Promotion, Relative Performance Information, and the Peter Principle

Abstract

PROMOTION, RELATIVE PERFORMANCE INFORMATION, AND THE PETER PRINCIPLE Eric Wai Yeung Chan, PhDUniversity of Pittsburgh, 2015 My dissertation consists of two main parts. In the first part, I present my experimental study in which I examine the effects of providing workers with relative performance information (RPI) on employers' promotion decisions and the impact of those decisions on worker performance. In my experimental setting, the job after promotion requires higher-level abilities than the current job. I find that workers increase their effort to improve their current job performance after a promotion opportunity is announced because they expect this to increase their chances of promotion even though the new task requires higher-level abilities. Moreover, because employers anticipate that workers who have RPI will react negatively if they see that the best current job performer is not promoted, employers promote the best current job performer rather than the worker best suited for the next job more often when workers have RPI than when they do not. Finally, consistent with the Peter Principle, I find that the promoted worker's performance after promotion is lower when workers have RPI than when they do not because the v promoted worker lacks the ability to perform the new job well. My results suggest that providing workers with RPI can have a downside that offsets the benefits documented in previous studies.In the second part of my dissertation, I discuss how three common firm practices could potentially help firms mitigate the sorting problem I identified in my experimental study.Specifically, I discuss how the communication of the promotion criteria, group incentive plans, and subjective performance evaluation could help employers improve the sorting of workers through promotions. However, while each approach has advantages, each also has drawbacks. It appears that there is no promotion-based incentive system that provides optimal effort incentives to workers while simultaneously achieving the best match between workers and their jobs. This conflict between the incentive and sorting roles of promotion is difficult to resolve and firms must ultimately trade-off between them. INTRODUCTIONPromotions are integral to most organizations and serve two important and distinct roles (Milgrom and Roberts 1992, p.364). The first is to motivate and reward workers (incentive role) and the second is to sort workers into jobs that best match their abilities (sorting role). However, the incentive and sorting roles may conflict when the nature of the tasks changes between hierarchical job levels such that workers' performance in the current job is not fully informative about their performance in the next job. In such cases, the best performer at one level of the hierarchy is often not the best candidate for the next higher-level job.The situation described above occurs quite often, such as when salespersons are promoted to sales managers, engineers are promoted to project managers, and teachers are promoted ...

The Informativeness of Relative Performance Information and Its Effect on Effort Allocation in a Multitask Environment

“…In this commentary, I challenge future researchers to continue progress in this area by considering settings in which RPI-induced effort reallocations are not necessarily suboptimal, and/or for which RPI can celebrate the team's success instead of just fomenting competition. Still other roles of RPI are also possible, such as the potentially conflicting motivational and sorting roles of RPI that come into play when promotions are at stake (Chan 2018). In short, performance reporting in general and RPI in particular constitute an important area of management accounting with continuing potential for future research.…”

Do First Impressions Last? The Impact of Initial Assessments and Subsequent Performance on Promotion Decisions

“…We contribute to the literature on the use of performance measures for promotion decisions (e.g., Gibbs 1995;Campbell 2008;Cichello, Fee, Hadlock, and Sonti 2009;Grabner and Moers 2013;Chan 2018). We extend these prior studies by showing that initial assessments about employee ability are an important input in promotion decisions, even many years after the assessments were made.…”

Debiasing as a powerful management accounting tool? Evidence from German firms

“…Considering MCS design, management accounting should acquire expertise regarding cognitive biases and debiasing to improve the decision-making environment for managers, as well as for lower-level employees. Initially, it is the responsibility of management accounting to avoid cognitive biases elicited by wrongly designed management controls (Chan, 2018). As management controls such as accountability or monetary incentives can serve as debiasing mechanisms (Lerner and Tetlock, 1999), management accounting should incorporate insights regarding cognitive biases and debiasing when designing these controls.…”