Effects of Performance Appraisal System on Employees

Effects of Performance Appraisal System on Employees Chapter 1 Introduction: This chapter will discuss the critical importance and understanding of performance appraisal systems in the banking industry of Pakistan. Moreover, this chapter will highlight the need of the study, aims and objectives of the study and also introduction to the key terms that has significant importance throughout the research paper. 1.1. Understanding Performance Appraisal: In the past few decades, organizations were very concerned about the development and orientation of their employees and also pondering on performance management (Murphy Cleveland, 1991). Now, Organizations are following the new patterns of working and doing jobs to adhere the aims and mission of it. To fulfil this new modernized concept of fast and technological revolution, they are realizing the importance and implementation of new methods of performance management (Cardy Dobbins, 1994). Organizations have indentified the importance of performance appraisal and it has been found in the cases of all big multinational companies that they have implemented the performance appraisal systems to enhance the productivity of their employees. There are varieties of different perspectives that evident the importance of performance management and its measurement (Whitney, 1994). Organization should present true and fair views of performance appraisal to gain trust of the employees, their loyalty and job satisfaction are the main core of any organizational success (Robinson Rousseau, 1994). Through rational performance measurement, Organizations management can get the maximum reliance of employees. This research papers aims to explore the performance appraisal system within the banking sector of Pakistan and its comparative study with JS (Jahangir Siddqui) bank. This research study will also explore the effects of performance appraisal on the employees considering motivation, job satisfaction and employee loyalty as key factors in HR functions. 1.2. The Research Topic: To explore the role of performance appraisal system in HR function within the banking sector of Pakistan. 1.2.1. Aim: This research aims to investigate the role of performance appraisal system and its effect on employees considering motivation, job satisfaction and employee loyalty as the key factors in HR function within the banking sector of Pakistan and comparative study with JS Bank. 1.2.2. Objectives: What is performance appraisal? What are different performance appraisal systems? How appraisal system interlinked with motivation and employee loyalty within banking sector of Pakistan? What are different problems with performance appraisal system? What are different strategies in HR department to enhance productivity? 1.3. Rational of Study: The system that identifies the Performance evaluation and review is called Performance Appraisal system. Performance appraisal system highlights the individual and group performance over the period of time and reviews for the promotion and raise in monetary funds. To get the real meaning of performance appraisal system can be elaborated to the concept of performance management. Performance Management can be defined as: â€Å"An approach to create shared vision of the purpose and aims of the organization, helping each individual employee understand and recognise their in contribution to them, and in so doing manage and enhance the performance of both individuals and the organization.† (Fletcher, 1992) Performance management is a process where it describes the performance of individuals that shapes a group and become the collective success of the organization with the set of objectives, time period, reviewing the performance and recognition of the performance with rewards (Connock, 1991). The main objective of performance management is to show the real picture of the employees performance over a period of time and this can be achieved through framed standards (Beaumont, 1993). In the Performance management, the appraisal system is the most significant part where it defines a structural and formal system that helps the manager and subordinate to interact with each other to evaluate performance. This interaction usually comes into process annually of semi-annually in shape of some structured interview or questionnaire. In this process, supervisor examines the performance of subordinate where supervisor identifies strengths and weaknesses and also highlights the area of improvements (Connock, 1991). In different sectors of economy including banking sector, results of appraisal of employees are used for the future employee planning, their rewards management and promotion. These rewards are directly or indirectly linked with the recognition of employees milestones in the personal and professional skills. Thus this identifies the rise in pay, cash bonuses, promotions and job satisfaction majorly (Beaumont, 1993). 1.4. Importance of Performance Appraisal: The managers are aware of the importance and criticality of performance appraisal, and its ultimate affect on the motivation, loyalty, job satisfaction plus its has a big affect on the growth and success of the organization, so while documenting, communicating, and describing the job particulars, they are more concerned. It has been noticed that in the current time, job performance systems have improved a lot, but still the outcome shows that it has a negative impact on the job satisfaction and motivation of the employees if it is not appraised systematically (Robert, 2002). So, it results in counter of an organization that employees are demoralized and also lose their loyalty, which affects the organizational aims and objectives. Human resource officials use performance appraisal for decision making such as planning payments and salary scale of the employees, they also determine what professional developments are needed to equip their employees with a proper feedback. Performance ap praisal can also help the officers to decide what are the factors that can be employed to increase the productivity of employees (Natalie Ann 2005). As performance appraisal encourages the good performers, on the same hand performance appraisal also highlights the poor performers and tells about their weak areas and it helps the management to remove the leaning hurdles and makes them to achieve the set objectives and aims. This system also identifies the employee who needs guidance and counselling from management to improve their performance at work. Organization believes that performance appraisal is the best tool to see the level of employees and their performances and making the decision about their rise in salary, promotions, demotions and penalties (March, 1982). 