SRM INSTITUTE OF SCIENCE & TECHNOLOGY

COLLEGE OF SCIENCE & HUMANITIES

DEPARTMENT OF COMMERCE
UCM20D07J HUMAN RESOURCE MANAGEMENT

UNIT 3 NOTES
PERFORMANCE APPRAISAL – MEANING
Performance Appraisal is the systematic evaluation of the performance of employees and to
understand the abilities of a person for further growth and development. Performance appraisal is
generally done in systematic ways which are as follows:
1. The supervisors measure the pay of employees and compare it with targets and plans.

2. The supervisor analyses the factors behind work performances of employees.

3. The employers are in position to guide the employees for a better performance.

IMPORTANCE OF PERFORMANCE APPRAISAL:

Performance appraisals are used by companies to know more about their workforce. These
evaluations enable managers to learn about each employee's skills and limitations so that they can
best utilize them in the workplace and improve their future performance. Companies can also use
performance management software to evaluate which employees require additional training and
which ones are capable of taking on new responsibilities in the workplace.

Benefits Of Performance Appraisals

Companies can keep their staff interested and encouraged to work more by conducting
performance appraisals on a routine basis. Some of the advantages of performing a performance
evaluation are as follows:

Creates Career Growth Opportunities

Employees can improve in their jobs with the help of performance appraisals, especially if they
want to rise to a higher position within the organisation. A performance assessment can assist
employees in developing a professional development plan.

Improves Employee Performance

Giving feedback encourages employees to perform better. When a manager gives positive
feedback, employees are motivated to perform in a better way. Because performance reviews are
frequently used to evaluate how incentives are distributed, they can help motivate and recognize
employees for their efforts.
Boosts Employee Engagement
Employee engagement and retention can be increased by incorporating them in the performance
appraisal process on a routine basis. Employees will be more likely to perform well when they can
see how their actions influence the organisation as a whole. Regular performance reviews also
demonstrate to employees that their employer cares about them and is ready to take the time to
offer them the guidance they need to succeed.

Helps Determine Training Requirements

Companies can use performance appraisals to see which employees require additional training and
to choose what subjects to re-train in. If several employees are struggling to achieve a daily target,
for example, an employer may offer a seminar on how to work more productively or consider
cutting down the target.

Establishes Clear Expectations

Managers might reiterate their expectations for staff during performance appraisals. This aids
employees in understanding their everyday tasks as well as what their employer expects of them.

Enhances Team Communication

Performance appraisals provide managers with a scheduled, defined period to review how each
employee is performing overall, allowing for a smooth flow of conversation with no interruptions.
Managers can coach employees and provide tips on how to enhance their productivity during these
sessions. This time is also set up for employees to ask questions and address any issues they may
have.

Helps In Goal-Setting
Employers can assess how effectively an employee met their objectives and provide input on what
kinds of objectives should be set for the next quarter. Creating a goal management system that is
updated regularly ensures that staff is progressing and contributing to the organisation‘s goal.

Helps Highlight Areas For Improvement

Employers that conduct performance reviews regularly can identify areas that require
improvement before they harm the firm or become permanent. Employers frequently offer
suggestions and actions that employees might do in the future. Employees can continue to develop
and become the best they can be as a result of this.

Develops Team Bonding

Managers and staff can use performance appraisals to synchronize their goals and brainstorm
together. Meetings regularly might help to strengthen ties and make the boss appear more
accessible. Peer reviews allow people to know how much their colleagues value them.
Helps Communicate The Company Vision Clearly
Employees frequently overlook why they are working or how their actions make a big difference
in the day-to-day functioning of the company. Employees can recall why their effort counts by
obtaining feedback on tasks they've done. Managers can use performance appraisals to reinforce
the organisation's values and the goals that employees are striving toward.

