Nature of transactions, Cost and revenue

Cost and Revenue:

Expenses and incomes associated with farming activities, other than agricultural activities are given below:

(A) Poultry Farm:

Expenses or Costs:

  1. Costs of chicken, feed;
  2. Stocks like hay, packing boxes, fuel;
  3. Maintenance cost of sheds;
  4. Medicines;
  5. Salaries and wages.

Revenue:

  1. Sale of eggs, chickens, broiler, hens;
  2. Sale of poultry excretions as manures.

(B) Dairy Farms:

Expenses or costs:

  1. Cattle feed and hay;
  2. Cost of cultivation of feed crop, if any;
  3. Insecticides;
  4. Salaries and wages;
  5. Cost of maintaining milk processing facilities.

Revenue:

  1. Sale of milk;
  2. Sale of milk products;
  3. Sale of calves;
  4. Sale of dairy cattle;
  5. Sale of slaughtered cattle.

(C) Fisheries:

  1. Cost of seed;
  2. Cost of water;
  3. Cost of fish feed;
  4. Maintenance costs of tanks;
  5. Catching expenses;
  6. Depreciation of nets and other assets;
  7. Salaries and wages.

Revenue:

  1. Sale of fish.

Treatment of Specific Items:

  1. Land Development Expenses:

A business may purchase land for cultivation. A lot of money may have to be spent by the business on cleaning, leveling the land, providing drainage, irrigation facili­ties etc. before the land can be used for cultivation. All these expenses are termed as “Land Develop­ment Expenses”, and should preferable is added to the cost of land.

  1. Drawings:

A farmer or his family may consume a part of farm production.

It is recorded as:

Drawings Account    Dr.

To Crop or Milk or Poultry or Fish Account.

  1. Similarly, when Farm Products are Consumed by Farm Workers it is Recorded as:

Wages Account Dr.

To Crop or Milk or Poultry or Fish Account

Apportionment Basis for Common Costs:

Seed, fertilizer, manure, pesticides, direct wages (Notional and Actual), land rent (Notional and actual) etc. can be identified crop-wise. But other costs like irrigation, services of agricultural machinery, implements or animal power depreciation, interest on capital etc. cannot be classified simply by nomenclature. Common costs of the agricultural farms are to be suitably apportioned among the crops for which such costs were incurred.

Many a time, common costs have been incurred for crop enterprises as well as livestock enterprises. Common costs should be apportioned among the crop enterprises on the basis of usage, wherever use of assets can be quantified. In other cases, length of crop season can be used.

Current purchasing power method (CPP)

The current purchasing power (CPP) method is also known as general price-level accounting. CPP adjusts historical cost based on changes in the general level of prices, as measured by the general price level index. Changes in the general level of prices represent changes in the general purchasing power of the monetary unit.

CPP is a mixed method in which financial statements are prepared on a historical basis. These statements, in the end, are converted based on the current purchasing power of the currency. Profit and loss items and balance sheet items are adjusted with the price index.

The basic idea of the CPP method is to apply changes in the value of money in response to changes in general price index.

Inflation reduces an individual’s purchasing power to purchase goods and services, while deflation increases an individual’s purchasing power to purchase goods and services.

Historical financial statements show transactions at various points in time and, as such, they also show replacement purchasing powers at various points in time.

CPP accounting transforms diverse historical measures into a single measure: namely, that of current purchasing power, which represents purchasing power at the same point in time.

Thus, CPP accounting makes all accounting numbers comparable in terms of general purchasing power. This is achieved by removing the mixed purchasing power element from historical financial statements.

CPP differs from current cost accounting (CCA) in that, under CPP, the current values of various assets are not worked out; instead, financial statements are stated in terms of dollars of uniform value.

Hence, the CPP method considers changes in price levels that are denoted by the general price index. Thus, all amounts are expressed in units of equal purchasing power.

Since the CPP method reflects the effects of changes in the general price level, it is also known as general price-level accounting.

Characteristics of CPP Method

  1. A supplementary statement is prepared and annexed to historical financial statement. The supplementary statement includes re-statement of income statement and re-stated balance sheet.
  2. Any statement prepared under CPP method is based on the historical statement.
  3. Consumer price index or wholesale price index is used as conversion factor for re-stated of historical items.
  4. All the items in financial statement are classified into monetary and non-monetary items. Non-monetary items are adjusted, there is no need of any adjustment for the monetary items.
  5. Net gain or loss account of monetary items is to be accounted in the profit and loss account.

Steps:

(1) Calculation of Conversion Factor

CPP method involves the restatement of historical figures at current purchasing power. For this purpose, historical figures must be multiplied by conversion factors. The formula for the calculation of the conversion factor is:

  • Conversion factor = Price Index at the date of Conversion/Price Index at the date of item aros
  • Conversion factor at the beginning = Price Index at the end/Price Index at the beginning
  • Conversion factor at an average = Price Index at the end/Average Price Index
  • Conversion factor at the end = Price Index at the end/Price Index at the en
  • Average Price Index = Price Index at beginning + Price Index at the end/2
  • CPP Value = Historical value X Conversion factor

(2) Distinction between Monetary and Non-monetary Accounts

CPP method classifies all assets and liabilities into two groups’ i.e. monetary items and non-monetary items.

Monetary Items: Monetary items are assets and liabilities, the amounts of which are receivable or payable only at a current monetary value. Monetary assets include cash, bank, bills receivables, debtors, prepaid expenses, account receivables, investment in bond or debentures, accrued income, etc. Monetary liabilities include creditors, accounts payable, bills payable, outstanding expenses, notes payable, dividend payable, tax payable, bonds or debentures, loan, advance income, preference share capital, etc.

Non-monetary Items: Those items which cannot be stated in fixed monetary value are called non-monetary items. Such items denote assets and liabilities that do not represent specific monetary claims. Non-monetary accounts include land, building, machinery, vehicles, furniture, inventory, equity share capital, irredeemable preference share capital, accumulated depreciation, etc.

