ABA Labor and Employment Law Section Equal Employment Opportunity Committee 2004 Mid-Winter Meeting March 24 27,

, 2004

PERFORMANCE APPRAISALS

Terrence H. Murphy Klett Rooney Lieber & Schorling A Professional Corporation 40th Floor, One Oxford Centre Pittsburgh, PA 15219-6498 Phone: (412) 392-2000 Fax: (412) 392-2128 E-mail: thmurphy@klettrooney.com Joyce Margulies Chief Counsel - Human Resources International Paper Company 6400 Poplar Avenue Memphis, TN 38197 Phone: (901) 419-3838 Fax: (901) 419-3855 E-mail: joyce.margulies@ipaper.com

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PERFORMANCE APPRAISALS By Terrence H. Murphy Joyce Margulies I. INTRODUCTION A. As competitive pressures have increased, employer interest in differentiating employee performance levels, addressing poor performance and using performance appraisals as constructively as possible, has increased. Performance appraisals may serve a variety of purposes. Among the potential aims of performance appraisals are: 1. 2. 3. 4. C. II. Pinpointing specific behavior or job performance that should be discontinued or reinforced. Serving as an employee development and coaching tool. Providing a realistic assessment of an employees readiness for promotion. Serving as the basis for awarding merit pay.

B.

Few tasks occupy as much time by human resource professionals as designing, implementing, monitoring and defending performance appraisal systems.

GENERAL APPROACHES A. Traditional performance appraisal methods involve quantitative tools to rate employees and are oriented to numerical or scalar ratings. When combined with reasonable judgment, such methods can provide adequate measures of performance, but as the complexity of jobs increases, the orientation to numbers becomes more problematic because reducing the complexities of each individuals contributions and competency to a letter or number is for a variety of reasons inadequate.

Shareholder Klett Rooney Lieber & Schorling Philadelphia, Pittsburgh and Harrisburg, PA Newark, NJ Wilmington, DE Washington, DC

Chief Counsel - Human Resources International Paper Memphis, TN

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1.

A single numerical rating for performance puts employers in the difficult position of depending on such a number for what may be several important career decisions about an employee, as well as use of such a number to pinpoint a pay increase allowed by a compensation system. Under such a system, the annual exercise of documenting performance appraisals can end up being geared generally to satisfying the compensation system and not providing employees with effective developmental counseling. Centralized, system-driven performance and pay systems may achieve a legal measure of equity and ease in administration, but management judgment and flexibility become limited, and individual treatment and motivational impact are minimized.

2.

3.

B.

A different approach to performance appraisals is to use more collaborative techniques management-by-objectives, work planning and review, 360 appraisals, peer review, etc. 1. These approaches are considered more effective than traditional methods particularly where employees have a high need for achievement and development. Collaborative approaches are designed to help people develop, grow and become more effective employees. The emphasis is on communication, on matching expectations between supervisor and subordinate, and on goal setting. These techniques often are perceived to be more humane or fair because of the involvement by subordinates with a commitment to the system and its goals.

2.

3.

C.

Over the years, approaches have been developed that fall between traditional, numerical appraisals at one pole and wholly collaborative systems at the other pole. Describing all these shades of gray in performance appraisals systems is beyond the scope of this brief outline. The goal of the performance appraisal system becomes a critical issue. Many companies do not consider this carefully enough and the result is that they ask their performance appraisal system to do too much. In many companies, appraisals are expected to fulfill all or most of the following functions feedback, coaching, goal setting, skill development, pay determination, legal documentation, employee comparison and layoff selection. No performance appraisal system can meet all these ends.

D.

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III.