PURPOSE OF PERFORMANCE APPRAISAL:

1. Ensure employees feel valued
In order to be productive and really at the top of their performance, it’s important to regularly
check in with them to give feedback that both express your appreciation for their work and helps
them understand the impact of their work on the business, which in turn makes them more likely
to stay engaged and continue performing well. While performance appraisals do give you the
opportunity to offer constructive criticism and address any shortcomings, it also gives you a great
opportunity to recognize the hard work of your employees.

2. Establishing goals
Part of your performance appraisal objectives is to track progress against past goals and give
direction for the future. Setting new target goals for your employees during a review helps to
motivate your employees towards what’s next, as well as help them align on the current strategic
goals of the business, particularly if those have changed since the last review. It keeps employers
and employees on the same page about expectations; employees also benefit from the confidence
they feel when meeting these new objectives.

3. Resolve problems
Whether an employee has a problem with their workload, a teammate, or a project, a formal review
gives you the opportunity to work on solving these issues and retaining your team members. It’s
also a key opportunity to share any grievances you have with their performance or progress.

4. Maintain positive managerial relationships

The best teams are those with the best relationships with their coworkers and managers. A
relationship doesn’t necessarily mean friendship, but health respect and open communication
between parties can go a long way towards enhancing productivity, creativity, and more.

5. Current project and day to day task check-in

 Managers don’t always get the chance to have regular one-on-one meetings with employees and
have oversight on current projects or the problems and successes that employees face along the
way. A performance appraisal is the minimum amount of time that a manager should be receiving
employee feedback and considering how to address complaints or work good employee
suggestions into a strategy.

6. Assess opportunities for promotion, advancement, and raises

A formal employee appraisal gives managers a dedicated space on their calendar to consider a
holistic list of employee contributions, strengths, and weaknesses and assess opportunities for
advancement is there’s a need in the organization that needs filling. Promoting from within not
only can save a company on hiring costs but can also greatly increase overall employee morale. It
also gives businesses an opportunity to consider additional compensation for a job well done and
an incentive for continued performance.

7. Understand training needs

Conversely, employee performance appraisals should give you an understanding of where
employees can benefit from more formal feedback or training. This helps you develop employees
into stronger business assets rather than dismiss them outright. Not only is hiring and retaining an
employee often less cost-effective than investing in current staff, offering training to develop skills
can help boost the job performance of someone who’s already a good team and culture fit. It’s
much harder to train for soft skills and culture fit than most other business skills.

METHODS OF PERFORMANCE APPRAISAL:

Organizations used various performance appraisal methods to rate and measure the performance
of their employees and set future goals for them. Current employees’ performance, as well as
benefits and costs used on the employees. There are two broad categories of Performance Appraisal
Methods.

 Traditional Methods of Performance Appraisal

 Modern Methods of Performance Appraisal

 TRADITIONAL METHODS OF PERFORMANCE APPRAISAL

Traditional methods are the old way of performance measuring methods. These are based on
personal qualities like knowledge, capacity, judgment, initiative, attitude, loyalty, leadership,
judgment, etc.

Ranking Method
Confidential Report
Forced distribution method
Essay Appraisal
Rating scale method
Paired Comparison
Checklist Method
Critical Incidents Method
Field review method

✔ 1. Ranking Method
The ranking method of performance appraisal is very common and widely used in organizations. In
this method, managers will rank all the employees or subordinates in order of their perceived
performance.

The ranking method of performance appraisal is quantitative only to the extent that a rank is a number.
No points are given to employees based on their performance in this method.

✔ 2. Confidential Report
This is one of the traditional methods of performance appraisal, which is mostly used in government
organizations. As suggested by the name, Confidential Report System involves handing over the
employee’s appraisal to senior-level management in sealed envelopes. These envelopes include their
performance detail in a certain time frame.
The confidential report is a traditional method of performance appraisal but is not generally used by
private organizations. Most commonly, this method is used by public or governmental organizations.

✔ 3. Forced Distribution Method

The forced distribution method is based on the assumption that employee performance level conforms
to a normal statistical distribution or bell shape curve.

This method solves the problem of performance appraisal in which the rater rate the majority of the
employee in the average categories. The forced distribution method forced the rater to rate the
employees on all points on the rating scale.

