5 steps to set up a performance appraisal process

Hard to imagine a modern systemic company with a mature HR function lacking a performance appraisal procedure. Appraisal formats and the idea behind this concept can vary greatly from company to company. Different models, multiple interpretations of it by HR professionals, and individual approaches sometimes required for specific companies contribute to it.

According to Gartner-CEB, managers spend 210 hours a year on performance management, and employees spend 40 hours a year. The primary reasons for this are poor performance appraisal process. Let’s look into a Performance Appraisal is and how to implement it effectively.

A performance appraisal not only evaluates how employees perform their current activities. As part of the Performance Management System, it allows effectively managing the entire company through balanced business planning and an alignment with the company’s strategy, vision, and mission. It also takes into account each employee's personal values and behavior.

How to implement a ‘working’ performance appraisal and avoid mistakes?

Step 1. Define your goals

First, you need to define what an ‘efficient performance’ in your company is and set the goals for your appraisal process. What criteria indicate that an employee/a group of employees is performing efficiently? 

Competencies and goals/KPIs/OKRs are essential for personnel performance management.

The differences between goals, KPIs, and OKRs are:

• Goals determine the target result, what needs to be achieved. An expert analysis uses a relative ‘done/not done’ in %/scores or other measurements to evaluate them. The main question is “WHAT needs to be done?”, “WHAT needs to be achieved?”
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• KPIs are quantifiable measurements of achieving the result or the said goals. This is how we understand that the result is achieved. Usually, we evaluate them ‘automatically’ by comparing the target value with the actual one in %, pcs, units, scores, etc. The KPIs can be quantitative (how much?) and qualitative (to what extent?). The main question is “WHAT will give me an understanding that the goal has been attained?”, “HOW will I understand that the result has been achieved?” 
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• OKRs are indicators of achieving the individual key results. As part of a strategic objective/a ’high-level goal’; they give us an understanding that we are moving in the right strategic direction. We can evaluate them in different ways but most often—through an expert analysis using a relative ‘done/not done’ in %/scores or other measurements. The major difference is that they set the performance at the level of 70-75% as a target value. The main question is “WHAT should I do to advance the achievement of a strategic objective/’an ambitious goal’?”

There should also be a monitoring cycle for these criteria. The recommended competency assessment cycle is six months/a year; for goals, KPIs/OKRs—depending on the position/role level: the more junior the position and the faster the operations, the shorter the assessment period. For example, for a CEO, CMO, or CHRO level manager, due to the strategic nature of their work, the assessment period should be one year (including the attainment of the company-wide objectives); for middle management—six months/a year; for non-management employees—a month/a quarter.

Step 2. Decide on the group for evaluation

Next, you need to understand whom you would like to assess: which roles, positions, groups of employees.

The main recommendation: if you are running a Performance Appraisal for the first time and your company is large, do not try to cover all employees at once (especially if there is no way to complete all stages in an automated performance evaluation solution). It is best to start with executive positions or those whose activities impact the company’s performance. After that, you can ‘spread’ the assessment to all personnel.

Each group of employees might have an individually set appraisal periodicity and a separate list of evaluation criteria.

Step 3. Create competency criteria

Knowing what and whom you will assess, you need to establish performance criteria specifically for your company and the identified groups.

You can develop a Competency Model by determining ‘specifically your’ competencies. Your aim is to describe goal-oriented behavior that will help your employees achieve results as efficiently as possible.

The Competency model is a list of competencies (standards of behavior) to achieve the target result of a process (within a position/role).

💡 Developing competencies involves:

- Looking at the activities performed by the most efficient employees.
- Analyzing the processes.
- Determining what knowledge, skills, abilities, experience, motives, and personal values are necessary for efficient work.
- Describing the desired behavioral patterns for efficient performance.

It's helpful to use in this process facilitation tools, in-depth interviews, focus groups, observations, and analysis. During creation of competency criteria, it's necessarily to involve the company’s employees. And not only at the stage of performance analysis but also at the stage of drawing up pattern descriptions.

