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Summary Article: Personnel Evaluation
from The SAGE Encyclopedia of Theory in Psychology

Personnel evaluation, or performance appraisal, is the process of assessing employees and giving them feedback based on how effectively they are completing the tasks, duties, and responsibilities of their job. The primary goal of personnel evaluation is to align the behaviors of employees with the goals of the organization. This entry discusses best practices for conducting effective employee evaluations.

An integral part of the performance appraisal process is sharing the evaluation with the employee, thus allowing the employee to be aware of any gaps between actual and desired performance and, ideally, encouraging changes in employee behavior. Much of performance appraisal is atheoretical, and research in this area typically lags behind practice. As a result, much of the established knowledge about personnel evaluation is descriptive of what has been done. That which is prescriptive—what should be done—draws on a combination of what has been shown to work (best practices) and information culled from psychological theories about how to structure processes for fairness and how to give feedback in a way that is nonthreatening to the employee.

In terms of what should be done, research on procedural justice clearly shows the importance of personnel evaluation processes that are perceived as fair. Those viewed as unfair tend to undermine motivation and increase turnover. Organizations should design processes carefully and train managers in how to conduct performance appraisals properly in order to increase positive results. In terms of content, managers can also increase perceptions of fairness by providing a balanced review—recognizing both strengths and weaknesses rather than just focusing on the negative.

Feedback intervention theory (FIT) provides additional guidance about the content of personnel evaluations. FIT is based on the finding that although giving employees feedback generally improves their subsequent performance, it actually causes decreases in performance about one third of the time. FIT proposes (and finds empirical support for the proposal) that performance decreases when the feedback focuses on the individual (which is ego threatening) rather than on the task. This draws attention away from performance and toward preservation of the ego, which actually leads to more detrimental effects on subsequent performance. Recommendations for best practices, therefore, include a focus on the task rather than the individual when conducting performance appraisals.

Personnel Evaluation Functions

Personnel evaluation, like other human resource practices, is most effective when it is aligned with the organization's strategy. As stated previously, it serves a basic function that is strategic in nature—aligning employees’ actions with the organization's goals. However, it can also fill two other purposes, and organizations vary in the extent to which they use performance appraisal for these other functions depending on their overall business strategy and their human resource strategy. In addition to the strategic purpose, many organizations use personnel evaluations for developmental or administrative purposes (or both).

Organizations that use personnel evaluations for developmental purposes use the performance appraisal as a way to identify areas for growth and to encourage employees to further develop (via training, etc.) their knowledge, skills, and abilities. This provides two benefits: Employees perform better in their current roles, and they are being prepared for future roles in the organization. This use of personnel evaluations is more common in organizations that promote from within. The ongoing development of employees is critical in these organizations in order to have qualified individuals to promote as higher positions become available.

Developmental personnel evaluations are also more common for jobs for which it is more costly to replace employees. Jobs that require substantial training after hiring, for example, are more costly than jobs that don't require training. Likewise, jobs for which there is a labor shortage are harder to fill, and new employees can often command higher salaries because their skills are in demand.

There is, therefore, an advantage to hiring on a long-term basis for jobs for which there is a shortage of qualified potential applicants. In contrast, simple jobs that require few skills and little training incur few replacement costs. Organizations with many jobs of this type tend to put less effort into performance appraisal processes because identifying developmental opportunities for employees does not provide consequential benefit to the organization.

Personnel evaluations can also be used for administrative purposes. This means that the results of the evaluation are used to make administrative decisions about rewards (and punishments) for employees. Typical rewards include bonuses, merit-based pay raises, and promotions. Rewards increase motivation and performance when the process is designed and administered effectively. Punishments are generally less common, but if the performance appraisal process reveals problems, there can be negative consequences for the employee, up to and including termination of employment.

Although it seems that all organizations would use performance appraisals for administrative purposes, there is considerable variance in the extent to which this process is linked to rewards and punishments. For example, nonprofit organizations tend to have fairly simple pay structures based on the job, not merit. When pay is increased, it tends to be increased for all employees (e.g., a cost-of-living adjustment or COLA). Likewise, the public sector (government) tends to increase pay based on length of service, not performance. In the private (for-profit) sector, organizations that compete on price tend to maintain fairly simple pay structures, given the competition to keep costs low.

Spending less on labor costs, by paying everyone about the same amount for the same job, helps these organizations keep their prices competitive. By contrast, organizations that compete based on factors other than price (e.g., innovation) are far more likely to provide rewards based on performance, as the performance of key, high-performing employees should contribute more to their success in the external marketplace. Organizations that use personnel evaluations for administrative purposes tend to put greater effort into ensuring the fairness of the process (procedural justice). If higher performance means a larger reward, some effort must go into confirming that managers accurately identify high performers.