✔ 4. Essay Appraisal
This is a traditional and easiest method of performance appraisal in which a manager or superior
compose an essay based on subordinate performance in the previous year.

In the essay, the manager writes about the employee’s skills, knowledge regarding the job, relationship
with peers and seniors, the targets you achieved understanding of the company’s process, policies, and
objectives, and how professional an employee has

✔ 5. Rating Scale Method

It is a traditional method of performance appraisal of employees, and it is very popular among
organizations.

This method used a rating scale generally ranging from poor to excellent or 1 to 5 points or 1 to 5
stars. The manager or rater rates the employee based on several different job-related parameters, such
as initiative skill, behavior, dedication, punctuality, problem-solving ability, etc.

✔ 6. Paired Comparison Method

The paired comparison method is a kind of traditional method in which employees can be ranked by
the manager to determine whether every employee has performed better or worse than every other
employee.

✔ 7. Checklist Method of Performance Appraisal

In this method, a checklist of statements is based on the employee traits given to the rater, and the rater
should tick in a “Yes” or “No” column.

it could also include particular statements and the manager would be required to answer it in the form
of the extent to which they agree or disagree with it.

On the other side of the coin, this method has its own limitations. Its biggest drawback is that it’s not
subjective enough to be efficiently applicable in corporate organizations.

✔ 8. Critical Incidents Method

This is one of the best traditional methods which focuses on the critical behavior of an employee. As
per this method of performing this, a manager would write down the details of all the critical incidents
that an employee is involved in or performs and this detailed collection of incidents help during the
performance appraisal process.

✔ 9. Field Review Method of Performance Appraisal

This is an unconventional method of performance appraisal in which an outsider or member from the
corporate office and HR department assess the employee performance.

The human resources department conduct these type of performance appraisal method to find or
believe that a manager’s review is biased or inflated.

The HR department takes an interview with both employee and or their superiors and asks a set of
predetermined questions to assess employees’ talents and abilities.
► MODERN METHODS OF PERFORMANCE APPRAISAL
Modern methods of performance appraisal use technology to measure performance. They are an
advanced and more accurate method of measuring employee performance by improving the old and
traditional methods.

The list of modern methods of performance appraisal is given below

MBO (Management by Objective)

BARS (Behaviorally Anchored Rating Scale)
Assessment Centres
360-Degree Appraisal
Cost Accounting Method

✔ 1. Management by Objectives (MBO)

Management by Objectives is the most used method for an individual’s performance evaluation. In
this process, a specific task is assigned to the employee, through which an organization or job rater
can assess an employee’s performance. The task which is assigned to an employee should be
measurable, realistic, and achievable.

This method is commonly used in well-reputed organizations to measure the individual’s performance,
however, this method is effective and less costly in contrast to other methods.

✔ 2. Behaviourally Anchored Rating Scale (BARS)

The behaviorally Anchored Rating Scale method is one of the modern methods to measure an
individual’s performance. It measures the behavioral patterns of the individuals.

In the BARS method, the first manager notes the task that the employee performs and analyzes the
employee’s behavior. After analyzing the employees’ behaviors rater rate the behavior with the help
of a rating scales them explaining an individual trait. On the basis of an individual’s behavior, the rater
the behavior as good, average, or poor.

✔ 3. Assessment Center
In the assessment center approach, the employee’s current performance is observed or evaluated by
the manager or rater through interviews, different tasks,s and activities.

In the assessment center method, an organization sets up a social simulation in which employees are
asked to take part and rater judge the major competencies of individuals such as interpersonal skills,
intellectual capability, planning and organizing capabilities, motivation, career orientation, etc.
assessment centers are also an effective way to determine the training and development needs of the
targeted employees.

✔ 4. 360-Degree Appraisal
The 360-degree appraisal method is a systematic process of developing a comprehensive review of an
employee’s performance. In this process, organizations take feedback or employee reviews from
multiple people who have had an interaction with the employee.

