It says because of across the board pay increases passed by the Legislature - and a lack of oversight at many state agencies - there is no incentive for many state employees to improve performance, and in some cases, less effective employees get larger raises than ones who do better.
The audit says the work of supervisors to review employee performance at some agencies is just wasted money.
"State supervisors could waste thousands of labor hours (millions of dollars in salaries) preparing and conducting performance appraisals that do not help the State achieve its goals," said the audit.
"Across-the-board legislative increases have rendered performance management irrelevant in the minds of most state employees," it continues.
The audit performed by the State Auditor Beth Woods office focused on the Office of State Personnel, Department of Correction, Department of Health and Human Services, and the Department of Transportation.
It recommends state agencies create written performance monitoring procedures for all employees, follow them, and implement corrective action plans for employees who don't measure up.
In their written response to the audit, many agencies blamed a recent changeover to a new payroll system for the lack of performance oversight.
The Department of Transportation said it recently changed to a new internal performance management system and felt monitoring the old state system was unnecessary.