The Effect of Relative Performance Information on Performance and Effort Allocation in a Multi-Task Environment

Abstract

This study investigates how relative performance information (RPI) affects employee performance and allocation of effort across tasks in a multi-task environment. Based on behavioral theories, we predict that the social comparison process inherent in RPI induces both a motivation effect that results in increased effort as well as an effort distortion effect that results in the distortion of effort allocations across tasks away from the firm-preferred allocations. We also predict that both effects are magnified when the RPI is public compared to private. We argue that although the motivation effect will generally benefit performance, the effort distortion effect may be detrimental to performance. We design an experiment that isolates these two effects. Consistent with our predictions, we find that RPI induces both motivation and effort distortion effects and that both effects are magnified when the RPI is public rather than private. Although the motivation effect increases performance, we demonstrate that the effort distortion effect can decrease performance. By isolating the motivation and effort distortion effects, our study provides insights into the costs and benefits of RPI in a multi-task environment. As such, it informs accountants regarding the design of information systems and when tasks should be aggregated or disaggregated across employees. Data Availability: Data are available from the authors upon request.

Effects of Ambiguous Common Uncertainty on Employees’ Preference for Relative Performance Contracts

“…Agency theory suggests that relative performance contracts, by filtering common uncertainty out of employees' evaluation, reduces employees' exposure to risk without reducing their incentive (Baiman and Demski 1980;Holmstrom 1980;Lazear and Rosen 1981;Holmstrom 1982;Nalebuff and Stiglitz 1983;Wolfson 1985;Antle and Smith 1986;Gibbons and Murphy 1990;Prendergast 1999). 2 Relative performance's positive effect on performance has been widely documented (Antle and Smith 1986;Gibbons and Murphy 1990;Frederickson 1992;Janakiraman et al 1992;Matsumura and Shin 2006;Matsumura and Shin 2006;Hannan et al 2008;Hannan et al 2013;Eriksson et al 2009). …”

The Effects of Performance Incentives and Creativity Training on Creative Problem-Solving Performance

“…Comparisons, however, generate the possibility that ability discrepancies among the workers will be observed. Whereas positive RPI suggests that one's ability is high and helps employees maintain a positive self-image, negative RPI is undesirable because it creates a conflict between one's desire for a positive self-image and actual performance results (Hannan et al, 2013;Suls & Wheeler, 2000;Tessor, 1985).…”

“…Recognition can increase effort because it provides a platform for social comparison. Social comparison theory suggests that individuals often use relative performance information to assess their own abilities and, as a result, are motivated to perform better than others in order to maintain a positive self-image (Festinger, 1954;Hannan, McPhee, Newman, & Tafkov, 2013;Suls & Wheeler, 2000;Tafkov, 2013). I expect that individuals receiving fixed wages plus recognition will expend higher raw effort than those receiving only fixed wages.…”

“…I state my hypothesis 2 as follows. 30 Research shows that, when confronted with negative RPI, individuals may dissociate themselves from the task in order to stop the comparison (Hannan et al, 2013). Moreover, individuals may stop identifying with the referent group in order to protect their self-esteem (Festinger, 1954).…”

Promotion, Relative Performance Information, and the Peter Principle

“…However, firms do not always have control over the dissemination of workers' RPI. For example, workers could obtain informal RPI by observing peers who work in close proximity (Hannan et al 2013). In such cases, the generalizability of my results will likely depend on the level of information symmetry between the employer and the workers.…”