The Determinants and Performance Effects of Managers' Performance Evaluation Biases

2011 ◽  
Vol 86 (5) ◽  
pp. 1549-1575 ◽  
Author(s):  
Jasmijn C Bol
Keyword(s):  
Performance Evaluation ◽  
Employee Motivation ◽  
Data Availability ◽  
Perceived Fairness ◽  
Future Performance ◽  
Confidentiality Agreement ◽  
Leniency Bias ◽  
Performance Effects ◽  
Employee Incentives ◽  
And Performance

ABSTRACT This study examines the determinants and performance effects of centrality bias and leniency bias. The results show that managers respond to their own incentives and preferences when subjectively evaluating performance. Specifically, information-gathering costs and strong employee-manager relationships positively affect centrality bias and leniency bias. The findings also indicate that performance evaluation biases affect not only current performance ratings, but also future employee incentives. Inconsistent with predictions based on the agency perspective, the results show that managers' performance evaluation biases are not necessarily detrimental to compensation contracting. Although centrality bias negatively affects performance improvement, the evidence does not reveal a significant negative relation between leniency bias and performance. Rather, leniency bias is positively associated with future performance, which is consistent with the behavioral argument that bias can improve perceived fairness and, in turn, employee motivation. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

An Empirical Analysis of Employee Responses to Bonuses and Penalties

2020 ◽  
Vol 95 (6) ◽  
pp. 395-412 ◽  
Author(s):  
Wim A. Van der Stede ◽  
Anne Wu ◽  
Steve Yu-Ching Wu
Keyword(s):  
Employee Turnover ◽  
Selection Effect ◽  
Unintended Consequences ◽  
Data Availability ◽  
Marginal Effect ◽  
Confidentiality Agreement ◽  
And Performance ◽  
Bonuses And Penalties ◽  
Employee Responses ◽  
Chip Manufacturer

ABSTRACT We examine how employees respond to bonuses and penalties using a proprietary dataset from an electronic chip manufacturer in China. First, we examine the relative effects of bonuses and penalties and observe a stronger effect on subsequent effort and performance for penalties than for bonuses. Second, we find that the marginal sensitivity of penalties diminishes faster than that of bonuses, indicating that the marginal effect of a bonus may eventually exceed that of a penalty as their value increases. Third, we find an undesirable selection effect of penalties: penalties increase employee turnover, especially for skillful and high-quality workers. These results may help inform our understanding of the observed limited use of penalties in practice due to their bounded effectiveness and possible unintended consequences. Data Availability: The confidentiality agreement with the company that provided data for this study precludes the dissemination of detailed data without the company's consent.

scholarly journals Do White-Collar Employee Incentives Improve Firm Profitability?

2017 ◽  
Vol 30 (3) ◽  
pp. 95-115 ◽  
Author(s):  
Seppo Ikäheimo ◽  
Juha-Pekka Kallunki ◽  
Sinikka Moilanen ◽  
Eduardo Schiehll
Keyword(s):  
Financial Incentives ◽  
Task Complexity ◽  
White Collar ◽  
Return On Equity ◽  
White Collar Employee ◽  
The Future ◽  
Performance Effects ◽  
Employee Incentives ◽  
Future Return ◽  
And Performance

ABSTRACT We use proprietary archival compensation panel data from Finnish white-collar employees (WCEs) over the period of 2002 to 2011 in order to examine the relationship between performance-based incentives for WCEs and the future profitability of the firm as well as to determine whether this association is moderated by task complexity. While many studies examine the determinants and performance effects of CEO compensation, virtually no evidence has been presented to indicate that explicit financial incentives for WCEs improve the profitability of the firm. Our empirical results show that performance-based incentives for WCEs are significantly positively related to the future return-on-assets, return-on-equity, and profit margin ratios of the firm. We also find that this effect comes from the performance-based incentives for low-level WCEs, corroborating the importance of implementing performance-based incentives also to low-task complexity jobs. JEL Classifications: M40.

