Performance evaluation (also performance appraisal or employee appraisal) is a systematic process for measuring and evaluating the work performance of employees. It serves as a basis for personnel decisions such as promotions, salary adjustments and continuing education. Modern approaches rely on continuous feedback instead of annual reviews and use objective, data-based methods to reduce unconscious bias.
What is performance evaluation? Definition and delimitation
Performance evaluation is an institutionalized process for the planned and formalized collection, processing and evaluation of information about the work performance of employees over a specific period of time. It is carried out by persons commissioned to do so (usually supervisors) on the basis of agreed criteria. As a central instrument of performance management, it helps HR managers identify and promote talent and make strategic personnel decisions.
However, according to Deloitte's Global Human Capital Trends 2025, only 28% of organizations trust their performance management system. The biggest challenge: 72% of employees and 61% of managers do not trust the process. These sobering figures show that traditional approaches urgently need to be reconsidered.
Performance evaluation vs. potential assessment
While the performance evaluation analyses past work performance (“What has been achieved?”) , assesses potential assessment of future development opportunities and capabilities (“What could be achieved?”). Both instruments complement each other in holistic talent management: The performance appraisal shows current performance, the potential assessment identifies development opportunities.
Performance evaluation vs. feedback
Performance appraisal is a formalized, structured process with documented results and often far-reaching consequences (promotion, salary). Feedback, on the other hand, is more informal, can be given at any time and focuses on behavior and communication in everyday working life. Modern performance management approaches combine both: structured annual assessments supplemented by continuous feedback.
Legal basis of performance appraisal
Section 82 Paragraph 2 BetrVG: Right of Discussion
The Works Constitution Act (BetrVG) gives employees the right to demand a discussion about their performance and professional development. According to Section 82 (2) BetrVG, every employee can demand that the performance appraisal and career development opportunities in the company be discussed with him or her. Employers are required to comply with this request.
Participation of the works council
According to Section 94 BetrVG, the works council has the right of participation in drawing up assessment principles and procedures. No performance appraisal systems may be introduced or amended without the approval of the works council. This is intended to ensure that assessments are carried out according to uniform, fair standards.
Fairness and transparency requirements
Performance reviews must be objective, transparent and comprehensible. All employees must be aware of the assessment criteria in advance. Judgments based on subjective impressions or discriminatory factors can be legally challenged. HR managers should therefore pay attention to clear criteria, documentation over the entire assessment period and calibration rounds between managers.
Performance evaluation methods
The choice of method depends on corporate culture, objectives and available resources. In practice, several methods are often combined.
Employee interview (classic supervisor appraisal)
The annual employee interview between manager and employee is the most widely used form of performance appraisal. The manager evaluates performance on the basis of predefined criteria and documents the result in writing. However, recent research shows that only 26% of organizations report that their managers are very or extremely effective at promoting the performance of their teams (Deloitte 2025).
The biggest disadvantage of this method is that it is based on the perspective of an individual person and is susceptible to assessment errors such as the recency effect or halo effect.
360 degree feedback
In 360-degree feedback, a person is evaluated from several perspectives: by supervisors, colleagues at the same level, subordinate employees and, if applicable, external stakeholders such as customers. This method provides a holistic picture and significantly reduces individual bias.
The advantage: Different perspectives reveal blind spots. The downside: The method is time-consuming and requires an open feedback culture in which constructive criticism is possible.
Target agreements (Management by Objectives)
With this method, supervisors and employees jointly set measurable, specific goals for a defined period of time (usually one year). At the end of the period, the extent to which the objectives have been achieved is assessed. This method is particularly transparent and objective, as the evaluation is based on clearly defined, measurable results.
Challenge: In dynamic work environments, annual goals can quickly become out of date. That is why modern approaches rely on shorter cycles (quarterly or monthly).
Ranking systems
In ranking systems, employees are compared on the basis of defined criteria and ranked — from worst to best performance. This method is often used for awards such as “employee of the month.”
