Performance Appraisal is the systematic evaluation of employees’ performance and abilities for future growth and development. It is the rational and continuous process of evaluating the performance of employees on a particular job in terms of the job requirements. 

Objectives of Performance Appraisal

1. To assess employee performance levels
2. To keep track of each employee’s performance for incentive pay and rewards.
3. Identify “misplaced” employees so corrective action can be taken.
4. To let an employee know where he stands so he can improve.
5. To assess employees’ promotion and development potential,
6. To focus on organizational effectiveness and individual accomplishments,
7. Identifying individual strengths and weaknesses to improve personnel quality, etc.

Benefits of performance appraisal

1. Performance appraisal is helpful in testing the effectiveness of selection, placement, and induction programs. 
2. Formal and systematic appraisal of employees provides a continuous record of employees’ performance, efficiency, and potential. 
3. Measurement of employee performance both in terms of quantity and quality provides a scientific basis for wage differentials and incentive plans of wage payment 
4. Performance appraisal facilitates the training and development of employees. 
5. It puts psychological pressure on people to improve job performance. 
6. Performance appraisal promotes a desire for improvement among employees. 

Limitations of Performance Appraisal

1. The supervisors may use different standards for different employees if the standards are unclear.
2. Horn & Halo Effect. It is a human tendency to see only the good or the bad in a person. For example, an employer might just see that the employee is never on time and will rate the employee low on all the brackets because of that.
3. Different raters may apply different standards in the appraisal, and their judgment may differ.
4. It can be a time-consuming process.
5. It can be prone to biases
6. The process of performance appraisal may create defensiveness among employees. 

Essentials of an Effective Performance Appraisal System

A sound system of performance appraisal must fulfill the following essentials;

1. Validity and reliability: The appraisal system should provide consistent, reliable, and valid data that can be used to defend the organization in court. If two appraisers are equally qualified and competent to appraise an employee, their ratings should match. The technique then meets inter-rater reliability. Appraisals must also be valid by measuring what they claim to measure
2. Job relatedness: The appraisal technique should assess job-related activities and provide information.
3. Standardization: Appraisal forms, procedures, administration of techniques, ratings, etc., should be standardized as appraisal decisions affect all employees of the group.
4. Practical viability: The techniques should be easy to administer, implement, and maintain.
5. Legal Sanction:. Appraisals must meet the laws of the land. In addition, they must comply with provisions of various acts relating to labor.
6. Appraiser training: Because appraisal is critical and sometimes tricky, it would be helpful to provide training to appraisers
7. Open communication: Most employees want feedback on their work performance. A sound appraisal system provides ongoing feedback. The appraisal interviews should help both parties identify gaps and plan for the future. 
8. Results for employees: Employees should know the rules of the game. They should receive adequate feedback on their performance. If performance appraisals are meant for improving employee performance, then withholding appraisal results would not serve any purpose. Employees simply cannot perform better without having access to this information.
9. Fair play: It follows then that formal procedures should be developed to enable employees who disagree with appraisal results (which are considered to be inaccurate or unfair). They must have the means for pursuing their grievances and having them addressed objectively.