The employee review is as old as business itself - it is a powerful, if often misused, tool. Done correctly, an employee review can act as a morale booster for a company's employees, or even straighten out an employee gone astray. Done incorrectly, a review can squash a company's collective ego. And, as more and more states allow reviews to be admissible court evidence, some company owners have been burned by poorly written or incomplete evaluations.

Bruce Wilkinson, president of Workplace Consultants in New Orleans, has advised company owners for 12 years on effective employee reviews. Some of his 660 clients are companies as large as Sara Lee and Procter & Gamble, but up to 40% have fewer than 100 employees. As a consultant, and a small-business owner himself, Wilkinson has gained valuable experience in this sticky area of employee reviews. Below, he weighs in on this all-powerful and all-important tool.

Inc. Online: Why should small companies bother with employee reviews?

Wilkinson: A lot of small company owners feel that because they're on a first-name, friendly basis with all of their employees, they don't need to do formal employee evaluations. But every company, even if it's a four-person operation, should have a review system.

Small companies are especially vulnerable to lawsuits. First of all, they often can't afford to have a full-time human resources consultant, or to pay a lawyer's retainer. Second of all, they start out with only one or two people, or as family operations, and so forget that as they grow, the people they hire won't automatically have an allegiance to them. When a problem with an employee does arise, companies have no way to defend themselves if they haven't kept written documentation of an employee's performance.

Inc. Online: What does a good employee review do?

Wilkinson: The main reason for reviews is to let employees know, at a certain point in time, how they are performing. A lot of employers see reviews as a way to give employees a raise and a pat on the back. If the employee is doing well, a review is the place to tell them this. But you also have to tell the truth, which is hard for most employers who want employees to like them. If an employee is in jeopardy of losing his or her job, for example, say so. Let them know where they need to improve. Also, a good employee review form will have a section for the employee's comments.

Inc. Online: If you're having problems with an employee, should you schedule an impromptu review?