Performance appraisal is a method of evaluating

the behavior of employees in the workplace,

normally including both the quantitative and
qualitative aspects of job performance. It is a
process that involves determining and
communicating to an employee how he or she
is performing the job and ideally, establishing
a plan of improvement.
Objectives:
a) Compensation Decisions: It can serve as a basis for
pay raises. As, now a days it is considered that raises
should be based on merit not on seniority.
b) Promotion Decisions: It can serve as a useful basis
for Job change or promotion.
c) Training and Development Programme:
Performance appraisal can inform employees about
their progress and tell them what skills they need to
develop to become eligible for pay raises and/or for
promotion.
d) Feedback: Performance appraisal enables the
employee to know how well he is doing on the
job.



PROCESS
a) Establish performance standards: appraisal
systems require performance standards, which
serve as benchmarks against which performance is
measured. The performance standards should be
clear to both the appraiser and appraisee.

b) Communicate the standards: Performance appraisal
involves at least two parties, the appraiser and the
appraisee. The appraiser should prepare job
descriptions clearly, help the appraisee set his goals
and targets, analyze results objectively, offer coaching
and guidance to the appraisee whenever required and
reward good result.


c) Measure actual performance: Four common
sources of information are used to measure
performance i.e. personal observation,
statistical reports, oral reports and written
reports.
d) Compare actual performance with standards
and discuss the appraisal: Actual performance
may be better than the standards and
sometimes it may go off the track.

e) Taking corrective actions, if necessary:
Immediate corrective action sets things right
and get things back on track whereas the basic
corrective action gets to the source of
deviations and seeks to adjust the difference
permanently.
Methods of Performance Appraisal
It may be classified into three categories:
1)Individual evaluation methods- It includes
Confidential report
Essay evaluation
Critical incidents
Checklist
Graphic rating scale
Behaviorally anchored rating scales
Forced choice method
MBO
2) Multiple- person evaluation methods:
Ranking
Paired comparison
Forced distribution
3) Other Methods
Group Appraisal
HRA
Assessment centre
Field review
MBO APPROACH: MBO requires the management
to set specific, measurable objectives with each
employee and then periodically discuss the
latters progress towards achieving these
objectives.
MBO focuses on what must be achieved rather than
how it is to be achieved. It is, thus, a kind of goal
setting and appraisal programme involving six
steps:
1)Set the organization's goals: Set the
organisationwide plan for next year and set
companys goals.
2)Set departmental goals: Departmental heads at
this stage take the broader company goals and
with their superiors, jointly set goals for their
departments.
3) Discuss departmental goals: These goals are now put
to discussion in a departmental meeting with
subordinates.
4) Define expected results: Then the departmental
heads and their subordinates agree on a set of short
term, and individual performance targets.
5) Performance reviews: Departmental heads compare
each employees actual and targeted performance,
either periodically or annually.
6) Provide feedback: Both parties now discuss and
evaluate the actual progress made in achieving goals.
Assessment Centre
It is a system or organization, where assessment
of several individuals is done by various
experts using various techniques such as in-
basket, role playing, case studies, simulation
exercises etc.
Assessment Centre consists of many multiples:
Multiple competencies to be evaluated for in a
candidate.
Multiple observers to eliminate the subjectivity &
increase objectivity involved in the process.
Multiple participants : for example 18 21 in case
of Tata Management Training Centre.
Multiple exercises : Exercises like role plays, case
analysis, presentations, group discussions etc
Multiple simulations: These could be creative,
crisis or exploitative type simulations.
Multiple observations: Each observation is
observed at least twice.

Characteristics of an Effective
Appraisal System
a. Reliability and validity
b. Job relatedness
c. Standardization
d. Practical viability
e. Legal sanction
f. Training to appraisers
g. Open communication
h. Employee access to results
i. Due process
Potential Appraisal: It is required to:
Inform employees about their future
prospects
Help the organization to chalk out a suitable
succession plan.
Update training efforts from time to time.
Advise employees about what they must do to
improve their career prospects.
Compensation Administration
Compensation is what employees receive in
exchange for their contribution to the
organization. Compensation is a comprehensive
term including pay, incentives, and benefits
offered by employers for hiring the services of
employees.
Nature of Compensation:
Base pay: It is the basic compensation an
employee gets, usually as a wage or salary.
Variable pay: It is the compensation that is
directly linked to performance accomplishments
viz., bonuses, incentives, stock options.
Benefits : These are indirect rewards given to
an employee or group of employees as a part
of organizational membership.( health
insurance, vacation pay, retirement pension
etc.)
Objectives of Compensation Planning:
Internal Equity: This ensures that more
difficult jobs are paid more.
External Equity: This ensures that jobs are
fairly compensated in comparison to similar
jobs in the labor market.