It includes all employee team members, employee’s manager, employee’s juniors, and clients whom
they worked with all taking part in appraisal. The assessment may be wholly quantitative or a mixture
of quantitative and qualitative metrics.

After collecting feedback from every person who interacts with the employee, the human resources
team and the senior management can build a realistic assessment of an employee’s performance.

✔ 5. Cost Accounting Method

In this performance appraisal method, the focus is on how much profit an employee generated for the
organization.

According to the cost accounting method of performance appraisal, the job rater or evaluator will
measure the value of your contribution to the organization’s profit.

The decisions regarding an employee’s future, salary, promotion, and other considerations are solely
based on the amount of profit or loss that the employee contributes to the organization.

When nothing but costs and profits matter, it is hard for

There is serious acrimony among employees, especially in businesses where client interactions are a
daily feature of the job.

REMUNERATION – MEANING
Remuneration is the total compensation received by an employee. It includes not only base salary but
any bonuses, commission payments, overtime pay, or other financial benefits that an employee
receives from an employer.

Key Differences Between Salary and Wages

Following are the major differences between salary and wages:
1. Salary is the fixed amount of compensation which is paid for the performance of an
employee. Wage is the variable amount of compensation which is paid on the basis of hours
spent in finishing a certain amount of work.
 2. Salary is given to the skilled persons who apply their proficiencies in respective fields and
generate the revenues for the firm. Whereas wages are paid to the semi-skilled or unskilled
worker such as carpenter, welder, electrician, etc. who work on hourly basis.
3. In the case of salary, the cost incurred is fixed i.e. fixed amount is paid monthly. Whereas
in wages, the cost is variable, because it can vary with the day to day performance of an
individual.
4. Salary once decided, in the beginning, remains fixed throughout. Whereas in wage system,
there is a wage rate that keeps on changing and an individual is paid on the basis of
prevailing wage rate.
5. Salary is generally paid at fixed intervals i.e. monthly. Whereas wages are paid on a daily
basis for the number of hours spent.
6. Salary is paid on the basis of the performance of an individual. Whereas wages are paid on
hourly basis i.e. the amount of work done in hours.
7. Salary is paid to employees who possess the skills and efficiencies in completing the office
work. Whereas wages are paid to the labours, who are engaged in manufacturing processes
and do the work on an hourly basis.
8. Salary is given to those who are engaged in administrative or office work job. Whereas
wages are paid to those, who are engaged in manufacturing processes that require unskilled
or semi-skilled workers.
9. A salaried person usually has KRA i.e. key resultant area set for the month on the basis of
which their performance is judged. Whereas the waged person does not have any KRA and
is judged on the basis of hourly work done.
10. Salaried persons are not paid additional compensation for any extra hours. Whereas wage
holder does get an additional pay for the extra hours devoted by him.

MEANING OF ALLOWANCE

Allowance is a fixed amount of financial or monetary benefit offered by the employer to its
employee to meet the required expenditures over and above the basic salary. Allowances are pre-
determined and are given irrespective of the actual expenditure.

For example – The company provides the employees with some additional benefits like overtime
allowance if they work for extra working hours. The company can also give a travel allowance if
 the employer is travelling from home to the workplace. There are many such examples for which
allowances can be provided to employers.

Companies provide the allowances as a part of the salary of the employer and are taxable except
for those which are specifically exempted from the Income Tax Act.