(3) Gain or Loss on Monetary items

Monetary items are receivable or payable in a fixed amounts irrespective of changes in the purchasing power of money. The change in purchasing power of money has an effect on monetary assets and monetary liabilities, Therefore, the holding of such items results in gain or loss in terms of real purchasing power. Such gain or loss is termed as general price level gain or loss.

(4) Valuation of Cost of Sales and Inventories

Cost of sales and inventory value vary according to cost flow assumptions i.e. first-in-first-out (FIFO) or last-in-first-out (LIFO). Under FIFO, the cost of sales comprises the entire opening stock and current purchases less closing stock. And closing is entirely from the current purchase. Under the LIFO method, the cost of sales comprises the current purchase only.

(5) Restated Balance Sheet

The historical balance sheet is prepared as per the historical income statement, so it can not represent the revised or changed value of assets and liabilities. Under the price level change, the historical balance sheet should be revised to reflect the true picture of the financial position of any organization. Inside the historical balance sheet, both monetary and non-monetary items are listed.

General insurance: Meaning accounting concepts

General insurance or non-life insurance policy, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance is typically defined as any insurance that is not determined to be life insurance. It is called property and casualty insurance in the United States and Canada and non-life insurance in Continental Europe.

In the United Kingdom, insurance is broadly divided into three areas: personal lines, commercial lines and London market.

The London market insures large commercial risks such as supermarkets, football players and other very specific risks. It consists of a number of insurers, reinsurers, P&I Clubs, brokers and other companies that are typically physically located in the City of London. Lloyd’s of London is a big participant in this market. The London market also participates in personal lines and commercial lines, domestic and foreign, through reinsurance.

Commercial lines products are usually designed for relatively small legal entities. These would include workers’ compensation (employers liability), public liability, product liability, commercial fleet and other general insurance products sold in a relatively standard fashion to many organisations. There are many companies that supply comprehensive commercial insurance packages for a wide range of different industries, including shops, restaurants and hotels.

Personal lines products are designed to be sold in large quantities. This would include autos (private car), homeowners (household), pet insurance, creditor insurance and others.

ACORD, which is the insurance industry global standards organization, has standards for personal and commercial lines and has been working with the Australian General Insurers to develop those XML standards, standard applications for insurance, and certificates of currency.

Types of General Insurance:

General insurance is sub-divided into:

(a) Fire

(b) Accident

(c) Marine.

General Insurance was controlled and conducted by General Insurance Corporation of India before the incorporation of Insurance Regulatory and Development Authority (IRDA) in 2002. General Insurance companies are to prepare accounts (Revenue) for each individual unit. General Insurance policies are issued for a short period, say, for a year, but it may be renewed. The Policies are issued at any date of the year.

In a general insurance, the liability of the insurer arises only when the insured suffers any loss caused by specific reasons and, consequently, he will be indemnified. If no loss is occurred question of compensation does not arise and the premium which was paid will not be carried forward for the next period; rather the same will be lapsed and will not be adjusted.

Marine Insurance:

A marine insurance contract is an agreement by which the insurer undertakes to indemnify the assured in the manner and to the extent thereby agreed, against marine losses. In other words, it is a contract which protects the insured against losses on inland water or any land risk which may be incidental to any sea voyage: Sec 4(i). In short, this policy may cover a ship during buildings or the launch of a ship or any adventure analogous to a marine adventure.

Fire Insurance:

Similarly, fire insurance means insurance against any loss caused by fire. Fire Insurance business means the business of effecting, otherwise than incidentally to some other class of business, contract of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies; Sec. 2(6A).

Accidental Insurance:

It is other than Life Insurance, Marine and Fire Insurance.

Like Life Insurance Companies, in general insurance also from April 2000 a good number of private players have come into the field:

(a) Tate AIG General Insurance;

(b) Reliance General Insurance Company

(c) HDFC-Chubb General Insurance;

(d) Bajaj Alliance General Insurance Co. Ltd.;

(e) Royal Sundaram Alliance Insurance Co. Ltd.

(f) IFFCO Tokyo General Insurance Co. Ltd.

(g) ICICI Lombard General Insurance Co. Ltd.

(h) Export Credit Guarantee Corporation Ltd. etc.

In 1971, General Insurance Corporation of India was established which was the holding company of:

(i) National Insurance Co. Ltd.;

(ii) United India Insurance Co. Ltd. and

(iii) The New India Assurance Co. Ltd.

However, from Dec. 2000, GIC became The National insurer for General Insurance.

Thus, they are treated as independent Insurance companies.

Regulatory Framework:

While preparing and presenting accounts for Insurance companies various rules and regulations should be taken into consideration.

The following Acts and Regulations are to be considered:

(a) The Insurance Act, 1938;

(b) The Companies Act, 1956;

(c) The General Insurance Business (Nationalization) Act, 1972;

(d) The Insurance Regulatory and Development Authority, 1999;

(e) The Insurance Regulatory and Development Authority Regulations, 2002.

Applicability of Accounting Standards:

While preparing Receipts and Payments Account, Profit and Loss Account and the Balance Sheet of the Insurance companies, the recommendations of Indian Accounting Standards (A3) framed by the ICAI should strictly be followed as far as practicable, to the General Insurance Company with the exception of

(i) AS 3 (Cash Flow Statement): To be prepared under Direct Method only.

(ii) AS 13 (Accounting for Investment): Not to be taken into consideration.

(iii) AS 17 (Segment Reporting): To be applied in general without considering the class of Security.

Acceptance, Endorsement and other obligations

Acceptances, endorsements and other obligations basically represents the bills accepted or endorsed by the bank on behalf of its customers. A bank has to disclose all it’s acceptances, endorsements and other obligations under the head Contingent Liability on the face of the balance sheet. It’s an off balance sheet item, for informative purpose.

This item includes the following balances:

(a) Letters of credit opened by the bank on behalf of its customers; and

(b) Bills drawn by the bank’s customers and accepted or endorsed by the bank (to provide security to the payees).

