CHAPTER 16

Ethical and Legal Issues of

Performance Management

Learning Objectives
After reading this chapter, you will be able to understand:
 Concepts of ethical and legal issues involved  Benefits of ethical practices in organizations
in performance management systems
 Implementing code of ethics in workplaces
 Ethical perspectives in performance appraisal
systems  Ethical dilemmas in performance manage-
 Objectives of performance management ethics ment
 Code of ethics and code of conduct  Legal aspects of performance management

Code of Ethics on Corporate Governance of Infosys, India

Infosys is one of the pioneers in information technology in India. The company is recognized for ethical
compliance and always emphasizes on achieving performance with integrity. Known internationally for
its best practices in corporate governance, Infosys always put endeavours to respect minority rights in
all its business decisions.
The company’s corporate governance philosophy is based on the following principles:

 Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should
go beyond the law.
 Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose.
 Make a clear distinction between personal conveniences and corporate resources.
 Communicate externally, in a truthful manner, about how the company is run internally.
 Comply with the laws in all the countries in which the company operates.
 Have a simple and transparent corporate structure driven solely by business needs.
 Management is the trustee of the shareholders’ capital and not the owner.

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 Ethical and Legal Issues of Performance Management 315

As a part of commitment to follow global best practices, the company complies with the Euro share-
holders Corporate Governance Guidelines 2000, and the recommendations of the Conference Board
Commission on Public Trusts and Private Enterprises in the USA. The performance management sys-
tems at Infosys are considered to be one of the best in the country, for its transparency and employees
acceptance.
Adapted from: http://www.infosys.com/investor/corporategovernance.asp.

INTRODUCTION
Compliance with the ethical issues by any organization is possible when they balance the bottom-line
and the social welfare. Such a process of balancing may not always be without conflict, because of the
differences in the stakeholders’ interest. Obviously for this reason, organizations feel constrained in
the process of balancing opposing objectives. Being multi-dimensional, an organization has to meet
such opposing expectations of stakeholders, who even encompass society, culture, religion, diversity
issues, religions, socio-politico-economic issues, or for that matter any possible issues which may have
direct or indirect linkages with the organizational activities. Ethical practices cascade to compliance
with the corporate social responsibility (CSR). Today CSR has become the managerial responsibility;
it is in-built with the organizational effiiciency. In practice, many organizations show their concern for
social responsibilities, but indulge in generating profits only. Therefore, organizations need to get a
model which can make a trade-off between the profit, ethics, and social responsibility. While doing such
trade-offs, it is often difficult for the organization to quantify the direct impact of social responsibility
vis-à-vis profit motive.
A mid-sized pharmaceutical company in India, started by an entrepreneur was trying to introduce
performance culture to weed out the deadwoods and non-performers and reward the good performers.
The company initially started as a family business, but for subsequent business expansion had to go
for professional management practices, hiring professional managers and employees. The owner CEO
gradually distanced himself from the nitty-gritty of day-to-day work, to play the figure-head role in the
organization. In the process of introducing the performance culture, the organization could identify seri-
ous ethical issues involving the marketing team members who in the name of achieving the sales targets,
indulged in unethical and even illegal means. While the business performance is achieved, adding to
the bottom-line of the company, the organization faced with the dilemma whether to comply with the
legal and ethical issues, or just keep quite to allow the things to continue to achieve the results. At this
stage, the owner CEO of the company, keeping in view the long-term perspectives, developed the code
of ethics in compliance with the law of the land. The CEO then ordered for listing of the issues involv-
ing managerial ethics and challenges to ensure its compliance. To do so, the first attempt was made to
list the factors, which contribute to the compliance of ethical behaviour, and then develop the suitable
mechanisms for ethical control and compliance.
An ethical organization can achieve better business results. This maxim is now making more and
more corporate leaders accept their social responsibilities and organizational ethics. Organizations
indulging in unethical business practices or in unethical dealings with their employees are now quickly
identified and become globally transparent in this era of technology-intensive communication systems.
Organizational activities require redesigning and updating, keeping pace with public expectations and