TYPES OF ALLOWANCES

Depending upon the application of tax treatment, the allowances can be bifurcated into three
segments:-

1. Taxable Allowances
2. Non – Taxable Allowances
3. Partially – Taxable Allowances

1. Taxable Allowances

Taxable allowances are those allowances which are part of salary and are not exempted under any
section of Income Tax Act. These are taxed as per the tax slab of the employee. Here are few commonly
known taxable allowances:

Dearness Allowance: Dearness Allowance is mostly paid to employees over the basic salary to
manage inflation and as an adjustment towards the cost of living expenses. The income tax act clearly
mentions that tax liability for Dearness Allowance will be calculated along with salary. Therefore, one
must declare the same while filing income tax returns.
Entertainment Allowance: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance
only to a Government employee and in case of non-government employees entertainment allowance
is completely taxable.
Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter
the following deduction is to be made from gross salary:
The amount of deduction will be lower of:
One-fifth of his basic salary or
5,000 or
Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment allowance
received by him is not a relevant consideration at all.
Medical Allowance: This allowance is paid for the medical expenses incurred by the employee. this
allowance is fully taxable.
Overtime Allowance - Employees who work beyond their regular shifts may receive an overtime
payment from their employers. This is referred to as overtime and any compensation received is fully
taxable.
City Compensatory Allowance - This payment is made to employees who work in urban areas that
may be quite expensive in order to help them cope with the excessive expense of living there. It is
taxable irrespective of the fact whether it is given as compensation for performing his duties in a
particular place or under special
Interim Allowance - Any interim allowance given by an employer in place of a final allowance is
completely taxed.
Project Allowance - When an employer pays an employee's project-related expenses out of an
allowance, that income is completely taxable.
Tiffin/Meals Allowance- When employer pays for employee’s tiffin/meals that is entirely taxable.
Cash Allowance - When an employer offers a cash allowance, such as one for a wedding, a funeral,
or a holiday, it is fully taxable.
Non-Practicing Allowance – this allowance is given to doctors who provides their employer a
certificate that they are not working in any self practice. This allowance is generally 20% of basic
salary and dearness allowance.
Warden Allowance - When an employer provides a stipend to a worker serving as a Warden, or
Keeper, at a school, the stipend is completely taxable.
Servant Allowance - When an employer pays a worker to use a servant's services, that allowance is
considered as taxable income.
Transport allowance - Transport allowance granted to an employee to meet his expenditure for the
purpose of commuting between the place of his residence and the place of his duty is fully However,in
case of blind/ deaf and dumb/ orthopedically handicapped employees exemption upto 3,200 p.m. is
provided under section 10(14).
Other Taxable allowances - Telephone Allowance, Holiday allowance, and so on.
2. Non-Taxable Allowance
These allowances are part of the salary, however, are fully exempt from tax, which means while
computing tax these are deducted from the salary. Here are few commonly known fully exempted
allowances:

