Subjective versus objective incentives and employee productivity

• In Event: Underlying assumptions and competing perspectives: Examining challenges in teacher policy and practice

Proposal

A central challenge facing organizations is how to incentivize employees. While high-powered incentives can motivate effort, they can lead employees to distort effort away from non-incentivized outcomes. This is one reason why most performance incentives allow for manager subjectivity. However, this subjectivity can introduce new concerns, including favoritism and bias.

We study the effect of subjective versus objective performance incentives on employee productivity using a randomized controlled trial in 234 Pakistani private schools. We estimate the effect of two performance raise treatments versus a control condition, in which all teachers receive the same raise. The first treatment arm is a “subjective” raise, in which principals evaluate teachers; the second treatment arm an “objective” raise based on student test scores.

First, we show that both subjective and objective incentives are equally effective at increasing test scores. However, objective incentives decrease student socio-emotional development. Second, we show that these effects are likely driven by the types of behavior change we observe from teachers during classroom observations. In objective schools, teachers spend more time on test preparation and use more punitive discipline, whereas, in subjective schools, pedagogy improves. Finally, we investigate the mechanisms of these effects through the lens of a moral hazard model with multi-tasking. We exploit variation within each treatment to isolate the causal effect of contract noisiness and distortion on student outcomes. We then show that teachers perceive subjective incentives as less noisy and less distorted, and these contract features affect student outcomes, serving as key channels to explain the reduced form effects we see.

Author

• Christina Brown, University of California, Berkeley