I do believe that people work harder when they are being observed. The first reason being that no one wants to get in trouble for slacking off. The second being that when you are being observed, it puts a pressure on you to not make mistakes.
My opinion is that for business purposes, the Hawthorne Effect is a good tool. I think it is a great way to motivate people. It keeps everyone focused and disciplined.
When a person is putting money and time into an employee, who they want to do well, it is completely fine. I wouldn't want to pay someone sixty-thousand dollars a year, and then find out they did a terrible job at the years end. It may put a little extra stress on people, but if they do a good job, its okay.
Observation is a good tool for gathering data in any system study. It provides and on-site way to gather the data at multiple locations. It is also good for reporting this data in real-time. That way it can be analyzed immediately. This is much better than waiting for reports from each specific branch of a company.