Competencies can be:

• Corporate—standard for all employees regardless of the field of activity/level of position/role (usually developed in line with corporate values)
• Managerial—defined for managerial positions/leadership roles
• Functional—defined for a particular area of activity/function/process

Depending on competencies and positions/roles/areas you plan to assess, create the relevant competency model:

• Corporate/organizational model is a list of competencies that are mandatory for all employees regardless of the field of activity and position level
• Managerial model is a list of competencies that are mandatory for directors (of all or certain levels/areas of activity) 
• Functional model is a list of competencies that are mandatory for employees in a particular field of activity/function/department

You can also make a list of standardized goals/KPIs/OKRs or create a ‘library’ of them. You may tentatively divide goals/KPIs/OKRs into:

• Operational or process-related—achieving results within processes or individual operations within processes
• Project-specific—achieving results within projects or specific milestones of projects

A library of goals/KPIs/OKRs is appropriate for individual ‘ongoing’ operational processes. It can define the goals/KPIs/OKRs (including general descriptions) standard for all or some employees. Project-specific KPIs/OKRs depend on a project.

The library may also include a list of PPIs (Process Performance Indicators). You need to cascade them down to the level of each participant in these processes within the operating activities. They show what result each participant in the process must achieve to ensure the effectiveness of the entire process).

Creating a list/library of standardized goals/KPIs/OKRs involves analyzing the strategy, strategic and operational objectives of a company, processes, and projects. It also describes target results and respective indicators for performance evaluation.

You must review the list/library of standardized goals/KPIs/OKRs annually taking into account the company’s operational objectives.

In addition to competencies, goals, KPIs, OKRs, you can also establish other criteria, such as quality of work criteria, SLI (service level indicators), etc., to be used in a performance appraisal.

The main recommendation when defining performance criteria: they should be relevant specifically to your company, its corporate culture, and strategy. You may use third-party libraries of similar competencies and KPIs but customize/adjust them to fit your needs without fail.

Step 4. Design evaluation system 

Having an idea of efficient performance, measurement criteria to be used, positions/roles whose performance will be regularly evaluated, and monitoring cycle, you decide how to carry out an employee performance appraisal system:

• What are the appraisal process stages?
• Who will be involved in this process, what roles?
• What methods are applied for each criterion/group of criteria?
• What will the appraisal results affect, i.e., what other HR management processes are they linked to?

The appraisal process consists of the following steps:

• Employee self-assessment and/or assessment by the manager/respondents against specific criteria—filling out the evaluation form in which a set of competencies are rated on a predefined scale.

💡 Pro tip: you should use the same criteria for both self-assessment and assessment by other respondents.

• Conducting an appraisal/feedback session/meeting during which an employee (appraisee) discusses with the manager (appraiser) the results of his/her performance during a specific period, achievements, challenges, an individual development plan, goals, and tasks for the next appraisal period.

💡 Pro tip: don’t skip the feedback stage as it is crucial for the appraisal quality and impacts leadership and corporate culture development.

• Finalizing the appraisal results for each employee/the company as a whole (a group of appraisees) and using these results in other processes:
• Remuneration: salary reviews, variable remuneration (bonuses, incentives, etc.);
• Training: consolidation of individual development plans and drawing up/updating a development plan for the company;
• Career advancement/creation and development of a personnel reserve: making the lists of successors/talents for further development/promotion;
• Mentoring: making the lists of mentors for further development and involvement in various processes that envisage mentoring (student internships, adaptation, development of a personnel reserve, etc.);
• Making decisions on transfers and promotions, or holding discussions on whether an employee fits the position he/she occupies.‍
• Informing the employees about the appraisal results and the decisions made.

The roles involved in the performance appraisal process are: 

• Employee—someone whose activity/performance is being evaluated
• Manager/managers—direct and/or senior supervisor who sets tasks to the employee and evaluates his/her performance
• HR specialist who supports the performance appraisal process

Some methodologies also involve other roles like customers, colleagues, or subordinates of an appraisee.