Objective Versus Subjective Evaluations
Objective Evaluation Methods

Methods for evaluating performance can be objective, though they are more commonly subjective. Objective methods are most often seen in sales (e.g., dollars of product sold) and manufacturing (e.g., the number of products assembled). Although objective methods would seem to be desirable, they are often deficient because they tend to provide information about outcomes, not processes. Supervisors’ evaluations, although subjective, can take into account the process by which the outcome was achieved. For example, a salesperson who was able to sell a great deal by making false promises to customers or by stealing clients from colleagues is probably not the best employee, regardless of dollars of product sold.

Unfortunately, subjective evaluations are also flawed, as supervisors bring their own idiosyncratic beliefs, opinions, and biases into the evaluation. They are not able to observe their employees 100% of the time, so their evaluation is based on incomplete information. Research that has examined variation in performance appraisal finds that over 50% of the variance in subjective performance is actually due to the supervisor who provides the evaluation rather than to the employee being evaluated.

Although many types of rater errors lead to bias in the evaluation process, the most common is similarity/likeness error. People tend to like other people whom they perceive to be similar to them (because they like themselves). Greater similarity leads to greater liking, and higher ratings of performance. This bias is incredibly difficult to mitigate because it is related to fundamental psychological processes.

Subjective Evaluation Methods

Subjective evaluations may consist of a narrative review, quantitative assessment, or both. In a narrative review, the supervisor generally provides a letter to the employee that details, in paragraph format, how the employee has performed over the last performance period (typically a year). Narrative reviews generally work well for developmental purposes because they can go into greater detail than a quantitative assessment does.

They are not as effective for administrative purposes in that they don't provide a clear method for comparing performance across employees and identifying who should receive the rewards. Quantitative assessments, usually ratings, are therefore more common when the performance appraisal is used for administrative purposes. A combination of a narrative review and a quantitative assessment tends to work best for organizations that want to use the performance appraisal for both developmental and administrative purposes.

Ratings require additional effort at the beginning of the process; the organization must develop an instrument that identifies what should be measured and what allows for quantitative assessment of performance. In terms of what to measure, organizations may decide to focus on attributes, behaviors, goal accomplishment, or some combination of criteria deemed important for the job in question. Personnel evaluations that focus on attributes are quite common; they require the least amount of time and effort to develop and are often applicable to a range of jobs. Attributes are general qualities of the employee that are considered beneficial to job performance, such as “verbal communication skills.” These are typically rated on a Likert-type scale (e.g., 1–5, where 1 = poor and 5 = excellent).

In an effort to reduce rater errors, some organizations have abandoned ratings in favor of rankings (though it should be noted that rankings really reduce only errors caused by differences in scale use). Although the rating method compares each individual to a standard, the ranking method compares the employees to one another. Ranking methods can be quite simple; managers can be told that they should rank their employees in order from best to worst. This assessment can be global (i.e., based on overall performance), or it can include a variety of attributes or behaviors (or both).

Some organizations use a variation of ranking called forced distributions. This method requires the supervisor to group his or her employees into categories, for example, 20% high performers, 70% average performers, and 10% poor performers. The top category usually receives merit-based pay increases and the middle category just a COLA. The bottom category is usually subject to some type of punishment; some organizations go so far as to terminate the bottom 10% every year.

Research shows that firing the bottom 10% is not a healthy practice for organizations in the long term; it tends to stifle creativity, risk taking, and cooperative behavior. It is also expensive to replace 10% of the workforce annually, and the practice is worth the expense only if the replacements are actually better than the workers who were terminated.

Finally, multisource (or 360-degree) evaluations are growing in popularity. These include evaluations by colleagues, customers, and the employee, in addition to supervisors. Multisource evaluations seem to work well when used for developmental purposes. Although an employee can discount negative feedback from one person, it is harder to ignore that same feedback when it comes from multiple sources. This method should not be used for administrative purposes, however, as it could create an incentive for employees to collude in order to increase their rewards.

See also Employee Motivation; Human Factors in Organizations; Performance Management; Personnel Development; Workforce Psychology

Further Readings
  • Kluger, A. N.; DeNisi, A. (1996). The effects of feedback interventions on performance: A historical review, a meta-analysis, and a preliminary feedback intervention theory. Psychological Bulletin, 119, 254-284.
  • Rynes, S. L.; Gerhart, B.; Parks, L. (2005). Personnel psychology: Performance evaluation and pay for performance. Annual Review of Psychology, 56, 571-600.
  • Scullen, S. E.; Bergey, P. K.; Aiman-Smith, L. (2005). Forced distribution rating systems and the improvement of workforce potential: A baseline simulation. Personnel Psychology, 58, 1-32.
  • Scullen, S. E.; Mount, M. K.; Goff, M. (2000). Understanding the latent structure of job performance ratings. Journal of Applied Psychology, 85, 956-970.
  • Laura Parks-Leduc
    Copyright © 2016 by SAGE Publications, Inc.

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