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The advantages of a good appraisal system are that it will:

• help you to assess your staff against defined objectives
• give you the chance to give constructive feedback and to praise staff for their good work
• allow you to define medium and long-term objectives for your employees

It also offers the opportunity to:

• address any problems
• discuss potential areas for development
• find solutions, such as offering training
• identify better ways to carry out tasks

Key elements of an effective appraisal system

There are four key elements in a good performance and appraisal system:

• set objectives for the incoming year
• monitor performance against objectives - giving feedback which will help staff to improve if you think they aren't performing as required
• carry out the appraisal (should include identifying any training needs to assist with meeting the incoming year's objectives)
• provide rewards/remedies

How often should appraisals happen?

Many businesses carry out an appraisal after a set period of time for new employees or those who have changed jobs within the company. After that, formal appraisal meetings once or twice a year may be enough. If it's twice a year, one option is that the first of the two appraisals is an 'interim appraisal' looking at objectives and/or competencies.

It is important that you deal with issues of poor performance as part of your ongoing day-to-day management ie you should never leave this discussion until the annual or bi-annual appraisal meeting. See performance management and staff training templates.

Get it right from the start

A performance system will work only if you plan and implement it properly:

• make sure that you know what an employee's job involves - read their job description
• keep it simple - this will save you time and money
• use a standard format for your appraisal forms
• make sure managers are committed to the appraisal process and they know what each employee will be expected to achieve
• discuss what is proposed with employees, or unions if appropriate before you implement an appraisal system

If you have an information and consultation agreement in place, you have a duty to inform and consult employees or their representatives on substantial changes to work, organisation or contractual relations. This could include the introduction of a new appraisal system.

If so, make sure you tell your employees about it in writing and include it in any new starter information packs.

Read more on how to inform and consult your employees.

Setting objectives can help you measure your employees' performance over a set period of time, and they usually form the basis for appraisals.

There are a variety of different ways to agree on objectives with your staff.

Key performance indicators (KPIs)

KPIs are objective factors that can be clearly identified and measured, such as:

• sales figures
• production output
• machine downtime
• financial performance

SMART objectives to track performance

To make sure objectives are useful, you could use the SMART system. This means making sure the objectives are:

• Specific
• Measurable
• Achievable
• Realistic
• Time-based

For example, instead of 'increase sales' as an objective for a sales person, you could set: 'Increase sales to new customers by 10% over the next six months.'

When performance is hard to measure

If results aren't easily quantifiable, try a system that scores employees. For example, you might give them a score between one and six for their level of competence in certain areas. These might include:

• leadership skills
• team working
• initiative
• flexibility

The objective might be for the employee to achieve an increase in their score.

Competencies

You may prefer to base your appraisal on competencies, rather than objectives. These are behaviours or qualities that your employee should display and include things like:

• teamwork
• communication
• time management
• leadership
• problem-solving

You will need to agree on competencies that fit in with your business objectives.

Whichever method you choose, it's important that your employees understand their objectives and know how they can achieve them.

Involve them in the objective setting, as they are often best placed to know how a particular task is done most effectively and will ensure they commit to achieving it.

There are many different methods of appraisal, and it is important that you choose the best one for your employees and your business.

Staff rating

Using the objectives you agreed with your employee, rate each one using a number, for example, from one to six, with one being excellent and six unacceptable.

Critical incidents

The appraiser keeps a record of good or bad performance (critical incidents) throughout the year. They discuss these incidents with the employee as and when they happen, but at the end of the year, the content of these records forms the basis of that part of the appraisal which looks at past performance.

Comparison with objectives

This style of appraisal concentrates on whether objectives or competencies have been met, partially met, or not met.

If your employee falls short of meeting their objectives, the appraisal offers the opportunity to understand why, and to look for solutions to any problems, such as the need for further training.

Line managers usually carry out the performance appraisal. They are likely to have day-to-day contact and be aware of the employee's performance. It is also common for senior management to see the results so that they are kept up to date on staff progress.

Another option is the 360-degree appraisal system, where a variety of people who come into contact with the employee give written feedback on their performance. This could include their line manager, peers, staff working below them, and in some cases even customers and suppliers. It may give a broad picture of how the employee is performing, but it can also be time-consuming and costly and needs to be handled sensitively.

Preparing for staff appraisals

Make sure employees know in advance what to expect, and ask them to prepare.

When filling in appraisal forms, try not to focus solely on the recent past. It helps if you keep records of performance throughout the year, including occasions when the employee has been praised, or when problems have been addressed.

The appraisal meeting

To make the appraisal meeting as productive as possible:

• set aside enough time
• make sure the room you use is comfortable and that you won't be disturbed
• open the meeting with positive comments
• use the appraisal form as a guide throughout the meeting
• discuss any objectives set at the last appraisal and whether they have been achieved - make sure it's a two-way discussion
• remember that any feedback should be constructive
• agree to further objectives together
• discuss and agree on appropriate training that will assist the employee in meeting the incoming year's objectives
• make sure the employee understands the next steps, such as a pay review or training programme
• always end the meeting on a positive note looking forward to the incoming year

Following up on a staff appraisal

Give employees a written copy of their new objectives, and keep one in their personal file. Some companies give their employees a copy of the appraiser's comments and invite the employee to record any comments they would wish to add. Your employees have a right to access appraisal or performance review notes.

It is good practice to give the employee the right to appeal if they don't agree with the appraisal and the opportunity to have this noted on their file.

You may choose to link your staff appraisal system to decisions about pay, bonuses, and other financial incentives.

One-off bonus payments

These are based on a combination of a percentage of salary and how far the employee has achieved their objectives over the year. Be aware of the need to avoid any bias/discrimination across staff. Any rewards must be fair and consistent.

Pay increase

This could be based on overall performance rating - for example:

• below average performance - no pay increase
• average performance - 2% pay increase
• above average performance - 3% pay increase
• excellent performance - 5% pay increase

See set the right pay rates.

Shares

If you are a limited company, you may want to reward employees with shares. This means it is in their financial interest for the company to do well and the share price to rise. See further guidance on how to set up employee share schemes.

The disadvantages of financial reward programmes

Offering financial rewards can be an excellent way to motivate employees, but it can also backfire. There may be cause for dispute if employees discover some are given greater rewards than others. Rewards should be fair and consistent - make sure you do not discriminate against any employees.

At a management level, reward incentives don't always have to be financial and can be tailored to different sorts of success. Examples of non-financial rewards could include an extra day's leave, access to mentoring programmes, free or discounted parking, and discounted gym memberships.