The total of all outstanding letters of credit as reduced by the cash margin and after deducting the payments made for the bills negotiated under them should be included in the balance sheet. In case of revolving credit, the maximum permissible limit of letters of credit that may remain outstanding at any point of time as reduced by the cash margin should be shown. If the transactions against which the letter of credit was opened have been completed and the liability has been marked off in the books of the bank, no amount should be shown as contingent liability on this account.

Advantages

  • If the bills of exchange are endorsed by the importer’s bank, exporters may choose to collect the bills earlier than their due dates by having them discounted via any bank.
  • With payments guaranteed by the bank, your company has greater flexibility and security in its foreign trade transactions.

It is a liability of a bank in respect of bills accepted or endorsed on behalf of its customers including letter of credit issued and guarantees given. A security is usually required for this purpose and a commission is charged by the bank. The customers are liable to pay to the bank for full payment of the bills plus any loss or expenses that may be incurred.

As a result, this item will appear in both sides of the Balance Sheet in the following manner:

On Liabilities side:

Acceptance, Endorsements and other obligations as per contra.

On Assets side:

Constituent’s liabilities for acceptance, Endorsements, and other obligations as per contra.

Branch Adjustments:

A banking company may have different branches in different places. As a result, some transactions may take place between the head office of the bank and its branches. Head office passes necessary entries after receiving the periodical statements from the branches.

In the absence of such information, some entries remains unadjusted in the head office books at the time of preparing the final accounts. Therefore, such entries are recorded in the Balance Sheet under the head ‘Branch Adjustments’. It may appear on either side of the Balance Sheet depending on the Debit or Credit Balance.

Unexpired Discounts, or Rebates on Bills Discounted:

If a bank discounts a bill or purchases a hundi etc. it receives discount for the full period which is credited to Discount Account. But the point is that the bank is not entitled to take credit for any greater amount of such discount than what has actually been earned to the Balance Sheet date.

As a result, such discounts are apportioned between the current year and the next year and the amount which is carried forward is shown in the Balance Sheet under the head ‘Unexpired Discount’ or ‘Rebate on Bills Discounted’.

Money at Call and Short Notice:

It includes:

(i) Inter-bank call money and

(ii) Call money at short notice.

These are actually inter-bank transactions. Under this head, money is borrowed by one bank from another for a period of 3 days to 31 days and, naturally, the bank having surplus money advances such loans to the bank having short supply of money. These transactions are transacted with the help of brokers who charge brokerage usually @½% from both the banks. The rate of interest, of course, fluctuates every day, depending on the demand and supply of money.

Advances:

It includes the following (if advances are made by Indian banks):

(i) Loans

(ii) Cash Credit

(iii) Overdrafts

(iv) Bills discounted and purchased.

Loans:

A loan is an advance of money made with or without security. A certain amount is advanced for a stipulated period at an agreed rate of interest in a loan account. The rate of interest is lower than rate of interest of cash credit.

Most of the business houses prefer to use cash credit although the rate of interest is higher since the same is most convenient to them.”

Cash Credit:

It is an arrangement made between the bank and its customer so that the former allows the latter to borrow money up to a certain limit. It is not always necessary that the money should immediately be withdrawn. It is usually sanctioned on hypothecation or pledge of stock.

Overdraft:

If a customer requires funds for a short period and he has a current account in a bank, he may be allowed to overdraw his current account with or within a certain limit fixed by the banking authorities.

The rate of interest is generally higher than the rate of interest of Cash Credit. It is advantageous on behalf of the customer since he is to pay interest only on the amount that has already been taken.

Definitions and Differentiation of Terms Related to Performance Management

Employee Setup:

Band      Employee hierarchy in the organization
Compensation Pay structure i.e. Heads under which salary is paid
Designation Job profiles of employees as per bands & departments
Employee Status Specifies the timeline for the review with a start & end date. Employee status in the organization. Example: Active | Terminated Sabbatical | Resign

Performance Measures:

360 Degree Feedback Feedback process where an employee receives feedback from  External & Internal  stakeholders
External Stakeholders Feedback process where an employee receives feedback from  External & Internal  stakeholders
Feedback Templates Set of questions to seek feedback on a specific aspect of employee
Goals Work objectives as per job role.
Instant Feedback Real-time Feedback to & from anyone. Ability to tag the feedback to Performance Measures
KRA Key Result Area. Outlines the task that employee has to perform & what is expected.
KPI Key Performance Indicator. A measurable value related to the Key result area for the employee.
Measurable KRAs Performance Measures against which targets can be set and performance tracked against actual achievements.
Performance Review Category Broad categories under which employee performance is reviewed i.e. KRAs, Competencies, Values etc
Performance Measure An employee performance parameter that can be evaluated either through subjective or measurable rating.
Review Templates Set of performance measures grouped to evaluate specific job role or function.
Rating Scales Used to rate performance measure of an employee.
Review Letter Templates Post review letter templates to be issued to employees based on Performance, Salary Increment and promotion for employees
Subjective A Performance Measure that requires a qualitative assessment by the Reviewer to be rated with the help of a Rating scale.

