ABSTRACT Introduction Performance appraisal (PA) is essential for healthcare organizations. Highlighting the impact of the nursing PA system on nurses’ work outcomes has the potential to significantly improve the quality of patient care. Understanding and enhancing the performance appraisal system is key to achieving this goal. This study aimed to assess the efficacy of the nursing PA system and its effect on nurses’ work outcomes. It also compared the perceptions of PA among staff nurses (SNs), charge nurses (CNs), and head nurses (HNs), providing valuable insights into the dynamics of the nursing PA system. Method A cross-sectional, descriptive, and comparative design was adopted to assess the current nursing PA system. Results This study, which included 356 nurses, revealed significant differences in the perception of PA among nurses at all levels. The findings underscore the practical implications of the potential for more efficient use of PA to improve nurses’ performance. SNs and CNs showed significant gender-based differences in PA effectiveness (p = 0.006) and efficiency (p = 0.034). The participant’s age and years of nursing experience also had statistically significant effects on PA effectiveness (p = 0.006, p = 0.025, respectively). Conclusion This study’s findings underscore the significant impact of inappropriate PA systems, inefficient instruments, and unskilled evaluators on organizational commitment, job satisfaction, maintaining a committed nursing workforce, and high-quality healthcare. The study also highlights the importance of effective performance appraisal systems in healthcare organizations. However, the study also emphasizes the crucial role of a mutual understanding between the appraiser and the appraisee. This understanding is a key factor in enhancing the efficacy of PA, thereby emphasizing its importance in the appraisal process.