Performance Appraisal: Importance, Meaning, Objectives, Need, Criteria

What is Performance Appraisal
What is Performance Appraisal?

What is Performance Appraisal?

Performance appraisal includes all formal procedures used to evaluate the personalities and contributions and potentials of group members in a working organisation. It is a continuous process to secure information necessary for making correct and objective decisions on employees.

Meaning of performance appraisal

Performance appraisal is one of the most important tasks performed by a manager. It is an integral part of the system of management. It forms the basis for several important decisions concerning employees. These decisions may concern determining employee training requirements, salary increments, promotion, etc.

However, making an assessment of employees’ performance is a complex and delicate taste. It is not always easy to judge a subordinate’s performance accurately. Further, it is even more difficult to convey that judgement to the subordinate in a constructive and painless manner.

To ensure rational appraisal of employee performance, a formal system of performance appraisal has been developed by modern-day organizations. Performance appraisal implies systen1atic or formal evaluation of the individual with respect to his performance on the job and his potential for development.

It is the rational and continuous process of evaluating the performance of employees on a particular job in terms of the job requirements. Dale Yoder defines as, performance appraisal consists of “all formal procedures used in working organization to evaluate personalities and contributions and potentials of group members”.

Importance of Performance Appraisal

Performance appraisal is important in organizations because of the numerous purposes for which it is employed and its impact on individuals as well as the organization. The following are importance of performance appraisal:

  1. Training
  2. Pay Increase
  3. Feedback
  4. Promotion
  5. Pressure on Employees
  6. Desire for Improvement
  7. Impact on the Individual
  8. Impact on the Organization
Importance of Performance Appraisal
Importance of Performance Appraisal


Performance appraisal tries to identify the strengths and weaknesses of an employee in his present job. This information can be used for devising training and development programmes appropriate for overcoming the weaknesses of the employees. In fact, many organizations use performance appraisal as means of identifying the training needs of their employees.

Pay Increase

Performance appraisal plays a significant role in making decisions about pay increases. The salary increase of an employee depends on how he is performing his job. There is continuous evaluation of his performance either formally or informally. In a small organization, since there is a direct contract between the employee and the one who makes decisions about salary increases, performance appraisal can be an informal process.

In a large organization, where such a contract hardly exists, a formal performance appraisal has to be undertaken. This may disclose how well an employee is performing and how much he should be compensated by way of a pay increase.


The person who gets feedback about his performance and may try to overcome his deficiencies will lead to better performance. Performance appraisal provides feedback to employees about their performance. It tells them where they stand. A person works better when he knows how he is working; how his efforts are contributing to the achievements of organizational objectives.


Most organizations often use a combination of merit and seniority for promotion. Performance appraisal discloses how an employee is working in his present job and what are his strong and weak points. In the light of these, it can be decided whether he can be promoted to the next higher position and what additional training will be necessary for him. Performance appraisal can be used for transfer demotion and discharge of an employee.

Pressure on Employees

Performance appraisal puts psychological pressure on people to improve job performance. If the employees are conscious that they are being appraised in respect of certain factors and their future largely depends on such appraisal, they tend to have positive and acceptable behaviour in this respect.

Desire for Improvement

Performance appraisal promotes a desire for improvement among employees. The confidence and morale of employees are increased when they are convinced that management evaluates them impartially and rewards individual performance. By creating a desire to be related high, performance appraisal stimulates a higher level of performance on the part of employees.

Impact on the Individual

Because of the importance of performance appraisals to employees, the appraisal methods used and the manners in which results are communicated can have positive or negative effects on employees’ morale. When appraisals are used for discipline, pay increases, promotions, discharges, or layoffs, they are likely to be regarded with apprehension by those employees who tend to underestimate themselves, by the less productive members of the organization, or by those who feel appraisals will be arbitrary or unjust.

Similar feelings result when employees don’t know or understand the criteria being used to assess them, or when they see the appraisal as overly critical rather than helpful. More employees understand the appraisal process, and the more appraisals are used as developmental opportunities rather than occasions for criticism, the more they need for self-actualization will be satisfied.

Impact on the Organization

The performance appraisal system has major effects on the organization. In addition to such matters as making compensation and promotion decisions and in providing feedback on performance, the results of the appraisal process can supply useful data about the success of other personnel activities such as recruiting, selection orientation, and training.

If the appraisal process reveals that a significant number of employees are deficient in some area of skill or knowledge modifications can be made in these other personnel areas. In large organizations, the results of appraisals are often used as criteria to study the validity of selection procedures. Performance appraisal facilitates various decisions concerning manpower planning and development.

Objectives of Performance Appraisal

The following are the objectives of Performance Appraisal:

  1. Performance Appraisal helps in identifying the gaps between the actual performance of the employee and the performance expected or desired by the organisation.

  2. It facilitates the process of identifying the employees who deserve promotions, transfers or even terminations in an objective manner.

  3. It also helps in identifying the specific skills which are required to be developed for each employee and helps in developing training and development programs.

  4. Performance Appraisal also helps in determining compensation packages like wage fixation, reward allocation and incentives for employees on a scientific basis.

  5. The performance appraisal also helps an organisation in improving the effectiveness of its employees by helping them identify their strengths and eliminate their weaknesses.

  6. It helps build cordial industrial relationships by encouraging good contacts between management and labourers.

  7. It also helps in identifying and recognising grievances of employees at the earliest and removes factors responsible for such grievances.

