Evidence on Incentive Effects of Subjective Performance Evaluations

Abstract

The authors investigate the effect of managerial performance evaluation styles on employee work effort. Using panel data on 4,080 employees in a Swiss unit of an international company for the period 1999-2002, they test two hypotheses using paid and unpaid overtime work as effort indicators. The company applies two performance-based remuneration mechanisms: an individual "surprise" bonus and one in which salary is affected by the extent to which an individual has reached personalized targets. The authors hypothesize that effort is higher in departments in which individual performance evaluations are more flexible over time as well as when surprise bonuses are used more frequently. Both hypotheses are supported, and the estimated effects are substantial. Increases in rating flexibility or bonus payments by one standard deviation above the mean increase average overtime hours by more than 20%. The findings are robust and suggest that surprise bonuses and flexible performance evaluations over time provide effective incentives. Contractsthat determine salary based on subjective evaluations have incentive effects that differ from those of other types of performance pay such as piece rates or commissions. This is important since subjective performance measures are increasingly used in organizations in which job complexity is high, individual productivity is hard to measure, and compliance with the norms of firm * Axel Engellandt is a professional statistical programmer in the field of validation and design of credit rating procedures.

The psychological effects of centrality bias: an experimental analysis

“…Prior research does not take into consideration whether the individuals who are subject to a centrality bias are aware of the degree to which their peers are affected (Bol 2011;Engellandt and Riphahn 2011;Kampkötter and Sliwka 2017). However, theoretical insights suggest that peer information may have an impact on the association of centrality bias with autonomous motivation as well as with procedural fairness perceptions.…”

“…Empirical evidence on the effects of centrality bias is scarce, potentially due to the lacking availability of corresponding company data sets and difficulties in getting access to them. However, the few exceptions that investigate the effects of centrality bias empirically tend to suggest that it is negatively associated with performance improvements (Ahn et al 2010;Berger et al 2013;Bol 2011;Engellandt and Riphahn 2011). This stream of research argues-in line with economic theory-that performance evaluations which are subject to centrality bias neither reward performance improvements nor sanction performance deteriorations adequately.…”

Efficiency of Pay for Performance Programs in Romanian Companies and the Mediating Role of Organizational Justice

“…Thus, as revealed by other studies on the same topic (e.g. Gerhart and Fang, 2014;Engellandt and Riphahn, 2011;Della Torre et al, 2014) conducted in different cultures, allocating supplementary financial rewards for certain levels of performance on the job has a substantial incentive effect on employees, who intensify their efforts in order to maximize their pay. Consequently, they reach significantly higher levels of performance in comparison to those of the employees in companies in which pay is not decided upon performance -related criteria.…”

Higher and Higher? Performance Pay and Wage Inequality in Germany

“…tournaments). This results in a huge complexity in reward systems (Schaefer, 1998;Lazear, 1992;Parent, 1999, p. 437) and a large heterogeneity between or even within firms (Engellandt and Riphahn, 2011). Therefore the empirical researcher, trying to confront this large heterogeneity, has the option of a very specific or a more general approach.…”

“…Dohmen and Falk, 2011;Lazear, 2000;Brown and Heywood, 2002a). This function as an incentive wage is of particular relevance in situations where the workerspecific effort or corresponding output cannot be observed by the employer or where job complexity is high (Engellandt and Riphahn, 2011). However, the employee herself knows about her effort and productivity and therefore selects herself into the more profitable payment scheme, i.e.…”