Abstract
This paper investigates the objectives guiding a superior’s subjective evaluation of subordinate performance. In a laboratory experiment, we implement a team production setting under uncertainty, where subordinates contribute to the organization’s output by choosing effort levels, but individual contributions are subject to random shocks. After observing joint output, the superior can invest into additional (perfect or imperfect) information about effort levels. We test two competing hypotheses about objectives guiding a superior’s subjective performance evaluation. The incentive alignment hypothesis states that the superior is guided by the objective to establish financial incentives that align a subordinate’s preferences with the organization’s goals such that it is in the subordinate’s self-interest to provide effort. In contrast, the norm enforcement hypothesis states that the superior has a focus on subordinate behavior and wants to enforce the norm of cooperation by rewarding high and punishing low effort. Our results reject the incentive alignment hypothesis and provide support for the norm enforcement hypothesis.
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Notes
In the experiment we also consider the control condition JO → JO where no additional information is available.
Stating that the superior is unwilling to pay for additional information about efforts seems to contradict the informativeness principle (Holmström 1979, 1982). However, the principle refers to second best solutions and effort levels only, whereas in the setting we analyze any mechanism that effectively overcomes the free rider problem leads to first best effort levels.
As the superior has only limited information about efforts in the IC condition, it is unclear whether allocations are more or even less sensitive to contributions under norm enforcement relative to incentive alignment.
In the instruments, participant roles were termed “general manager” (superior) and “division manager” (subordinate). No information of any kind was given to participants that would be related to one of the two competing objectives (incentive alignment versus norm enforcement) investigated.
Matching was such that no superior interacted more than once with the same two subordinates, and that no participant interacted more than twice with any other participant (Maas et al. 2012).
In the two conditions IC → FI and IE → FI, the superior received more information than joint output even without buying additional information. In the JO → JO control treatment, the superior could not buy any additional information, i.e., this event does not occur in the control treatment.
p levels for the corresponding non-parametric tests comparing effort levels between treatment conditions JO → JO vs. JO → IC, JO → JO vs. JO → IE, JO → JO vs. JO → FI, JO → IC vs. JO → IE, JO → IC vs. JO → FI, and JO → IE vs. JO → FI are below 0.001 (two-tailed) in all cases.
Note that the IC → FI and IE → FI conditions are not directly comparable to the other information conditions, because the superior will know the individual contributions (IC → FI) or even effort levels (IE → FI) in any case.
For all tests of information values, the unit of observation is the mean information value of a superior over the four rounds of a cycle. All p values are two-tailed.
An extreme output is more informative because if output is very high (low), it is unlikely that a subordinate chose a low (high) effort. This may reduce the superior’s willingness to pay for additional information.
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Acknowledgments
The authors would like to thank the anonymous reviewer, Matthias Meyer, and participants at the 2015 EAA, VHB, and ACMAR conferences for helpful comments on an earlier version of this paper.
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Appendix
Appendix
1.1 Supplementary analyses
1.1.1 Allocation decisions in the IC conditions
When superiors have information about individual contributions (but cannot identify effort levels), the incentive alignment objective implies that superiors make unbiased allocations of individual contributions, such that the sensitivity of an allocation to a subordinate’s own contribution equals one, and the sensitivity to the other subordinate’s contribution equals zero. With respect to norm enforcement, there is no clear prediction about sensitivities. The reason is that, as contributions provide only incomplete information about efforts, superiors are aware that they might make severe errors when their allocations are highly sensitive to contributions, in that they may punish high and reward low instead of reward high and punish low effort. Table 5 provides descriptive data on allocations in Panel A and a regression analysis in Panel B.
Comparing the differences between average allocations and contributions (Panel A) shows that allocations are closer to each other than contributions, suggesting that superiors have a tendency to equality. However, the regression analysis in Panel B does not provide strong support for this observation. The allocation to the subordinate with the higher contribution has a sensitivity to this contribution which is very close to one [β(eH) = 0.970], and the sensitivity to the other subordinate’s contribution is near zero [β(eL) = 0.102]. Thus, we have no evidence for superiors actually being guided by the objective to more equally allocate joint output in the IC condition.
1.1.2 Distributive fairness in allocations
In order to investigate in more detail how superiors’ allocation decisions relate to the merit principle of distributive fairness, we compared actual allocations to the allocations the merit principle would predict if it were literally interpreted. That is, we define as Amerit(eH) the allocation to subordinate H that corresponds to an allocation of joint output proportional to effort levels, and compare Amerit(eH) to the actual allocation A(eH). The respective data is available for the IE and FI conditions only. On average, the actual allocation A(eH) is close to, but smaller than Amerit(eH) [14.67 vs. 15.00, N = 216 cases]. A(eH) exceeds Amerit(eH) in 40.2 % of the cases. We further investigate how relations between the random shocks affect allocations in the FI condition. Results (untabulated) show that when the random shock of subordinate H, θ(eH), is lower than the random shock of subordinate L, θ(eL), superiors re-allocate a significant part of x(eL) to subordinate H. In contrast, when θ(eH) > θ(eL), although superiors on average make allocations that are close to contributions, A(eH) exceeds Amerit(eH) in 63.3 % (31 out of 49) of the cases. These observations indicate that superiors in many cases are in fact willing to violate the merit principle in order to reward high and punish low effort, which provides further support for norm enforcement being the dominant guiding objective of subjective performance evaluation.
1.1.3 Time effects in information values and effort levels
Figure 2 presents data on participant behavior over the four rounds within a cycle and over the four cycles of the experiment. The two diagrams on the top, (a1) and (a2), show how information values in the three conditions JO → IC, JO → IE, and JO → FI change across the rounds within a cycle (a1), and across the cycles of the experiment (a2). Correspondingly, diagrams (b1) and (b2) show how effort levels change across cycles and rounds in the three conditions.
Cycle and round effects on information values and effort levels. The four diagrams of the figure display average information values and effort levels over the four rounds (diagrams a1 and b1) within a cycle, and over the four cycles of the experiment (diagrams a2 and b2). JO denotes Joint Output, IC Individual Contributions, IE Individual Efforts, and FI Full Information. There is one missing observation for the FI condition because the condition was manipulated in three sessions only; see Table 1 for details. V(·) is the average of a superior’s willingness to pay for information (the information value) in the respective condition. effort(·) is the average effort chosen by the subordinates in the respective condition
Diagram (a1) confirms the regression result from Sect. 5.2 (see Panel B of Table 3), where round had no significant effect on information values. The same holds for the effort levels displayed in diagram (b1), which are also relatively stable over the rounds within a cycle. In contrast, diagram (a2) shows that superiors’ average willingness to pay for information somewhat decreases over the four cycles of the experiment in both the JO → IC and the JO → IE conditions. The same does not hold, though, in the JO → FI condition. Furthermore, as diagram (b2) shows, there are no such effects on effort levels, which are relatively stable over cycles.
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Gillenkirch, R.M., Kreienbaum, H. What guides subjective performance evaluation: Incentive alignment or norm enforcement?. Rev Manag Sci 11, 933–957 (2017). https://doi.org/10.1007/s11846-016-0209-9
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DOI: https://doi.org/10.1007/s11846-016-0209-9