This article provides a critical examination of formal performance appraisal systems in organizations. It argues that the role, effectiveness, and validity of appraisal data are limited by a number of organizational factors: the purposes of the appraisal (both avowed and covert), the characteristics of the tasks for which the appraisal is performed, and the location in the structure of the organization of both appraisers and appraisees. The authors conclude that data from formal performance appraisal systems should never be utilized alone and uncritically, without full consideration of the context in which the appraisal is being performed and used.