Management Accounting Section Midyear Meeting

Performance Measurement and a Theory of Management

• In Event: Analytical Models I

Abstract

Managers consistently and routinely inflate performance ratings in employee evaluations. This paper aims to explain this phenomenom by building a theory of management. I model management as a team production problem between a manager and his subordinate. The manager can produce output himself, manage his subordinate, and evaluate his subordinate’s performance. The paper explores how the manager allocates his time between these activities, as his compensation and effort costs vary. Firms cannot separately identify managerial from subordinate labor, so giving managers incentives to manage well induces incentives to inflate performance ratings. Managers bias performance reviews more as the cost of management falls. This suggests that information technology and hiring domestic (versus foreign) labor reduces inflation in performance evaluations.

Author

• Korok Ray, Texas A&m University