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ever-rising standards. The pattern of organizational behaviour, injustice, corporate dishonesty, exploita-
tion, and negligence being more visible, and attracting public opinion and criticism, ethical violations
are carefully avoided. We all know City Toy’s case, which used to manufacture toys, using child labour
in China to offer it as gift item to the customers of McDonald. It was subjected to criticism interna-
tionally to such an extent that McDonald had to withdraw the practice. The Indian carpet industry and
Bangladesh garment industry faced similar predicaments in terms of export restrictions for using child
labour. Even suppressing facts on products and services become an ethical violation from customers’
point of view.
For organizations, ethical issues encompass every citizen of the world. The definition of stake-
holder is no longer limited to shareholders, investors, and partners. Stakeholder is any group, which
has an interest in, involvement with, dependence on, contribution to, or is affected by the organization.
A stakeholder is any individual or group who could lose or gain something because of the actions of the
organization.
Unethical corporate practices can be classified into immoral category, that is, a deliberate violation
of ethical issues to harm the stakeholders. This apart; there may be unknowing violations of ethics by
the organization, which we can be categorized in amoral type. Negative consequences of unethical
corporate cultures in human resource management or organizational behaviour pervade selection and
staffing, performance appraisal, compensation, and retention decisions. Thus, human resource systems
and ethical corporate cultures should be considered partners in the process of creating competitive
advantages for organizations. According to Zadek (1997), while complying with the ethical issues in
the organizations, managers must also be able to get the flexibility in aligning performance, ethics, and
accountability.

DEFINITION AND CONCEPTS

Ethics are moral principles about what is good, defensible, and right. Although operationally ethics need
to be integrated with our behaviour and actions, we often treat ethics as an afterthought. Ethics and ethi-
cal reflection need to be integrated through all organizational practices. A common philosophical defini-
tion of ethics is the science of conduct or values of management. Moral values such as respect, honesty,
fairness, and responsibility are important constructs of ethics. Application of such ethics is ensured by
organizations by adopting some code of ethics. Thus, ethics includes the fundamental ground rules and
organizations give an informed choice to the employees to understand whether something is right or
wrong and then take decisions making the right choice. Ethics, therefore, is the framework of values
for moral behaviour. It is a social glue to ensure that an organized society prospers and everybody’s
interest is served. The Ten Commandments of the Christians or the teachings of the Bhagwad Gita for
Hindus are sources of directions for ethical behaviour in life. Today, we are concerned with the issue of
ethics in two aspects of life, namely, business and profession. Business represents the entrepreneurs and
profession represents those who are employed in an organization or who work for an employer. In other
words, ethics are equally applicable for the employers and the employees. In India, we find reference
to ethics in the Bhagwad Gita. Our traditional guild systems laid down the ethics of business or profes-
sion. This sacred text emphasizes the need for internalization of the ethical codes by the individuals, so
that they can reflect the same through their behaviour. Organizations can benefit in the best way when
they make their people internalize the ethical codes and values. However, external forces now also
compel organizations to comply with ethical issues. External forces always need not be the regulatory
authorities alone, they could even be stakeholders, whose changing expectations require organizations