Criticism: Ranking systems can promote competition instead of cooperation and have a demotivating effect if they are too closely linked to negative consequences (e.g. layoffs). The so-called “forced ranking” (which automatically classifies a certain percentage as a “low performer”) has been abolished again by many companies.
Continuous feedback (modern method)
Instead of annual reviews, more and more companies rely on continuous feedback: regular, brief discussions between manager and employee (weekly or monthly). According to HR.com, 41% of organizations are already using frequent one-on-one meetings. The advantage: Timely feedback enables faster adjustments and keeps employees engaged. Studies show that 85% of employees who receive weekly reviews are more engaged.
Criteria and common assessment errors
Typical assessment criteria
Performance reviews are usually based on a combination of criteria:
Work quality: Accuracy, diligence, error rate and overall execution of work. How precisely does the person work?
Work quantity: Productivity, meeting deadlines, speed. Does the person complete their tasks within the expected time frame?
Professional expertise: Mastering the skills and expertise required for the position
Soft Skills: teamwork, communication skills, problem-solving skills, leadership skills (if relevant).
Objective achievement: Target agreement systems measure the extent to which the agreed goals have been achieved.
The 5 most common assessment errors
Despite structured processes, performance appraisals are susceptible to systematic errors. Knowledge of these bias traps is essential for fair assessments:
- Recency effect: Current events disproportionately influence the valuation, while overall performance over the year is neglected. For example, poor performance in the last month overshadows ten months of good work.
- Halo effect: One particularly positive or negative characteristic outshines the evaluation of all other characteristics. Example: Someone who is very charismatic is automatically perceived as competent — regardless of actual work performance.
- Hierarchy effect: Employees in higher positions are automatically rated better, based on the assumption that only particularly talented people are promoted. Working students can certainly show more commitment than department heads.
- Similarity bias: Managers tend to rate people with similar backgrounds (education, origin, hobbies) better — a classic case of unconscious bias.
- Primacy effect (primary effect): The first impression is overrated and overshadows subsequent observations. Example: Someone who starts off weak in the first few weeks will fight against this negative initial impression all year round.
Modern Trends in Performance Management 2025
The way companies evaluate performance is undergoing fundamental change. The COVID-19 pandemic accelerated developments that were already underway — away from static annual meetings towards dynamic, employee-centred approaches.
From yearly to continuous
Traditional annual performance reviews are experiencing a dramatic decline: 82% of companies were still using annual reviews in 2016, compared to just 54% in 2019. This trend is continuing. The reason: Annual feedback comes too late to change behavior. Gallup estimates that organizations lose between 2.4 and 35 million US dollars in working time annually — time spent on ineffective performance reviews.
Modern approaches rely on shorter feedback cycles: quarterly check-ins, monthly meetings, or even weekly one-on-ones. This enables timely course correction and keeps employees more engaged.
AI and people analytics
The use of artificial intelligence in performance management is increasing rapidly. According to the Harvard Business Analytics Program, companies with AI-based systems report 27% higher employee satisfaction with the feedback process and 31% better alignment of individual contributions to corporate goals.
AI systems analyze performance patterns in real time, identify early signs of disengagement or burnout, and provide managers with data-based insights. Predictive analytics make it possible to predict performance trends before they become problematic.
Employee Wellbeing Integration
Another key trend: The integration of wellbeing metrics into performance reviews. Companies recognize that physically, mentally and emotionally healthy employees perform better. Gallup estimates that low employee engagement and poor wellbeing cost the global economy 8.9 trillion US dollars annually — equivalent to 9% of global GDP.
Modern performance management systems therefore not only record output, but also work-life balance, stress levels and satisfaction. 84% of managers agree that burnout must be addressed as part of performance management.
Objective, data-based methods
The shift to more objective assessment methods is one of the most important trends. Instead of relying on subjective assessments, leading organizations are increasingly relying on data-based assessments and scientifically validated procedures.
Modern performance evaluation uses objective competency assessment methods to reduce unconscious bias. Digital platforms such as Aivy rely on scientifically validated assessments — originally developed for recruiting, increasingly used for internal talent assessment and potential analyses. Such approaches create transparent bases for decision-making and reduce systematic distortions in assessments.
