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Aligning Performance Appraisals and Compensation Plans


Performance appraisal is the formal management system that organizations use to evaluate an individual employee’s performance. It is an important management tool covering a whole spectrum of employees in an organization. This paper seeks to discuss Management by Objective as a method of employee performance appraisal and its impact on employee compensation; its potential impact on organizational stakeholder groups such as the employees, customers, and investors; and how to prevent the legal and ethical issues that arise from the method.

Management by Objective performance appraisal and compensation plans

Management by Objectives (MBO) is a strategic performance appraisal method that aims to create cohesive communication between the management and employees (Islami et al., 2018). Organizations use it to clearly outline specific objectives and company goals that are agreed upon by both management and employees. Most organizations use MBO to motivate employees by associating performance with compensation.

According to (Schleicher et al. (2019), MBO motivate employees to perform well knowing that there is a reward for it. Additionally, the relationship between achievement of the predetermined goals and incentives is what drives the employees to give their best. Furthermore, the organization should openly communicate with the employees about the compensation decisions. However, associating high performance with compensation leads to frustration and competitiveness among employees; that may cause the employer to appear unfair since all the employees always work towards the same goals.

One of the significances of MBO is that it is a motivating strategy that increases employee empowerment, thus encouraging high-performance standards by greatly promoting the timely achievement of organizational goals. Furthermore, its participative goal-setting principle encourages a high level of employee satisfaction and dedication to their work. The effectiveness of this strategy and its impact on employee compensation is based on how the management conducts the evaluation.

The strategy can be effectively used to impact employee compensation in an organization. It is worth noting that MBO increases merit-based compensation to the employees; it presents an opportunity for employees to receive bonuses, raises, and other rewards based on target achievement (Schleicher et al., 2019). The competitive compensation package enables the employees to earn more if they achieve their goals. Rewarding employees motivates and drives them to work hard to achieve the set objectives, both individual and organizational goals.

One of the ways MBO impacts employee compensation is an MBO bonus, a performance-based reward that an employee receives after completing the goals laid down on their agreed program. The management explains what the employees need to achieve to receive their compensation. One of the critical aspects of the MBO bonus is transparency; they are extremely motivating since the employees are highly involved in the goal-setting process (Idowu, 2017). The bonus acts as a motivation for the employees to meet and surpass the set individual objectives.

The impact of MBO on employees

One of the primary impacts of using MBO is that it aligns the employees’ individual goals and objectives with the entire organization (Islami et al., 2018). It is important to note that the performance appraisal process enables the management and employees to discuss the organization’s targets and their significance. The strategy allows employees to comprehend the significant role they play in achieving the objectives and goals of the company at large.

Additionally, the strategy helps employees improve their performance and career in general. MBO allows employees to identify their weaknesses and develop solutions to their problems. It has a significant impact on an employee’s motivation and morale. Since it involves a conversation between the organization and employees during the formulation of objectives, the employees have a sense of loyalty and belonging that drives them to perform even better. The company values its contribution towards the company’s goals and objectives.

While the strategy evaluates the employee’s current position, it helps manage employee productivity. MBO helps create a productive conversation between the management and employees that may not happen otherwise; it offers an opportunity for a discussion beneficial to both the organization and the employees. The insights presented by the employees are helpful in the company’s decision-making processes.

The impact of MBO on customers

Objective performance appraisal and evaluation impact the quality of service that employees discharge to the customers. When employees feel presented with objective evaluations and are held accountable for reasonable performance standards, they are more inclined to provide high-quality customer service (Abdallah, 2018). There is no denial of the fact that happy employees create happy customers. In addition to motivation, MBO delivers employees with better clarity on their role in customer satisfaction which is one of the significant organizational goals.

Secondly, it enhances customer satisfaction. Since defined objectives characterize the MBO, employees, and management will align their customer service goals with the organization. With a clear understanding of the customers’ needs and expectations, the performance appraisal will ensure that everyone works towards customer satisfaction; it enables employees to deliver value to the customers within the shortest time possible.

The impact of MBO on investors

A strong MBO helps in improving the organization’s profit margins. It is critical to delivering excellent customer service, which allows the organization to remain ahead of its competitors (Obiekwe & Ejo-Orusa, 2019). The organization must use MBO to transform employees’ talent and knowledge into a competitive business advantage. A sustainable competitive advantage is important because it enables the organization to consistently outdo its competitors, attract many customers, and improve its profit margins.

Additionally, MBO enables investors to monitor the performance of the organization. This employee performance appraisal and evaluation strategy in its feedback role would allow investors to analyze the performance of employees and the organization at large. Investors can evaluate how well the organization achieved its goals and provide feedback on new goals that it should achieve in the next phase. The continuous goal-setting system helps ensure that the investor interests are taken care of.

