The Effects of Managerial Discretion in Complex Performance Evaluation Settings: Experimental Evidence

• In Event: Attributes of Incentives

Abstract

Subjective performance evaluation often has positive performance effects when employees’ effort provision is unidimensional. However, prior work also indicates that it can have negative effects in complex performance evaluation settings, in which employees’ effort provision can be efficient or inefficient. This study uses an experiment to investigate why subjective performance evaluation can lead to difficulties in complex performance evaluation settings and to disentangle three potential explanations. First, employees may not prefer performance evaluations based on efficient effort only when the provision of inefficient effort cannot be unambiguously attributed to employees’ bad intentions. Second, managers may deliberately deviate from rewarding efficient effort because they (falsely) anticipate employees’ preferences for rewarding inefficient effort or have such preferences themselves. Finally, the mere existence of a manager (as opposed to an automatic bonus allocation) may lead employees to be concerned about how performance will be evaluated and whether their bonus will be sufficiently large and this distorts effort provision. We test our theory in an interdependent team setting, where a bonus has to be allocated to multiple employees. We predict and find that employees, without any managerial intervention, prefer efficient effort-based to equal bonus allocation. Managers, however, deliberately deviate from efficient effort-based bonus allocations to partly reward inefficient effort, thereby decreasing team performance. Finally, we find some evidence that, by depleting cognitive resources, employees’ concerns about their performance evaluation and bonus shares distorts cognitively demanding aspects of their effort provision. We contribute to the literature on manager discretion in performance evaluation by disentangling potential explanations for the observed negative effects of subjective performance evaluation in complex performance evaluation settings.

Authors

• Markus C Arnold, University of Bern

• Kai Alexander Bauch, University of Bern