The Effect of Output-Based Contracts on the Flow of Lower-Level Employee Feedback: A Proposal

• In Event: Emerging Research and Research Interaction 3

Abstract

It is not realistic for upper management to possess a broad array of knowledge that is specific to lower levels of the firm (e.g. knowledge of how each piece fits together on the assembly line). However, this specific knowledge (as defined by Jensen and Meckling 1992) is passed along through layers of middle management to upper management in the form of lower-level employee feedback. This feedback can prove critical to maintaining an optimal strategy and guiding the firm to maximize shareholder value. Knox (2015) presents evidence that middle managers are biased in the way they treat this lower-level employee feedback: middle managers are less likely to pass along the feedback to upper management when the feedback is incompatible with the firm’s current strategy and middle managers are more likely to give negative performance reviews to subordinates who provide feedback that is incompatible with the firm’s current strategy. I propose an experiment to examine whether output-based contracts affect middle managers’ biased treatment of lower-level employee feedback. Output-based contracts use performance measures that reflect outcomes important to the firm (e.g. a bonus that is based on reaching a sales target) and are expected to give middle managers ‘skin in the game’, encouraging them to use specific information for the benefit of the company. In my proposed experiment, I will examine how output-based contracts (compared to input-based contracts) affect the likelihood that middle managers will report lower-level employee feedback and the performance reviews middle managers give to subordinates.

Author

• Brian Knox, University of Pittsburgh