# What Is Performance Appraisal? | Capterra > Discover effective performance appraisal strategies for SMBs. Learn modern methods, tackle biases, and optimize your evaluation process for employee growth. Source: https://www.capterra.com/resources/what-is-performance-appraisal --- Employee ManagementHuman Resources # What Is Performance Appraisal? A Must-Have for Effective Performance Management By Stephan Miller Stephan Miller Stephan Miller is a writer and software developer specializing in software and programming topics. He has written two published books and is a frequent contr... [See bio & all articles](https://www.capterra.com/resources/author/smiller/) Published November 2, 2023 7 min read Table of Contents - [What is performance appraisal?](#what-is-performance-appraisal) - [How bias impacts performance appraisals](#how-bias-impacts-performance-appraisals) - [How to build a strong performance appraisal strategy](#a-strong-performance-appraisal-strategy-helps-employees-contribute-to-company-goals) - [Building a better performance review process](#building-a-better-performance-review-process) ## Nurture talent and performance with modern appraisal approaches. For HR leaders at small to mid-sized businesses, conducting accurate and constructive performance reviews is a constant challenge. With limited resources compared to larger companies, SMBs often rely on outdated or inaccurate evaluation methods that fail to provide meaningful feedback. This frequently leads to frustration on both sides of the review process. According to a survey by WTW, only 49% of organizations think that managers are effective at assessing the performance of their direct reports.[\[1\]](#sources) Without proper [tools to measure and track performance](https://www.capterra.com/performance-appraisal-software/), managers struggle to provide objective assessments. In this article, we'll take a look at performance appraisals. We'll review some of the most common modern appraisal methods that are suitable for SMBs, along with tips for minimizing bias. With the right performance evaluation tactics, you can gain deeper insights into the capabilities of your employees and help maximize their contributions to your business's success. ## What is performance appraisal? Performance appraisals serve as formal evaluations conducted by managers or HR professionals to assess and provide feedback on an employee's performance. By incorporating performance appraisals into a comprehensive [performance management](https://www.capterra.com/glossary/performance-management/) strategy, organizations aim to optimize employee productivity and foster a culture of [continuous improvement](https://www.capterra.com/glossary/cqi-continuous-quality-improvement/). Performance management involves making sure that both the organization and its employees are performing optimally. It uses various corporate management tools that aid in managing and evaluating individual performance. Performance appraisals are one of these many tools. Performance evaluations or appraisals provide a structured framework for assessing employees' progress, identifying strengths, addressing areas for improvement, and aligning individual goals with the business's objectives. ### 4 common performance appraisal strategies There are a variety of appraisal methods to choose from. The best approach depends on your business needs and structure. Here are four popular options: #### _360-degree feedback_ The [360-degree feedback](https://www.capterra.com/glossary/360-degree-feedback/) approach involves gathering feedback from multiple sources, including peers, subordinates, supervisors, and even customers, to provide a comprehensive assessment of an employee's performance. This strategy offers a well-rounded perspective on strengths, weaknesses, and areas for improvement. It's particularly beneficial for remote or hybrid teams, as it allows for diverse input and promotes collaboration across different levels and locations within the organization. #### _Management by objective (MBO)_ Management by objective (MBO) is a performance appraisal strategy that focuses on setting specific, measurable objectives for employees to achieve within a defined timeframe. This approach emphasizes aligning individual goals with organizational goals, fostering [employee engagement](https://www.capterra.com/employee-engagement-software/) and accountability. It's especially effective for measuring the quantitative and qualitative output of senior management, such as managers, directors, and executives, where goal attainment is important for organizational success. #### _Behaviorally anchored rating scale (BARS)_ The behaviorally anchored rating scale (BARS) method combines qualitative and quantitative elements to evaluate employee performance. It involves defining specific behavioral indicators that are anchored to different performance levels. Evaluators assess employee performance based on these predetermined criteria, providing clear standards, improved feedback, accurate [performance analysis](https://www.capterra.com/resources/employee-performance-tracking/), and consistent evaluations. BARS also helps minimize bias in performance evaluations by providing explicit behavioral examples for each performance level. #### _Human resources accounting method_ The [human resources](https://www.capterra.com/human-resource-software/) accounting method focuses on measuring and quantifying the financial implications of an employee's performance on the organization's bottom line. This strategy helps identify the direct and indirect costs associated with an [employee's productivity](https://www.capterra.com/glossary/employee-productivity/), turnover, and training investments. It's beneficial for small to mid-sized businesses looking to understand the financial impact of their employees and make informed decisions regarding resource allocation and performance improvement initiatives. ## How bias impacts performance appraisals Performance appraisals are essential for evaluating employee performance and making important talent decisions. However, bias can significantly impact the objectivity and fairness of these assessments. Biases in performance appraisals can lead to unequal treatment, hinder the advancement of underrepresented talent, and create barriers to [diversity, equity, and inclusion](https://www.capterra.com/dei-software/) within your organization. According to Gartner's 4 Ways to Mitigate Bias in Performance Management, only 35% of senior-level positions in organizations are held by people of color, indicating a lack of representation and opportunities for underrepresented groups.