A case study to solve

I am posting this case study especially for a discussion so that people interested can up with their own views over the case. The case is as follows

A company XYZ pvt ltd uses Graphical Rating System for the evaluation of performance of its employees.This system of performance appraisal is carried out for many years now and is done by the supervisors and the Engineers.The various criterion used to evaluate a person consists of various competencies like initiative, performance at work, responsibility, regularity and punctuality, leadership qualities, potential to develop community activities and so on. Community activities refer to the activities an employee carries out with a purview of betterment of the society beyond the office hours. However Mr.A and Mr.B who were at the bottom of the graphical scale (indicating low performance) went to see the Chairman of the company showing away their dissatisfaction with the present system of appraisal. Their main points for argument were as follows

1. The present system of rating is not the true indicator of their performance
2. Community Activities should not be a part of the appraisal system because what an employee does beyond office hours is none of the company's business
3. Salary hike should be automatic and not based on such graphical ratings.

The Chairman sensed their dissatisfaction and their inclination towards Union.Hence in order to control the situation the chairman contacted the HR Manager.

Q .1 Place yourself in the role of the HR Manager and prepare a communication to chairman mentioning your comments ion this incident and your recommendations to handle this situation.

Q.2 Offer your comments on inclusion of Community Activities as a factor for appraisal.