutually acceptable performance goals ("Are Employee Performance Reviews," 2000). At Hewlett-Packard, the company appraisal policy focuses on three process steps in formally establishing performance standards: (1) clearly communicating company goals and objectives (corporate, divisional, and departmental), (2) documenting the employee's personal interests, strengths, limitations, and long-term career plans, and (3) finding an acceptable compromise position that reflects both the corporate goals and the individual employee's needs.

Performance Measurement at New York Life Insurance

Noe et al. (2003) suggest that employees need to know three things regarding performance to goals: (1) what is expected, (2) how much is expected, and (3) when it is expected. In addition, the effectiveness and perceived credibility of any performance measurement system is directly linked to the importance the organization actually places on these employee evaluations. According to Andross (2002), management's commitment to the evaluation process is crucial -- along with the prompt processing of all performance reviews prior to their due date. Griffin (1999) states that "one of the most important tools required of an effective appraisal system is a valid and well-accepted yardstick to measure performance. Both the company and the individual must know very clearly when performance is on target or off. However, for many jobs, measuring performance is not easy" (para. 12).

According to Chang and Sanchez (2000), the New York Life Insurance Company took more than two years to develop an adequate performance measurement tool. The authors report that the majority of jobs at New York Life were customer service oriented. Until recently, the company lacked clear and objective performance measures. The standards previously in use were broad and ill-defined concepts like "displays a helpful attitude" or "provides good customer service." These criteria were too vague and were not objective or measurable, suggest Chang and Sanchez.

In addressing these issues, the revised method used at New York Life rates employee performance via an automated system (Chang & Sanchez, 2000). Since all policy transactions were processed through the company computer system, job performance could also be measured via the data employees entered into the system. The quantity, completeness, dollar value and transaction error rates made by each employee were tracked and reviewed monthly. This objective information, along with the supervisor's observations and subjective judgment, was used to significantly improve the performance appraisal process at New York Life.

Pay for Performance at IBM

According to Noe et al. (2003), in recent years many organizations have attempted some form of pay for performance compensation system. The authors suggest that, at their best, these systems can provide a direct linkage between pay and individual job performance, and they can offer certain motivational benefits as well. Antonioni (1994) reports that, in striving to meet these goals, employee effort, activity and risk taking should be recognized and encouraged, but the actual achievement of the desired results is what should be formally rewarded and financially compensated.

Noe et al. (2003) describe the details of an effective, customer-focused, pay-for-performance system. According to the authors, goals and objectives for each employee must be mutually established with the supervisor on either a monthly, quarterly or annual basis depending upon three factors: (1) the importance of the contribution that position offers to the external customer and the overall organization, (2) how directly the position interfaces with the external customer, and (3) the company's ability to record and track objective customer satisfaction information on a cost-effective basis. The online article "Performance Reviews" (n.d.) suggests that directly linking compensation to performance is essential with today's diverse workforce.

As an example, during the mid 1990's the IBM Corporation made a dramatic and successful turn around. One element of this successful reengineering effort was the company's innovative pay-for-performance program (IBM, 2002). According to the company handbook, a key factor in assessing