Performance Appraisal and Salary Determination

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Performance Appraisal and Salary Determination
Neil F. Keehn, Member
The performance appraisal process should be based upon an assessment of the employee's value to the company. This value should be based upon the employee's contribution to revenue generation, profit enhancement and/or cost reduction.
I have devised a 13-point employee evaluation method that is part of a process that leads an estimate of an employee's total monetary value to the company. Once the total value of the individual has been computed, the employee's baseline salary can be computed. One method for computing this value is to use the inverse relief from royalty valuation method. This value is based upon the employee's past performance.
A real options method is then used to modify this baseline salary up or down, depending upon management's perception of what the employee will contribute to the company's bottom line in the future. The time horizon for this estimate is based upon how quickly the employee's skill set becomes obsolete if he/she does nothing to upgrade his/her skills.



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