The focus is shifting from “performance management” to “performance enablement”: Instead of just measuring performance, it is about actively making it possible — through coaching, resources, clear goals and continuous support.
Practical implementation: tips for fair performance reviews
Preparation for an appraisal interview
Thorough preparation is crucial for a constructive assessment interview:
- Collect documentation: Use notes from the entire year, not just from the last few weeks (avoid recency effect). Document specific examples of good and improvable performance.
- Get a self-assessment: Let employees rate themselves. The comparison between self-image and image of others is informative and promotes self-reflection.
- Apply clear criteria: Make sure that the assessment criteria have been communicated in advance and are transparent to everyone.
- Plan the conversation structure: Start with positive aspects, then discuss areas of development and conclude with specific agreements.
- Prepare specific examples: Instead of “you communicate poorly,” use specific situations: “In the meeting on March 15, you interrupted Team Member X's concerns.”
Avoiding bias
Unconscious prejudices significantly influence assessments. How to reduce systematic distortions:
Perform calibration rounds: Executives compare their assessments to ensure that the same performance is rated equally — regardless of the evaluating manager.
Training on assessment errors: Explicitly train managers on the recency effect, halo effect, and other bias traps.
Data-based decisions: Supplement subjective assessments with objective metrics (goal achievement, measurable KPIs, 360-degree feedback).
Diversity in the assessment team: If possible, assessments should be made by multiple people with different backgrounds.
Software support
Performance management software can make the process significantly easier:
Automation: Tools such as Personio, Factorial, or Quantum Workplace automate feedback cycles, send reminders and continuously collect performance data.
Standardization: Uniform forms and rating scales ensure that all employees are rated according to the same criteria.
Analytics: Software provides insights about trends, identifies systematic bias patterns and highlights development needs.
Transparency: Employees can access their assessments, track goals and provide feedback at any time.
According to recent surveys, however, only 33% of employees use performance management software. The cloud-based solutions are expected to achieve a market share of 65% by 2025 — digitization is therefore progressing rapidly.
Common questions about performance evaluation
What is the difference between performance appraisal and potential appraisal?
Performance appraisal assesses work done in the past — it answers the question “What has been achieved?” The potential assessment, on the other hand, assesses future development opportunities and capabilities — it asks “What could be achieved?” Performance refers to past performance, potential to future development capacity. Both instruments complement each other in holistic talent management: The performance assessment shows current strengths and weaknesses, the potential assessment identifies development opportunities and successor candidates.
How often should a performance appraisal be carried out?
Traditionally, a formal performance review takes place once a year — this is still the case in 54% of companies, but with a downward trend. Modern approaches rely on continuous feedback: 41% of organizations already use frequent one-on-one meetings (weekly, biweekly or monthly). The recommendation: An annual main discussion with formal documentation, supplemented by quarterly check-ins for interim feedback. For new hires, an additional interview should take place after 3-6 months to evaluate the training.
What are common appraisal errors?
The five most common assessment errors are: (1) Recency effect — current events are overweighted compared to the overall performance of the year. (2) halo effect — a particularly positive or negative characteristic outshines the evaluation of all other characteristics. (3) Hierarchy effect — Higher-positioned employees are automatically rated better. (4) Similarity bias — People with a similar background to the evaluating manager are preferred. (5) Primacy effect — first impressions are overemphasized and later achievements neglected. Awareness of these mistakes and appropriate training can help achieve fairer assessments.
What criteria are used in performance reviews?
Typical assessment criteria include: (1) Quality of work — Accuracy, accuracy and error rate in the execution of tasks. (2) Work quantity — Productivity, meeting deadlines and pace of work. (3) professional expertise — Mastering the skills and expertise required for the position. (4) Soft Skills — Teamwork, communication, problem-solving skills and, in the case of managers, leadership qualities. (5) Objective achievement — Target agreement systems measure the extent to which the goals agreed at the beginning of the year have been achieved. The specific criteria should be transparently communicated and tailored to the respective position.
What is 360 degree feedback?
