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Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good
or service. The actual costs or expenditures are recorded in the books of accounts of a business
unit. Actual costs are also called as "Outlay Costs" or "Absolute Costs" or "Acquisition Costs".
Examples: Cost of raw materials, Wage Bill etc.
If a firm owns a land, there is no cost of using the land (ie., the rent) in the firms account. But the firm
has an opportunity cost of using the land, which is equal to the rent forgone by not letting the land out
on rent.
Controllable costs are those which can be controlled or regulated through observation by an executive and
therefore they can be used for assessing the efficiency of the executive. Most of the costs are controllable.
Example: Inventory costs can be controlled at the shop level etc.
Postponable costs are those which if not incurred in time do not effect the operational efficiency of the
firm. Examples are maintenance costs.
Full costs include business costs, opportunity costs, and normal profits. Opportunity costs is the
expected return/earnings from the next best use of the firms resources like capital, land and building,
owners efforts and time. Normal profits is necessary minimum earning in addition to the opportunity costs,
which a firm must receive to remain in its present occupation.
Average Cost (AC) , refers to the cost per unit of output assuming that production of each unit incurs the
same cost. It is statistical in nature and is not an actual cost. It is obtained by dividing Total Cost(TC) by
Total Output(Q)
AC= TC/Q
Marginal costs(MC), refers to the additional costs that are incurred when there is an addition to the existing
output level of goods ans services. In other words, it is the addition to the Total Cost(TC) on account of
producing additional units.
Short Run Cost: These costs are which vary with the variation in the output with size of the firm as same.
Short run costs are same as variable costs. Broadly, short run costs are associated with variable inputs in
the utilization of fixed plant or other requirements.
Forms of Business Organisation
Introduction
In the previous lesson, you have learnt that business activities consist of industrial and
commercial activities. The units which undertake these activities are known as business
organisations. They are also called business undertakings, enterprises, concerns or firms. We
must look into the formation, of such organisations in order to understand how to organise a
business because the right form of business organisation is largely responsible for the success of
an enterprise. In this lesson, we are going to study business organisations in detail.
Business Organisation
Meaning
Business organisation refers to all necessary arrangements required to conduct a business. It
refers to all those steps that need to be undertaken for establishing relationship between men,
material, and machinery to carry on business efficiently for earning profits. This may be called
the process of organising. The arrangement which follows this process of organising is called a
business undertaking or organisation. A business undertaking can be better understood by
analysing its characteristics.
Characteristics
1. Distinct Ownership : The term ownership refers to the right of an individual or a group of
individuals to acquire legal title to assets or properties for the purpose of running the business. A
business firm may be owned by one individual or a group of individuals jointly.
2. Lawful Business : Every business enterprise must undertake such business which is lawful,
that is, the business must not involve activities which are illegal.
3. Separate Status and Management : Every business undertaking is an independent entity. It
has its own assets and liabilities. It has its own way of functioning. The profits earned or losses
incurred by one firm cannot be accounted for by any other firm.
4. Dealing in goods and services : Every business undertaking is engaged in the production
and/or distribution of goods or services in exchange of money.
5. Continuity of business operations : All business enterprise engage in operation on a
continuous basis. Any unit having just one single operation or transaction is not a business unit.
6. Risk involvement : Business undertakings are always exposed to risk and uncertainty.
Business is influenced by future conditions which are unpredictable and uncertain. This makes
business decisions risky, thereby increasing the chances of loss arising out of business.
Characteristics:
1. Ownership : The business enterprise is owned by one single individual, that is the individual
has got legal title to the assets and properties of the business. The entire profit arising out of
business goes to the sole proprietor. Similarly, he also bears the entire risk or loss of the firm.
2. Management : The owner of the enterprise is generally the manager of the business. He has
got absolute right to plan for the business and execute them without any interference from
anywhere. He is the sole decision maker.
3. Source of Capital : The entire capital of the business is provided by the owner. In addition to
his own capital he may raise more funds from outside through borrowings from close relatives or
friends, and through loans from banks or other financial institutions.
4. Legal Status : The proprietor and the business enterprise are one and the same in the eyes of
law. There is no difference between the business assets and the private assets of the sole
proprietor. The business ceases to exist in the absence of the owner.