Administration:

Roles Helps to assign system access (Create, Modify, View) rights to users

Review Process Setup:

Coverage Employee set to be reviewed; can be chosen by departments/bands too.
Frequency          Defines the number of times the employee evaluation will be conducted during the period.  For example Bi-Monthly, Quarterly, Half-Yearly or Annually
Min. Service Period Minimum number of months employees should serve in the organization to be eligible for the performance review process
Period   Specifies the timeline for the review with a start & end date.
Remainder Alerts Allows auto-reminders to be triggered to employees based on pending Performance review tasks

Review Form Configuration:

Acceptance        A formal review process activity when the employee gets to have a look at the final review inputs of the Manager and formally accepts & sign-offs. 
Employee Development Plan A Review Form section that allows for recording of Employee Development and training needs. 
Employee Review Form Sections Parts of the review form for recording different aspects of employee’s performance.
Goal Settings A formal review process activity where the Performance Measures/KRAs are set for each employee & signed off. Goal setting can be done by employee & reviewer collaboratively or by the Manager or HR alone.
Highlights A Review Form section that allows specific open-ended aspects of employee’s performance to be recorded i.e. Strengths & Weaknesses, Achievements etc.
Performance Metrics A Review Form section that allows for a rating of Performance Measures & KRAs based on the KPIs.
Moderation A formal review process activity where a senior employee reviews the inputs by employee & manager for fairness and thus assures that the process was conducted appropriately & consistently.
Moderator A senior employee that conducts the Moderation process in a Performance Review, ensuring that the reviews were conducted properly.
Process Flow The process workflow for the Performance Review i.e. Whether  Goal setting will be done, whether employees can do self-evaluation, whether there will be an acceptance process etc.
Reviewee An employee who undergoes review
Reviewer An employee who reviews the performance of a Reviewee
Set Reviewers   A Review process activity that confirms the Reviewers who will be reviewing the employees for the review.
Transfer & Promotion A Review process activity that allows Managers to recommend employees for transfer & promotion and record reasons in the Review Form.

Performance Measures Setup:

Department Performance Measures that are set to evaluate departmental performance & thus indirectly an employee’s contribution to the same
Individual Performance Measures that are set to evaluate individual employee’s performance.
Organization Performance Measures that are set to evaluate organizational performance & thus indirectly an employee’s contribution to the same.

Grade & Score:

Grade Frequency Allows for gradation of employees based on performance. For multi-frequency reviews like Quarterly, Half Yearly, etc grading can be chosen to be set for any of the legs of the review.
Scoring Basis      The basis for calculating performance scores of employees based on final ratings of performance measures.
Weightage The weightage for different categories of performance measures used for employee evaluation. This helps to calculate one overall final review score for the employee.

Plan and Schedule:  

Set Assessment date Set the start and end date for the review process that may include self-evaluation, Manager’s performance appraisal, and Moderation.
Set Performance Measures date Set the start and end date for the setting of Performance Measures if either Reviewee or Reviewer are involved in the process.

Review Process:

Absolute Grading A Grading method based on an absolute range of scores. i.e. 80-100% is Grade A, 60-80% is Grade B, etc.

 

Grading                A review process activity where employees are graded based on overall performance review scores.
Normalize Ratings A review process activity where employee performance scores as submitted by Reviewers are readjusted based on various organizational factors to set the final review scores for employees.
Professional Development A Review process activity where development recommendations along with Plan, timeline and linked to performance measures are recorded.
Relative Grading A Grading method based on percentile review scores of employee’s performance.
Self Review               Self-evaluation process by an employee.

Compensation:

Budgeting Setting the compensation budget for the next period. Budgeting can be done at an organizational level or a department & band level. 
Increment A process of compensation planning where employees are given a fixed or performance linked pay raise.
Salary Correction Any adjustments to employee’s correction, outside the scope of the increment process.
Salary Finalization            Any adjustments to employee’s correction, outside the scope of the increment process.

Review Close:

Analytics Employee Wise             Top & Bottom 5/10/15/n employees in a performance review.
Analytics Goal Wise                       Average % score on each performance measure department wise. Top & Bottom 5 measures to identify, strength & weaknesses.
Analytics Grade Distribution        Percentage of Employees in each Grade Bucket.  Department wise Grade distribution of employees.
Analytics Score Distribution        Average Review Score department wise in a performance review. The variation (standard deviation) in a spread of review scores        
Review Letters  Post Review formal Letters issued to employees with details of Performance Review Grades, Increments, transfer, and promotion
Reports                Detailed Analysis of Employee Score Distribution, Grade Distribution, Employee Review Comments, Employee Ratings, Development Sheet, and Performance Score related to a Performance Review.

Evolution of Performance Management

The idea of measuring performance has been around for centuries. The journey of this concept began during the industrial revolution when a system was created to document the productivity of humans alongside machines. This system was then revisited during World War II when the military wanted to identify high performers with the potential to move up in rank. As the military began to adopt this new way of reinforcing positive behaviors during the war, corporations began to adopt this process. They started creating systems for documenting performance as well as allocating rewards and creating benefits for high performers.

By the 1960s, General Electric saw an opportunity to revolutionize the now 20-year-old performance management process. The team began leveraging this existing system and used it as a development tool to help people grow while reducing employee turnover. Other high-performing organizations soon followed suit to reduce their own turnover.

The next decade doesn’t just bring peace and love. The 1970s also brought inflation. As inflation started to rise, organizations became unable to afford compensation or merit pay increases for all employees. So they started to create a process to objectively understand how to provide merit increases to high performers.

The performance management process evolved in several phases.