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to step up their ethical standards and conducts. In the case of a profession, it could be the professional
association or the guild and in the case of a society where there is a government, it is the government
agency, which ensures that the laws are obeyed. In fact, in a secular society, it is the law that lays down
what is acceptable conduct and what is not. Acceptable conduct would be encouraged and unacceptable
conduct would be considered illegal and punishment meted out.
When performance management systems are abused in organizations, we call it a violation of ethics.
It not only speaks on poor corporate governance, but also creates unhealthy work environment, where
every employee feels demoralized. Reduced performance and productivity, and employees’ dissension
even ultimately weakens the organizational competitive strength. It is necessary to ensure transparency
in performance evaluation process and communicate to employees, whose interests get prejudiced for
any performance aligned decisions like promotions, transfer, salary raise or increments, training, etc.
Some organizations even ask the poor performers to quit. Violation of ethics in performance manage-
ment systems may not always be deliberate for the managers. It may be just for their self-understanding
of the process in the absence of any guidelines. Managers often feel they are skillful and knowledgeable
enough to rationally use the performance management process.
Sometimes, major miscommunications occur in performance review sessions due to basic differences
in ethical orientation. For example, the reviewer may say, ‘Reviewing the employees’ performance is
a requirement, and we need to follow the rules of the organization’. The person being reviewed may
reply, ‘I contribute to the organization very significantly, but I don’t get the rewards or appreciation.
I am being treated equally like my other colleagues who underperform. The reviewer is concerned with
decisions and actions that conform to basic principles and rules (adherence). The employee appears to
be oriented towards the outcome, the ends justify the means (results). They are talking on two different,
non-connecting planes. Unless the employee and the reviewer are successful in negotiating an ethical
balance, each may view the other as taking unfair shots—and the battleground will be the performance
review process.

ETHICAL PERSPECTIVE IN PERFORMANCE

APPRAISAL SYSTEM
The American Heritage Dictionary elaborates the term ethics as certain set of principles of right con-
duct, moral values, philosophy, and rules or standards that govern the conduct of a person or the mem-
bers of a profession. Ethical issues become more challenging in human resource management issue,
which encompasses performance management as well. Performance evaluation, generally, consists of
multiple factors like punctuality, attitude, conforming to dress codes, good interpersonal relations with
the customers, peers, and subordinates, language, neatness, congeniality, and finally the performance
output, among other things. The evaluation process will be considerably different between service and
production employees and between general employees and professional employees. The ethical chal-
lenge arises when, after all the factors have been considered, the decision is made on a factor or factors
other than those by which all the employees have been evaluated.
Performance appraisal processes is susceptible to ethical issues. Ethical violation occurs when per-
formance evaluation is done based on biased observation and judgement. Even at times of appraisals,
managers often emphasize on unrelated factors like race, religion, argumentative, etc. Ethical perfor-
mance review is the most important aspect of the performance evaluation process. It requires managers
to conduct the review process with honesty and mutuality. Honesty requires honest assessment of per-
formance, while mutuality requires mutual development of performance plans that can ensure improve-
ment of performance.

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OBJECTIVES OF PERFORMANCE
MANAGEMENT ETHICS
The overall objective of performance appraisal is to provide an honest assessment of performance and
to mutually develop a plan to improve the individual’s effectiveness. Prerequisites for the same are
to make people understand where they stand in terms of their performance achievement. To ensure
compliance with the performance ethics, structured performance objectives are laid down, keeping the
following points in the backdrop:
 Adequate definitions of the objectives and the purpose of the organization.
 Issues of priority, like values or achievement of performance goals.
 How the employees contribute to the achievement of organizational results.
 Focus of the organization in terms of achieving the performance results like individual, group, or
organizational.
 Degree of compatibility of employees with the job position.
Many effective, high-ethics managers invite such inputs to ensure that performance management pro-
cess becomes ethic complaints. Managers help the employees to understand how their contribution
leads to mutually beneficial performance outcomes. Often during the process of performance review,
managers face the paradoxical situation, where the employees allege their performance review is mean-
ingless as they see no future in the organization and hence they have made an informed decision to leave
the organization. In such cases, most of the managers commit the blunder of immediate recommenda-
tion for promotion, even going to the extent of tampering of performance results for the retention of the
employees when they feel employees are valuable for the organization. However, ideally in such cases,
managers instead of insisting the employees to stay need to allow the normal separation, despite the fact
that such separation is painful.
Some managers again, while reviewing the performance of employees, emphasize on conformance
with legal aspects. They nurture this impression wrongly, as legal compliance is not the adequate taste
of ethical performance evaluation process. Adhering to the rules and regulations and documentation of
the entire performance review results may put them in perceptive secured and defensible position, but
may make them liable for ethical violation. Managers need to appreciate that the performance review
process is not just an annual ritual, but rather a human resource development initiative in terms of inject-
ing the spirit which enables the individuals to recognize and strive for performance improvement.
Again a mechanical performance review process may not violate the ethical requirements, but may
imbibe feelings in the minds of the employees being reviewed, that their feelings are ignored. Employ-
ees with such feelings lose their personal worth. Again the managers’ propensity to stereotype the per-
formance review process is not desirable, as managers in such cases often try to please the subordinates
with overrating, without considering the differences in their performance levels. Such erroneous perfor-
mance review, in reality, make the organization prone to high turnover of best performers. Therefore,
performance appraisal process needs to balance between the ethical, legal, and business issues. Without
the proper trade-off, the process is meaningless. Self-esteem of employees is the most critical issue. The
review process should not damage the self-esteem of the employees for the coercive behaviour of the
managers.
Contrarily, when the performance appraisal process helps employees to understand how their con-
tributions relate to the overall objectives of the organizations, they perform better and with proper
feedback, they can even autonomously develop themselves and renew their capabilities to improve their