5. Liability : The liability of the sole proprietor is unlimited. This means that, in case the sole
proprietor fails to pay for the business obligations and debts arising out of business activities, his
personal property can be used to meet those liabilities.
6. Stability : The stability and continuity of the firm depend upon the capacity, competence and
the life span of the proprietor.
7. Legal Formalities : In the setting up, functioning and dissolution of a sole proprietorship
business no legal formalities are necessary. However, a few legal restrictions may be there in
setting up a particular type of business. For example, to open a restaurant, the sole proprietor
needs a license from the local municipality ; to open a chemist shop, the individual must have a
license from the government.
6. Direct Motivation : The owner is directly motivated to put his best efforts as he alone is the
beneficiary of the profits earned.
7. Personal Attention to Consumer Needs : In a sole tradership business, one generally finds
the proprietor taking personal care of consumer needs as he normally functions within a small
geographical area.
8. Creation of Employment : A sole tradership business facilitates selfemployment and also
employment for many others. It promotes entrepreneurial skill among the individuals.
9. Social Benefits : A sole proprietor is the master of his own business. He has absolute freedom
in taking decisions, using his skill and capability. This gives him high self-esteem and dignity in
the society and gradually he acquires several social virtues like self- reliance, self-determination,
independent thought and action, initiative, hard work etc,. Thus, he sets an example for others to
follow.
10. Equitable Distribution of Wealth : A sole proprietorship business is generally a small scale
business. Hence there is opportunity for many individuals to own and manage small business
units. This enables widespread dispersion of economic wealth and diffuses concentration of
business in the hands of a few.
Partnership
Meaning
A partnership form of organisation is one where two or more persons are associated to run a
business with a view to earn profit. Persons from similar background or persons of different
ability and skills, may join together to carry on a business. Each member of such a group is
individually known as partner and collectively the members are known as a partnership
firm. These firms are governed by the Indian Partnership Act, 1932.
Characteristics:
1. Number of Partners : A minimum of two persons are required to start a partnership business.
The maximum membership limit is 10 in case of banking business and 20 in case of all other
types of business.
2. Contractual Relationship : The relation between the partners of a partnership firm is created
by contract. The partners enter into partnership through an agreement which may be verbal,
written or implied. If the agreement is in writing it is known as a Partnership Deed.
3. Competence of Partners : Since individuals have to enter into a contract to become partners,
they must be competent enough to do so. Thus, minors, lunatics and insolvent persons are not
eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e.
he can have a share in the profits.
4. Sharing of Profit and Loss : The partners can share profit in any ratio as agreed. In the
absence of an agreement, they share it equally.
5. Unlimited Liability : The partners have unlimited liability. They are liable jointly and
severally for the debts and obligations of the firm. Creditors can lay claim on the personal
properties of any individual partner or all the partners jointly. Even a single partner may be
called upon to pay the debts of the firm. Of course, he can get back the money due from other
partners. The liability of a minor is, however, limited to the extent of his share in the profits, in
case of dissolution of a firm.
6. Principal-Agent Relationship : The business in a partnership firm may be carried on by all
the partners or any one of them acting for all. This means that every partner is an agent when he
is acting on behalf of others and he is a principal when others act on his behalf. It is, therefore,
essential that there should be mutual trust and faith among the partners in the interest of the firm.
7. Transfer of Interest : No partner can sell or transfer his interest in the firm to anyone without
the consent of other partners.
8. Legal Status : A partnership firm is just a name for the business as a whole. The firm means
partners and the partners mean the firm. Law does not recognise the firm as a separate entity
distinct from the partners.
9. Voluntary Registration : Registration of partnership is not compulsory. But since registration
entitles the firm to several benefits, it is considered desirable. For example, if it is registered, any
partner can file a case against other partners, or a firm can file a suit against outsiders in case of
disputes, claims, disagreements, etc.
10. Dissolution of Partnership : Dissolution of partnership implies not only a complete closure
or termination of partnership business, but it also includes any change in the existing agreement
among the partners due to a change in the number of partners.
Characteristics:
1. Artificial Person : A Joint Stock Company is an artificial person in the sense that it is created
by law and does not possess physical attributes of a natural person. However, it has a legal status.