Challenges of subjectivity in team performance evaluation

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Markus Arnold
Keyword(s):  
Performance Evaluation ◽  
Team Performance ◽  
Cognitive Biases ◽  
Future Research ◽  
Human Beings ◽  
Perceived Fairness ◽  
Content Type ◽  
Positive Effects ◽  
Open Questions ◽  
Performance Effects

Purpose This paper aims to analyze challenges of subjective performance evaluation (SPE) and their effects on team performance. It focuses on discretionary bonus allocations in teams and challenges driven by cognitive biases on the superior or the employee side. This is important as efficient teamwork is a relevant source of competitive advantages in firms, and firms often rely on teams to coordinate various, mutually supportive organizational activities. Design/methodology/approach The author analyzes results that have recently been discussed in the literature and link them to each other to create a more holistic picture about potential performance effects of SPE. Based on the analyses, the author develops avenues for future research and point out open questions. Findings Exploring employees’ fairness perceptions in team settings in which there is no clear standard for a “fair” team bonus allocation, the author finds that perceived fairness of team bonus allocation may decrease under SPE because employees interpret the “fairness” of the bonus allocation from an egocentric perspective. Such decrease in perceived fairness can eventually even lead to decreased team performance. Likewise, on the superior side, more complex, but highly relevant team can cause cognitive biases of superiors in assessing employee performance, thereby decreasing the potentially positive effects of SPE on team performance. Originality/value This paper contributes to the literature by analyzing recently discovered challenges of SPE in teams and linking them to each other to draw more general conclusions about the performance effects of SPE. For practice, my findings imply that firms may want to be cautious when evaluating the potential effects of SPE – as it is made by human beings with their cognitive biases. For research, the paper opens up new research possibilities and points out open questions.

Toward an Understanding of Audit Team Distribution and Performance Quality

2020 ◽  
Vol 39 (4) ◽  
pp. 87-112
Author(s):  
Denise Hanes Downey ◽  
Kara M. Obermire ◽  
Karla M. Zehms
Keyword(s):  
Data Availability ◽  
Distributed Teams ◽  
Mutual Understanding ◽  
Negatively Associated ◽  
Performance Quality ◽  
Performance Effects ◽  
And Performance ◽  
Audit Team ◽  
Shared Context ◽  
Culture And Language

SUMMARY We develop and test a model that anticipates detrimental performance effects in within-office distributed teams (i.e., teams based out of the same office that conduct work at different geographic locations). This setting offers a clean test of theory around distributed work because it eliminates confounding factors such as differences in culture and language. Using an experiential questionnaire we find that greater distribution is negatively associated with team communication (quality, ease, and spontaneity) and auditors' sense of shared context (access to the same information, mutual understanding, and common norms), which are in turn negatively associated with engagement performance (efficiency, commitment to excellence, overall work quality, adhering to the budget, and the team's innovative approach). Further, we find an indirect effect between distribution and performance through communication and shared context when accountability is lower, but not higher, implying that accountability interventions have the potential to aid performance quality in distributed teams. Data Availability: Contact the authors.

The Relation between CEO Compensation and Past Performance

2012 ◽  
Vol 88 (1) ◽  
pp. 1-30 ◽  
Author(s):  
Rajiv D. Banker ◽  
Masako N. Darrough ◽  
Rong Huang ◽  
Jose M. Plehn-Dujowich
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Ceo Compensation ◽  
Chief Executive ◽  
Data Availability ◽  
Past Performance ◽  
Future Performance ◽  
Theoretical Predictions ◽  
Information Rent ◽  
And Performance

ABSTRACT: This study focuses on the relation between current compensation and past performance measures as signals of a chief executive officer's (CEO's) ability. We develop a simple two-period principal-agent model with moral hazard and adverse selection and test theoretical predictions using CEO compensation data from 1993–2006. Consistent with the predictions, we find that salary (bonus) is positively (negatively) associated with past performance for both continuing and newly hired CEOs. We also find that while current salary is positively associated with future performance, current bonus is not. As the model suggests, salary is adjusted to meet the reservation utility and information rent, and is positively correlated over time to reflect ability. Bonus serves to address moral hazard and adverse selection by separating high-ability agents into riskier contracts. Our results indicate that it is important to disaggregate cash compensation into salary and bonus components to understand the dynamic interaction between incentives and performance. Data Availability: Data are available from public sources indicated in the text.