[\[1\]](#sources) Biases present throughout the performance management process can make these inequalities even worse. - **Stereotyping:** A manager may rely on stereotypes to make judgments about an employee's abilities, potential, or performance, which can lead to biased evaluations. - **Confirmation bias:** Managers may selectively focus on evidence that supports their initial impressions or beliefs about an employee's performance while ignoring or downplaying information that contradicts those beliefs. - **Recency bias:** A manager may give more weight to an employee's recent performance, overlooking earlier achievements or consistent performance throughout the evaluation cycle. - **Halo effect:** Managers could assign less challenging goals and opportunities to certain employees based on a single trait or characteristic they may attribute to them. - **Ingroup bias:** Managers may rate employees with similar backgrounds or characteristics more favorably compared to employees from different groups, leading to unequal treatment and opportunities. #### 7 tips for minimizing bias in performance reviews To address these biases and promote a more inclusive and equitable [performance management](https://www.capterra.com/performance-appraisal-software/) process, businesses need to implement strategies that promote objective decision-making. Here are some tips for minimizing bias in performance reviews: - **Improve goal-setting practices:** Reduce manager subjectivity by encouraging managers to compare employee goals with those of peers in similar roles. - **Use better feedback practices:** Foster trust between managers and employees and make sure that all employees receive unbiased feedback that supports their development and performance. - **Implement data-driven decision-making:** Provide managers with relevant data before, during, and after performance assessments to promote objective decision-making and prevent bias from influencing the process. - **Provide training:** Provide managers and employees with [training](https://www.capterra.com/training-software/) on unconscious bias to raise awareness of common types and sources of bias in performance management. - **Use bias detection support:** Assign neutral and trained individuals from the business or HR to identify biases and assumptions against underrepresented talent groups during performance evaluations. - **Structure evaluation forms:** Use standardized evaluation forms and criteria that align with organizational goals and strategy to enhance objectivity and fairness. - **Gather feedback from multiple sources:** seek feedback from many stakeholders, like peers, subordinates, and customers, to obtain a comprehensive and balanced view of employee performance. ## A strong performance appraisal strategy helps employees contribute to company goals Performance appraisals are a necessary part of an effective [performance management](https://www.capterra.com/performance-appraisal-software/s/small-businesses/) strategy. They can help employees to: - Understand how their work contributes to the company's goals and visions. - Receive feedback and recognition for their accomplishments and challenges. - Identify their strengths and areas for improvement. - Plan their [career development](https://www.capterra.com/resources/stages-of-career-development/) and growth. - Enhance their motivation and [engagement](https://www.capterra.com/employee-engagement-software/s/small-businesses/). All of these benefits to employees also benefit the business, but not all performance appraisal strategies are equally effective or suitable for every business. Different businesses have different needs and challenges when it comes to assessing and improving their employees' performance. Here are some of the factors to consider when designing a performance appraisal strategy: - **Business size:** Small businesses often need to choose a performance appraisal strategy that is simple and efficient. One option is to use a [360-degree feedback](https://www.capterra.com/360-degree-feedback-software/s/small-businesses/) process. This type of feedback comes from multiple sources and helps to reduce bias and provide the employee with a more holistic view of their performance. - **Tech available:** There is a variety of [performance appraisal software](https://www.capterra.com/performance-appraisal-software/) available that can help businesses streamline the process and make it more efficient. But implementing this software also depends on having staff or an outsourced team that can help with installing, configuring, and maintaining it. - **Work environment:** When employees are working hybrid or remotely, it is important to choose a performance appraisal strategy that is flexible and can be conducted remotely. Gartner's report, Effective Evaluation Strategies for Hybrid and Remote Employees, suggests broadening the inputs to performance evaluations by including team-based peer assessments and self-reviews that ask about contributions beyond stated objectives.[\[3\]](#sources) - **Budget:** Your budget can impact the options available. Some performance appraisal methods and software solutions may involve additional costs, such as [licensing fees](https://www.capterra.com/resources/small-business-software-pricing-models/) or [training expenses](https://www.capterra.com/training-software/). - **Staff roles:** You must consider who will conduct the appraisals, provide feedback, and manage the overall process. Depending on the size and structure of your business, dedicated HR personnel, managers, or a combination of the two may be responsible for conducting performance appraisals. ## Building a better performance review process For HR leaders at small to mid-sized businesses, conducting accurate and constructive performance appraisals is a challenge they face often. Without the right processes in place, reviews become frustrating rather than helpful for skill growth and alignment with company goals. This article outlined modern strategies that can optimize your organization's performance evaluation program. It also addressed the business challenge of bias in performance appraisals by providing an overview of different types of bias, how bias can impact performance appraisals, and tips for minimizing bias. Now it's time to take action. Here are some quick steps: - Audit your current review process and identify areas for improvement. - Select the appraisal method or methods that best suit your business needs and resources. - Develop a timeline for rolling out changes and training managers on delivering meaningful feedback. - Monitor your new strategy for effectiveness and adapt it to fit changing needs. To learn more about the tools and techniques that can help build a better performance review process, visit these resources: - [3 Effective Employee Performance Tracking Strategies](https://www.capterra.com/resources/employee-performance-tracking/) - [The 6 Stages of Career Development, and How To Guide Employees Through Them](https://www.capterra.com/resources/stages-of-career-development/) - [Best Performance Management System Software](https://www.capterra.com/performance-appraisal-software/) - [Best 360 Degree Feedback Software](https://www.capterra.com/360-degree-feedback-software/) ## Capterra's 2026 Software Buying Trends Report ### Download our 2026 Software Buying Trends Report to see how successful software adopters avoid disappointment and how your business can, too. * * * Sources 1. [2022 Performance Reset Survey](https://www.wtwco.com/en-us/insights/2023/01/2022-performance-reset-survey-executive-summary), WTW 2. [4 Ways to Mitigate Bias in Performance Management](https://www.gartner.com/document/4015027), Gartner 3. [Effective Evaluation Strategies for Hybrid and Remote Employees,](https://www.gartner.com/document/4015943) Gartner * * * Looking for Performance Management System software?Check out Capterra's list of the [best Performance Management System software](https://www.capterra.com/performance-appraisal-software/) solutions. ### Was this article helpful? * * * ## About the Author [### Stephan Miller](https://www.capterra.com/resources/author/smiller/) Stephan Miller is a writer and software developer specializing in software and programming topics. 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