Person demotivated by evaluation - Fault tree analysis diagram

"Subjective performance evaluation allows the use of a subtler, more balanced assessment of employee performance, and is typically used for more complex jobs where comprehensive objective measures are difficult to specify and/ or measure. Whilst often the only feasible method, the attendant problems with subjective performance evaluation have resulted in a variety of incentive structures and supervisory schemes. One problem, for example, is that supervisors may under-report performance in order to save on wages, if they are in some way residual claimants, or perhaps rewarded on the basis of cost savings. This tendency is of course to some extent offset by the danger of retaliation and/ or demotivation of the employee, if the supervisor is responsible for that employee’s output. ...
Another problem relates to what is known as the "compression of ratings". Two related influences—centrality bias, and leniency bias—have been documented ... The former results from supervisors being reluctant to distinguish critically between workers (perhaps for fear of destroying team spirit), while the latter derives from supervisors being averse to offering poor ratings to subordinates, especially where these ratings are used to determine pay, not least because bad evaluations may be demotivating rather than motivating. However, these biases introduce noise into the relationship between pay and effort, reducing the incentive effect of performance-related pay. ... this is the reason for the common separation of evaluations and pay, with evaluations primarily used to allocate training.
Finally, while the problem of compression of ratings originates on the supervisor-side, related effects occur when workers actively attempt to influence the appraisals supervisors give, either by influencing the performance information going to the supervisor: multitasking (focussing on the more visibly productive activities...), or by working “too hard” to signal worker quality or create a good impression...; or by influencing the evaluation of it, e.g., by "currying influence"... or by outright bribery..." [Principal–agent problem. Wikipedia]
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