The Seven Fatal Flaws of Performance Measurement [the broken link was removed] by Joseph F. Castellano, Saul Young, and Harper A. Roehm
Once the targets are established, most organizations measure the performance of component units by comparing targets to actual performance for certain time periods. Variances from expected results are noted and explanations are required. The popular business press trumpets the efficacy of the above approach, but this methodology has serious flaws. In fact, the design and use of performance measurement systems in most organizations suffer from a number of fatal flaws that can undermine an organization’s ability to use its measurement system to improve processes and make better decisions.
The proper role of measurements should be seen in the context of helping employees connect with the overall aim of the organization. Management must gather and analyze information that will help employees become better contributors to the firm’s purpose.
The articles does an excellent job of explaining the flaws in how performance measurement is applied (both in Management by Objective (MBO) and performance appraisals).