Abstract: Abstract: The internal driving mechanism of performance appraisal and its effectiveness is systematically probed into. EFI and CFI analysis verified the groundbreaking conclusion drawn by Latham, namely, an effective performance appraisal system is built on the basis of formalization, goal orientation, and organization equity which function as three landmarks. Further study shows that there is an inverted U-shaped relationship between regularization and employees’ performance. With the uniqueness of human capital rising, a tight control will decrease the performance, while improvement of perceived fairness will dramatically raise it. With strong uniqueness of human capital, the incentive effect of goal setting exert the significantly positive effect on employees’ performance, whereas with weak uniqueness, it is in a typical S-shaped relationship with performance. It is revealed that the focus of performance appraisal should be shifted from the result of behavior to self-management ability and from the performance management to the deep level management of employees’ values.

Key words: performance appraisal, degree of formalization, goal setting, perceived fairness