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future performance levels. With such continuous development of employees, organizations can achieve
long-term sustainability and a high degree of competitiveness.
Thus, the primary objective of the performance appraisal process is to develop the employees, and
through employees’ development and capability enhancement to gain the competitive strength. Ethical
consideration of the managers becomes evident from the explicit understanding that making people
understand their self-worth autonomously make them deliver better performance results.

CODE OF ETHICS AND CODE OF CONDUCT

Code of ethics and code of conduct specify the ethical standards that a group (e.g., staff or a professional
group) should follow in order to continue as a member of the group. They are generally formally stated
and members are required to accept them as part of their membership of the group while accepting
employment/membership. Values vary between individuals and across cultures. Hofstede’s four value
dimensions (1980) help us understand cultural value clashes. Long-term versus short-term values affect
many aspects of organizational life. The four key ethical principles are egalitarianism, utilitarianism,
individual right, and distributive justice. Organizations following the utilitarianism approach in ethics
make decisions based on their outcomes and consequences. Ethical behaviour is influenced by moral
intensity, ethical sensitivity, and the situation. A code of ethics serves a number of key roles.
A code of ethics is different from a code of conduct. Code of ethics for an organization or for a pro-
fession is developed more in the form of statement of values and beliefs that defines an organization
or a group. Value statements are aspirational, while rules or principles are the beliefs, which individ-
ual members of an organization should subscribe to in order to continue as members of the organiza-
tion. These are listed in different sections in the code, regarding specific relationships with employees,
customers, shareholders, suppliers, and competitors, as well as the society in general. Because of the
increasing importance of ethical compliance, professional organizations emphasize on imparting train-
ing on ethics.
The code of conduct, on the other hand, translates the values (documented in the code of ethics) into
specific behavioural standards, keeping in mind the possible reflection on the stakeholders’ interest. It
outlines a fundamental set of principles, explains why members of an organization should behave in a
certain way, what actions are prohibited, and also how to determine which action is ethical or unethical.
Therefore, codes of ethics are general guides to operational values and decisions, while codes of con-
duct are more specific or formal statements of the values and practices of a business. Codes of conduct
for any organization are better understood through the mission statement of the organization.
A common philosophical definition of ethics is the science of conducts or values of management.
Moral values are respect, honesty, fairness, and responsibility, and these values are translated into a code
of ethics, according to Carter McNamara (2002), a Minneapolis consultant, specializing in leadership
development and strategic planning ethics ‘includes the fundamental ground rules by which we live our
lives’. As it pertains to business, ethics is generally considered the act of learning what is right and what
is wrong in the workplace and then making the decision to do the right thing.