  • First Phase: The origin of performance management can be traced in the early 1960’s when the performance appraisal systems were in practice. During this period, Annual Confidential Reports (ACR’s) which was also known as Employee service Records were maintained for controlling the behaviors of the employees and these reports provided substantial information on the performance of the employees.
  • Any negative comment or a remark in the ESR or ACR used to adversely affect the prospects of career growth of an employee. The assessments were usually done for ten traits on a five or a ten point rating scale basis. These traits were job knowledge, sincerity, dynamism, punctuality, leadership, loyalty, etc. The remarks of these reports were never communicated to the employees and strict confidentiality was maintained in the entire process. The employees used to remain in absolute darkness due to the absence of a transparent mechanism of feedback and communication. This system had suffered from many drawbacks.
  • Second Phase: This phase continued from late 1960’s till early 1970’s, and the key hallmark of this phase was that whatever adverse remarks were incorporated in the performance reports were communicated to the employees so that they could take corrective actions for overcoming such deficiencies. In this process of appraising the performance, the reviewing officer used to enjoy a discretionary power of overruling the ratings given by the reporting officer. The employees usually used to get a formal written communication on their identified areas of improvements if the rating for any specific trait used to be below 33%.
  • Third Phase: In this phase the term ACR was replaced by performance appraisal. One of the key changes that were introduced in this stage was that the employees were permitted to describe their accomplishments in the confidential performance reports. The employees were allowed to describe their accomplishments in the self appraisal forms in the end of a year. Besides inclusion of the traits in the rating scale, several new components were considered by many organizations which could measure the productivity and performance of an employee in quantifiable terms such as targets achieved, etc. Certain organizations also introduced a new section on training needs in the appraisal form. However, the confidentiality element was still being maintained and the entire process continued to be control oriented instead of being development oriented.
  • Fourth Phase: This phase started in mid 1970’s and its origin was in India as great business tycoons like Larsen & Toubro, followed by State Bank of India and many others introduced appreciable reforms in this field.
  • In this phase, the appraisal process was more development driven, target based (performance based), participative and open instead of being treated as a confidential process. The system focused on performance planning, review and development of an employee by following a methodical approach.
  • In the entire process, the appraisee (employee) and the reporting officer mutually decided upon the key result areas in the beginning of a year and reviewed it after every six months. In the review period various issues such as factors affecting the performance, training needs of an employee, newer targets and also the ratings were discussed with the appraisee in a collaborative environment.
  • This phase was a welcoming change in the area of performance management and many organizations introduced a new HR department for taking care of the developmental issues of the organization.
  • Fifth Phase: This phase was characterized by maturity in approach of handling people’s issues. It was more performance driven and emphasis was on development, planning and improvement. Utmost importance was given to culture building, team appraisals and quality circles were established for assessing the improvement in the overall employee productivity.

Performance Evaluation

Performance evaluation is the process of evaluating how effectively employees are fulfilling their job responsibilities and contributing to the accomplishment of organizational goals.

Performance evaluations are extremely important to an organization, although they may be difficult to conduct. They tell organizations whether their selection methods are right.

They demonstrate where training, development and motivational programs are needed and later help to assess whether these have been effective.

As a matter of fact, many organizational policies and practices are evaluated, in large part, through their impact on performance.

Performance evaluations, after all, are the basis on which managers make decisions about compensation, promotion, and dismissal.

Purpose of performance evaluation

  • Periodic performance evaluation is an employee’s report card from his/her manager that acknowledges the work he/she has done in a specific time and the scope for improvement.
  • An employer can provide consistent feedback on an employee’s strengths and strive for improvement in the areas that the employees need to work on.
  • It is an integrated platform for both the employee and employer to attain common ground on what both think is befitting a quality performance. This helps in improving communication, which usually leads to better and more accurate team metrics and, thus, improved performance results.
  • The goal of this entire process of performance evaluation is to improve the way a team or an organization function, to achieve higher levels of customer satisfaction.
  • A manager should evaluate his/her team member regularly and not just once a year. This way, the team can avert new and unexpected problems with constant work being done to improve competence and efficiency.
  • An organization’s management can conduct frequent employee training and skill development sessions based on the development areas recognized after a performance evaluation session.
  • The management can effectively manage the team and conduct productive resource allocation after evaluating the goals and preset standards of performance.
  • Regular performance evaluation can help determine the scope of growth in an employee’s career and the level of motivation with which he/she contributes towards the success of an organization.
  • Performance evaluation lets an employee understand where does he/she stands as compared to others in the organization.

Performance evaluation;

  • Is the systematic evaluation of the performance of employees and to understand the abilities of a person for further growth and development,
  • Is a process of evaluating an employee’s performance of a job in terms of its requirements,
  • Is the process of evaluating the performance of employees, sharing that information with them and searching for ways to improve their performance,
  • Provides the basis for assessment of employee contributions, coaching for improved performance and distribution of economic rewards,
  • Refers to the outcome of the behaviour of employees.

360-degree review

The 360-degree survey is a comprehensive review mechanism that helps gather the greatest insights and feedback on an employee’s performance from his/her supervisor, peers, colleagues, and subordinates.

Supervisor evaluation

The supervisor evaluation survey is deployed to collect feedback and information from employees related to their supervisor. Supervisor evaluation helps an organization and its leadership understand the accuracy of the work done by the supervisor and also help them evaluate the overall value the supervisor adds to his/her team and to the organization as a whole.

Manager evaluation

A manager evaluation survey offers a set of questions that are answered by the employees to evaluate their direct or indirect manager’s effectiveness at work. This survey is extremely useful for the management to understand the manager’s performance, the attitude at work, willingness to help his/her subordinate, and more.

Senior management evaluation

Senior management evaluation survey questions are used to understand the employee’s perspective of the senior management and evaluate their abilities to be able to run the organization smoothly. This questionnaire should have questions that help an organization gather insights on effectiveness, direction, policy-making abilities, and other useful traits. 

Employee satisfaction surveys and employee engagement surveys are also one of the best ways to conduct the performance evaluation. A satisfied and engaged employee is most likely to perform 14% better than his/her counterparts (Gallup).

Employee satisfaction

An employee satisfaction survey is deployed to understand how satisfied or dissatisfied your workforce is. It is essential you measure employee satisfaction as dissatisfied employees not only not perform well but also can be a major reason for high levels of employee attrition in an organization. This survey can power your workforce and HR strategies to cultivate a work culture that enables your organization to win from within. Many times, if an employee doesn’t feel challenged enough, then he/she remains unsatisfied with the work. Performance evaluation can find reasons behind one’s contribution to the company and ways of enhancing it.

Employee engagement

Employee engagement survey enables you as an organization to test the levels of engagement of your employees and to understand how motivated they are to perform well in the workplace. Employee engagement is a matter of concern for most organizations, and disengaged employees set a negative example for other employees. Disengaged employees perform poorly as compared to their colleagues. Thus, this survey can be used to analyze and review the level of performance of an employee and take corrective measures immediately.

