Companies have traditionally linked performance reviews with pay increases. Linking performance appraisals and compensation levels is fraught with difficulty, though. The paramount goal of performance appraisals is to enhance workers' productivity and value to the company. Ideally, after a performance review, an employee learns what his weaknesses are and seeks improvement in those areas.
A good performance review is multifaceted. Because of this, it is complex and subjective. An acquaintance of mine worked at a language institute where bonuses depended on one factor: student retention. Professional development, lesson preparation, and teaching ability played no role whatsoever. Not surprising, that institute is awash in red ink.
One problem with the traditional approach is that pecuniary considerations almost always overshadow performance goals. Employees who sit down with a manager after a performance review are focused on getting a raise, and they see the particulars of a review as extraneous to the raise. Employees compare their raises to those of their colleagues, and discrepancies can undermine motivation and morale.
I believe that performance reviews should be detached from pay hikes. In general, employees with seniority should receive higher pay. Those pay increases are linked to employee retention, so poorly performing workers are let go if they do not improve. This system is more transparent than older ones with a direct link between performance reviews and salary adjustments.