Individual equity: It ensures equal pay for
equal work i.e. each individuals pay is fair in
comparison to others doing the same/similar
jobs.
Equity in pay rates : Equity can be maintained
by:
Find the worth of each job through job
evaluation.
Conduct a salary survey to find what other
employers are paying for comparable jobs
Group similar jobs into pay grades.
Price each pay grade by using wage curves
Adjust pay rates.
Job Evaluation: Job analysis offers valuable
information for developing a compensation
system in terms of what duties and
responsibilities need to be undertaken.
Generally, a committee is appointed to collect
information and work out a hierarchy of jobs
according to their value.
Wage and salary Surveys: Job evaluation ensures
internal equity whereas surveys ensure
external equity.
Components of pay structure in India:
Wages: In India, all the Acts include basic wage
and dearness allowance under the term
wages.
Basic Wages: While deciding the basic wage,
the following criteria may be considered:
Skill needs of the job
Experience needed

Difficulty of work: mental as well as physical
Training needed
Responsibilities involved
Hazardous nature of job.
Dearness Allowance: It is the allowance paid to
employees in order to enable them to face the
increasing dearness of essential commodities.
Wage and Salary Administration: Employee
compensation may be classified into two
types- base compensation and supplementary
compensation.
Base Compensation: It is a fixed and non-
incentive payment on the basis of time spent
by an employee on the job.
Supplementary compensation: It signifies
incentive payments based on actual
performance of an employee or a group of
employees.
Objectives:
To establish a fair and equitable remuneration
offering similar pay for similar work.
To attract qualified and competent personnel.
To retain the present employees by keeping
wage levels in tune with competing units.
To control labor and administrative costs in
line with the ability of the organization to pay.
To improve motivation and morale of
employees and to improve union-
management relations.
To project a good image of the company and
to comply with legal needs relating to wages
and salaries.
Principles of wage and Salary Administration:
Wage and salary plans should be sufficiently
flexible.
Job evaluation must be done scientifically.
W & S plans should be in line with countries
objectives i.e. attainment of equality in
income distribution and controlling
inflationary trends.



Elements of Wage and Salary System: Acc. To
Henderson:
1. Identify the available salary opportunities,
their costs, estimating the worth of its
members, of their salary opportunities and
communicating them to employees.
2. Relating salary to needs and goals.
3. Developing quality, quantity and time
standards related to work and goals.
4. Determining the effort necessary to achieve
standards.
5. Measuring the actual performance.
6. Comparing the performance with the salary
received.
7. Measuring the job satisfaction of the
employees.
8. Evaluating the unsatisfied wants and
unrealized goals aspirations of the
employees.
9. Finding out the dissatisfaction arising from
unfulfilled needs and unattained goals.

10.Adjusting the salary levels accordingly with a
view to enabling the employees to reach
unreached goals and fulfill the unfulfilled
needs and aspiration.
Factors Influencing Compensation Levels:
Job needs
Ability to pay
Cost of living
Prevailing wage rates
Unions
Productivity
State regulation
Demand and supply of labor.
Wage Policy in India:
Minimum Wages: Its the wage that every
worker expects to get for services rendered by
him, it should be paid by the company
irrespective of the companys condition i.e.
whether it makes a profit or loss.
Calculation of minimum wages:
Fair wages: Its above minimum wages.
According to the committee on fair wage
1948, fair wage should be determined taking
the following factors into account:
The productivity of labor,
The prevailing rates of wages in the same or
similar occupations.
The level of national income and its
distribution.
The place of industry in the economy of the
country.
The employers capacity to pay.
Living Wages: The living wage is the highest
among the three. It must provide 1) basic
amenities of life 2) efficiency of worker and 3)
satisfy social needs of workers such as
medical, education, retirement , etc.
State Regulation of Wages:
Minimum Wages Act,1948: This act prescribes
minimum rates of wages for certain
unorganized sectors covered under the Act.
The minimum wages can be fixed by hour, day,
month or any other longer period. The act
provides for tripartite body consisting of
employees, unions and the government, to
advise and assist in fixing and revising
minimum wage rates.
The Payments of wages Act, 1936: The main
purpose of the act is to provide for regular
payment of wages without any unauthorized
reductions to persons who are employed in any
factory. There are certain permissible
deductions.
Adjudication of Wage Disputes:
If the labor problems are not settled by
collective bargaining then may be settled by
arbitrator.
Wage Boards:
This is one of the important institutions set up
by the government of India for fixation and
revision of wages.
Pay Commissions:
Pay commission determines the wages and
allowances of Central and State government
employees.
Bonus: Bonus is the extra payment to the
workers beyond the wages.

Payment of Bonus Act,1965
The Act defines an employee who is covered by
it as one earning Rs. 2500 p.m basic
+Dearness Allowances. The minimum bonus
paid is 8.33%.