Management Accounting Section Midyear Meeting

Use and Design of Peer Evaluations for Bonus Allocations

• In Event: Team Incentives

Abstract

We conduct an experiment to investigate the use of peer evaluations for compensation purposes. Although organizations often rely on peer evaluations for incentive compensation, it is not well understood how peer feedback should be (i) used and (ii) designed to ensure fair evaluations and, thus, motivate effort provision. We examine peer evaluations in form of bonus pool allocation proposals, allowing us to test our theory with quantifiable data. Specifically, we differentiate between (i) a discretionary use (allocation by the manager) and a formulaic use (allocation by the team via the average) of (ii) self-including and self-excluding allocation proposals. We find that, relative to self-including proposals, self-excluding proposals only generate more effort provision under the formulaic use. Under the discretionary use, the benefits of self-excluding proposals are offset, as managerial biases enter bonus allocations. Our results are relevant for practitioners and researchers interested in incorporating peer feedback into incentive compensation.

Authors

• Manuel Grieder, School of Management and Law, ZHAW

• Karl Schuhmacher, Emory University