Performance Appraisal and Merit Pay

Literature Review

Performance appraisal is a human resource management activity that is a systematic process of reviewing an employee’s work, achievements, and failures over a period of time which leads to planning for the future. The exercise can be done on a quarterly or on annual basis depending on how the organizing has planned on when to conduct the exercise.

Merit pay can be defined as the reward given to employee/employees in recognition of their outstanding performance at work as per their job descriptions. It provides bonuses for the workers who perform better in their jobs following the criteria set by the organization. This package is meant to be a morale booster to the employees so that they keep on improving their performance for they will be rewarded if there is a drastic improvement. Payment by merit can not be said to be operational if performance appraisal is not a determining factor in the payment of the salaries. Therefore employee payment should be based on performance appraisal. The major objectives of conducting a performance appraisal are:

  1. Identifying the poor performers so that they can be trained, retrained, advised, transferred, or if necessary be dismissed.
  2. Accessing the individual performance of the employees and determine whether they can be rewarded for their good performance.
  3. Assisting in future recruitment, selection, and placement exercise.
  4. Assisting in developing employment selection standards.
  5. Performance acts as a catalyst that reminds employees about the expectation of them while attaining the objectives of the company. Therefore they will know what will be appraised at the end of the year.
  6. Eliminating the misunderstandings that may exist in the mind of the employee.
  7. Providing the management with data that may be used to determine future job assignments and compensation.

Besides the above objectives, an appraisal can also assist the supervisor or manager in influencing and directing the performance of employees. Evaluation should be handled with care as it is important to all parties involved in the process. To the evaluators, it provides them with goal setting while those being evaluated, it provides them with a performance target for their behavior by indicating exactly what aspects of their behavior are important enough for management to measure. This can influence the amount of efforts employees put into their performance once it is made clear that effort increases performance and untimely rewards.

Performance appraisals can clarify the links between employees’ performance and organization rewards. Most of the time an employee who receives a promotion or pay rise has a vague idea of what aspects of the performance have earned it. Due to the lack of clear measures of performance, organizational rewards may be attributed to error, luck, favoritism, sympathy, or aspects of performance other than those desired by the organization. Vague and inaccurate performance measurements can create a number of behavioral problems for supervisors or managers. An inaccurate appraisal can result in employee confusion over what behavior is desired or what good behavior really is. If a performance receives a higher rating than it deserves, a feeling of inequality can lead to dissatisfaction and labor turnover among good performers.

Performance Appraisal

Performance appraisal often brings into the fold some strong opinions, strong reactions, and emotions from the employees when the exercise is being conducted or when it has already been done. Many organizations, whether they are big or small, whether public or private use performance appraisals as the best tool to achieve the human resource management objectives. Different organizations used their tailor-made performance appraisal techniques which can be unacceptable to some employees. The performance appraisal process allows the organization to evaluate and measure the employee’s behavior and general work performance within a specified period of time. It is a process of evaluating each individual employee’s performance, linking them to the goals of the organization.

Some time back employees’ performance appraisal was centered on traits, abilities, and weaknesses; however, this has changed to new methods that consider future needs of the organization. This method of appraisal considers both participant and evaluator in coming up with appraisal goals as well as how it should be done. The evaluations in the modern world have scales on how it is being rated once complete. Secondly, for a successful performance appraisal, there must be an evaluator who is more skilled and experienced in conducting an effective performance appraisal but unfortunately, not many evaluators/managers possess these much-needed attributes (Fink and Longenecker, 218).

Performance appraisal and merit pay are the most important issues in any organization but most aspects of them are always mishandled by the management. Some studies have suggested that the evaluators/managers have found that the performance appraisal process is very frustrating, sometimes political when there is interference from politicians. Most managers and supervisors are not adequately trained for the performance appraisal exercise thus they provide little or no meaningful information to the subordinates which at times breaks their work morale. Recent studies have shown that most organizations do not conduct rigorous, skills-based training with their evaluators, but instead, the organizations just give the performance appraisal forms and instructions to the managers outlining how the exercise could be conducted. This kind of system has often failed and the employees don’t feel that they have been appraised fairly, which concludes with a saying that a poor appraisal is worse than no appraisal at all (Grote, 199).