1.4.1. Factors of Performance Appraisal: There are many factors influencing performance appraisals systems at work. Internal and external factors always play an important role in appraising the employees. Internal factors could be labour unions, managements attitude, the employees behaviour and their stance in the direction of work. External factors are legislations in relation to the employees. Labour union always get into the matters of employees well being at work and also in their personal lives so that they can give their full at work. But some time it has a negative impact on performance appraisal and the management to give promotion or rise in the salary on the bases of seniority (Isaac, 2001). Internal factors can also affect the performance appraisal in shape of bad corporate culture that can be a big hurdle in the performance management. The main objective is to set specific goals and make framework of getting those objectives. For all this, management should inform the employees that what is expected from their j obs and what should they do to make hundred percent out of it. At the end management sees and evaluates on the whole performance and also communicates these efforts to employees. This communication also develops relationship between employees and supervisors (Isaac, 2001). There are different techniques and methods used for the performance appraisal and it gives an outline to measure the performances that are in use of different organizational and it also varies from industry to industry. There is no hard and fast rule to use specific performance appraisal system, but it is always suggested to use the same performance criteria within one organizational and it applies to all of the employees. These models and techniques include, Six Sigma, Balance Scorecard, 360 degree feedback, etc. These models and techniques to measure the performance is widely in use of many MNCs and local organizations, in the banking industry of Pakistan and in JS bank. While designing performance appraisal, management should keep in view the nature and type of the business to conduct these performance management techniques. In the performance management, 360 Degree is common and Six sigma is the operational management technique; both leads to performance appraisal measurement whe re the HR function is able to appraise and it involves the motivational factors, employee loyalty, and job satisfaction aspects. Extensive and appropriate use of these techniques will make the appraisal much unbiased (Natalie Ann 2005). Employees motivation and job satisfaction can never push aside, as these are elementary aspects of any Job. In the process of appraisal system, an employee always expect some feedback from other employees which gives him motivation and the satisfaction from the job done, so these are the complementary part of any job. When any employee is appraised, then he always get the communication and feedback of that appraisal and it actually indicates the level of satisfaction of job the employee has plus the loyalty he has for the organization (Robert, 2002). In the banking industry, as the recession hits and many of the employees being fired, so at the time of performance appraisal, employees are so dissatisfied as they dont know when they are going to be p art of sacked list of employees, keeping in this view, the performance appraisal system plays role in the Hr department to indicate the key factors such as motivation, job satisfaction and loyalty (Caruth and John 2008). Chapter 2 Literature Review This chapter will look into the supporting literature of performance appraisal systems and its importance. As in the recent Times research, in the area of performance and its technical justice and fairness should be categorised as all the decisions and producers for employees in their working capacity and the management should highlight the importance of performance appraisal and its different tools. Furthermore, this part of research study will stick the significance of banking industry and usage of different performance appraisal systems and what are the linkage of motivation, job satisfaction and employee loyalty and strategic importance of performance appraisal systems. 2.1. Performance Appraisal: The process in which human resource management department obtains, analysis and makes decisions on the performance of an employee over a period of time is called Performance Appraisal Process and the methods which are used to appraise the employees are called Performance Appraisal Systems (Yee 2009). The main objective of performance appraisal system is to focus on the performance, key attributes of the job, what is the improvement in the performance and the proportion of the performance that the employee will make in future in the productivity of the organization. It aims towards the employee and its his performance over the period of time (Dobbins, 1994). In the field of human resource management a prominent name of Flippo (1999) says that Performance appraisal is the systematic, periodic and an impartial rating of an employees excellence in the matters pertaining to his present job and his potential for a better job. (Flippo, 1999) This systematic process allows the management to look into employees activities in last fiscal year or the performance time periods and analyse where it is falling, what improvement has he made and what is the future planning regarding job and activities. Management should educate the employees about their individual goals and share the aims and objectives with the organization. Employees should have the knowledge and freedom to participate in the decision making process. Here, if the management has the full corporation of the employees and on the same hand if employees coordinate with management then this performance and participation can actually helps in the appraisal for the next period. In