Influence Activities and Favoritism in Subjective Performance Evaluation: Evidence from Chinese State-Owned Enterprises

2012 ◽  
Vol 87 (5) ◽  
pp. 1555-1588 ◽  
Author(s):  
Fei Du ◽  
Guliang Tang ◽  
S. Mark Young
Keyword(s):  
Performance Evaluation ◽  
Data Availability ◽  
Chief Financial Officers ◽  
Political Connection ◽  
Geographic Proximity ◽  
Evaluation Scores ◽  
Confidentiality Agreement ◽  
Subjective Performance Evaluation ◽  
Chinese State ◽  
Influence Activities

ABSTRACT This study addresses the two-way process in which a subordinate and a superior engage in influence activities (bottom-up) and favoritism (top-down) in subjective Performance Evaluation. The research context is the Chinese government's evaluation of Chinese state-owned enterprises (SOEs) by the State-Owned Assets Supervision and Administration Commission of China (SASAC). We analyze archival records of the government's evaluation scores, score adjustments, and evaluation ratings given to 63 SOEs between 2005 and 2007. These analyses are also interpreted based on insights gained from in-depth field interviews with SASAC officials and chief financial officers (CFOs) of SOEs. Results indicate that the political connection of SOE CFOs, the geographic proximity of SOE headquarters to the SASAC central office, and political rank of the firm affect the SASAC's evaluations. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement.

CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes

2019 ◽  
Vol 95 (2) ◽  
pp. 61-88 ◽  
Author(s):  
Shane S. Dikolli ◽  
Thomas Keusch ◽  
William J. Mayew ◽  
Thomas D. Steffen
Keyword(s):  
Audit Fees ◽  
Data Availability ◽  
Behavioral Integrity ◽  
The Public ◽  
Future Performance ◽  
Confidentiality Agreement ◽  
Audit Fee ◽  
Financial Misstatement ◽  
High Integrity ◽  
Jel Classifications

ABSTRACT We investigate the audit fee response to CEO behavioral integrity (BI). BI refers to the perceived congruence between an individual's words and deeds (Simons 2002). Because low word-deed congruence should result in more explanations when communicating, we use variation in explanations beyond firm fundamentals and CEO-specific characteristics in more than 30,000 shareholder letters to serve as a linguistic-based proxy for CEO BI. We find that audit fees increase as BI decreases, but BI is not associated with financial misstatement or litigation. These findings are potentially consistent with auditors undertaking additional work in response to low BI, which, in turn, mitigates the risk of restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors lacked incentives to prevent backdating. Finally, BI is increasing in future performance, which suggests that CEOs partially underpin the returns to high-integrity corporate cultures. JEL Classifications: J24; L25; M14; M41; M42. Data Availability: Proprietary data from KRW International cannot be shared because of the terms of a confidentiality agreement. All other data are available from the public sources cited in the text.

Undesirable Effects of Goal Setting on Perceived Fairness, Commitment, and Unethical Behavior

2018 ◽  
Vol 62 (2) ◽  
pp. 97-107 ◽  
Author(s):  
Nina Keith
Keyword(s):  
Goal Setting ◽  
Unethical Behavior ◽  
The United States ◽  
Goal Commitment ◽  
Management Technique ◽  
Long Term Effects ◽  
Perceived Fairness ◽  
Negative Effects ◽  
Positive Effects ◽  
And Performance

Abstract. The positive effects of goal setting on motivation and performance are among the most established findings of industrial–organizational psychology. Accordingly, goal setting is a common management technique. Lately, however, potential negative effects of goal-setting, for example, on unethical behavior, are increasingly being discussed. This research replicates and extends a laboratory experiment conducted in the United States. In one of three goal conditions (do-your-best goals, consistently high goals, increasingly high goals), 101 participants worked on a search task in five rounds. Half of them (transparency yes/no) were informed at the outset about goal development. We did not find the expected effects on unethical behavior but medium-to-large effects on subjective variables: Perceived fairness of goals and goal commitment were least favorable in the increasing-goal condition, particularly in later goal rounds. Results indicate that when designing goal-setting interventions, organizations may consider potential undesirable long-term effects.

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