To tell or not to tell: the incentive effects of disclosing employer assessments

Abstract

Should employers disclose their assessments of their employees? Popular managerial advice suggests that telling an employee that she is assessed to have high potential leads to greater effort and engagement, boosting firm profits. However, some employers still choose to withhold employee assessments. What explains this observation? We show that if the internal accounting system is weak, telling an employee that she is assessed to have high potential increases her incentive to manipulate the accounting report instead of working harder, thereby decreasing firm profits. Thus, we explain why some employers withhold employee assessments.