2. Separate Legal Entity : Being an artificial person, a company has an existence independent
of its members. It can own property, enter into contract and conduct any lawful business in its
own name. It can sue and can be sued in the court of law. A shareholder cannot be held
responsible for the acts of the company.
3. Common Seal : Every company has a common seal by which it is represented while dealing
with outsiders. Any document with the common seal and duly signed by an officer of the
company is binding on the company.
4. Perpetual Existence : A company once formed continues to exist as long as it fulfils the
requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its
members.
5. Limited Liability : The liability of a member of a Joint Stock Company is limited by
guarantee or the shares he owns. In other words, in case of payment of debts by the company, a
shareholder is held liable only to the extent of his share.
6. Transferability of Shares : The members of a company are free to transfer the shares held by
them to anyone else.
7. Formation : A company comes into existence only when it has been registered after
completing the formalities prescribed under the Indian Companies Act 1956. A company is
formed by the initiative of a group of persons known as promoters.
8. Membership : A company having a minimum membership of two persons and maximum fifty
is known as a Private Limited Company. But in case of a Public Limited Company, the
minimum is seven and the maximum membership is unlimited.
9. Management : Joint Stock Companies have democratic management and control. Even
though the shareholders are the owners of the company, all of the them cannot participate in the
management process. The company is managed by the elected representatives of shareholders
known as Directors.
10. Capital : A Joint Stock Company generally raises a large amount of capital through issue of
shares.
Co-operative Society
Meaning
Any ten persons can form a co-operative society. It functions under the Cooperative Societies
Act, 1912 and other State Co-operative Societies Acts. A co-operative society is entirely different
from all other forms of organization discussed obove in terms of its objective. The co-operatives
are formed primarily to render services to its members. Generally it also provides some service
to the society. The main objectives of co-operative society are: (a) rendering service rather than
earning profit, (b) mutual help instead of competition, and (c) self help in place of dependence.
On the basis of objectives, various types of co-operatives are formed :
a. Consumer co-operatives : These are formed to protect the interests of ordinary consumers of
society by making consumer goods available at reasonable prices. Kendriya Bhandar in Delhi,
Alaka in Bhubaneswar and similar others are all examples of consumer co-operatives
b. Producers co-operatives : These societies are set up to benefit small producers who face
problems in collecting inputs and marketing their products. The Weavers co-operative society,
the Handloom owners cooperative society are examples of such co-operatives.
c. Marketing co-operatives : These are formed by producers and manufactures to eliminate
exploitation by the middlemen while marketing their product. Kashmir Arts Emporium, J&K
Handicrafts, Utkalika etc. are examples of marketing co-operatives.
d. Housing Co-operatives : These are formed to provide housing facilities to its members. They
are called co-operative group housing societies.
e. Credit Co-operatives : These societies are formed to provide financial help to its members.
The rural credit societies, the credit and thrift societies, the urban co-operative banks etc. come
under this category.
f. Forming Co-operatives : These are formed by small farmers to carry on work jointly and
thereby share the benefits of large scale farming. Besides these types, other co-operatives can be
formed with the objective of providing different benefits to its members, like the construction co-
operatives, transport co-operatives, co-operatives to provide education etc.
Characteristics:
1. Voluntary association : Individuals having common interest can come together to form a co-
operative society. Any person can become a member of such an organisation an leave the same.
2. Membership : The minimum membership required to form a co-operative society is ten and
the maximum number is unlimited. At times the cooperatives after their formation fix a
maximum membership limit.
3. Body corporate : Registration of a society under the Co-operative Societies Act is a must.
Once it is registered, it becomes a body corporate and enjoys certain privileges just like a joint
stock company. Some of the privileges are:
(a) The society enjoys perpetual succession.
(b) It has its own common seal.
(c) It can own property in its name.
(d) It can enter into contract with others.
(e) It can sue others in court of law.
4. Service Motive : The primary objective of any co-operative organization is to render services
to its members in particular and to the society in general.
5. Democratic Set up : Every member has a right to take part in the management of the society.
Each member has one vote. Generally the members elect a committee known as the Executive
Committee to look after the day to day administration and the said committee is responsible
to the general body of members.