Benefits of Code of Ethics

It is now clear that merely having by default a code of ethics or conduct will not solve the ethical prob-
lems. However, having a developed code of ethics will certainly be beneficial to the organization and to
the society as a whole. For the organization, a clear code of ethics or standards provides concrete guide-
lines necessary to deal with situations both within the company as well as in external relations. Internal

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ethical dilemmas always need not be straight and simple; it may be complex, requiring well-defined
policies to facilitate fairness and moral management. In external relations with suppliers, customers,
and shareholders, a solid code is the best way to avoid decisions that can lead, in extreme cases, to gov-
ernmental intervention and prosecution.
A clear statement of ethics policy of an organization also helps employees to align their personal
values with those of the organization, creating a stronger workplace bond with both fellow workers and
company leaders. Also, a code of ethics provides individual workers with security that protects them
from possible violation of ethical practices by unscrupulous organizations. Society also benefits when
the organizations comply with the ethical codes. Some such areas may be organizations’ decision to
comply with environmental hazards, and improving the quality of work life (apart from the benefit to
the people who work with the organization, it also benefits the society through improved infrastructural
facilities). Also, a code of ethics benefits future corporate leaders, as these prospects can improve their
moral standards right from the beginning, to rise to the future expectations of ethical standards in their
higher role positions.
Hence, a developed code of ethics benefits all types of organizations and businesses, irrespective of
their size and nature of activities. Such a code not only transcends business practices, but also encour-
ages employees to be upfront about problems, which they may encounter in the workplace.

Benefits of Ethical Practices in Organizations

By behaving ethically, organizations can derive huge advantages. Even though the primary constructs
of ethical practices are humanity and compassion for the stakeholders, it can provide the following
advantages to organizations:
 Competitive advantage—Customers favour those organizations which are known for their ethical
practices. Hence, ethical violation reduces the market share, reduces their sales and revenues, and
ultimately adversely affects the bottom line of the organization.
 Better staff attraction and retention—Ethics compliant organizations also develop their brand
image and such employer branding helps them to attract and retain the best people, which eventu-
ally contribute to their sustainable competitive advantage. On the contrary, ethical violation means
high attrition rate of employees, recruitment of average performers, and overall cost inefficiency.
 Investment—Ethics compliant organizations can also attract investors as people repose their confi-
dence only on those who show integrity, a sense of responsibility, and who are trustworthy.
 Morale and culture—Ethics-compliant organizations also create a workplace, where employees
feel compelled to work. Ethical organizations develop high integrity, become socially responsible,
and globally considerate. All these, make such organizations less prone to stress, attrition, and dis-
satisfaction. Therefore, complying with the ethics, organizations develop a work culture, free from
stress, which makes employees feel happier and become more productive.
 Reputation—Building organizational reputation takes years of efforts and ruining it hardly
requires one violation. Ethically responsible organizations are less prone to scandals and disasters.
They become more sensitive to any such practices, which may adversely affect the reputation of
the organization.
 Legal and regulatory reasons—Even though compliance with ethics still now voluntary and orga-
nizations comply with these for their long-term business interests, globally ethical issues are likely
to come under legal and regulatory norms, making it compulsory for organizations to comply with

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the same. Hence, early preparedness of the organization will benefit them in the long run, when
ethical issues become legally enforceable.
 Legacy—It is human nature to be good. Ethical consideration changing our percept of legacy,
which is not to pile up money at the cost of others’ sufferings, but decisions and business practices
which are beneficial to mankind. Hence, organizations believe the test of real legacy is ethical
decision-making.

