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Performance Appraisal

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Submitted By ALAM6666
Words 1900
Pages 8
Term Paper on
Different Methods of Performance Appraisal

Submitted to
Md. Mosharraf Hossain
Professor
Department of Management
University of Dhaka.

Submitted by
Mohammad Shafiqul Alam
ID: 3-10-19-030
Batch-19
Dept. of Management
Evening MBA Program
University of Dhaka.

Date of submission: 11th July, 2012.

Table of Contents
SL.No. Topics Page Number
1 Performance Appraisal 1
2 Classification of Methods 1-3
3 Management By Objectives (MBO) Method 4
4 Critical Incident Method 5
5 Weighted Checklist Method 6
6 Paired Comparison Analysis 7
7 Graphic Rating Scale 8-9
8 Essay Evaluation Method 10
9 Behaviorally Anchored Rating Scales(BARS) 10
10 Performance Ranking Method 11-12
11 360 degree performance appraisal 13-14
12 Forced Distribution 15
13 Behavioral Observation Scales 16
14 References 17

Performance Appraisal
A performance appraisal (PA) is a systematic and periodic process that assesses an individual employee’s job performance and productivity in relation to certain pre-established criteria and organizational objectives.
According to Michael R. Carrell and Frank E. Kuzmits
“Performance appraisal is a method of evaluating the behavior of employees in the work spot, normally including both the quantitative and qualitative aspects of job performance”.
To collect PA data, there are two main measures:
 Objective Measures
 Subjective Measures

Figure: Methods of Performance Appraisal

Compensation Determination
Definition
Employee compensation refers to all forms of pay going to employees and arising from their employment. Direct financial payments include wages, salaries, incentives, commissions and bonuses whereas financial benefits like employer-paid insurance and vacation. It has to main components: Figure: Employee Compensation
Different types of compensation include:
• Base Pay
• Commissions
• Overtime Pay
• Bonuses, Profit Sharing, Merit Pay
• Stock Options
• Travel/Meal/Housing Allowance
• Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes

Establishing Compensation
Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures.
The components of a compensation system include:
• Job Descriptions
• Job Analysis
• Job Evaluation
• Pay Structures
• Salary Surveys
• Policies and Regulations

Factors Influencing Pay
There are some factors that influence pay rates:

 Firm’s ability to pay
 Cost of living
 Union’s pressures and strategies
 Legal considerations
 Company policy
 Competitive strategy
 Equity

Equity here is of two kinds such as (1) internal equity and (2) external equity. Internal equity has been established when the pay rate is equal for same level of designation among different departments whereas external equity has been ensured when same level of payment existed for the same level of designation among different companies in the same industry.

The process of establishing compensation while ensuring equity consists of five steps:

Figure: Establishing Compensation Rates

1. Salary survey
The salary survey is a survey that aimed at determining prevailing wage rates which includes:
 Formal
 Informal
A good salary survey provides specific wage rates for specific jobs. Formal written questionnaire surveys are the most comprehensive, but telephone surveys and newspaper ads are also sources of information.
Employers use salary surveys in three ways:
Firstly, they use survey data to price benchmark jobs where benchmark jobs refer to the jobs around which other jobs are arranged in order of relative worth.
Secondly, employers typically price 20% or more of their positions directly in their market place (rather than relative to the firm’s benchmark jobs).
Thirdly, the surveys also collect data on benefits like insurance, sick leave and vacations to provide a basis for decisions regarding employee benefits.
Sources of salary survey:
There are some well established sources from which information regarding salary survey can be collected. The sources are more or less the followings:

2. Job Evaluation
A systematic comparison done to determine the worth of one job relative to another is called job evaluation. Job evaluation eventually results in a wage or salary structure or hierarchy. The basic principle of job evaluation is this: jobs that require greater qualifications, more responsibilities and more complex job duties should receive more pay than jobs with lesser requirements.

Job evaluation methods:
i. Ranking Method ii. Point Method iii. Factor Comparison Method
Ranking:
The method involves ranking each job relative to all other jobs, usually based on overall difficulty.

There are certain steps to complete a job evaluation process using ranking method:
 Obtain job information
 Select raters and jobs
 Select compensable factors
 Rank jobs
 Combine ratings Point method: The job evaluation method in which a number of compensable factors are identified and then the degree to which each of these factor present on the job is determined. Factor comparison method: A widely used method of ranking jobs according to a variety of skills and difficulty factors, then adding up these rankings to arrive at an overall numerical rating for each given job is called factor comparison method. 3. Group similar jobs into pay grades Once the committee has used job evaluation to determine the relative worth of each job, it can turn to the task of assigning pay rates to each job; however, it will usually want to first group jobs into pay grades. A pay grade is comprised of jobs approximately equal difficulty or importance as established by job evaluation.

