Investing in your employees and suitably rewarding them in a transparent manner is as important as channelling profits in your company's growth, especially so if you run a small or medium enterprise.

SMEs should accord high priority to this because any discontentment on part of an employee can spread fast, especially if you have a small employee base.

No rocket science in appraising employees

The general misconception is that conducting appraisals is a tough job. SMEs may not even have a system in place to conduct transparent assessments. Its usually the promoter's influence that determines the quantum of increment an employee would get. Even some large Indian corporates suffer from similar mindset.

"Actually it does not need lot of experience neither is it an expansive process. Due to the misconception, Indian companies have not gained by suitably rewarding employees. It also needs certain degree of will and perseverance on part of the owner to implement it," says Misra.

What is the aim of an appraisal?

>  To ascertain the amount of pay hike/increment to be given to each employee
>  Optimizing the potential of employees for your company to achieve more
>  To ensure that the best employees  win and continue to remain the best
>  Keeping your employees together. Giving or not giving a salary hike depends on the vertical your company is in. If your sector is growing, you have to give a hike irrespective of your company's performance. For example currently the healthcare and education verticals are witnessing swift growth and most companies are doing well. Even if your company is not making money, you need to give a hike to keep your folks together, otherwise they will leave in search of better wages.

Methods of appraisal

>EVA (Economic Value Add)

Under this, assessments are done based on how much EVA an employee brings to the company. Every individual knows that whatever they do is measurable and could be rewarded accordingly. Here, appraisal is based on profit and loss (P&L) method.

For example, X employee draws a salary of Rs 10 lakh per annum. If the overall expenditure incurred on him/her is another Rs 10 lakh per year, then the person has an economic value of Rs 20 lakh. If that person has been given a business target of Rs 40 lakh per year, and he/she achieves only Rs 30 lakh, then the EVA is Rs 10 lakh (Rs 30 lakh minus Rs 20 lakh).  So based on that EVA, the employee gets X per cent in reward.

"Very few SMEs follow this method as they don't have a system in place to evaluate EVA. It makes organizations highly customized. EVA needs to be tailor-made to suit to your organization.," says Jyorden Tsering Misra, Managing Director of Spearhead InterSearch, an executive search consultancy.

>360 degree feedback

Under this, each person will be assessed by his/her superior, peers and subordinates.

Example: A marketing manager will be evaluated by the vice president, who is his senior; the sales manager who is his peer and 10 others who report to him/her. This will yield a clear picture about the person. In this system a fair assessment is done and people don't feel that they are misjudged due to some personal grouse or difference in opinion.

>Self assessment

Many organisations prefer self assessment by the staff as the basis of
appraisal. But even in this system, the boss is the final authority and the employee
can boast his/her achievements.

"People should be allowed to come up with their personal plans. Increments should be result oriented. The owner should not bring in emotions while conducting an appraisal. The objective is not the report card of the staff, but about their future contributions," says Amit Grover, CEO, Nurture Talent Academy.

Some tips:

>  Increments should be linked to a company's performance. If a company reaches 100 percent of the target, then 20 percent of the earnings before tax must be available for incentives programmes.

>  Startups should reserve some funds for the growth of the company and if they are unable to give a pay hike, promotions and higher responsibilities can be given to keep the staff happy.

>  Don't borrow appraisal systems from other companies. The DNA of every organization is different. Customize the system to suit you and your company.

>  Don't neglect back office personnel. It is very easy to judge the performance of a sales and marketing person who are considered to be the front line staff. But managements should not forget that the back office personnel are equally important.

>  Follow a graded structure. Those who perform must get excellent grade
Those who do not will get less.

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