What the organization can do to prevent legal challenges

There are serious legal challenges that can arise from conducting an employee performance appraisal. Some of the common legal challenges include unfair dismissal, potential breach of contract, and claim of possible discrimination. Therefore, the management must take care when conducting employee performance evaluations.

First, the employer should be fair and consistent when conducting an employee performance appraisal (Kramar et al., 2017). Discrimination claims arise when an employer treats employees in the same situation differently. Significantly, the employer uses the same standards and procedures to review every employee.

Second, it is critical that the management documents appraisals; they should record both the good and the bad aspects of an employee’s performance. Having a performance record on the employee’s file, together with any other examples of areas of concern, will help the management demonstrate that the process and result of the review were fair. This will help in preventing legal challenges that are related to unfair dismissal.

Thirdly, management should follow a fair, transparent, and consistent process in monitoring performance and promptly deal with potentially complex situations. Further, the management should aim to provide feedback throughout the employment period; it reduces the cases of claims that may arise. Frequent feedback and guidance enable employees who struggle to meet performance objectives to improve their work. As a result, the management can handle the potential problem before it becomes serious.

Lastly, all appraisal information should be private and confidential; all the appraisal results should be stored in a secure place. Only authorized individuals should be allowed to access the report. The management has the legal obligation of protecting employee information.

What the organization can do to prevent ethical challenges

Employee performance appraisals are somewhat subjective. This means that the employee’s reviews are open to potential ethical challenges (Kramar et al., 2017). The management can consciously or unconsciously judge employees using various techniques, which can positively or negatively impact the value of an employee’s scores. Furthermore, the employer may have an emotional attachment when conducting performance evaluations. This is unethical since the judgment is not based on merit but bias.

The first way to prevent these ethical challenges is by adopting a uniform evaluation criterion that gives an honest assessment of where the employee stands. The management should come up with a personal way of measuring the reviews in advance to avoid cases of biasness. Various scoring methods could be improper since the employees are evaluated based on different measurements. It is important to note that management plays a critical role in maintaining harmony between performance improvement and organizational ethical behavior.

Secondly, the management should curb the tendencies of human errors and biases; it must strive to exercise fairness and justice in rewarding and recognizing employee achievement. It is interesting to note that some managers have personal prejudices that are more pronounced. Such character enables personal matters and assumptions to impact the employee’s review negatively. The rewards should be based on merit and not friendship; an employee reward and recognition program is critical in employee engagement. They have a sense of purpose at work that creates extra energy and commitment towards the organization.

Finally, the management should take the responsibility of training and developing employees to effectively address issues related to morality, honesty, and integrity when dealing with the stakeholder groups such as customers, suppliers and fellow employees. Providing training enables the employees to better understand their moral obligation to the organization. Also, it gives a perfect opportunity for the management to share the moral values of the company. The training should emphasize the significance of ethics in attaining high-performance standards.


After critically analyzing the Management by Objective method of employee performance appraisal, it comes out clearly that the appraisal process is an important aspect of any organization. From the above analysis, MBO is one of the best employee performance appraisal strategies since it involves both the employee and organization in defining individual objectives; it benefits both the employee and the employer. Additionally, MBO increases merit-based compensation to the employees.

Even though MBO is an important tool used in employee performance appraisal, it exposes the organization to various forms of legal and ethical challenges such as human errors and biases, discrimination, and potential breach of contract. As a result, the management has the legal and moral obligation of ensuring that all the loopholes are sealed; the organization can achieve this by embracing fairness, transparency, and consistency during the evaluation process.


Abdallah, S. (2018). Relationship Between Employee Performance and Customer Service Quality in Kenya Bureau of Standards. Journal Of Human Resource6(5).

Idowu, A. (2017). Effectiveness of Performance Appraisal System and its Effect on Employee Motivation. Nile Journal Of Business And Economics3(5), 5-39.

Islami, X., Mulolli, E., & Mustafa, N. (2018). Using Management by Objectives as a performance appraisal tool for employee satisfaction. Future Business Journal4(1), 94-108.

Kramar, R., Bartram, T., Cieri, H., Noe, R., Hollenbeck, J., Gerhart, B., & Wright, P. (2017). Human Resource Management in Australia (5th ed.). McGrawHill Education.

Obiekwe, O., & Ejo-Orusa, H. (2019). Impact of Employee Performance Appraisal on Performance on Business Organizations: A Theoritical Review. EPRA International Journal Of Economic And Business Review7(9).

Schleicher, D., Baumann, H., Sullivan, D., & Yim, J. (2019). Evaluating the Effectiveness of Performance Management: A 30-Year Integrative Conceptual Revie. Journal Of Applied Psychology104(7), 851-887.


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