IMPLEMENTING CODE OF ETHICS

IN THE WORKPLACE
Once a decision is made to develop a code ethics or a code of conduct for an organization, the next
step is to decide what it will include, what it will aim at, and who will prepare it. Carter McNamara, in
the guidebook, The Ethics Toolkit for Managers, points out ‘codes should not be developed out of the
human resource or legal departments alone, as is too often done’. Rather, he says, ‘All staff must see the
ethics programme being driven by top management’.
The Institute of Business Ethics recommends these general steps to be followed in the initial plan-
ning phase:
 Find a champion—preferably a very senior level management person.
 Get endorsement from the chairman and the board.
 Find out what bothers people—talk to both employees and management to find out topics that are
sensitive issues or require guidance.
 Pick a well-tested model, looking to other organizations’ codes to develop ideas and to understand
what could be appropriate for meeting own organizational needs.
 Develop your own organization’s code of conduct, document it with due care to customization to
deal with the problems that are likely to arise in all areas of organizational relations.
 Pilot test it both within and outside the organization to understand its suitability.
 Issue the code—publish the code and make sure it gets sent directly to all employees, shareholders,
suppliers, and customers. It’s also a good idea to post it on the company’s Web site.
 Introduce examples of the code in action into company’s training programmes.
 Enforce the code and regularly review it, and assess whether it continues to remain a good fit for
your needs.
Ben and Jerry’s (1978) code begins with a mission statement: The code goes on to state the company’s
mission, relating to the product quality, economic mission, and the social mission of the organization.
Similarly, Gap Inc’s (1998) code contains specific statements for each group with whom the company
has relationship, viz., ‘commitment to ethical sourcing’, ‘code of vendor conduct’, ‘code for global
compliance team’, etc. Such elaborate codes for specific groups, the company feels, are necessary
because of globally expanded operations and outsourcing.

ETHICAL DILEMMA IN PERFORMANCE MANAGEMENT

In the process of performance evaluation, the following ethical dilemmas are experienced by perfor-
mance reviewers.

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 Emphasis on trait-oriented and subjective performance evaluation criteria, which are difficult to
quantify—It is always desirable to use objective criteria for performance evaluation. Subjective
evaluation often becomes discriminatory. Using the SMART approach, and so also BARS (behav-
iourally anchored rating scales), many subjective performance attributes can be quantified (Barrett,
1966, Campbell et al., 1970, and Smith and Kendall, 1963).
 Ambiguous performance standards and KPIs—This restraints accurate assessment of performance.
Performance standards need to be quantitative; time bound, realistic, and job related. Such stan-
dards need to be developed by the managers in such a way, so that it can encapsulate the critical
performance dimensions of the job. Again while developing performance standards, managers also
need to understand that too much emphasis on quantitative performance criteria may not help them
to track the important qualitative skills of the employees that facilitate them to manipulate a situa-
tion to get the results, without, however, ethical violation. More careful approach of the managers
in writing the performance standards may reduce the errors.
 Simultaneous use of different performance appraisal tools—Often, managers to reduce the rating
errors use this approach of multiple uses of performance appraisal tools. But this practice may
lead to ambiguous performance results, as different raters for their different use of performance
appraisal tools, may come out to different rating results for the same individual, leading to the
problem of consolidation.
 Difference in approach in using the performance results—Essentially, performance management
system is an employee development tool. It must facilitate the human resource development, which
includes succession planning, promotions, compensation design, training, human resource planning,
etc. Arbitrary use of performance results information is detrimental to the interests of the employ-
ees only, and ultimately makes the performance management process incredible to the employees.
Gradually for this performance management systems in an organization loses its sanctity.
 Non-participative approach in developing performance standards—Ideally, managers need to adopt
the practice of mutuality in terms of discussing the performance standards with the employees. If
required, managers also need to make changes in the performance standards, based on the inputs of
the employees. Employees’ participation in performance goal setting, designing the performance
standards and the KPIs, substantially enhances their level of performance commitment and facili-
tates the organizations to achieve the business goals. Once it is ethically agreed by the managers
to involve employees in the performance appraisal process, the scope of employees participation
can be extended to performance goals setting, performance standards development, performance
criteria development, data collection, self-rating, problem solving, and feedback (DeVries et al.
1980). Form of such participation may be in terms of mutual problem solving (Maier, 1958), in
MBO process (Meyer et al., 1965), and ‘rap session’ formats (Meyer, 1977).

