Performance Appraisal, Incentives, and Employee Benefits: HRM Fundamentals

Performance appraisal

A formal system used to evaluate employee performance for administrative, developmental, cultural, and legal purposes.

Purposes of performance appraisal

Cultural alignment, administrative decisions, legal documentation, HRM coordination, and performance management.

Challenges of performance appraisal

Rater discomfort, reluctance to provide negative feedback, recall problems, employee reactions, administrative burden.

Value-expressive voice

When employees express opinions to feel heard; expression matters more than influencing outcomes.

Instrumental voice

When employees express opinions that directly influence decisions or outcomes.

Adequate notice (due process)

Employees must know performance standards and expectations before being evaluated.

Fair hearing (due process)

Employees must have an opportunity to present their side and participate in evaluation discussions.

Judgment based on evidence (due process)

Performance ratings must reflect documented, job-related evidence, not bias or favoritism.

Ways to improve performance appraisal

Frequent, private, and specific feedback; coaching; consistency; focus on patterns not single events.

PA model: Administrative

Ratings are used for decisions such as raises, promotions, and terminations.

PA model: Developmental

Ratings are used to improve employee skills, coaching, and career development.

PA model: Mixed model

Combines developmental and administrative purposes; most common model in organizations.

Continuous management model

Ongoing performance conversations that replace annual reviews (e.g., Adobe Check-In).

Rater-ratee relationship

High trust leads to higher acceptance of feedback and an effective appraisal system.

Forced ranking example

GE Vitality Curve requiring ranking employees into top, middle, and bottom categories.

Pay for performance (P4P)

Compensation directly tied to measurable employee performance outcomes.

Why P4P is important

Motivates employees, aligns behavior with goals, attracts high performers, and controls labor costs.

Does P4P work?

Yes, when performance is measurable, rewards are meaningful, and the system is fair; poorly designed systems can cause unethical behavior.

Cognitive evaluation theory (CET)

Suggests that extrinsic rewards may reduce intrinsic motivation; supported mostly in creative tasks.

Implications of CET

Use incentives carefully; maintain autonomy and meaningful work to preserve intrinsic motivation.

Merit pay

Permanent salary increases based on performance appraisal ratings.

Problems with merit pay

Small raises, unfair ratings, favoritism, poor differentiation, low motivational impact.

How to improve merit pay

Clear performance standards, meaningful raise differentiation, accurate and fair appraisals.

Lump-sum bonus

A one-time bonus that does not increase base salary; highly salient and motivating.

Individual incentives

Pay linked to individual output (e.g., piecework, commissions, spot bonuses).

Advantages of individual incentives

Strong motivation, high productivity, clear line-of-sight between effort and reward.

Disadvantages of individual incentives

Competition, reduced teamwork, risk-taking, cheating, quality issues.

Team incentives

Rewards based on team performance.

Advantages of team incentives

Improve collaboration, teamwork, and shared accountability.

Disadvantages of team incentives

Free-riding, unfair distributions, frustration among high performers.

Gainsharing

Group bonus system where employees share savings from productivity improvements or cost reductions.

Why gainsharing is effective

Strong line-of-sight; employees participate in improvement teams; highly motivating.

Profit sharing

Bonuses based on company-wide profits; typically shared with all employees.

Effectiveness of profit sharing

Moderately effective; weak line-of-sight; typically leads to ~7% productivity improvement.

Piece rate example

Nucor Steel's system where employees are paid based on output.

Incentive culture example

Lincoln Electric's system emphasizing strong incentive programs.

Misaligned incentive example

Sears Auto scandal where P4P created unethical behavior.

Purpose of legally required benefits

To protect employee income, provide health security, ensure workplace safety, and support job stability.

Categories of legally required benefits

Income protection, health protection, workplace injury protection, job-protected leave.

OASDI (Social Security)

Provides retirement income, disability benefits, survivor benefits, and Medicare eligibility.

Issues with Social Security

Trust fund strain, aging population, fewer workers per retiree, long-term sustainability concerns.

Unemployment Insurance

Provides temporary income to eligible unemployed workers; typically available up to 26 weeks.

Medicare Part A

Hospital insurance.

Medicare Part B

Medical/physician services insurance.

Medicare Part C

Medicare Advantage plans (HMO/PPO-style managed care).

Medicare Part D

Prescription drug coverage.

Workers' Compensation

No-fault insurance covering medical care, wage replacement, disability, and survivor benefits for workplace injuries.

Types of workers' comp claims

Injuries, repetitive strain, occupational illness, workplace death.

FMLA eligibility

12 months of employment, 1,250 hours worked, and employer with 50 or more employees.

FMLA benefits

12 weeks of unpaid, job-protected leave for birth/adoption, serious illness, or military caregiving.

Discretionary benefits

Employer-provided benefits not required by law, used to attract and retain employees.

Importance of discretionary benefits

Enhance retention, morale, and organizational competitiveness.

Income protection programs

Short-term disability, long-term disability, and life insurance.

Traditional indemnity plan

Highest cost; most freedom to choose providers; reimburses after service.

HMO

Low cost; limited provider network; requires PCP referrals and gatekeeping.

PPO

Moderate cost; more flexibility; can see specialists without referral; in/out-of-network options.

Cost control mechanisms

Deductibles, limited networks, wellness programs, preauthorization, disease management.

Defined Benefit (DB) plan

Employer guarantees pension payout; employer bears investment risk.

Defined Contribution (DC) plan

Employer contributes a fixed amount (e.g., 401k); employee bears investment risk.

Current trend in retirement plans

Shift from DB to DC due to cost savings and reduced employer risk.