How should performance reviews be done?

I believe that large software companies spend an inordinate amount of time stack ranking employees during performance reviews and fitting a performance curve and then distributing rewards (stocks + bonuses) according to the curve. For the longest time, a bell curve was used to model performance but recent studies advocate using a power-law curve. A simpler common sense approach to distributing rewards should be that the CEO decides how to distribute rewards among his direct reports and let each of them in turn decide how they want to distribute their share and so on. Besides the time wastage, stack ranking is also detrimental to teamwork and smells highly of hypocrisy because on one hand managers are expected to preach teamwork and then the same people behind closed doors are playing games and pitching people against each other. How can an employee be expected to act selflessly and be a strong team player when s/he knows that behind closed doors s/he will be ranked against his/her own peers?

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