FORCED RANKING SYSTEMS A. The competitive pressures of recent years have led some major employers to look to the concept of forced ranking of employees, using a traditional bell curve. The idea is to eliminate marginal performers and thereby raise overall performance with the employer. Although proponents say these programs are an effective way to reward high performance, eliminate unproductive employees and increase organizational effectiveness, they have a variety of critical defects. Problems with forced ranking approaches 1. With respect to discrimination issues, because forced ranking presents the possibility that a satisfactorily-performing employee may nonetheless be ranked at the bottom and discharged as a result, the employer must be prepared to present a thorough explanation of the program, including its emphasis on comparative rather than actual job performance, in order to avoid findings of pretext and/or discriminatory intent. To avoid disparate or adverse impact claims, the employer must ensure against disproportionate effect on employees in protected categories. Such systems do not impose honesty in performance evaluations - more often they artificially deflate ratings. Because employee performance is rated in comparison with performance of other employees, it may have little to do with actual job performance. Even if all employees are performing well, some will be ranked at the bottom, which may punish those organizations that have recruited and trained well, but weeded out poor performers. At the senior or executive-level, a company may not be accepting of the proposition that a certain proportion of employees are unworthy of retention. If a forced ranking system is pushed too many levels down from senior and executive level positions, the tendency may be to impose the forced lower ranking on employees in positions which are less crucial, so that ranking becomes more dependent on criticality of job than quality of performance. Forced ranking systems provide little allowance for market factors some positions are difficult to fill because the labor market includes few persons with necessary skills. An employee in such a position may be a marginal performer, but hard to replace, so that a discharge based on forced ranking would be an unwanted result.

B.

C.

2. 3.

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IV.

LEGALLY WORKABLE PERFORMANCE APPRAISALS A. A focus with respect to performance appraisal is the involvement of subjective judgments. In general, the courts have shown tolerance for subjectivity and performance appraisals, particularly when the positions involved are upper level jobs involving skills, attributes and abilities arguably not susceptible or at least less susceptible to objective measurement. Elements of a Successful Performance Appraisal System 1. 2. Clear instructions and training for performance raters. Performance-rater familiarity with the nature and importance of job duties on which employee is being rated and with the employees actual performance. Use of an appraisal system that is as job-related and understandable as possible. Precautions against improper bias by performance raters. Some additional level of review and signature beyond the performance rater. Some amount of monitoring to ensure uniform approach or application of the standards in the performance system. Employee right to review and comment. Employee signature to signify reading of review but not necessarily agreement with any rating. Employee right of appeal if the system is oriented toward that. Whether the system is numerical and traditional, or collaborative, some means to ensure specific and mutually agreed-upon goals. Some statistical evaluation for adverse impact.

B.

3. 4. 5. 6. 7. 8. 9. 10. 11. C.

Practical considerations 1. 2. 3. Make sure the appraisals are actually done. Try to ensure that the written text in the appraisal matches any numerical rating. Use some form of review process to help ensure against arbitrary decisions.

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4.

Try as best as possible to ensure honest and candid appraisals so that, to the extent that the appraisal is set up to do this, it distinguishes between high and low performers.

D.

Most truly effective performance appraisal systems are characterized by the fact that those administering the performance appraisals are well trained. Instead of offering simple instructions to performance raters, organizations that want the most from their appraisal process usually implement training programs to correct a raters common mistakes. A list of common mistakes is as follows: 1. 2. 3. 4. 5. 6. Halo effect rating employees excellent in many categories when they excel only in one. Leniency/stringency very low or high ratings instead of finding any category in which the employee is average. Contrast effect evaluating an individual in relation to other employees performance instead of on job requirements. Similar-to-me effect rating employees favorably because they mirror the raters self-image. Central tendency error putting every employees performance in the middle of the rating scale. First impression letting initial evaluations of employees overshadow actual performance during the rating period.

V.

SOME MANAGEMENT CONSIDERATIONS A. As noted, a major issue with performance appraisal systems is defining the goals of the system and matching goals with the right tools and techniques. 1. An emphasis on selection of employees for promotion or training and/or granting of compensation increases favors a traditional, quantitive appraisal with unilateral goal-setting by management. a. b. B. Managers may be more comfortable with numerical or scale rankings. Quantitive measures sometimes are easier to defend against legal challenges than qualitative appraisals.

If the emphasis is on communication, matching expectations between supervisor and subordinate, and mutual goal setting, then a collaborative approach aimed at helping employees develop and become more effective is preferable.

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C.

A system incorporating both traditional and collaborative approaches may be desirable, but such systems require sophistication and considerable attention to design. Employers should be wary, as noted, of imposing more goals on a performance appraisal system than it can be expected to accomplish. Whatever system is used, a good measure of success is how those appraised and compensated perceive the accuracy and fairness of the program. A program that is seen as fair and personalized, regardless of sophistication, will likely be motivational. A good first step in deciding whether changes are needed in a performance appraisal system may be a survey of management and employee attitudes about appraisal practices and compensation.

D.

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