Theories of Employee Evaluation, Motivation and Recognition

You should at least skim this, it is really good:
http://www.joelonsoftware.com/articles/fog0000000070.html

There are (at least) 2 distinct theories of employee evaluation. One is the hard-core GE / Jack Welch--rank people, tell them where they stand in the rank. That will fire up people's competitive spirits, and cause them to work harder to move up.

Another school of thought says that the Jack Welch theory is counter-productive, for several reasons. One, it motivates internal competition, which often takes destructive forms. So if your enterprise requires a high-degree of collaboration (and what modern corporation doesn't?), then you may get some very bad side-effects from over-emphasizing internal competition. Second, it idealizes human behavior. That idealization may work for the ultra-competitive types that find themselves in the Olympian Jack Welch-like position of establishing company norms. But for the rest of us, it may be that we do our best when positively encouraged, and we are all allowed to feel like we are doing good work and are a little bit above average. Obviously you can't allow gross distortions, it is a subtle thing. Does the 11th player on the basketball team constantly get reminded that they are at the bottom of the list, or do they receive some encouragement for working hard, and staying prepared, even when game after game they never see action?

That example is not perfectly analogous to the workplace, but it's something to think about. Joel on Software also has written insightfully along these lines.