Objectives:

  • To confirm the services of probationary employees upon their completing the probationary period satisfactorily.
  • To effect promotions based on competence and performance.
  • To assess the training and development needs of employees.
  • To decide upon a pay raise where (as in the unorganized sector) regular pay scales have not been fixed.
  • To let the employees know where they stand insofar as their performance is concerned and to assist them with constructive criticism and guidance for the purpose of their development.
  • To improve communication, performance evaluation provides a format for dialogue between the superior and subordinate and improves understanding of personal goals and concerns. This can also have the effect of increasing the trust between the rater and the ratee.
  • Finally, performance evaluation can be used to determine whether HR programs such as selection, training, and transfers have been effective or not.

Advantages

Career Development

Performance evaluations allow managers to help employees with career development. Performing an unbiased evaluation can point out where employees are excelling and the areas needing improvement. After the evaluation is completed, managers can develop plans with specific tasks to help employees develop in their career and meet goals that benefit the company. Evaluations can help employees increase their commitment to the firm and productivity. Employees that add value to the firm are considered first when better positions open up and employers decide to promote from within.

Work Achievement Recognition

Performance evaluations give managers a chance to recognize employees who performed well during the evaluated year. Recognizing employees for their achievements builds their morale, and employees with high morale are more productive. If monetary bonuses and raises are given based on performance evaluations, employees possess tangible evidence that shows the company values their hard work. Employees can list achievements received by an employer as awards on their resume if ever looking for another job.

Disadvantages:

A disadvantage of performance evaluations is that the managers evaluating employees may show bias to certain employees, which may happen intentionally or unintentionally. One major risk of using performance evaluations is that some managers unconsciously favor employees that possess similar characteristics as the manager. Bias causes managers to focus more on the personality and style of the employee instead of the actual achievements. This can result in good employees feeling slighted, which may cause tension in the workplace. Bias also affects the favorable employee because he may miss much-needed guidance to improve his performance.

One-Sided Feedback

Another disadvantage of performance evaluations is that the meeting can result in a one-sided conversation. Although a manager may give an employee a chance to offer feedback, some managers already make up their mind about an employee and are not opened to two-sided dialogue. If the performance review is one-sided, employees may feel as if their opinions do no matter. This may cause an employee to shut down and refuse to communicate with management in the future. Managers should listen to feedback presented by employees, and correct evaluations if employees make valid points.

Performance evaluation process

Step 1

In most organizations, a performance evaluation process states that an employee’s performance is tracked every three and six months, provided, the employee has worked with the organization continually for that tenure. The HR department can send across an online survey for the employees to fill out regarding their satisfaction and engagement levels.

Step 2

The employee’s immediate manager will decide his/her performance quality after evaluating the yearly performance, conducting an employee engagement survey, and eventually having a face-to-face meeting.

Step 3

The feedback received from the online employee satisfaction survey can be kept anonymous. This feedback can be analyzed in real-time from a centralized dashboard. On the basis of the analysis, the manager can prepare further questions for the face-to-face performance evaluation meeting.

For a probationary employee to be termed as a tenured employee, he/she must perform as per their supervisor’s expectations for six months. The first six months of an employee’s tenure are crucial as the management always has a watchful eye on them for all their contribution towards assigned tasks, ownership skills, and punctuality in task completion.

Mid-cycle Review Process, End-cycle Review Process

Mid-cycle Review Process

The Mid-cycle Review is an informal 1:1 meeting between supervisor and employee to discuss the performance plan previously established. During the mid-cycle review, teams informally assess whether expectations are being met and if any readjustments need to be made.

Mid-year evaluations are formal, and they’re needed. People may leave anytime. You don’t want to have a poorly performing employee leave the company one month before the annual performance reviews. Also, bonus policies are dependent on performance. The more transactional the work is, the more consistent and continuous it becomes concerning performance metrics. Therefore, this mid-year formal review allows managers to sit with their team members and figure out the roadblocks, objectives, and achievements.

  • Adjustments to goals may occur, where appropriate.
  • Conversations may be documented, if desired.
  • Supervisor and employees should acknowledge successes and note opportunities for improvement.

Steps:

No Last-Minute Meetings

Book the meeting a few days in advance and be consistent with your check-ins and provide the employee with proper meeting objectives and time to prepare.

Let the employee know that it is not a quick meeting to talk about small issues. But rather a formal conversation on things that matter. Communicate the purpose of the meeting clearly and make sure the employee understands the agendas without any confusion.

Adequate Preparation

A great manager ensures that their employees know they are as invested in their success as they are. That’s why it’s better to start preparing in advance. Talk to peers or stakeholders the employee has worked with and take notes. Prepared a detailed list of goals and responsibilities and what was achieved concerning those objectives. A list of actionable items will help you provide constructive feedback instead of vague conversation.

During the Review Meeting

Keep it formal, direct, and backed by data. Listen to employee input and incorporate acknowledgment of different perspectives. Also, this meeting is as much about the next 6 months as it is about the last 6. Refresh objectives, create plans, and help your employees feel motivated.

  • Meet somewhere quiet, with no distractions.
  • To start, re-iterate the purpose of the meeting with the agenda for the day.
  • Allow the employee to share his version of the happenings of the last 6 months first.
  • Review the progress of goals and communicate your feedback.
  • Discuss the action plan for the next 6 months.
  • Allow the employee to ask questions.

Follow-Up

A manager’s duty isn’t over once the meeting is over. Do follow-up on the items discussed in the meeting. Send an email after the mid-year review to talk about key points and tasks for the employee. It will help you keep a check on the promise made during the meetings.

Performance Review

The Performance Review is the process in which both supervisor and employee formally assess performance and meet 1:1 to discuss the overall performance of the year, according to the expectations set in the plan and any adjustments made during the mid-cycle review.

  • Employee self-assesses online.
  • Supervisor assesses employee online.
  • Both supervisor and employee meet 1:1.
  • Acknowledgements from the employee and employee supervisor.

