The Impact of Performance Appraisal, Compensation, and Separation on Employee in an Organization


By: Site Engineer, Staff

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Performance appraisal means the process of defining expectations for employee performance, measuring, evaluating, and recording employee performance relative to those expectations; and providing feedback to the employee.

A major purpose of performance appraisal is to influence positively, employee performance and development. This evaluation also assists the entrepreneurs in assessing their staff’s cheers, attitudes, potentials and past performance on the job.

Entrepreneurs must be objective and careful in their staff evaluation because when staff is communicated with their poor rating, their morale is always affected which will increase their absenteeism rate and tardiness and consequently their overall production.

The information obtained from the performance appraisal is used for promotion, demotion, transfer, pay increase, training and development and discharge.

Methods of Performance Appraisals

These are the most common appraisal methods:

  1. Paired Comparison Method: This is a process of comparing at a time the two employees and the better one is noted. The better ones are then paired again. This method is no longer popular.
  2. Critical Incident Method: Entrepreneur is expected to show incidents in the work situation in which the employee being evaluated has shown positive or negative influence in the work situation. Examples of factors to be shown are initiative judgment, creativity, etc.
  3. Ranking Method: The supervisor ranks his subordinates from the most productive to the least productive. This is the oldest and most common appraisal method.
  4. Graphics Rating Method: This is one of the most popular rating methods. This technique measures two major areas of employee work characteristics:
  • The basic work characteristics such as knowledge, initiative, dependability, leadership, loyalty, etc.
  • The employee’s contribution to the organization such as quality and volume of work done.
  1. Review Technique: The outside specialists or consultants arc to evaluate the employee. The disadvantage here is that the outsider does not know the employees; hence poor ratings may be done.
  2. Forced Choice Method: This type of method forces the supervisor to make use of retards. The rater is forced to select a pair of sentences that best describe the employee.
  3. Peer Ratio Method: The employee’s co-workers evaluate his performance.

The employee’s general behavior and characteristics rate scale could be formed by these factors below:

Level of Performance

  • Tactfulness
  • Quality of Work
  • Honesty
  • Personality
  • Judgment
  • Industriousness
  • Loyalty
  • Attitude
  • Maturity
  • Motivation
  • Job Knowledge
  • Dependability
  • Persistence
  • Quality of Work
  • Cooperativeness
  • Enthusiasm
  • Leadership
  • Aggressive
  • Skill Competency
  • Creativity
  • Resourcefulness
  • Adaptability
  • Imaginative Ability
  • Initiative
  • Relationship with People

The employee could be rated against each factor enlisted above with the score in terms of Unsatisfactory, Average, Above Average and Excellent. The total score is the employee’s Highest Level of Performance for each individual.

Steps in Employee Performance Rating

  • Evaluate his performance against the requirement
  • Discuss the evaluation with the employee.
  • Observe what the employee is doing
  • Take appropriate actions.
  • Prepare the performance requirements. Determine how well you expect the employee to do his work.
  • Discuss the performance requirement with the employee and adjust them as needed

Common Performance Rating Errors

The performance appraisal process is complicated by the fact that entrepreneur’s memories are somewhat fallible and entrepreneurs are liable to biases that produce rating errors.

Some of these are:

  1. Latency Error: This is the tendency of rating one positively or negatively because of the latest events that took place before the rating
  2. Severity Error: Here the entrepreneurs tend to be unjustifiably harsh.
  3. Self-Serving Bias: This is the tendency to perceive oneself as responsible for successes and to see others as responsible for failures.
  4. Halo Effect: This is the tendency of allowing one outstanding negative or positive incident or trait to influence the rating of the employee.
  5. Contrast Error: This is the tendency of comparing subordinates with one another rather than against a performance standard. Then when compared with two unsatisfactory workers, an average worker may end up being rated “outstanding or excellent.”

The training of raters may help in overcoming these biases. The performance evaluation is not an end in itself; it helps the employee know his weaknesses and strengths, and help the employer make some basic decisions on how to distribute organizational favors. The equity demands that those employees that work harder should derive greater benefit. The main purpose of any evaluation is not punitive but corrective; this can be done not only yearly but also periodically.


Compensation is designed to motivate employees to work harder, retain their services, attract qualified and capable hands and above all establish a healthy relationship between the employer and employees.

Compensation is one of the major factors that help in maintaining organizational peace if properly handled. Entrepreneurs are advised to give good monetary compensation to their workers if they should be kept happy, motivated and stay long in the organization.

Compensation consists of wages paid directly time worked, as well as a more indirect benefit that employees receive as part of their employment relationship with an organization.

