Most modern organizations engage in some form of performance appraisal in an effort to determine how well employees are performing their jobs. In the United States, these appraisals tend to be fairly formal and structured, in part because of potential legal liability when employment decisions are made on the basis of appraisals. Regardless of the system used, in the vast majority of cases, all of the parties involved are unhappy with the appraisal process. That is, employees often feel as though appraisal systems do not fairly assess their contributions, and many also believe that ratings are biased. The managers who typically conduct the appraisals often feel that they are not adequately trained in appraising performance, and they feel uncomfortable being put in the role of "judge." Managers at higher levels in the organization are often not convinced that there is a relationship between the appraisals and any measure of corporate performance. At all levels in the organization, there is often the feeling that appraisals are done because they have to be done but that nothing productive ever comes out of the process. These problems are well documented in both the academic literature (e.g., Murphy & Cleveland, 1995) and the practitioner literature (e.g., Pulakos, 2004). Yet, despite these problems and some calls for the abolishment of appraisals (cf. Coens & Jenkins, 2000), most organizations continue to conduct performance appraisals. Why?Performance appraisal is the managerial evaluation of an employee's performance, often annually, in which an evaluator assesses the extent to which certain desired behaviors have been observed or achieved (note that our primary focus is on the performance of individual employees and not the performance of teams-that topic needs to be discussed in its own right). Organizations conduct appraisals for a number of reasons, such as providing documentation for decision making, providing performance feedback, and developing a basis for pay decisions (cf. Cleveland, Murphy, & Williams, 1989), but it is our view that the ultimate purpose for conducting appraisals is to improve organizational performance. In this chapter, however, we focus most of our attention on improving the performance of the individual because that is the area in which most of the attention in industrial and organizational psychology has been focused. We also make note of how organizational functioning can be enhanced by implementing performance management systems (PMSs) to complement performance appraisal systems. (See also Vol. 1, chap. 10, this handbook.) More formal attempts to build the linkages between individual-level and organizational-level performance are beyond the scope of this chapter (see, e.g., the review in DeNisi, 2000), but we show how effective performance management can affect organizational-level performance by aligning individual performance goals with organizational performance goals. That is, we believe that in an ideal system employees are told about areas in which they need to improve, are...