6. Sources of Finances : A co-operative organisation starts with a fund contribute by its
members in the form of units called shares. It can also raise loans and secure grants from the
government easily. One fourth of the profits of the co-operative are transferred to its fund every
year.
7. Return on capital : The return on capital subscribed by the members is in the form of a fixed
rate of dividend after deduction from the profit.
Disadvantages of Co-operatives :
1. Limited Capital : The amount of capital that a co-operative can generate is limited because of
the membership remaining confined to a locality or region or a particular section of people.
2. Problems in Management : Generally it is seen that co-operative do not function efficiently
due to lack of managerial talent.
3. Lack of Motivation : Co-operatives are formed to render service to its members than to earn
profit. This does not provide enough motivation to manage the co-operatives effectively.
4. Lack of Co-operation : Co-operatives are formed with the very idea of co-operation. But, it is
often seen that there is lot of friction and bickering among the members due to personality
differences, ego clash etc.
5. Lack of Secrecy : Maintenance of business secrecy is one of the important factors for the
success of enterprise which the co-operatives always lack.
6. Dependence on Government : The inadequacy of capital and various other limitations make
co-operatives dependant on the government for support and patronage in terms of grants, loans
and subject themselves to interference.
Suitability of Co-operatives :
When the purpose of business is to provide service than to earn profit and to promote common
economic interest, the co-operative society is the only alternative. Co-operatives are also
preferred as it is easier to raise capital through assistance from financial institutions and
government. Generally it seems that a co-operative society is suitable for small and medium size
operations. However, the large sized IFFCO [Indian Farmers and Fertilisers Cooperative] and
the Kaira Co-operative Processing Milk under the brand name AMUL are the illustrious
exceptions.
HUMAN RESOURCE MANAGEMENT ( H R M )
MEANING OF HRM: -
HRM is management function that helps managers to recruit, select, train and develop
members for an organization. Obviously HRM is concerned with the peoples dimensions in
organizations. HRM refers to set of programs, functions, and activities designed and carried
out
Co r e elem ent s o f H RM
Peo ple: Organizations mean people. It is the people who staff and manage
organizations.
M a na gem ent : HRM involves application of management functions and principles for
acquisitioning, developing, maintaining and remunerating employees in organizations.
I nt egr at io n & Co nsist enc y: Decisions regarding people must be integrated and
consistent.
I nfluenc e: Decisions must influence the effectiveness of organization resulting into
betterment of services to customers in the form of high quality products supplied at
reasonable cost.
A pplic a bilit y: HRM principles are applicable to business as well as non-business
organizations too, such as education, health, recreation and the like.
OBJECTIVES OF HRM: -
1. So c iet a l Objec t ives: To be ethically and socially responsible to the needs and
challenges of the society while minimizing the negative impact of such demands upon the
organization.
2. Or ga niz at io na l Objec t ives: To recognize the role of HRM in bringing about
organizational effectiveness. HRM is only means to achieve to assist the organization with its
primary objectives.
3. Func t io na l Objec t ives: To maintain departments contribution and level of services
at a level appropriate to the organizations needs.
4. Per so na l Objec t ives: To assist employees in achieving their personal goals, at least
in so far as these goals enhance the individuals contribution to the organization. This is
necessary to maintain employee performance and satisfaction for the purpose of
maintaining, retaining and motivating the employees in the organization.
SCOPE OF HRM: -
Scope of HRM can be described based on the following activities of HRM. Based on these
activities we can summarize the scope of HRM into 7 different categories as mentioned
below after the activities. Lets check out both of them.
HRM Activities
1. HR Planning
2. Job Analysis
3. Job Design
4. Recruitment & Selection
5. Orientation & Placement
6. Training & Development
7. Performance Appraisals
8. Job Evaluation
9. Employee and Executive Remuneration
10. Motivation
11. Communication
12. Welfare
13. Safety & Health
14. Industrial Relations
ROLE OF HRM
1. Advisory Role: HRM advises management on the solutions to any problems affecting
people, personnel policies and procedures.
a. Personnel Policies: Organization Structure, Social Responsibility, Employment
Terms & Conditions, Compensation, Career & Promotion, Training & Development and
Industrial Relations.
b. Personnel Procedures: Relating to manpower planning procedures, recruitment
and selection procedures, and employment procedures, training procedures, management
development procedures, performance appraisal procedures, compensation procedures,
industrial relations procedures and health and safety procedures.
