The purpose of this study was to audit employee perceptions of the Sentara Health System performance appraisal system in a merit pay setting. To accomplish this, the study investigated variables having a positive relationship on employee perception of performance appraisal acceptability, fairness and accuracy. The study had three objectives: (1) integrate the current body of literature to develop variables that adequately describe employee perception of appraisal systems, (2) integrate these variables into several hypotheses that are consistent with current literature, and (3) test the hypotheses using Pearson product moment correlations. Nine variables hypothesized as depicting aspects of employee perceptions were conceptualized, and multiple indicators were developed for each variable. A questionnaire containing these items was randomly distributed to 300 employees throughout a large health care system. Results indicate that performance appraisal acceptability, fairness and accuracy had a positive relationship with supervisor trust, supervisor knowledge of performance, interview information, interview atmosphere, performance standard acceptability, participation in development, performance reward link and merit pay acceptability. All the hypotheses had significant positive correlations (≤.01). These findings were discussed in terms of the study limitations, suggested future research and implications for the organization studied, as well as other organizations with merit pay programs. / Master of Science