Formal systematic appraisal usually occurs semiannually or annually. Formal appraisal has four major purposes: (1) to let employees know formally how their current performance is being rated; (2) to identify employees who deserve merit raises; (3) to locate employees who need additional training, and (4) to identify candidates for promotion.
It is important for managers to differentiate between the current performance and the potential performance of employees. Managers in many organizations fail to make this distinction because they assume that a person with the skills and ability to perform well in one job will automatically perform well in a different or more responsible position. This is why people are often promoted to positions in which they cannot perform adequately.
Who is responsible for formal performance appraisals? In answer to this question, four basic appraisal approaches have evolved in organizations. The first approach, a manager’s rating of an employee, is by far the most common. However, other approaches are becoming more popular and can be a valuable supplement to appraisal by a single person.
A group of managers rating an employee is the second most frequently used appraisal approach. Employees are rated by a managerial committee or by a series of managers who fill out separate rating forms. Because it relies on a number of views, this approach is often more effective than appraisal by a single manager. However, it is time consuming and often dilutes employees’ feelings of accountability to their immediate supervisor.
The third appraisal approach is a group of peers rating a colleague. The individual is rated separately and on paper by co-workers on the same organizational level.
The fourth approach is employees’ rating of bosses. This approach is used in some colleges where faculty are asked to evaluate their dean on a number of performance measures. But it is increasingly used at businesses that are responding to the furor of dynamic engagement. At AT&T and other companies many employees rate their bosses in what is called “3600 Feedback.” Even the chairman gets a review from his direct subordinates.
Compensation has traditionally been linked to a particular job or job description. The general idea is that the more responsibility a manager has, the more compensation he or she should earn. Oftentimes jobs are rated by a job evaluation system which measures such variables as the number of subordinates, level in the organizational hierarchy, and the complexity and importance of the job function. In such a traditional or bureaucratic approach, senior organizational executives tend to be paid very well. Lower level employees may be well paid, especially in the United States and Europe, but they have been increasingly under utilized. When competition from other countries with lower pay scales emerges, companies find they are no longer competitive. Compensation systems that make organizations more productive must therefore be devised.
Compensation should be linked to the process of setting and achieving organizational objectives. Many organizations have adopted a new approach to compensation that avoids the sometimes bureaucratic and hierarchical linkage to job descriptions and spans of control. This new approach dubbed ‘the new way’ or it is sometimes called strategic pay. The new pay approach is based on responses to the world of dynamic engagement that organizations face. New global competition and a changing labor force spell the need for creative human resources strategies, especially with regard to compensation.
The new pay consists of strategic approach to total compensation. Total compensation involves base pay, variable pay (often called “inventive pay”) and indirect pay (often called benefits). Organizations attempt to match base pay with labor market conditions in order to have competitively priced labor forces at their disposal. Incentive or variable pay is used to reward performance improvements. In addition, it gives management and employees the idea that they are partners in the competitive success of their organizations. Indirect pay or benefits have changed dramatically during the last few years as many organizations have moved toward flexible benefits packages that allow employees to tailor packages to their particular situations. On issues such as health care benefits, many organizations are experimenting with cost sharing techniques.
By linking base pay to the labor to the labor market and variable pay to the success of the organization, managers can use the compensation system to foster teamwork and other organizational goals. At Johnsonville Sausage, for example hourly workers have a base pay rate determined by the labor market. Since the goals of Johnsonville Sausage include the self improvement of its employees and the encouragement of teamwork, the company has linked an increase in the base pay arte with the education and skill training of the employees and an annual bonus with overall organizational performance. Many consulting firms and investment banks adopt strategic pay. They compensate people at a base rate necessary to hire and keep the best people, and they offer bonuses based on firm or work group performance.