Performance appraisals and job satisfaction

Abstract

The research in this article is focused on formal performance appraisals (PA), one of the most important human resource management practices in firms. In detail, the study analyzes the effect of PAs on employees’ overall job satisfaction. We are able to differentiate between appraisals that are linked to monetary outcomes, such as bonus payments and promotions, and appraisals that have no monetary consequences. Building on a representative, longitudinal sample of around 10,500 German employees, we apply fixed effects regressions that allow us to more closely estimate the causal effect of appraisals on job satisfaction compared to previous cross-sectional studies. We find a significantly positive effect of PAs on job satisfaction, which is primarily driven by appraisals linked to monetary outcomes. The results demonstrate that PAs linked to monetary outcomes are a powerful HR management tool that is appreciated by employees. Furthermore, we explore the moderating effects of personality traits (Big Five, locus of control) on the relationship between PAs and job satisfaction. The results show that if tangible benefits cannot be provided or are not tied to the assessment procedure, the use of appraisals with no monetary consequences can be detrimental for open-minded and self-determined employees, as appraisals could then potentially raise expectations that are not fulfilled. Theoretical and practical implications of these results are discussed.