3. Service Role: Personnel function provides services that need to be carried out by full
time specialists. These services constitute the main activities carried out by personnel
departments and involve the implementation of the policies and procedures described
above.
Benefits
Employee Relations
Performance Appraisals
Employee Assessment
Performance Appraisals
Compensation
Employee Assessment
1. Planning: Plan and research about wage trends, labor market conditions, union
demands and other personnel benefits. Forecasting manpower needs etc.
2. Organizing: Organizing manpower and material resources by creating authorities and
responsibilities for the achievement of organizational goals and objectives.
3. Staffing: Recruitment & Selection
4. Directing: Issuance of orders and instructions, providing guidance and motivation of
employees to follow the path laid-down.
5. Controlling: Regulating personnel activities and policies according to plans.
Observations and comparisons of deviations
Definit io n Of Rec r uit m ent : Find ing and Attr acting Applica tio ns
Recruitment is the Process of finding and attracting capable applicants for employment. The
Process begins when new recruits are sought and ends when their applications are
submitted. The result is a pool of application from which new employees are selected.
M EA NI N G OF RECRUI TM EN T:
Recruitment is understood as the process of searching for and obtaining applicants for jobs,
from among them the right people can be selected. Though theoretically recruitment
process is said to end with the receipt of applications, in practice the activity extends to the
screening of applications so as to eliminate those who are not qualified for the job.
1. Determine the present and future requirements in conjunction with personnel planning
and job analysis activities
2. Increase the pool of job candidates at minimum cost
3. Help increase success rate of selection process by reducing number of under-qualified or
over-qualified applications.
4. Reduce the probability that job applicants once selected would leave shortly
5. Meet legal and social obligations
6. Identify and prepare potential job applicants
7. Evaluate effectiveness of various recruitment techniques and sources for job applicants.
External Factors:
Demand and Supply (Specific Skills)
Unemployment Rate (Area-wise)
Labor Market Conditions
Political and Legal Environment (Reservations, Labor laws)
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Internal Factors
Recruitment Policy (Internal Hiring or External Hiring?)
Human Resource Planning (Planning of resources required)
Size of the Organization (Bigger the size lesser the recruitment problems)
Cost
Growth and Expansion Plans
RECRUI TM EN T PROCESS
Recruitment Planning
Number of contacts
Types of contacts
Recruitment Strategy Development
Make or Buy Employees
Technological Sophistication
Where to look
How to look
Internal Recruitment (Source 1)
Present employees
Employee referrals
Transfers & Promotions
Former Employees
Previous Applicants
Evaluation of Internal Recruitment
External Recruitment (Source 2)
Professionals or Trade Associations
Advertisements
Employment Exchanges
Campus Recruitment
Walk-ins Interviews
Consultants
Contractors
Displaced Persons
Radio & Television
Acquisitions & Mergers
Competitors
Evaluation of External Recruitment
Searching
Source activation
Selling
Screening of Applications
Evaluation and Cost Control
Salary Cost
Management & Professional Time spent
Advertisement Cost
Producing Supporting literature
Recruitment Overheads and Expenses
Cost of Overtime and Outsourcing
Consultants fees
Evaluation of Recruitment Process
Return rate of applications sent out
Suitable Candidates for selection
Retention and Performance of selected candidates
Recruitment Cost
Time lapsed data
Image projection
IN TERN A L RECRUI TM EN T
A dva nta ges Disa dva nt a ges
1. Less Costly 1. Old concept of doing things
2. Candidates already oriented towards 2. It abets raiding
organization 3. Candidates current work may be
3. Organizations have better knowledge affected
about internal candidates 4. Politics play greater roles
4. Employee morale and motivation is 5. Morale problem for those not
enhanced promoted.
EXTERN A L RECRUI TM EN T
A dva nta ges Disa dva nt a ges
1. Benefits of new skills and talents 1. Better morale and motivation
2. Benefits of new experiences associated with internal recruiting is
3. Compliance with reservation policy denied
becomes easy 2. It is costly method
4. Scope for resentment, jealousies, and 3. Chances of creeping in false positive
heartburn are avoided. and false negative errors
4. Adjustment of new employees takes
longer time.