Uniform Allowance: Any allowance granted to meet the expenditure on the purchase or maintenance
of uniform for wear during the performance of the duties of an office or employment of This is
exempted to the limit of the actual amount spent on the expenses.
Allowances Paid to Government Employees Abroad - Allowances or perquisites paid or allowed as
such outside India by the Government to a citizen of India for services rendered outside India are
exempt from tax
Allowances Paid to UNO Employees - Allowance paid by the UNO to its employees is not taxable
by virtue of section 2 of the United Nations (Privileges and Immunities) Act,
Allowances Judges of the High Court and Supreme Court - Any allowance paid to a Judge of a
High Court and Supreme Court is not taxable.
Compensatory Allowances - Compensatory allowance received by judge under Article 222(2) of the
Constitution is not taxable since it is neither salary not
Sumptuary allowance- Sumptuary allowance given to High Court Judges under section 22C of the
High Court Judges Act, 1954 is not chargeable to tax.
Helper Allowance - Helper Allowance is the allowance granted to an employee to meet the
expenditure incurred on a helper when such helper is engaged for performing official duty.
Other Tax Free Allowances – Daily Allowance, Academic / Research Allowance, Conveyance
allowance, Allowances paid to government employee posted outside India, Compensatory Allowances
paid to Judges, and Travelling Allowance, and so on.
3. Partially Taxable Allowances
These allowances are exempt from tax to a certain limit as instructed in the income tax act. Here are
few commonly known partially taxable allowances:
House Rent Allowance - HRA is a special allowance specifically granted to an employee by his
employer towards payment of rent for residence of the As per the Sec 10 (13A), the least of the
following is exempted, and rest amount is taxable.
Actual HRA received
Rent Paid – 10% (Basic salary + DA)
40% of salary ( basic + DA) and 50% in metro cities like Mumbai, Kolkata, Delhi, or Chennai)
Exemption is not available to an assessee who lives in his own house, or in a house for which he has
not incurred the expenditure of rent.
Children Education Allowance - This allowance is granted towards the expenses incurred on a
child’s education. This is exempted up to Rs. 100 per month per child up to a maximum of 2 children.
Hostel Expenditure Allowance - This allowance is granted to employees for the expenses incurred
on the hostel fees of their child. This is exempted up to Rs. 300 per month per child up to a maximum
of 2 children.
Transport allowance - Any transport allowance granted to an employee who is blind or deaf and
dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his
expenditure for commuting between his residence and place of duty is exempt upto rs 3200 per month.
Allowance given to an employee in the transportation industry - Allowance given to an employee
in the transportation industry to cover personal expenses while performing duties related to the
operation of such transportation from one location to another, if the employee is not receiving the daily
allowance.
Amount of exemption shall be lower of following:
70% of such allowance; or
Rs 10,000 per month.
Special Allowance - Special Allowance is a allowance granted to the Employees to meet certain
expenses. The expenses must be incurred against which such allowance is given to the employee.
Underground Allowance- This allowance is granted to an employee who is working in uncongenial,
unnatural climate in underground mines is exempt upto 800 per month.
Conveyance Allowance Exemption Limit - Conveyance allowance refers to the compensation
provided by the employer to the employee for travelling to and from the workplace. Taxes are not due
on the allowance up to a monthly cap of INR 1600. According to the Income Tax Act, taxes will be
due on any sums received in excess of INR 1600. However, with the amendment coming in Budget
2018, tax exemption on conveyance/transport allowance has been replaced and included in the
Standard Deduction allowed. Therefore, no separate exemption will be allowed for
conveyance/transport allowance from FY 2018-19 onwards.
Leave Travel Allowance- You are eligible to claim exemption for LTA if you are going on a vacation
subject to exemption limit as specified under the Income Tax Act, 1961. This exemption applies to the
employee's when the journey is performed by rail, aircraft, or bus. The exemption is as below
If travel by Air: Maximum exemption shall be economy fare calculated by the airlines considering
shortest route to the Destination.
Where place of origin and destination is connected by Railways and the Journey is performed between
such places: Maximum exemption shall be not more than air-conditioned first-class rail fare by the
shortest route.
Where place of origin and destination is not connected by Railways: In case recognized public
transport exist, maximum exemption will be of amount not exceeding first class fare of such transport
by shortest route. In case recognized public transport does not exist, amount equal to air-conditioned
first-class rail fare.
This exemption does not apply to any additional local transportation, sightseeing, hotel
accommodations, meals, or other expenses. The lower of the two exemptions will be allowed:
The employer provides LTA.
Exemption based on expenses incurred or the applicable amounts subject to the conditions covered
above for each method of transportation.
Medical Allowance - Medical allowance is a part of the salary, exactly like dearness allowance. It is
totally taxed.
Medical reimbursement is a refund of the employee's or his family's medical expenses. The exemption
amount will be the lesser of the two;
However, with the amendment coming in Budget 2018, tax exemption on medical reimbursement has
been replaced and included in the Standard Deduction allowed. Therefore, no separate exemption will
be allowed for Medical Reimbursement from FY 2018-19 onwards.
Car maintenance allowance - If an employee uses a company's car and the company repays the
driver's wage, insurance, maintenance, and fuel expenses, the taxable value is Rs 2,700 per month
(cars with cubic capacity within 1.6 Litre) or Rs 3,300 per month (cars with engines over 1,600 cc)
(car with cubic capacity exceeding 1.6 Litre).
An exemption of Rs 2,700 per month or Rs 3,300 per month in respect of the driver salary,
maintenance, and fuel expenditures paid and refunded by the employer if the employee owns the car.