all this, the right of expressing of opinion will certainly adds to their performance (Beach, 1995). Performance appraisal systems are the powerful tool to measure the performance of an employee and to issue or offer the rewards on that quality performed job. This process allows the management to evaluate the achievements and contribution to the success and productivity of the organization to get the overall organizational aims and objectives (Dobbins, 1994). Moreover these systems are standardising for all the employees. Performance appraisal is a system in which HR managers measures the performance of the employee, either he is performing his job rightly, is he achieving what organization wants from his job, what is his behaviour and attitude towards his job, either he is showing positivity towards his job, is he the right employee for the right job, as all this comes under the HR function of an organization (Randhawa 2007). The main objective of performance appraisal is to make sure that employee‘s performance is up to the mark, to communicate this job performance measurement makes the employee enable to enhance his productivity and cover his loopholes where he is lagging behind. The main idea behind performance appraisal is to insure that organizational goals are being met, because meeting organizational objective is an individual as well collective effort. Strategic objectives on banking sector and any financial institution are to multiply their profits by gaining the top performance from i ts employees. By monitoring employees performance, they actually see what the criticality of the importance is and the effect that job is making on the organizational objectives. An effective performance appraisal must have collaboration between the management and the subordinates. An employee should work according to the job description, which is decided by the immediate manager. By doing this, there will be no conflict between the management and the employees (Propper, Wilson, 2003). The objective of performance appraisal is to influence the employees job performance with a systematic process appraisal, what are the major impacts on the employees to get the certain level of motivation to improve the productivity of the organization as well as the job satisfaction (Natalie Ann 2005). In the past, the sole purpose of performance appraisal was just to calculate the financial position of the company, either it has made some progress in terms of monetary growth, what influence it has made on the department growth and what are the affects of performance on organizational objectives. But now, things have changed. Now researchers are seeing beyond the monetary terms, they are not discussing the financial aspect but they are measuring the job performance in terms of employees job satisfaction and his level of motivation, because ultimately the manpower of an organization is its labour force. If this labour force is getting what they want, then they will perform according to the job description they have with them within their departments. In the banking sector as credit crunch has been taken place all the investment and financing in Pakistan has stopped, it has very negative impact on the employees working in the banking industry, and the HR department of the banks are actually working on the moral and motivation of the employees. 2.2. History of Performance Appraisal: Performance appraisal has a brief history starting from earth 20th century where the need of performance appraisal was felt and some measures developed. This history shows that Taylor (1964) who is the revolutionary person in times and motion studies brought the real sense of performance appraisal and performance measurement. But in the modern human resource management it can be seen that the thread of performance measurement is linked with the Second World War. This tells the history that it is not more than sixty years ago. Yet the guru of human recourses says that the art and procedures of performance measurement and appraisal is very ancient art and people of old times had some tools to appraise their employees on the basis of activities and job they performed. On these historical felt notes it can be said that performance appraisal management is the worlds second oldest profession too. Here Dulewicz (1989) says that â€Å"It is a basic human tendency to make judgements about th ose one is working with, as well as about oneself. If the management has a concept that performance and its appraisal is inevitable then it will be wrong that performance of an employee cannot be judge in advance. In the absence of a structured appraisal system then it will ultimately affects the performance of employees, the productivity of the organization and moreover the reputation of the organization in the industry. It will de-motivate the employees, they will lose satisfaction from their jobs and loyalty with the organization will be most likely finished and labour turn over will increase. One serious offence can be seen in the absence of appraisal system that organization can go unlawful, harassing the employee and unfair judgement on their performance. Consequently, it helps the management and employees to go lawful, fair and accurate with the performance over the period of time (Murphy, 1989). 2.3. Benefits of Performance Appraisal: Where performance appraisal allows the employees to get the monetary and non monetary rewards from the management, here it also give the most significant benefit for employees that it gives the chance to get reasonable time for one to one discussion on the performance over the period of time. This discussion between employee and supervisor allows discussing the main issues that are hurdle in the performance and work concerns addressed. It can observe from all over the world organizations, the feedback of performance appraisal says that it creates a strong bond between subordinate and supervisor only if the appraisal is conducted properly and fairly. This process also gives the opportunity to employees to review their performances and discuss the issues and difficulties they are facing in the work and also it gives the path to gain the aims and objectives in the future time. This interaction of subordinates and supervisors give the opportunity to help the future goals. Therefore it en