In today’s competitive and dynamic business environment, small organisations play a crucial role in economic development and job creation. However, their success largely depends on the motivation and commitment of their employees. Performance appraisal, when implemented effectively, serves as a key human resource tool to recognise employee contributions, provide constructive feedback, and foster motivation. This paper explores how performance appraisal systems influence employee motivation in small organisations. It analyses the relationship between fair evaluation, feedback mechanisms, goal alignment, and intrinsic as well as extrinsic motivation. The study is based on a mixed-method approach involving surveys and interviews conducted among employees of small enterprises. Findings reveal that transparent and participatory appraisal systems enhance motivation and job satisfaction, while a lack of clarity and bias in evaluation tend to demotivate employees. The paper concludes with recommendations for designing simple yet effective performance appraisal systems tailored to the needs of small organisations.