LEGAL ASPECTS OF PERFORMANCE MANAGEMENT

Performance management and decisions thereupon, per se, is the prerogative of management, unless it
prejudices the interest of the appraisee. Prejudicing of interest occurs when decisions on promotions,
pay raises, and other career development of the employees are taken by the organizations, affecting
their interests. The premise of prejudicing the interest of employees, however, is the perception of the
employees. Hence legally, it is the onus of employees to substantiate that their interests have been preju-
diced. In India, we have many labour law provisions to enforce the mandatory requirements that the per-
formance evaluations, or for that matter any work-related behaviour be based on objective, job-related

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criteria, to ensure that mangers are free from biases. Biases in performance evaluation of employees
affect the interests of the employees and become a legal issue. Therefore, legal consideration is one of
the most important aspects of performance evaluation systems.
Performance evaluation results are used to select present employees for merit pay, promotion, train-
ing, retention, transfer, discipline, demotion, or termination. The nature of the employment relationship,
as well as the nature of the employment decision, must be considered to determine the potential for
performance evaluations. Where there are no express contract terms that govern performance apprais-
als, courts have allowed employers a good deal of latitude to determine how to evaluate their employees
(Gomez-Mejia et al.1995). However, even in an employment at will relationship, under which either
the employer or the employee may terminate the employment relationship at any time, an employer’s
discretion is not entirely without limits. As Keys et al. (1987) have pointed out, courts vary by juris-
diction in their recognition of the at will doctrine as a matter of state contract and labour law. More-
over, courts have found employers liable under numerous exceptions to the doctrine. These exceptions
include implied contract (as where an obligation to terminate only for just cause arises based on verbal
promises or those contained in an employee handbook) and violation of public policy (as where an
employee is terminated after complaining of harassment or accusing the employer of other misconduct).
Potential liability for defamation or negligence also may restrict, in practical terms, the manner in which
employers can manage and appraise performance. As the following examples illustrate, performance
appraisals also may figure in determining the very nature of the employment relationship.
Some of the legal principles that may govern the performance appraisals and the nature of employ-
ment relationsips, based on the global trend can be listed as under:

Employment at Will—It indicates the employer or the employee may terminate the employment
relationship at any point of time, viz., in India in the letter of appointment, many organizations
endorse the statement, ‘This employment may be terminated from either side giving one-month
notice, or one-month pay in lieu of notice, without assigning any reason’. In such a situation, the
employer gets considerable latitude in determining whether, when, and how to appraise the perfor-
mance of employees.
Implied Contract—Such assumptions in employment relationship restrict the employer to appraise
the performance with a structured and documented approach with adequate transparency. Employment
termination decision, based on the performance results, often becomes the litigation issue. Hence, per-
formance evaluation process needs to be considered by the managers very carefully.
Violation of Public Policy—Determination that given action is adverse to the public welfare and is,
therefore, prohibited. Public policy may restrict the manner in which an employer can use appraisal
results (e.g., may prevent retaliation for reporting illegal conduct by employer).
Negligence—Breach of duty to conduct performance appraisals with due care. Potential liability may
require employer to inform employee of poor performance and provide opportunity to improve.
Defamation—Disclosure of untrue unfavourable performance information that damages an employee’s
reputation. Potential liability may restrict the manner in which negative performance information can
be communicated to others.
Misrepresentation—Disclosure of untrue favourable performance information that causes risk of harm
to others. Potential liability may restrict willingness of employer to provide references altogether, even
for good former employees.

