Different design choices in the controls used to manage performance often lead to a range of unintended consequences, which have profound effects on individuals and organizations. This paper presents a mixed review (both systematic and eclectic) of the literature on the unintended consequences of performance management systems, and develops a typology to explain how and why they occur. It finds that the most salient unintended consequences of directive performance management systems are gaming, information manipulation, selective attention, illusion of control and relationships transformation. It argues that these consequences exist as a result of limiting factors such as ignorance, error, short‐term concerns, fundamental values, self‐fulfilling forecasts and changes in social relationships. The emerging typology‐based theory suggests that the choice of control mechanisms is based on two key assumptions concerning goal‐alignment and goal‐uncertainty that relate back to ideas in agency theory and stewardship theory. It concludes that, in the design of performance management systems, the more the ‘assumed’ reality about the state of goal‐alignment and goal‐uncertainty diverges from the ‘real’ state of affairs, the more the resultant system is likely to create perverse unintended consequences, leading to poor organizational outcomes.