In many organizations, reward decisions depend on subjective performance evaluations. However, evaluating an employee's performance is often difficult. In this paper, we develop a model in which the employee is uncertain about his own performance and about the manager's ability to assess him. The manager gives an employee a performance appraisal with a view of affecting the employee's self perception, and the employee's perception of the manager's ability to assess performance. We examine how performance appraisals affect the employee's future performance. The predictions of our model are consistent with various empirical findings. These comprise (i) the observation that managers tend to give positive appraisals, (ii) the finding that on average positive appraisals motivate more than negative appraisals, and (iii) the observation that the effects of appraisals depend on the employee's perception of the manager's ability to assess performance accurately.

Cheap Talk, Credibility, Subjective Performance Appraisal
Asymmetric and Private Information (jel D82), Search; Learning; Information and Knowledge (jel D83), Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues) (jel M52), Labor Management (team formation, worker empowerment, job design, tasks and authority, job satisfaction) (jel M54)
Tinbergen Institute
hdl.handle.net/1765/32104
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

Kamphorst, J.J.A, & Swank, O.H. (2012). The Role of Performance Appraisals in Motivating Employees (No. TI 2012-034/1). Discussion paper / Tinbergen Institute (pp. 1–27). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/32104