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Whom Company Should Evaluate
First, the organization must determine which employees in what types of jobs should be evaluated. Whom the organization needs to evaluate has implications for the type of system chosen. For example, a system that effectively appraises managerial performance would be quite different from a system evaluating the performance of clerical workers. Different jobs place different demands on appraisal systems. Jobs that are difficult to describe or that vary substantially in terms of activities and tasks create difficulties in terms of appraising performance.

What criteria should be used to evaluate
Next, an organization must decide what criteria it will use for evaluation. Does it want a system based on evaluating individual traits, behaviors, or job results? This decision depends in part on who is being evaluated and how the organization intends to use the performance appraisal.

TRAIT
Early graphic rating scales evaluated workers on individual traits or personal characteristics which were presumably related to job performance. Initiative, aggressiveness, reliability, and personality are examples of traits on which employees have been rated. One problem with trait rating is that the traits themselves are difficult to define and may be subject to varying interpretation by evaluators.

BEHAVIOR
Rating employees according to job behaviors is based on the assumption that there are effective and ineffective behaviors and that these have been identified for each job or type of job. Behaviors are judged effective or ineffective in terms of the results the behaviors produce (either desirable or undesirable). For example, a customer service representative could be judged on the amount of patience shown to irate customers. Evaluating employees along behavioral dimensions is especially important for employee development purposes.

JOB RESULT
Results indexes are often used for appraisal purposes if an employee's job has measurable results. Examples of job results indexes are dollar volume of sales, amount of scrap, and quantity and quality of work produced. When such quantitative results are not available, evaluators tend to use appraisal forms based on employee behaviors and/or personal characteristics. In some cases, appraisals may of necessity focus on results rather than behaviors. This is especially true where job content is highly variable, as in many managerial positions, thus making it difficult to specify appropriate behaviors for evaluative purposes. Results indexes such as turnover, absenteeism, grievances, profitability, and production rates can be used to evaluate the performance of organization units.

Sources of Reference:
Thomas H. Stone, Understanding Personnel Management, Dryden Press.
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You can download excellent powerpoint slides on HR Management and Performance Management HERE.