hances the productivity. So, this process gives the best time to employees to have chat with the supervisors without any hindrance and instruction (Orpen, 1997). The importance of this process should not be underestimated as this is the integral part of performance appraisal system. Moreover this process allows the supervisors and employees to discuss the future targets and, training and rotation need orientation and development, if needed. In this discussion, the supervisors and the subordinates discuss the various problems about the present as well as the absent working skills, career development and what is to be done in the future (DYCK, 1997). Here, supervisor highlights the key skills of the subordinate and makes or arranges for the future career inspirations. This discussion can be useful to measure the productivity of the organization, for the recruitment and orientation process. For example, the feedback can indentify how employees are performing those who hired in the past two years and so. Appraisal data can also tell how well the recruiting strategies are working, what developmental process are good enough and what the effectiveness of employees is. Performance appraisal process could be a data sheet highlighting the overall performance of all employees; telling has productivity improved, remains same or fall. Evaluation is the ongoing process and its run throughout the year but some clash can be noted in the evaluations and developmental process but in a nutshell its a process of evaluating, analysing and giving feedback of that process (THOMPSON DALTON, 1970). 2.4. Basic purpose of Performance Appraisal: Performance appraisal systems have the two main elements in it; one is evolution of the performance and the feedback of the evaluated performance. The main objective of performance evaluation is to define the gaps in the actual job and job performed. This gap creates when the employee is not working on the standard level and doesnt meet the expectation of the organization (ANTHONY, 1986). The main objective of feedback is to inform the employee about his performance and the quality work he is producing but this feedback doesnt flow in a one direction and the supervisor of the appraiser also gets the feedback from the employee to resolve the job issues, if have. To get the real sense of performance appraisal system is to look at the whole process on different angles so that it can create a meaningful difference in the organization. These different angles could be: from employees point of view and organizations point of view (ANTHONY, 1986). From employees point of view it can be unfold as: What does the organization want me to do? What are my loopholes? And what I have done remarkably well? What help will be given by the organization for my own improvements? What is the reward of my good performance? In the organizations point of view, it is mandatory to have an accountability and justice within organization so that all the employees get a fair compensation out of their performance and also to establish the repute of the organization. The research shows that organization fails when non-alignment of responsibility and accountability occurs. These failures occur when the employees are given tasks but there is no check on the responsibilities and duties and how they are performing their jobs. Sometimes it happens when the employees are working in shape of group and teams so they pass on the work to each other but ultimately no one held accountable of any task so the rule of accountability fails (TOWNLEY, 1997). Performance appraisal system has always an integral part of HRM and this research will highlight the main issues within the systems and the rating of employees. Rating the performance appraisal and giving the feedback is not an easy task for the HR department, as the criteria of apprising is a complex job. There are certain strategies underlying to make the traditional methods accurate than it had been in the past and therefore the likelihood of correct and affective appraisal will be increased (TOWNLEY, 1997). These strategies can be considered as a practical training to the HR officials. New learning techniques and methods should be true n fair for all set of employees, transparent and should be computerized so there are no chances on intermingled results which will remove the chances of favouritism. The main tactics and objective of the performance appraisal is that it should be conducted for the motivation of the employees with no negative aspect associated with it, as it will de crease the morale of the employees. There should be some reward or bonus announced so that this will be stimulation for other employees and they will try to excel their performance too. Proper communication and feedback session should be introduced so that the employees come to know their loopholes (Natalie Ann 2005). 2.5. Objective of Performance Appraisal: Followings are the main objectives of performance appraisal. To review the performance of employees over the period of time. This review of performance, evaluator judges the actual performance with the targeted performance standards and benchmarks. It also helps the management to control the organization targets depending upon the performance of employees. It also creates healthy environment between employees and supervisors. It indentifies the strengths and weaknesses of employees and also suggests the various improvement plans by the management after performance appraisal process. This process also allows the employees to get the proper training and orientation of skills where they are lacking. To communicate the feedback with the employees. Give all information regarding the tasks and job responsibilities and also clarifies all the tasks which are required from the employees. One of the objectives of performance appraisal is to judge the HR function within the organization for smooth running of business. It also tries to removes the complaints of employees about the function of organization, if have any. 2.6. Performance Appraisal Employee Motivation and loyalty: In the growing age of business and markets, human resource is the big asset of the organization; if the organization is not keeping well with its labour work force then it might get into trouble. As the employees are the main features