Performance appraisal is a nine-step process. At the first stage, performance standards are established based on job description and job specification. The standards should be clear, objective and incorporate all the factors. The second stage is to inform these standards to all the employees including appraisers. The third stage is following the instructions given for appraisal measurement of employee performance by the appraisers through observation, interview, records and reports.

The fourth stage is finding out the influence of various internal and external factors on actual performance. The influence of these factors may be either inducing or hindering the employee performance. The measured performance may be adjusted according to the influence of external and internal factors. The performance derived at this stage may be taken as actual performance. The fifth stage is comparing the actual performance with that of other employees and previous performance of the employee and others. This gives an idea where the employee stands. If performance of all the employees is ranked either too high or too low, there may be something wrong with the standards and job analysis.

The sixth stage is comparing the actual performance with the standard and finding out the deviations. Deviations may be positive or negative. If employee performance is more than the standards, it is positive deviation and vice versa is negative deviation. The seventh stage is communicating, the actual performance of the employee and other employees doing the same job and discuss with him about the reasons for positive or negative deviations from the pre-set standard as the case may be.

The eighth stage is suggesting necessary changes in standards, job analysis in internal and external environment. Lastly, there is follow up of performance appraisal report. This stage includes guiding, counseling, coaching and directing the employee or making arrangements for training and development of the employee in order to ensure improved performance. If the actual performance is very poor and beyond the scope of improvement, it may be necessary to take steps for demotion, retrenchment or any other suitable measure.