4. Price each pay grade-Wage Curves The wage curve shows the pay rate currently paid for jobs in each pay grades relative to the points or rankings assigned to each job or grade by the job evaluation. The purpose of the wage curve is to show the relationship between (1) the value of the job determined by one of the job evaluation method and (2) the current average pay rate for your grades. The figure in the next page presents an example. Note that it shows average pay rate on the vertical axis and points in the horizontal axis. The wage curve has been drawn on the basis of the relationship of both variables, i.e. the value of the job determined by one of the job evaluation method and the current average pay rate for grades.

Figure: Wage Curve

5. Fine tune pay rates

The wage line usually anchors the pay rate for each pay range. The firm might then arbitrarily decide on a maximum and minimum rate for each grade, such as 15% above and below the wage lines.
Fine tuning involves (1) developing pay ranges and (2) correcting out of line rates.

Developing Pay Ranges:
Most employers do not just pay one rate for all jobs in a particular pay grade. Instead, employers develop vertical pay (or rate) for each of the horizontal pay grades (or pay classes)
 Flexibility in meeting external job market rates
 Easier for employees to move into higher pay grades
 Allows for rewarding performance differences and seniority

Correcting out of line rates: The wage rate for a particular job may now fall well off the wage line or well outside the arte range for its grade, as shown in the figure above. This means that the average pay for that job is currently too high or too low, relative to other jobs in the firm. For underpaid jobs, the solution is clear; raise the wages of underpaid employees to the minimum of the rate range for their pay grade. Pricing managerial and professional jobs Pricing managerial and professional jobs involves some special issues. Managerial pay typically consists of:
 Base Pay
 Short Term Incentives
 Long Term Incentives and
 Executive Benefits Base pay includes the person’s fixed salary as well as, often guaranteed bonuses such as “10% of pay at the end of the fourth fiscal quarter, regardless of whether the company makes profit a profit. Short term incentives are usually cash or stock bonuses for achieving short term goals. Long term incentives aim to encourage the executive to take actions that drive up the value of the company’s stock and include things like stock options; these generally give the executive the right to purchase stock at a specific price for a specific period. Finally, executive benefits might include supplemental executive retirement pension plans, supplemental insurance, and health insurance. What determines executive pay? For top executive jobs (especially the CEO), job evaluation typically has little relevance. One recent study concluded that three main factors accounted for about two thirds of executive compensation variance. They are:

1. Job complexity (span of control, degree of range),
2. Employer’s ability to pay (profit/rate of return) and
3. Human Capital(education, field of study, work experience)

The traditional wisdom is that company size and performance significantly affect top managers’ salaries. In reality, CEO pay is set by the board taking into account a variety of factors such as the business strategy, corporate trends and most importantly where they want to be in a short or long term.

Competency based pay We have seen that employees traditionally base a job’s pay rate on the relative worth of the job. But, in case of competency based pay payment is based on performance rather than job title s/he holds. Competency based pay means the company pays for the employee’s range, depth and types of skills and knowledge, rather than for the job title he or she holds.

In practice, competency based pay usually comes down to using one or both of two basic types of pay programs.

Pay for knowledge: Pay for knowledge pay plan reward employees for learning organizationally relevant knowledge-for instance, Microsoft pays new programmers more as they learn the intricacies of windows. Skill based pay: Skill-based pay tends to be used more for workers with manual jobs-thus; carpenters earn more as they become more proficient at finishing cabinets. Differences between traditional and competency based pay The biggest difference between traditional and competency based pay is the following:

 Traditional job evaluation-based pay plans tie the worker’s pay to the worth of the job based on the job description-pay here is more job oriented.
 Competency based pay ties the worker’s pay to his or her competencies-pay is more person oriented. Employees here are paid based on what they know or can do-even if, at the moment, they don’t have to do it.

Competency based pay in practice In practice, any skill/competency/knowledge based pay program generally contains five main elements, which are listed as follows:
i. A system for defining specific required skills ii. A process for tying the person’s pay to his or her skill level iii. A training system that lets employees acquire the skills iv. A formal skill competency testing system
v. A work design that lets employees move among jobs to permit work assignment flexibility.

Conclusion Developing a pay plan is as important in a small firm as a large one. Paying overly high wages may be unnecessarily expensive, and paying less may guarantee inferior help and high turnover. Furthermore, internally inequitable wage rates will reduce morale and causes endless badgering by employees demanding raises. In it can be inferred that necessary factors should be considered for establishing an effective pay plan.

References
Human Resource Management,12th edition,2011-2012,Gary Dessler, publishing as Printice Hall,One Lake street,Upper Saddle River,New Jersey 07458,ISBN 10:0-13-509519-0.
Methods of Performance Appraisal,2012, collected from the website www.openlearnigworld.com
Techniques of Performance appraisal and its form, 2012, collected from the website www.humanresources.hrvinet.com
Performance Appraisal Tool, 2012, collected from the website www.hronline.com

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