In addition, there is also the question about whether a truly accurate (when negative) appraisal is the best course of action due to the possible negative consequences. Management by Objectives (MBO)

Sudarsan (2009) surmises that, in the past, researchers have concluded that there are primarily three approaches to performance appraisals. The first approach -- the results focused approach -- is centered on determining whether a specific job has been performed or not. If these performance targets are met or exceeded, the employee is rewarded. The second approach -- the behavioral approach -- focuses on employee behavior. The actual output of the employee is ignored, but instead the methods the employee is using is evaluated. This approach has the benefit of being able to spot what the employee may be doing wrong and allow for efficient correction of the behavior. Lastly, the third approach -- the person-centered approach -- measures personal characteristics of the employee. These include their skills, knowledge and ability. Employees with a higher rating, via this approach, possess characteristics that the organization deems superior. This system has nothing to do with the output of the employee or the processes they use, but instead is based on items such as formal qualification and certifications that the employee has earned, even if actual performance is lacking.

The earliest appraisals were based on employee traits. However, these evolved into appraisals of actual employee performance and behavior, thanks primarily to the work of Peter Drucker in 1955 and his theory of Management by Objectives (MBO). Of course, as Sudarsan (2009) cites Douglas McGregor, he too felt the trait-based appraisal systems that were popular at first were ineffective, noting that "managers don't like 'playing God'." McGregor further felt that managers were reluctant to perform performance appraisals because they didn't have the skill to conduct the appraisal, and they doubted the appraisal instrument's validity. Instead, he recommended Drucker's MBO concept, where an employee's performance is measured against goals that are established by the organization itself. Although work output had been an appraisal factor in the past, Drucker's MBO theory uses objectives as performance yardsticks. Sudarsan explains that the theory involved the "unit managers were expected to participate in the process and help to set their own goals. In theory, organizations would develop a cascading system of objectives linking units to the organization. The contributions of the units would therefore directly reflect on achievement of the organizational objectives.

Sudarsan's (2009) study found that nearly all of the organizations he surveyed were concerned about their employees meeting objectives or achievements. These objectives were described by a variety of terms including: objectives, goals, targets, Key Results Areas (KRAs), Key Performance Indicators (KPI), and work achievement. More than 60% of those surveyed indicated that objectives were a criterion for appraisals. Forty percent actually required their employees to specify their objectives for the following year, on a form. The difference in these two figures is of concern.

If 60% of organizations use objectives to determine whether or not an employee has made a valuable contribution to the organization, yet only 40% require their employees to specify what their objectives are for the upcoming year, which will be used when their appraisal time rolls around again, this is a problem. Twenty percent of the organizations had individual employees who may not now what their objectives are, for the upcoming year. In addition, when it comes time for appraisals, how is the evaluator supposed to accurately rate the employee, when they themselves likely don't know what the objectives were to measure against?

A primary fault that lies within the MBO system, according to Sudarsan (2009), is that although clearly employee performance contributes towards the completion on organizational objectives, most often these individuals perform a variety of tasks. These tasks don't always directly relate to objectives. There are a multitude of intangible inputs, Sudarsan notes, and for this reason, a performance appraisal system that is primarily based on objectives cannot be applied universally. There are normal routines in any position that are not amenable to the use of MBO to determine if they are being completed effectively.

Citing Deming and Levinson, Sudarsen (2009) explains "that things that are easy to count are counted. (However,) as measurement and quantification gain in importance, the finer, qualitative aspects tend to get ignored." This can result in 'impression management', where an organization places great importance on minor matters that give the appearance of being impressive, but are really not connected to performance. Sudarsen gives the example of how the Royal Navy, in the 1890s, used to promote their...

This resulted in some of them not performing gunnery practice as they were afraid it would spoil the paint on their ship. This is analogous with today's organizations focusing on tasks that can be measured, even if they don't truly impact the success of the organization. In addition to this concern, there is still the underlying concern, just as there were in both Murphy (2008) and Rao's (2008) systems.
This underlying concern with the MBO system is that it is again based on a rating given by an evaluator and there is no way to ensure that this rating was fairly given. The differences in output of an employee 94% of the time are due to the system in which they work, not their own skill or effort (Sudarsen, 2009). The environmental factors are the responsibility of management, not the employee. Yet, the employee's performance appraisal is negatively affected by factors that are beyond their control.

Data Envelopment Analysis (DEA)

Manoharan, Muralidharan, and Deshmukh (2009) note that performance appraisals have been one of the most researched topics in the fields of human resource management and industrial-organizational psychology. Over recent years, human resource services has undergone a significant amount of change. Instead of focusing on the management of established HR functions, as is traditional, human resources will be concerned with guiding and implementing organizational strategies. This increasingly strategic role, according to the authors, has increased the need for line managers consistently being able to measure performance of the organization's human resources.

One of the functions of a performance appraisal system, according to Manoharan, Muralidharan, and Deshmukh (2009), is to mobilize the energy of the employees, to work towards strategic goals. Performance appraisals can connect an organization's strategy, including their vision, mission and values, with the daily performance of the organizational members. While many businesses focus on the 'hard science' of performance management, including the operational and financial aspects, the most successful companies, Manoharan, Muralidharan, and Deshmukh surmise, are those who pay attention also to the softer aspects of applying performance measurements.

An effective performance appraisal system should do more than establish salaries and make promotion decisions. It should also help the organization develop performance improvement plans, where superiors can coach their subordinates and increase their skills. This transforms appraisals from backward looking reviews of past performance to tools for foreward looking training. These appraisals, Manoharan, Muralidharan, and Deshmukh (2009) note, set the foundation for a variety of human resource functions. These include: hiring, evaluating, promoting, compensation, and training. For this reason, Manoharan, Muralidharan, and Deshmukh believe there is a need for tools to improve the appraisal process.

Manoharan, Muralidharan, and Deshmukh (2009) put forth that the use of data envelopment analysis (DEA) would overcome the subjective aspects of performance appraisal systems such as management by objectives, 360-degree feedback, and even the controversial weighting of systems such as Yee and Chen's fuzzy-based system. According to Manoharan, Muralidharan, and Deshmukh,

DEA measures efficiency by estimating an empirical production function, which represents the highest values of outputs that could be generated by relevant inputs, as obtained from observed and input output vectors for the analyzed Decision Making Units

(DMU). The efficiency of a DMU is then measured by the distance from the point representing its input and output values to the corresponding reference point on the production function. DEA defines the relative efficiency for each DMU by comparing its input and out put data to all other DMUs in the same cultural environment.

Although Manoharan, Muralidharan, and Deshmukh's DEA system for performance appraisals appears to counteract some of the major challenges of appraisals, on the surface, looking closer it can be seen that these challenges still exist.

Sudarsen's (2009) concern that the system (the environment within which the employee works) most often contributes to the differences in production efforts, appears to be countered with Manoharan, Muralidharan, and Deshmukh's (2009) DEA appraisal system, through the use of comparing one employee's inputs and outputs with those in the same environment. However, as these environments aren't exactly identical, it's impossible to fairly make the comparison. As an example, a group of production employees doing the same function work side-by-side. One, however, has a knife that is less sharp than his peers, making it slightly more difficult to perform his tasks. The knife is not so dull that he notices and complains, so management will issue him a…