SEL ECTI ON : -
M EA NI N G OF SEL ECTI ON :
Selection is the process of picking up individuals (out of the pool of job applicants) with
requisite qualifications and competence to fill jobs in the organization. A formal definition of
Selection is as under
Selection is the process of differentiating between applicants in order to identify and hire
those with a greater likelihood of success in a job.
Recruitment Selection
1. Recruitment refers to the process of 1. Selection is concerned with picking up
identifying and encouraging prospective the right candidates from a pool of
employees to apply for jobs. applicants.
2. Recruitment is said to be positive in 2. Selection on the other hand is
its approach as it seeks to attract as negative in its application in as much as
many candidates as possible. it seeks to eliminate as many unqualified
applicants as possible in order to identify
the right candidates.
Training Education
Application oriented Theoretical Orientation
Job experience Classroom learning
Specific Task in mind Covers general concepts
Narrow Perspective Has Broad Perspective
Training is Job Specific Education is no bar
Training: Training refers to the process of imparting specific skills. An employee undergoing
training is presumed to have had some formal education. No training program is complete
without an element of education. Hence we can say that Training is offered to operatives.
Advantages of Development
1. Making them
Self-starters
Committed
Motivated
Result oriented
Sensitive to environment
Understand use of power
2. Creating self awareness
3. Develop inspiring leadership styles
4. Instill zest for excellence
5. Teach them about effective communication
6. To subordinate their functional loyalties to the interests of the organization
Training Development
Training is skills focused Development is creating learning abilities
Training is presumed to have a formal Development is not education dependent
education
Training needs depend upon lack or Development depends on personal drive
deficiency in skills and ambition
Trainings are generally need based Development is voluntary
Training is a narrower concept focused on Development is a broader concept
job related skills focused on personality development
Training may not include development Development includes training wherever
necessary
Training is aimed at improving job related Development aims at overall personal
efficiency and performance effectiveness including job efficiencies
Need of Training
Individual level
Diagnosis of present problems and future challenges
Improve individual performance or fix up performance deficiency
Improve skills or knowledge or any other problem
To anticipate future skill-needs and prepare employee to handle more challenging tasks
To prepare for possible job transfers
Group level
To face any change in organization strategy at group levels
When new products and services are launched
To avoid scraps and accident rates
1. Performance Appraisals
2. Interviews
3. Questionnaires
4. Attitude Surveys
5. Training Progress Feedback
6. Work Sampling
7. Rating Scales
Methods of Training
On the Job Trainings: These methods are generally applied on the workplace while
employees is actually working. Following are the on-the-job methods.
1. Job Rotation: In this method, usually employees are put on different jobs turn by
turn where they learn all sorts of jobs of various departments. The objective is to give a
comprehensive awareness about the jobs of different departments. Advantage employee
gets to know how his own and other departments also function. Interdepartmental
coordination can be improved, instills team spirit. Disadvantage It may become too much
for an employee to learn. It is not focused on employees own job responsibilities. Employees
basic talents may remain under utilized.
2. Job Coaching: An experienced employee can give a verbal presentation to explain
the nitty-grittys of the job.
3. Job Instruction: It may consist an instruction or directions to perform a particular
task or a function. It may be in the form of orders or steps to perform a task.
4. Apprenticeships: Generally fresh graduates are put under the experienced
employee to learn the functions of job.
5. Internships and Assistantships: An intern or an assistants are recruited to
perform a specific time-bound jobs or projects during their education. It may consist a part
of their educational courses.
Off the Job Trainings: These are used away from work places while employees are not
working like classroom trainings, seminars etc. Following are the off-the-job methods;
Advantages of Off-the-Job Training:
Trainers are usually experienced enough to train
It is systematically organized
Efficiently created programs may add lot of value
Disadvantages of Off-the-Job Training:
It is not directly in the context of job
It is often formal
It is not based on experience
It is least expensive
Trainees may not be highly motivated
It is more artificial in nature
PERFORMANCE APPRAISALS
Definition 1: Systematic Evaluation
It is a systematic evaluation of an individual with respect to performance on the job and
individuals potential for development.