of the progress of the organization. In order to have productivity, employee should be motivated and should be satisfied with their job and have loyalty with the organization (EPstein,1992). HR professionals are making it possible to motivate the employees with the performance appraisal systems by giving them fair appraisals as per their performance over a period of time. It has been noticed that there is a strong relationship between performance appraisal and motivation, job satisfaction and loyalty (bonnie, 2002). Keeping aside the main objectives of performance appraisal, it can be use as a mechanism to create a completion between employees to get the job done with all the linked targets and benchmarks (Robert, 1984). It is also mandatory that employees gets the accurate performance appraisal results to get motivate, if the feedback of appraisal is according to their performance over the period of time that will be a great source of motivation to them. Inaccurate performance can create dissatisfaction from job and ultimately can affect the loyalty with organization. One employee always expects that evaluator recognise his efforts and achievement in the professional life and also support him to overcome on his failure and allows the opportunity to make improvements in his performance in future (bonnie, 2002). If the performance appraisal has some shortcoming in it and is actually creating some discrepancy in the process, then it will affect the motivational level of the employees and ultimately it will affect their efforts and the risk taking ideas for the betterment of the organization. Also they will lose interest in the affairs of the organization (Robert Kim, 2007). Plus this de-motivation leads the employees to the lack of loyalty and they will look other options of good job and hikes in the rewards (bonnie, 2002). Accurate performance appraisal is always preferable but if there is any inaccuracy then employees always prefers to have accurate performance appraisal with no hikes in rewards but not an inaccurate system that never encourages or recognises their efforts. Employees who tend to receive accurate performance appraisal over the period of time and also have all the rewards associated with that appraisal is most motivated employee among all of them and similarly he tends to be more satisfied with job and more loyal to the organization. Therefore, the process should be fair as this is the ultimate system to motivate, satisfied with job and creates the loyalty (Storey Sisson, 1993). 2.7. Different performance appraisal systems: There are different systems and methods for measuring performance and appraising the employees. These methods and systems are categorised as the traditional methods and the modern methods. 2.7.1. Traditional Methods: In the traditional methods there are various systems to measure the performance employees. In the traditional method of measurement Behaviourally Anchored Rating Scale is widely used by many organizations across the globe. In this system it focuses on specific behaviours, either affective or ineffective performance is given by the employee. It involves critical incident technique (CIT) and different combinations of rating scale. However, in Graphic Rating Scale supervisor or evaluator simples checks the different blocks in the appraisal form to measure the performance. Though this a old technique to appraise the employees but broadly used method. Unlike scaling system, in Essay Evaluation Method asks the managers, supervisor and evaluators to write an essay or a descriptive narration about the strength and weakness of the employees and also the overall behaviour towards the job. This is a qualitative measure to appraise the employees. Another ranking system is Performance ranking Met hod in which evaluator or supervisor rank the performance of employee from best to worst. This method differs from other methods as it compares the employee to employee but not with the standards and benchmarks for performance measurement. In Critical Incident Method (CIT), evaluators appraise the performance depending upon the critical incident and the positives and negatives behaviours occur in the period of time to measure the performance (Dessler, 2000). Like other ranking and scaling methods in Weighted Checklist Method evaluator makes a checklist of all the job responsibilities and all the narrative statements about the effective and ineffective attitude or behaviour of job. As weighted method weights the narrative statements, in Paired Comparison Analysis, it weights the relative importance of the different options available and listed. Every option is compared with all the option listed (Mondy, 2008). After comparison of all option, the one with most weight is preferred opti on for the performance measurement. In the traditional methods qualitative methods and systems have more frequency of usage, here another method of Behavioural Observation Scale evaluates the performance with negatives and positives happens on workplace and also the critical incidence the employee has performed. In the tradition method there is a quantitative method called Forced Distribution or Forced Ranking, unlike other method it involves the percentages. In the top category it ranked from 10 to 20 percent, middle category ranges from 70 to 80 percent and it ranked employees with worst performance 10 percent in the bottom line (Mondy, 2008). 2.7.2. Modern Methods: There are different methods of performance measurement in the modern times, 360 Feedback System and Management By Objectives (MBO). 2.7.2.1. 360 degree feedback: 360 Feedback is a systematic technique which also known as the multi-rater feedback system. In this method evaluator or the appraiser takes feedback from all the people who are inter-linked with the person to be appraised. The 360 Feedback can be defined as: â€Å"The systematic collection and feedback of performance data on an individual or group derived from a number of the shareholders on their performance.† (Ward , 1997) This method of performance appraisal is detailed and comprehensive where evaluator asks from all sources about the performance of the employee. In this method all the sources are involved as: customers, suppliers/ vendors, team member and colleagues, superiors, juniors, subordinates and all the oth