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Labour Standards—Employment relationships in India and in other countries are largely governed by
various laws and regulations. All these impose obligations to the employers in matters of termination,
even when performance level may not be up to the mark.
Some of the important suggestions while drafting the appointment letter, employees’ handbooks,
employment standing orders, human resource management policy manuals, which can minimize the
problem of future litigation, alleging biased performance evaluation can be listed as under:
 That employment is understood to be at will.
 That the employer expressly reserves the right to discharge the employee at any time for any reason
with or without any cause and with or without any notice.
 That nothing in the employer’s policies, practices, or procedures, including performance appraisals,
should be construed to confer any right upon the employee to continued employment.
 That the employer expressly reserves the right to unilaterally alter the terms and conditions of
employment, including the manner in which performance is or is not appraised.
 That the employer is under no obligation to appraise performance.
 That neither the fact that appraisals are or are not conducted, nor the manner in which they may
be conducted, should be construed to give rise to a ‘just cause’ requirement for terminating the
employment relationship.
 That performance appraisals and other evaluation procedures should in no way be considered in
any other manner in determining the existence or nature of any employment relationship that may
be found to exist between the parties.
Some of the legal aspects of the performance evaluation systems are listed as under:
 Punitive or retaliatory attitude of managers while evaluation of employees’ performance. This
problem occurs when managers fail to become impersonal, and even a trivial disagreement with
the employees occupies their mind, while they make the performance evaluation of employees.
 Disregard of diversity issues while evaluating the performance of employees. Managers while per-
forming their duties of performance evaluation, often discriminate employees on the basis of race,
religion, age, gender, disability, culture, etc.
 Doing performance evaluation of employees without adequate backup or evidences. While tak-
ing decisions based on poor performance evaluation reports, it is important for managers to keep
backup support; else it may affect the morale and the motivation level of employees. For example,
in 360-degree performance appraisal systems, peers views may be recorded as evidence to avoid
any future litigation.
 It is important to give adequate cognizance to the employees’ views. This can be done by giving
adequate opportunities to the employees to express their feelings, while commenting on their per-
formance appraisal reports.
 Hundred per cent weight, or absolute performance-based decision on promotion, compensation,
transfer, career development opportunities, and even termination, to the extent possible should be
avoided by the managers, else such decisions may become legal issues, particularly when it affects
the interests of the employees. Many organizations while appreciating the performance-based or
for those matter merit-based decisions, also give importance to other multiple factors, for holistic
study of the employees.

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 Ethical and Legal Issues of Performance Management 325

 Employees with poor performance need to be given fair chance to improve the performance. If,
however, the employees continue to underperform, they can then be asked to leave.
 Sharing of performance feedback with the employees, time to time, and giving them the guidance
through the performance counseling sessions, make the performance appraisal process more cred-
ible, and can avoid litigation.
 Retention of performance records to avoid future litigation is important. Charges of discriminatory
performance appraisal can be mooted by the employees, even afterwards.
 Auditing of performance evaluation results by outside experts for validation may be necessary to
avoid any possible litigation.
 Performance evaluation needs to be specific to job requirements, hence it must be written in dispas-
sionate style.
 Training the managers and supervisors, on the nitty-gritty of performance evaluation systems, can
reduce the rating errors and make the process immune from litigation.
 Records and reports on performance appraisal need to be kept in secured condition. This ensures
zero tampering of performance records, and minimizes the chances of litigation.

Keeping in view the legal complications involved, performance appraisal criteria need to conform to
the following:

 Should be objective rather than subjective.

 Should be job-related or based on job analysis.
 Should be based on behaviours rather than traits.
 Should be within the control of the ratee.
 Should relate to specific functions, not global assessments.
 Should be communicated to the employee.

Procedural recommendations for legally sound performance appraisals need to conform to:

 Should be standardized and uniform for all employees within a job group.
 Should be formally communicated to employees.
 Should provide notice of performance deficiencies, and opportunities to correct them.
 Should provide access for employees to review appraisal results.
 Should provide formal appeal mechanisms that allows for employee input.
 Should use multiple, diverse, and unbiased raters.
 Should provide written instructions and training for raters.
 Should require thorough and consistent documentation across raters that includes specific examples
of performance based on personal knowledge.
 Should establish a system to detect potentially discriminatory effects or abuses of the system
overall.

Nevertheless there are principles of equity and fairness that should be upheld in any good performance
evaluation process.

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