Performance Evaluations over Time

This paper examines the benefits of evaluating employees halfway on long projects. Both the firm and the worker prefer halfway evaluations because they provide information on intermediate progress and the option to terminate employment. Both parties gain with more information revelation during the evaluation. The paper compares efficient effort levels across time under the various evaluation schemes, and solves for the optimal contracts. The model shows that turnover rates are higher among less able workers and younger workers. Also, more precise evaluation procedures, such as the 360 degree performance appraisal, will generate higher turnover.