Numerous methods have been devised to measure the quantity and quality of performance
appraisals. Each of the methods is effective for some purposes for some organizations only.
None should be dismissed or accepted as appropriate except as they relate to the particular
needs of the organization or an employee.
Broadly all methods of appraisals can be divided into two different categories.
1. Rating Scales: Rating scales consists of several numerical scales representing job
related performance criterions such as dependability, initiative, output, attendance, attitude
etc. Each scales ranges from excellent to poor. The total numerical scores are computed and
final conclusions are derived. Advantages Adaptability, easy to use, low cost, every type of
job can be evaluated, large number of employees covered, no formal training required.
Disadvantages Raters biases
2. Checklist: Under this method, checklist of statements of traits of employee in the form
of Yes or No based questions is prepared. Here the rater only does the reporting or checking
and HR department does the actual evaluation. Advantages economy, ease of
administration, limited training required, standardization. Disadvantages Raters biases,
use of improper weighs by HR, does not allow rater to give relative ratings
3. Forced Choice Method: The series of statements arranged in the blocks of two or more
are given and the rater indicates which statement is true or false. The rater is forced to
make a choice. HR department does actual assessment. Advantages Absence of personal
biases because of forced choice. Disadvantages Statements may be wrongly framed.
4. Forced Distribution Method: here employees are clustered around a high point on a
rating scale. Rater is compelled to distribute the employees on all points on the scale. It is
assumed that the performance is conformed to normal distribution. Advantages Eliminates
Disadvantages Assumption of normal distribution, unrealistic, errors of central tendency.
7. Field Review Method: This is an appraisal done by someone outside employees own
department usually from corporate or HR department. Advantages Useful for managerial
level promotions, when comparable information is needed, Disadvantages Outsider is
generally not familiar with employees work environment, Observation of actual behaviors
not possible.
8. Performance Tests & Observations: This is based on the test of knowledge or skills.
The tests may be written or an actual presentation of skills. Tests must be reliable and
validated to be useful. Advantage Tests may be apt to measure potential more than actual
performance. Disadvantages Tests may suffer if costs of test development or
administration are high.
10. Essay Method: In this method the rater writes down the employee description in detail
within a number of broad categories like, overall impression of performance, promoteability
of employee, existing capabilities and qualifications of performing jobs, strengths and
weaknesses and training needs of the employee. Advantage It is extremely useful in filing
information gaps about the employees that often occur in a better-structured checklist.
Disadvantages It its highly dependent upon the writing skills of rater and most of them
are not good writers. They may get confused success depends on the memory power of
raters.
11. Cost Accounting Method: Here performance is evaluated from the monetary returns
yields to his or her organization. Cost to keep employee, and benefit the organization
derives is ascertained. Hence it is more dependent upon cost and benefit analysis.
12. Comparative Evaluation Method (Ranking & Paired Comparisons): These are
collection of different methods that compare performance with that of other co-workers. The
usual techniques used may be ranking methods and paired comparison method.
Ranking Methods: Superior ranks his worker based on merit, from best to
worst. However how best and why best are not elaborated in this method. It is easy to
administer and explanation.
Paired Comparison Methods: In this method each employee is rated with
another employee in the form of pairs. The number of comparisons may be calculated with
the help of a formula as under.
N x (N-1) / 2
3. Assessment Centers: This technique was first developed in USA and UK in 1943. An
assessment center is a central location where managers may come together to have their
participation in job related exercises evaluated by trained observers. It is more focused on
observation of behaviors across a series of select exercises or work samples. Assessees are
requested to participate in in-basket exercises, work groups, computer simulations, role
playing and other similar activities which require same attributes for successful performance
in actual job. The characteristics assessed in assessment center can be assertiveness,
persuasive ability, communicating ability, planning and organizational ability, self confidence,
resistance to stress, energy level, decision making, sensitivity to feelings, administrative
ability, creativity and mental alertness etc. Disadvantages Costs of employees traveling
and lodging, psychologists, ratings strongly influenced by assessees inter-personal skills.
Solid performers may feel suffocated in simulated situations. Those who are not selected for
this also may get affected.