Wages paid for time worked is typically payments made in a cashable form that reflect direct work-related remuneration such as base pay, merit increases or bonuses. Benefits, on the other hand, are forms of compensation beyond wages for time worked, including various protection plans (such as health insurance or insurance), services (such as an organizational cafeteria or drug counseling), pay time not worked (such as vacations or sick leave), and income supplements (such as stock ownership plans).

Benefits are considered a more indirect form of compensation because they are generally not as closely tied to job and performance issues as are other forms of remunerations.

Types of Equity

Entrepreneurs should be aware that a qualified worker with a small payment is likely going to leave an organization and join a competing one where he would be paid higher. Having this in mind, they should attempt to develop a compensation system that carefully considers issues of equity and fairness.

Equity issues are important because individuals tend to compare their relative inputs and outcomes with those of others in assessing the degree of equitable treatment that they receive.

In practice, developing fair compensation systems is quite challenging primarily because four major types of equity are involved:

  • Individual Equity: This is the extent to which pay rates allocated to specific individuals within the organization reject variation in individual merit.
  • Process Equity: This is the extent to which the procedures used in determining and distributing pay are fair. Recent evidence suggests that process equity also influences employee’s satisfaction with the compensation that they receive.
  • External Equity: This is the extent to which the organization’s pay rates for similar jobs in the external job market.
  • Internal Equity: This is the degree to which pay rates for various jobs inside the organization reflect the relative worth of those jobs.

Methods of Remuneration

There are three main components of a good remuneration policy:

  • Fringe Benefits: These are the forms of compensation beyond wages for time worked. These include: medical bills, housing, paid leave, lunch, transport, gratuity and pension alter leaving the job, etc.
  • Basic Pay: This should be made comparable to that of the competitors if capable employees can be attracted; this is the base pay of an employee.
  • Incentive Pay: This is the system of motivating the workers to achieve or above average through a commensurate reward system. This is done through the payment of commission and or bonuses for extra work done by the employee.


Normally, when an employee is employed, there is always an agreement signed between the management and the employee regarding the method of leaving the company. It is agreed by both sides to give one-month notice to either side when separating. There are many ways of separation, namely: resignation, retirement, death, discharge, layoff, and disability.

1. Resignation

Resignation is the process whereby the employee voluntarily or compulsorily applies for separation of work in an organization. Required notice of resignation is normally given after which resignation takes effect.

There are many reasons why one can resign in an organization such as job dissatisfaction, poor payment, unfavorable environment, discrimination, oppression, non-payments, etc. For the entrepreneur to keep his good staff he has to endeavor to meet up with some of the genuine demands of the employees to keep them motivated.

2. Retirement

This is the type of separation where the employee retires voluntarily or involuntarily (mandatory). In some cases, the employee may be retired by the organization compulsory to create a chance for the young ones. Another one is when the employee is advised to retire when he commits an offense or has reached the age of retirement.

In Nigeria, the retirement age in the public service is 60 years and recently the judges’ retirement age has been raised to 70 years due to the nature of their job.

In other words, if somebody worked up to 35 years in one organization he will retire even if he has not reached 60 years of age. So it is either you have reached 60 years of age or worked 35 years in one organization.

Again if one has worked up to 10 years one will be entitled to earn pension but will start earning it from the age of 45 years. With this information, the entrepreneur is advised to start preparing for the retirement of his employees by introducing a retirement income scheme where reasonable gratuity will be paid to staff on retirement.

3. Death

Death could be a result of an accident in the workplace or outside the workplace. It could equally be a natural death, whoever may death come, the separation must occur. Since this is an inescapable issue, the entrepreneur should always get ready for such a type of separation anytime it may occur.

4. Discharge

The most painful method of separation is discharged. This is because an employee may find it very difficult to be employed by any organization that knows the reason for discharge.

On many occasions, discharged workers are not paid compensation. Many organizations spelled it clearly in their contract book those offenses that may attract discharge such as gross indiscipline like stealing, fraud, etc.

Many organizations are equally fraudulent in the way they handle their employee separations, hence they can discharge some employees unjustly. The local trade (labor) unions are always on hand to see that their members are not unjustly separated.

5. Layoff

This is the process of standing off of the employee either on a temporary or permanent basis. Many organizations due to the hard economic situations are forced to trim down in their operations, and normally this action will lead to the slimming down of staff temporarily or permanent basis, hence-layoff.

When employees are laid-off permanently, they are usually paid their financial entitlement-gratuity and pension if applicable. If the layoff is temporary, the employees may not be paid since they are coming back to the organization when the situation improves. Layoffs should always not be seen as an end of the world by the employees since in most cases it is never the fault of the employers.

6. Disability

This is another separation method where the employee is stopped work or stops work on his own due to disability on him. This disability could be from the workplace or outside the workplace. At times workers are temporarily or permanently disabled from their workplace or outside their workplace. If it is from the workplace the staff will be compensated by the organization according to the gravity of the disability before being paid his entitlement.


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