The aim of performance appraisal is to provide the employee to improve productivity not to act as a de-motivating factor, therefore it is not the issue of filling the forms. After it has been carried out it is expected that employees should improve on their performance. If filling the forms by the employees is not done with a lot of close supervision and guidance, the whole process becomes a waste of time and at worst insulting. Improving the performance appraisal and merit pay in organizations is a challenging proposition which needs developing sound appraisal criteria. Training plays an important role in an appraisal that is the appraiser should be trained on what to evaluate and what to ask while carrying out his job successively. The reasons for ill-training managers should not be an excuse for not conducting an effective appraisal exercise and this should not be tolerated. The appraisal system improves performance and morale among employees. It does not matter how well the performance appraisal and merit pay systems have been designed, what is most important is its effectiveness and impact on each individual employee and the organization.

In addition to deciding on appropriate measures of performance, consideration must be given to the size of the rewards available, and the manner in which they are related to performance. Many organizations, especially in the public sector, have set very low limits on performance-related pay, frequently in the order of 7% or less of basic pay, with a presumed median payment in the order of half of this amount. It is scarcely surprising when such schemes fail to motivate and have a significant impact on productivity schemes in the private sector frequently provide the opportunity to earn 30% or more on top of basic salary (Armstrong and Murlis, 1994).

Criteria for Performance Appraisal

Factors that should be evaluated must be predetermined and the evaluator trained on how to do it. Traits such as appearance, initiative, and enthusiasm should be included only if they have a bearing on the job. What is measured in the evaluation influences employees’ behavior because when they know they will be evaluated and on what dimensions they will behave as expected so that they can get high-performance ratings. There are common criteria that should be considered in performance appraisal and these include:

  1. Relevance- Performance appraisals should measure everything related to the objectives of the job. Irrelevant factors or issues to the job should not be part of what is considered while carrying out an evaluation. Relevance is a value judgment and it is entirely to the organization’s management to determine and establish what is relevant in each and every job.
  2. Reliability- the evaluation procedure should produce consistent results. the evaluator should be able to evaluate different traits differently but if a trait is evaluated at different times it should reliable.
  3. Freedom from contamination-Evaluation should only measure each employee’s performance without being influenced by factors that an employee cannot control, such as economic conditions, materials/tools/equipment shortages, breakdowns, or poor working conditions.

It is the responsibility of supervisors or managers to evaluate the performance of their immediate subordinates. However, this responsibility can and is in fact shared at two levels; i.e. personnel department and line managers. The personnel department is responsible for designing and maintaining a formalized appraisal system, establishing a formal reporting system, ensuring that the reports are on time, and training those charged with the actual appraisal exercise while the line managers are responsible for conducting the performance appraisal exercise, making the formal reports, reviewing appraisals with the employees and setting the future appraisal targets.

Problems associated with performance appraisal

Some of the problems can be related to issues of validity and reliability. Validity is the extent to which a measure or an instrument actually measures what is intended to measure, while reliability is the extent to which the instrument consistently produces the same results each time it is used. Some of the factors which can interfere with validity and reliability include:

  1. Central tendency error-this arise when supervisors rate employees with narrow ranges. The supervisor fails to distinguish significant differences between group members and lumps everyone together in an average or above category. This fails to recognize both good and very poor performers and even merit pay becomes an issue.
  2. Strictness or leniency error- this is closely related to central tendency. The supervisor tends to see most of the subordinates as deserving a high rating, therefore, failing to distinguish between good and poor performers.
  3. Halo effect- this can exist where an evaluator assigns the same rating to each factor being evaluated e.g. an employee rated above average on quantity performance, may also be treated average on quality performance, attendance, promotion readiness, or on such other factors.
  4. Recency error- this happens when the evaluator focuses on the employee’s recent work behavior. It can happen during the annual evaluation when the supervisor puts emphasis on the last two or three months and ignores the rest of the other months. If this practice is known by the employees, they can relax their efforts for the early part of the year, and then put more effort in the last months. Such a practice is bound to produce uneven performance and employees will receive merit pay which they do not deserve.
  5. Personal biases- it happens when a supervisor allows one’s own personal biases to influence the appraisal. These are likes and dislikes for someone as well as sexual, ethnic, and racial biases.

The performance appraisal exercise will have no meaning to both the employee and the management if it does not touch on what has been achieved and what needs to be done to improve the performance. This should not be a criticism exercise but a self-development one where the employee is able to know what has been achieved and how one can realize full potential on the job. Here, the supervisor should not mix issues of performance and pay increments or promotion. Pay increments or promotions may come up especially where one feels and actually has performed well, but the superior should be prepared for this. One way of dealing with such an issue is pointing out that the exercise is just part of the objectives in pay and promotion considerations, but there are other considerations too e.g. the organization’s ability to pay, career progression, and existing personnel policy. It may be wise in trying not to create an opportunity for this to be raised by the employee during the exercise.

