The merit rating nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, [and] nourishes rivalry and politics. It leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to the people in a group differences that may be caused totally by the system that they work in.
The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.
The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser. The merit rating rewards people that conform to the system. It does not reward attempts to improve the system.
From The Merit System: The Annual Appraisal: Destroyer of People by W. Edwards Deming. As included in The Essential Deming (pp. 27-28).
Related: Dr. Deming Called for the Elimination of The Annual Performance Appraisal – The Greatest Waste – Total Quality or Performance Appraisal: Choose One by Peter Scholtes – Dump Performance Appraisals and Get Better Performance