360-degree feedback is a comprehensive assessment method that evaluates an individual from multiple perspectives. The feedback comes from various sources: supervisors, colleagues at the same hierarchical level, subordinate employees and, where appropriate, external stakeholders such as customers. The advantage of this method lies in the holistic picture that is created and in the reduction of individual bias. The disadvantage: 360-degree feedback is time-consuming and requires an open, trusting feedback culture in which critical feedback is also possible without having to fear negative consequences.
What does the Works Constitution Act say about performance appraisal?
According to Section 82 (2) BetrVG, employees have the right to request that their performance review be discussed. They are entitled to an interview about their professional development and career opportunities in the company. In addition, in accordance with Section 94 BetrVG, the works council has the right of participation in drawing up assessment principles and procedures. No performance appraisal systems may be introduced or amended without the approval of the works council. In addition, assessments must be fair, transparent and comprehensible — discriminatory or arbitrary assessments can be legally challenged.
As a manager, how can I ensure objective assessments?
To ensure objective assessments, you should take the following measures: (1) Define clear, measurable criteria in advance and communicate them transparently. (2) Conduct continuous documentation over the entire year — not just in the last weeks before the assessment interview. (3) Complete the employees' self-assessment and compare it with your assessment. (4) Conduct calibration rounds with other managers to ensure that comparable performance evaluates equally become. (5) Complete training courses on Assessment errors to identify bias traps. (6) Use data-based tools such as performance management software, which collect and evaluate objective metrics.
What are the trends in performance management 2025?
The most important trends in performance management 2025 are: (1) Continuous feedback instead of annual reviews — 54% decline in annual reviews in favor of more frequent one-on-ones. (2) AI-powered performance analytics — Organizations with AI systems report 27% higher employee satisfaction with feedback. (3) Integrate employee wellbeing — Health, work-life balance and stress levels are recognized as performance factors. (4) Skills-based rather than job-based assessments — Assessment focuses on specific competencies instead of rigid job profiles. (5) Performance Enablement — the focus is shifting from simply measuring to actively enabling performance through coaching, resources and clear goals.
Conclusion: Performance evaluation as a tool for personnel development
Performance evaluation is much more than an administrative duty — it is a strategic tool for managing talent, development and corporate success. However, the figures clearly show that traditional approaches no longer work. Only 2% of CHROs think their performance management system is effective, and 72% of employees do not trust the process.
The future belongs to objective, data-based methods that reduce unconscious bias and enable continuous feedback. Organizations that not only measure performance but actively enable it — through coaching, clear goals and transparent criteria — will develop and retain their talents more successfully.
The change is already underway: from annual to continuous, from subjective to data-based, from evaluation to empower. HR managers who actively shape this change are positioning their companies for the working world of tomorrow.
Would you like to integrate objective, scientifically based competency assessment methods into your company? Learn more about objective aptitude diagnostics with Aivy.
Sources
- Works Constitution Act (BetrVG) — Section 82 (2) and Section 94 Federal Ministry of Justice, 2023. https://www.gesetze-im-internet.de/betrvg/
- Global Human Capital Trends 2025: Employee Performance Management. Deloitte Insights 2025 https://www.deloitte.com/us/en/insights/topics/talent/human-capital-trends/2025/
- The Cost of Poor Performance Management. Gallup, Inc., 2024. https://www.gallup.com/
- State of Performance Management Survey. HR.com Research Institute, 2024. https://www.hr.com/
- Performance Management Trends 2025. Quantum Workplace, 2025. https://www.quantumworkplace.com/
- Performance Management Statistics 2025. Betterworks & ThriveSparrow, 2024. https://www.betterworks.com/
- The Disruption of Digital Business Models in the HR Function. Josh Bersin, 2018. https://joshbersin.com/
- Performance review of employees. Qualtrics 2025 https://www.qualtrics.com/de/erlebnismanagement/mitarbeiter/leistungsbeurteilung/
- Everything you need to know about performance appraisals. HR Today, 2024. https://www.hr-heute.com/glossar/leistungsbeurteilung
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