What Do Performance Appraisals Do?

Performance appraisals, the evaluation of an employee’s job performance over the previous period by one’s supervisor, are a standard practice in virtually every organization. They are one of the most important, time-consuming, and unpopular tasks in management. Despite this, remarkably little is known about how performance appraisals operate, especially their consequences. Indeed, much of what is written from a practitioner perspective typically suggests that they do little. By contrast, we document empirical evidence of the importance of performance appraisals using data from a large US corporation. The results in this case show that appraisals are informative and directly influence many dimensions of employee outcomes, including employee bonuses, merit pay, employee promotions, and decisions to exit the firm. The evidence shows that the appraisal process here is consistent with a relational, open-ended view of employment. It is not consistent with the common economic view that performance appraisals simply settle-up contractually based employment relationships.