It seems like any time you try to measure the performance of knowledge workers, things rapidly disintegrate, and you get what Robert D. Austin calls measurement dysfunction. His book Measuring and Managing Performance in Organizations is an excellent and thorough survey of the subject. Managers like to implement measurement systems, and they like to tie compensation to performance based on these measurement systems. But in the absence of 100% supervision, workers have an incentive to “work to the measurement,” concerning themselves solely with the measurement and not with the actual value or quality of their work.
I've long claimed that incentive pay isn't such a hot idea, even if you could measure who was doing a good job and who wasn't, but Austin reinforces this by showing that you can't even measure performance, so incentive pay is even less likely to work. [Joel On Software]