First, you have to get past the idea that performance appraisals or salary increases are ever fair. They are not and they never will be. There simply isn't enough money in the budget to go around and increases often depend more on your ability to play office politics than your ability to do your job. That's life and you need to accept it.
Do I think performance appraisal systems are in the overall best interests of the individuals? No, of course not. Nor are they in the best interests of the company most of the time, as they do create hate and discontent and encourage people to leave that the company should be trying to retain. But few companies care if they retain workers. At least not enough to give all of their employees with decent performance decent pay raises.
If you are looking for arguments about the ineffectiveness of performance appraisals, I suggest you look at the work of W. Edwards Deming. Just search the web for "Deming on performance appraisals" for lots of info.
I'll give some real life examples I know of from over 30 years of work experience and from friends and family and other co-workers. These are typical of what happens with performance reviews and why they are harmful to morale and thus productivity.
In one workplace we went to "Merit Pay" for supervisors. There were only two levels in my department that were in the same reward pool, the department head and the first-line supervisors. He got an Outstanding (we still announced such things back then) and none of the managers who reported to him did. Guess who got the entire budgeted amount for merit pay. Guess who did all the appraisals except his own. Guess how angry the entire rest of the management staff was. Guess what the affect on morale and productivity was.
Myself and several other people I know have been flat told we did not receive an outstanding even though our work was because "it's not your turn". In another case my boss came out of the meeting spitting angry and told me what had happened and that my rating had been lowered since there were too many outstanding employees. In this case, it wasn't my performance that was worse than the people who did get the reward but the political pull my boss had.
One year I did not get an outstanding even though I was doing the work of someone two levels higher than me in the organization and writing government-wide policy (a job probably 5 levels above my pay grade) for a new type of government program. The stated reason was that I did not do any of the elements that I was being graded on (which I didn't - I was on a special project the whole year) and changing the elements I was being graded to be more appropriate was not allowed.
Twice I have seen a policy announcement that anyone who got a promotion in the previous year was not eligible for a performance rating above satisfactory or a pay raise. I saw several good people who had recently been promoted leave over those policies.
In one supposedly objective performance rating system, the employees asked if everyone met the goals would everyone get a pay raise and they were told, "No, we would have to change the criteria then as it clearly was too easy to meet." Again we lost several good employees over that short-sighted decision.
Another time, 4 of us worked for the same manager. He gave out one outstanding to the person who managed the fewest studies and whose studies were not on time, on budget or able to pass the QA testing (and the issues were major). The other three handled more work, did meet the budget and time deadlines and their work passed QA the first time or only had minor issues. The actual stated reason why his performance was considered better was "his desk is cleaner." 3 of the 4 of us found a different job after that.
In another workplace, all the managers spend literally hundreds of hours in meetings coming up with the criteria for the objective grading. Then a few hundred more hours writing the appraisals and arguing the results with each other until the number of people at each rating level hit the correct. All time totally wasted in the end because they decided to give no pay raises that year. Most of the managers didn't even bother sharing the end result with the employees because there was no official rating that year.
In another workplace, an employee was given an unsatisfactory review by her boss when he left the company (I saw a copy as I was assigned to clean out his computer and determine what stuff to keep). It was changed to an outstanding by the CEO who she was having an affair with and the reward was publicly given.
I think these examples clearly show that performance ratings do not reward only the best people, they are not fairly administered and they do cause morale and productivity problems and cause good people to leave jobs when the organization should want to keep them. These examples also come from a variety of organizations including government jobs, government contractors, Fortune 500 companies and small privately-held businesses. In all the years I've worked, I have never seen a performance appraisal system that didn't harm the organization more than it helped.
