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Without a formal employee evaluation program, employee perception of a pay-for-performance environment is that decisions are "Arbitrary and unsubstantiated". This can affect employee morale negatively. However, the opposite is also true - employees can be highly motivated if their compensation and rewards are shown to be carefully assessed on the basis of documented standards of excellence in job performance. This process is very complicated - even if is easy to separate the "Stars" from the "Average performers," it tends to be much more difficult to make the necessary fine distinctions among average employees given the complex nature of job performance and subjective nature of many evaluation systems.
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