Maslow’s Hierarchy on Motivation

Abraham Maslow was a psychologist who argued that human beings are always motivated by needs that are in a hierarchical order flowing from those orders regarded to be low to those said to be of high order. Maslow theory identifies five needs of human beings that have to be satisfied. Maslow involves the provision of protective clothing, medical cover, housing and transport allowances, pension schemes, job security and insurance scheme to meet these needs. The main psychological needs that are basic to most human beings are food, shelter and clothing. We also have social needs that are provisioned to be social like family morals and feelings, intimacy and understanding of each other, sharing of social amenities or services like sports and entertainment. (Maund, 203).

Maslow theory also entails the esteem needs that entail education, rank and title symbols, fringe benefits like shares, bonus, size of work place and equipments. The other need is the self fulfillment needs that incorporate individuals need fro appreciating potentialities, feeling of achievement or success and continuous self development. Research has shown that a satisfied employee does his job well and in return the company’s performance is greatly improved. Employer and employee relations are very important in ensuring that a company realizes its mission. In fact, it has been researched and found out satisfied employees usually translate to satisfied customers. Hence, with proper policies and administrative skills, managers can create satisfied employees. (Maund, 201).

He states that every individual develops a desire to be safe and secure in every situation the best example of this is that of, the Safety in the work environment people who feel safe in their working environment tend to perform better than those who don’t. Safety can be in the form of human-machine relations and human-human relations. Personal organization and family budget go in line with job security concerns. When an employee is confident of his or her job security at the workplace, his performance is far much better than a case where he or she is not sure of being retained in the next year. (Cullen and Parboteeah, 78).

Under this Maslow states that individual need to be recognized, to be given attention and also to be appreciated by other people around them, for this case we find that the managers in any organization provide this needs to their employees through rewards and gifts these two should not be very big inducements but the small gifts given to anybody is well appreciated. A handwritten thank you note is normally appreciated and cherished. Everybody loves chocolate, and provision of such kind of rewards especially at the weekends and special days like Christmas and Valentine days, helps to build positive relationships between the company and the employees. Gift certificates such as birthday wishes are a morale booster to self-confidence of the employees. Some companies offer their logo merchandizes in form of t-shirts, caps, mugs, pens, jackets and computer mouse pads. In addition, motivational posters could be strategically drafted for individual recognition for job well done. (John and Keith, 152).

Performance related pay

This system is usually seen as the way to motivate directors’ and senior managers to achieve targets incorporated into strategic plans. Today performance related pay is a term normally used to describe a specialized from of pay system linked to merit and appraisal. Traditional piecework and payment by results performance related pay schemes for manual workers, commissions’ schemes for sales representatives, annul bonuses and merit pay schemes are usually under the umbrella of performance related pay.

Linking pay to performance

In addition to deciding on appropriate measures of performance, consideration must be given to the size of the rewards available, and the manner in which they are related to performance. Many organizations, especially in the public sector, have set very low limits on performance related pay, frequently in the order of 7% or less of basic pay, with a presumed median payment in the order of half of this amount. It is scarcely surprising when such schemes fail to motivate and have a significant impact on productivity schemes in the private sector frequently provide the opportunity to earn 30% or more on top of basic salary (Armstrong and Murlis, 194).

Problems associated with performance related pay

Unfortunately much of the current evidence points to a considerable degree of dissatisfaction with performance related pay, and little evidence that it leads to higher levels of productivity. Its important to remember when considering the results of recent research in to performance related pay and higher productivity, and that performance related pay frequently disturbs working practices and changes expectations in a manner disturbing to employees used to traditional pay systems. However the pace of economic change is forcing employers to move in the direction of performance related pay schemes, whether they like it or not. The study has found that many employed objected to having the size of their pay packets determined by what they saw as poor line manager, the survey evidence shows that performance pay has failed to motivate employees and may have done to demoralize staff. (Thompson, 293).