End-cycle Review Process

End of the Rating Period

  • Employees should complete the Self-Assessment around eleven (11) months and give to their supervisor. Employees may leave sections blank if appropriate or desired.
  • At the end of the performance review period, the supervisor will complete the Annual Review and Salary Review Addendum and submit it to the school/department management center HR office for approval to ensure the Annual Review language is appropriate and pay guidelines are followed.
  • Once the Annual Review and proposed salary increase are approved and signed, the management center returns the Annual Review to the Supervisor.
  • The supervisor will hold an end of the rating period performance discussion with the employee. Supervisors should give employees sufficient notice of when their performance discussion will be scheduled so that employees may prepare for the discussion. It is recommended to give employees at least one to two (1-2) days’ notice.
  • The supervisor and employee together will review the past year’s performance, including objectives and goals and the performance rating appropriate for the performance over the same time frame. If the evaluation of the employee’s performance changes based on their self-evaluation or the discussion, the supervisor should re-submit the Annual Review Form for review and approval by the management center.
  • Employees should sign the completed Salary Review Addendum Form that has already been approved by the management center. The form is a means of documenting the outcome of the discussion, but is not a substitute for a one-on-one discussion with the employee. Employee’s signature acknowledges receipt only, not agreement. The Salary Review Addendum and Annual Review should then be submitted to the management center’s HR office (or directly to HR Records if instructed by the management center) within one (1) business day of signature so the Annual Review can become part of the Employee’s personnel file and any salary increase, if applicable, can be entered into the Employee’s next paycheck.

A review is not a guarantee of an increase. Additionally, employees who have below average ratings do not qualify for a salary increase.

Characteristics of Performance Appraisal

Reliable and Valid:

Appraisal system should provide consistent, reliable and valid information and date. Appraisals should measure what they are supposed to measure. For example, if the objective of appraisal is to show potential of an employee for promotion, it should supply the date relating to potentialities of the employee.

Clear Objectives:

The objectives of performance appraisal should be clear, specific, timely and open. The appraisal system should be fair and beneficial to both the individual employee and the organization should be linked with other subsystems of personnel management.

Standardisation:

The appraisal form, procedures and rules should be standardised. There should be well-defined performance criteria and standards. Employees should be made fully aware of these standards as appraisal decisions affect all employees of the group.

Fob Relatedness:

The appraisal system should focus attention on job-related behaviour and performance. It should provide information on job related activities and areas.

Training:

Evaluators should be given training in procedures and principles of appraisal. They should be provided with knowledge and skills in designing appraisals, conducting post appraisal interviews and correcting rating errors.

Mutual Trust:

Before introducing the appraisal system, a climate of mutual trust, cooperation and confidence should be created in the organisation. Under the system, the employees should be treated in a supportive manner.

Help Focus:

Appraisal should not judegemental. It should not be purely control- oriented. The evaluator should also play the role of coach and counsellor. He should- help people reach their full potential. The overall purpose of appraisals should be developmental.

Feedback and Participation:

The ratings should be communicated to both the employees and the raters. The appraisal r system should be open and participative. The employees should get information on their performance. The system should involve employees in the goal setting process.

Recognition of Differences:

Organisation differs in terms of work, size, resources, needs and environment. Hence, the appraisal system must be designed to meet the needs of particular organisation. It should be specific and tailor made for the particular company.

Post Appraisal Interview:

An appraisal system is only as effective as the manager is iii communications. Hence, an interview with the employee should be arranged after appraising his performance. It will help to know the difficulties of work and training needs of employees. In interview, problem solving approach should be adopted and counseling should be provided for improving performance.

Manager’s, Employee’s Responsibility in Performance Planning Mechanics and Documentation

Role of Top Managers in Performance Management

The top managers play a lead in the entire process by setting trends for the lower rung and acting as role models for the employees. Their responsibility is to design policies which ensure an efficient management of performance in an organization and to define and act upon the core values relating to performance. Top management plays a vital role in convincing the line managers that performance management can be instrumental in the achievement of business goals and thus ensure that they take this aspect seriously in their work front for maximizing employee satisfaction and productivity.

Top managers are expected to develop a high performance culture in an organization by ensuring the following:

  • By communicating an organization’s mission and values to its customers and employees.
  • By clearly defining the work expectations and communicating to everyone for ensuring success in the achievement of business goals and facilitating an overall performance improvement.
  • By keeping the employees informed about their progress towards the achievement of goals and suggesting corrective actions for non-achievement of performance.
  • By establishing a shared belief amongst the employees regarding the importance of continuous improvement in performance.

Managing your employees, helping to develop their skill sets and growing their productivity in a meaningful way is no easy task! Fortunately, there are some excellent tools available today to make it all a lot easier.

Orientation

It sounds pretty basic but we’ve seen time and again that Managers get the following wrong! Simply put, managers should provide each new employee with a copy of their specific job description.

Ideally, candidates get a copy of their job description during the recruitment and selection process. A manager’s primary role is to provide new employees, as well as seasoned employees with the tools necessary to perform their job functions. Identifying key KPIs sets the stage for ongoing performance evaluation and ensures accountability within the workforce.

Managers also are responsible for workforce planning as it relates to performance evaluation workforce planning matches the right job assignments and tasks with employee skills, qualifications, and interests.

Training

We believe that an enormously important part of the performance evaluation process includes employee training and development, which are within the purview of an HR and management role.

Although managers may use the talent of experienced, long-term employees to assist with skills training, the ultimate responsibility for training rests on the shoulders of the department manager. In addition to developing the skills and capabilities of their employees, managers identify employees who have high potential. Such employees are distinguishable from high performing employees. Managers use their own skills and talent to select employees who demonstrate aptitude and promise.

Feedback

Managers are responsible for providing employees with constructive feedback on a regular basis.

Throughout the evaluation period, managers give their employees ongoing support, feedback and counseling on performance issues and, when necessary, disciplinary and corrective action. When employee performance suffers, managers are the first ones to observe the decline. It’s their responsibility to address performance issues and determine whether an employee needs skills training or corrective action to return her to an acceptable performance level.