Need of Performance Appraisal

An organisation undertakes performance appraisal for many reasons. According to the area where the performance appraisal results would be used, a particular performance appraisal technique would be adopted. The following are some of the areas where the results of performance appraisal are used. These are the need of performance appraisal:

  1. Human Resource Planning
  2. Recruitment and Selection
  3. Employee Training and Development
  4. Compensation Decisions
  5. Career Planning and Development
  6. Grievance and Discipline Issues
  7. Feedback
Need of Performance Appraisal
Need of Performance Appraisal

Human Resource Planning

Human Resource Planning involves forecasting and developing manpower requirements of the organisation to meet the strategic goals of the organisation. Performance appraisal helps the organisation to assess the available manpower in an effective manner and plan human resource programs and anticipate future labour requirements. It also helps in preparing a profile of strengths and weaknesses for supporting strategic missions and goals.

Recruitment and Selection

The performance appraisal techniques help in predicting the likely performance of candidates when they are transferred or promoted from their current positions. The scores which are generated from various tools which are generated from various selection tools are used at the time of selection and are then compared with the scores generated from performance appraisal to determine the validity of selection tools. The tools used for performance appraisal are good at predicting the performance of the candidates.

Employee Training and Development

With the help of performance evaluation, the training that has to be given to a particular employee can be identified. This is so because; the performance evaluation tools help in identifying the shortcomings in the performance of employees and what skills they are lacking.

It also helps in determining if additional training and development programs have to be developed. It helps the organisation in identifying the strengths of the employees and how their weaknesses can be reduced.

Compensation Decisions

Performance appraisal techniques provide reliable information for determining the pay scale of the employees. It helps the organisation to reward behaviour which contributes towards the accomplishment of organisational goals. It helps in identifying employees who are most efficient and rewards them in an appropriate manner.

Career Planning and Development

Performance appraisal helps in determining the career plans of employees. It helps in identifying the most qualified employees and enables promotions for such employees to higher levels. An organisation may decide about transfers, layoffs and such activities on the basis of results of performance appraisal.

It also helps the organisation to develop and implement career plans on the basis of the results of performance appraisal.

Grievance and Discipline Issues

Information from performance appraisal is used for decisions which are related to promotion, demotion, termination, layoffs and transfers. The results of the performance appraisal are used to initiate such actions against the employees who are considered incompetent and have fared poorly in the performance appraisal.

The data obtained through the exercise of performance appraisal can also be used as an official document against the grievance which is formally filed in connection with disciplinary action filed by the employees against whom the actions have been initiated.


Employees are generally interested to know the results of the performance appraisal to understand how their present performance is and how much has their performance improved when compared to the past. The feedback in form of performance appraisal results helps them to have a clear idea regarding their standing in the organisation as related to performance rewards such as promotions.

The feedback which is received on time helps the employees in improving their job satisfaction and motivates them to perform in a better manner. Due to this, the cooperation and productivity of the employees improve.

Criteria for Performance Appraisal

Deciding the criteria for undertaking performance appraisal is often a very difficult task as what aspects of an employee’s performance are to be considered is to be decided. The following are the criteria which are considered by the organisation on the basis of which performance appraisal is undertaken:

  1. Individual Traits
  2. Behavioural Characteristics
  3. Goal Accomplishment
  4. Scope for improvement
  5. Competencies
Criteria for Performance Appraisal
Criteria for Performance Appraisal

Individual Traits

Employee attributes such as attitude, outlook and initiative can form the basis of performance appraisal. But these all are subjective terms and they should be considered and evaluated in a proper manner. If this is not done, then there would be inaccuracy in the performance appraisals which would be undertaken.

Behavioural Characteristics

The behaviour of a person is an aggregate of responses, reactions or movements made by a person in any situation. It is generally very difficult to evaluate the performance of a person, but generally, such evaluation is done on the basis of certain standard task-related behaviour or competencies.

Such evaluation is undertaken for leadership styles, teamwork, commitment or customer care. Behaviour which contributes to the overall growth of the organisation is identified and rewarded.

Goal Accomplishment

Successful accomplishment of goals is considered for evaluating the performance of employees. The outcomes of those goals that contribute to the success of the organisation can be ideal appraisal criteria. The goals may be profit, cash flow or marketing goals like desired sales, achieving target market share or standing in the market or total quality management. But it is very essential that employees should be included while fixing goals for evaluation.

Scope for improvement

Performance appraisal criteria may focus on assessing the future potential of the employees. Proper evaluation of the potential of the employees helps in designing a career path for them in a systematic manner.


The competency of an employee is the quality of being well qualified physically and intellectually. Competency is an attempt to evaluate the job-related skills, knowledge, qualities, ethical values, flexibility and sense of judgment that contribute to job success.

The competencies of employees can be evaluated on the basis of the contribution of the employee towards the organisation’s goals, their knowledge of business, how they demonstrate credibility, how efficiently and effectively services are provided to the customers and the use of technology for delivering value to customers.

It should be noted that there are no universally accepted job-related criteria which are used for performance appraisal. The criteria used generally differ and depend on the nature of the job, purpose and situation. The criteria to be used should be carefully selected otherwise the purpose of performance appraisal cannot be achieved.

FAQ Section

What is performance appraisal for example?

We can say that performance appraisal is expected to result in an assessment of the development potential of the employees, training needs for the employees; capabilities of employees being placed in higher posts, behaviour and obedience of the employees; and the need of the organization to evolve a control mechanism.

What is the importance of performance appraisal?

These are the importance of performance appraisal:
1. Training
2. Pay Increase
3. Feedback
4. Promotion
5. Pressure on Employees
6. Desire for Improvement
7. Impact on the Individual
8. Impact on the Organization etc.

What are the objectives of performance appraisal?

Performance appraisal also has some objectives which differ from organization to organization:
1. Increment in Salary
2. Promotion
3. Training and Development
4. Feedback
5. Stress on Employees etc.

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