Behavioural consequences of performance appraisal, of students, teachers, and schools, or of workers, managers, and offices, are analyzed in terms of a newly proposed theory of Criterion Shaped Behaviour (CSB). Unstated assumptions of advocates for the extensive use of performance appraisal, using performance‐based rewards and punishments, are scrutinized, and many are found to be insupportable. CSB Theory predicts that numerous behavioural effects, not all of which are desirable, will be shaped by the use of rewards and punishments made contingent upon criterion measure scores. Using cognitive expectancy theories of learning and performance, in conjunction with traditional measurement theory, it anticipates the types of behaviour change likely to result from imposition of different performance appraisal systems, and suggests alternatives less likely to result in undesirable effect