Appraisal

The culminating stage in the performance review is the actual performance appraisal. Managers complete leadership training that enables them to understand the importance of performance management and evaluation, as well as how to prepare for and conduct an annual performance appraisal. Preparing for an appraisal requires that managers know how to rate employees; their duty is to rate employees according to the company’s expectations and performance standards. Therefore, a manager’s role includes observation and assessment. It’s up to the manager to conduct an appraisal meeting that employees look forward to and one that encourages employees to achieve their goals year after year.

As a manager, you are expected to:

  • Use the performance management process as a valuable tool for supporting employee development and improvement.
  • If your employees sense a lack of interest on your part, they’ll lose interest too.
  • When talking with your team about the process, be sure to emphasize its benefits, and encourage employees to take ownership of their own performance and development.
  • Determine an appropriate schedule for regular performance conversations with those you manage directly.
  • Conduct short, regular meetings to discuss and record milestones, accomplishments, successes and challenges as they occur, when details are fresh in both your minds. This will allow you to better monitor progress on goals, and provide coaching as required. Plus, these short meetings reduce the effort it takes to prepare for and conduct your annual performance reviews because you’ve tracked progress and performance and provided the needed feedback when it was most valuable.
  • Use the annual performance review meeting to review the achievements, setbacks, development and training that have already been discussed throughout the year — and then use this information to establish goals and a development plan for the coming year.
  • Deliver regular positive and constructive feedback.
  • Give employees feedback during one-on-one meetings and informally as regularly as possible.
  • Commend your employee in front of their peers.
  • Make performance notes about each employee in the period between conversations, so that come conversation time, you have concrete examples to share.
  • Remember that the goal of feedback is to describe desired behaviors and expectations, not to dwell on undesirable behaviors.
  • Check-in on goal progress
  • Regularly check in with employees on their progress on goals; offer coaching or assistance, or revise goals as necessary.
  • Communicate and revisit performance expectations.
  • Communicate your organizations’ performance standards and expectations to your employees. This will help your employees differentiate between acceptable and unacceptable behaviors and results and reduce any misunderstandings.
  • Gather feedback on employee performance from multiple sources. Use a 360-degree feedback or survey tool to complete and validate your own observations and perceptions.
  • Improve your management and leadership skills.
  • Take the time to learn how to be a better manager and coach. Invest in your own development!
  • Acquaint yourself with the different management needs of the different generations.
  • Employees from the Millennial generation may have different needs and different expectations of managers. Research tells us they require constant feedback and recognition, and expect quick career advancement. Workers from other generations have different needs. Learn what motivates each employee, and adjust your management approach accordingly.
  • Coach your employees in a way that strengthens two-way communication and reinforces desired behaviors.
  • Coach when you want to focus attention on a specific aspect of the employee’s performance.
  • Advise the employee ahead of time of issues you want to discuss.
  • Focus on describing your expectations and the desired behaviors rather than describing the gaps.
  • Take the time to understand why their performance is what it is, and get them to take ownership for performance improvements.
  • Support your employees’ professional and career development while making them accountable for it.
  • Regularly ask employees about their career aspirations and help them identify areas they may wish to improve or develop, as well as resources available.
  • Ensure each employee has a well-defined job description and understands the skills and competencies they must develop in order to progress up the career ladder.
  • Give your employees the time and flexibility they need to complete learning and development activities.
  • Ensure development is having an impact on performance.
  • Submit your completed employee reviews by the designated deadline.
  • Failing to complete your formal performance review documentation on time sends your employees the message that recognition of their success and support for their development is not your top priority. It may also delay any pay for performance/ merit increases or bonuses your organization allocates to employees based on their performance ratings.
  • Understand and correctly use your organization’s rating scale.
  • Be objective and have quantitative/qualitative facts ready to substantiate the ratings you give.
  • Provide details on how the employee demonstrated the core and job specific competencies you are rating them on.
  • Provide details on how they accomplished their goals, the milestones they met and work products they delivered.
  • Assign each employee a development plan to help them improve their performance and support the organization’s success.

Employees’ responsibilities

  • Work towards achieving your individual goals, which help the organization reach its objectives.
  • You and your manager should have set these goals collaboratively as part of your performance management activities.
  • Keep track of your progress on your goals and regularly communicate their status to your manager, especially if you’re facing challenges that could prevent you from achieving your goals.
  • Take responsibility for your own professional and career development.
  • Be clear about how you would like to grow professionally.
  • Know what knowledge, skills and experience you want and need to develop.
  • Actively seek opportunities for professional and career development, both in the organization or through external learning resources.
  • Be open to feedback
  • Accept constructive feedback and take the initiative to improve.
  • Complete any development plans assigned to you and apply the learning to improve your performance.
  • Seek support as required
  • Work to establish and maintain a healthy relationship with your manager.
  • Ask your manager for feedback and guidance, especially when you encounter challenges.
  • Solicit feedback and guidance on your performance from others you work with.
  • Keep a record of your performance achievements, successes and challenges.
  • Keep a performance journal and share things like your successes, and the feedback and recognition you receive from others with your manager.
  • Give others feedback.
  • Just as you need feedback and recognition to improve your performance, your co-workers need it too. Give feedback verbally, as well as using online communication and social collaboration tools available to you. And don’t be afraid to copy managers on your written feedback so they can gain more insight into their employees’ performance.
  • Complete your self-appraisal by the specified deadline.
  • Reacquaint yourself with your job description, critical competencies for the role and performance expectations as defined by the organization.
  • Understand and correctly use the organization’s rating scale.
  • Be honest about your performance but don’t underestimate your abilities.
  • Be objective and have quantitative/qualitative facts ready to substantiate the ratings you give yourself.
  • Provide details on how you demonstrated the core and job specific competencies you are being rated on.
  • Provide details on how you accomplished your goals, the milestones you met and work products you delivered.
  • Consider your current knowledge, skills and abilities as well as your career aspirations and identify learning activities that could benefit you and your organization.
  • Draft your goals for the coming period, making sure they in some way contribute to the organization’s goals, and are appropriate for your role.
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