To overcome these problem Armstrong and Murlis advice:

  • Match the culture
  • Link performance related pay to the performance management process
  • Ensure individuals are clear about targets and standards of performance against these targets and standards.
  • Employees should be able to influence performance
  • Employees should be clear about rewards.
  • Rewards should be meaningful enough to make the efforts required worthwhile (Murlis and Armstrong, 199)

Results and Analysis

About the Organization: The organization “Well Care” is in the service of providing help in the form of palliative care to the victims of Cancer and having presence all over the world with just above 1000 employees. Head Quartered at New York and having a four tire employee systems. This includes workers of over 700 people and supervisors of 100 people and rest middle level and top level mangers. The organization is having separate appraisal system for its work force, supervisors and mangers. The appraisal system for the work force is discussed here.

Scope of the Appraisal system: Employees are appraised on two angles. One from their performance on the job and the other is on their attitude and other personality variables towards the company. It is well designed and structured so that the employees are properly assessed

Contents of the appraisal system: First sheet of the appraisal system needs to be filled in by the employee himself. This consists of his personal information.

  1. Name
  2. Employee code
  3. Joining Date
  4. Designation
  5. Nature of work
  6. Special training if any undergone in the assessment
  7. Period
  8. Strengths
  9. Weakness

The supervisor of the employee is required to fill the second part of the form after interviewing the employee. The appraisal is carried out on the following headings:

  1. Quantity of work. Whether the employee is producing the result as per the task.
  2. How better he does the job.
  3. Knowledge of the job
  4. Loyalty of the employee towards the company
  5. Attitude of the employee
  6. Discipline- respect towards his superiors.
  7. Is he respected by his coworkers
  8. How good in following instructions
  9. Is he shows empathy to Cancer Patients
  10. Team work.

Appraisal Rating: The supervised is asked to asses the employees working under him on the attributes discussed above. He is to be impartial and professional in rating the employees. He is supposed to make an interview with the employees and should advice the employees on his shortcoming for improvement. After his appraisal he is to submit the report to the reviewing officer, who is placed above the supervisor. Each employee is given mark out of ten under each attributes. Then the total mark obtained is calculated. This is used for grading the employees in five categories.

Grading: Excellent 80-100, Superior 70-80, Satisfactory-50-69, Poor30-49 and Very Poor-Below 30.

After grading the employees, who got excellent and grading -poor and below that would go for another interview with the reviewing officer. Depends up on his appraisal those who gets continuous excellent for two consecutive years would be considered for a promotion. Similarly the employee who gets rating Poor and very poor are likely to be fired from the organization and they are warned of it. How ever they are given chances for improvement before firing.


For an effective performance appraisal and merit pay to take place and to be practical, the following recommendations should be considered:

  1. Organizations must train their managers and supervisors/ evaluators thoroughly on how to handle the appraisal exercise. This will prepare them fully so that when the exercise will be conducted, it will be done professionally with less on no errors.
  2. Employees duties and responsibilities should be well be defined so as to make evaluation easy. This will prepare the employees for the exercise.
  3. Employees should be given guidance as well as counseling before, during and after the exercise. This will make employees to be aware of the outcomes of the review process and should be informed on what channels to follow if making a follow up of the out come.
  4. The performance appraisal exercise should carried out on a regular basis preferably on a quarterly basis as this is the shortest time to appraise an employee more effectively and its easier for the evaluator to track down the performance of the employee in that particular quarter.
  5. The employees who deserve merit pay should be rewarded so that they continue putting more efforts and excellence in their jobs. Not rewarding them is one way of demoralizing them and hence the organizational objectives will not be attained.
  6. The appraisal systems should be reviewed on a regular basis so that they can best fit the changing times.


It is important for organizations to handle performance appraisal with care bearing in mind it is importance. In an organization where the exercise is not carried out, it is very difficult to determine who is a good and poor performer. The exercise should be fair to all employees without any considerations of tribe, age, sex and race. It should be done on merit and those who have performed better and need promotion and merit pay should be awarded this but organizations must first explain this to their employees before the exercise is done.

All organizations be it private sector, Non-governmental organizations, the public sector should embrace performance appraisal exercise in order to evaluate whether their employees reach the targets they set themselves against the targets of the organizations they are working for. The exercise should not be intimidating to the employees but should be a friendly one between the employee and the evaluator. Personal biases should not be allowed to interfere with the appraisal exercise as this may jeopardize the whole process as irrelevant information will be gathered which will not be useful to the employees and the organization. Organizations should also endeavour to improve and make corrections in their appraisal systems so that they can be more relevant to the changing work dynamics.


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