As a rule, you carry out a Performance Appraisal at the employee-manager level, i.e., the manager who sets goals, determines the direction of the employee’s work and evaluates his/her performance. The employee performs a self-assessment at the respective stage (e.g., evaluates the competency development level and the extent to which the goals have been met).

For managerial positions, you can also use a more objective 360-degree performance appraisal to assess the competencies (values-based behavior). It shows the ‘place’ of a manager in the company and the quality/pattern of his/her interaction with others.

Do an all-round appraisal at the level of:

• His/her employees (self-assessment)
• His/her supervisor/supervisors (immediate and senior)
• His/her colleagues (at the peer level; for project teams—team members)
• His/her customers (including internal ones, those with whom they interact)
• His/her subordinates (those to whom they set goals/tasks)

All appraisal participants should rate an employee on the same criteria and scale. Based on the results, the employee’s profile is ‘drawn’ from the point of view of these criteria (e.g., competencies). This profile serves as a starting point to devise a development plan.

You can conduct a 360-degree performance appraisal in a scaled-down format, for example, without one of the respondent groups. Self-assessment and evaluation by the supervisor are required anyway.

An Assessment Center (AC) is another performance appraisal method for managerial positions. 

The AC is a group assessment method that looks at an employee’s behavior when performing a set of exercises. These include group interaction, role-playing games, interviews, individual written assignments, tests, etc. AC participants undergo them simultaneously/in parallel.

The AC’s advantage is that it allows ‘observing’ an employee’s behavior in the conditions as close as possible to real work situations.

Step 5. Start the process

Finally, once you are clear about the criteria, target audience (participants), frequency, and appraisal methodology, you can start the Performance Appraisal process.

What is worth paying attention to here:

1. You should ‘embed’ a performance appraisal In the performance management system and align it with the organization’s strategy.
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2. The purpose of a performance appraisal is to evaluate efficiency for improving this very efficiency; do not use an appraisal for punishing or demotivating employees.
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3. The correctly selected criteria must ‘support’ the appraisal purpose:
   - If the achievement of goals is important, measure goals/ KPIs/OKRs depending on WHAT exactly the goals are and HOW to achieve them;
   - If not only performance but also behavior matters—include competencies;
   - If employees should adhere to values/demonstrate values-based behavior, it makes sense to assess the values, too.

4. The more criteria you use, the less detailed evaluation against them will be and the more difficult it will be to measure the effectiveness of these criteria:
   - The optimal number of competencies to be assessed is 3-5; 
   - The optimal number of goals/KPIs/OKRs is 5-7.

5. Develop all criteria specifically for your company; it is important for the Performance Appraisal quality.
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6. Employees take any appraisal with some unease even in healthy corporate cultures built on openness and trust. So be sure to explain all the nuances of a performance appraisal, its purpose, stages, and what the appraisal will affect. Open communication about the procedure and stages of its implementation (including constant information support throughout the process) is a key condition for the Performance Appraisal effectiveness.
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7. Train managers and employees to conduct and undergo performance reviews. And not only from a technical point of view—how to fill out different forms—but also in giving feedback on the appraisal results. The performance appraisal effectiveness of a line of the business depends directly on the preparedness of those involved in it.
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8. Feedback (and a feedback session) is what matters the most in a Performance Appraisal. So be sure to pay attention to this stage. Train/assist participants in providing and receiving feedback. Their further development will benefit from it.
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9. Bear in mind that only those who have a chance to observe/analyze the behavior and results achieved by an employee can appraise. If a respondent does not work together with an appraisee regularly and does not see the way he/she behaves, such a respondent will not be able to objectively appraise the employee’s performance. The respondent is likely to base his/her appraisal on hypotheses and assumptions. This is especially true for the assessment of competencies/values.
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10. Automate the performance appraisal process as much as possible. However, a Performance Appraisal is one of those procedures that require maximum flexibility. It also tends to transform and develop over time, along with the company’s growth. That is why automated Performance Appraisal solutions should enable you to improve this process as time goes by.

So, now you are familiar with key steps in effective performance appraisals.

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