Managers’ Choices of Performance Measures in Promotion Decisions: An Analysis of Alternative Job Assignments
TL;DR: In this paper, the authors investigate the choice of performance measures in promotion decisions and examine the extent to which managers incorporate different performance measures for different types of job assignment, and find that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion.
Abstract: In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.
Citations
More filters
TL;DR: The authors examined the effects of providing workers with relative performance information (RPI) on employers' promotion decisions and the impact of those decisions on worker performance and found 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.
Abstract: 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. I find that this increase in effort is greater for high performers than for low performers. 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 when workers have RPI, the promoted worker’s performance is lower after promotion because the promoted worker lacks the ability to perform the new job well. My results suggest that, notwithstanding the benefits documented in previous studies, RPI also imposes potential costs that firms should take into account when deciding whether or not to disclose RPI.
24 citations
TL;DR: Tan and Libby as discussed by the authors investigated how tacit knowledge influences auditor expertise and human capital development, and found evidence supporting three direct organizational consequences of audit supervisors' tacit knowledge: (1) it improves development of their subordinates' implicit knowledge, (2) it increases the relative value they place on subordinates' tacit versus technical knowledge when assessing annual performance, and (3) increases the firm commitment of subordinates with relatively high tacit knowledge.
Abstract: In this study we investigate how tacit knowledge influences auditor expertise and human capital development. While prior research provides evidence that tacit knowledge is a key determinant of experienced auditors’ annual performance evaluations (Tan and Libby [1997]), we posit and find that tacit knowledge differentiates more from less promising auditors early in their careers, in terms of leadership potential. Tacit knowledge therefore plays a previously undocumented, forward-looking role in inexperienced auditors’ expertise development. In addition, we predict and find evidence supporting three direct organizational consequences of audit supervisors’ tacit knowledge: (1) it improves development of their subordinates’ tacit knowledge, (2) it increases the relative value they place on subordinates’ tacit versus technical knowledge when assessing annual performance, and (3) it increases the firm commitment of subordinates with relatively high tacit knowledge. Collectively, these findings contribute to the audit expertise, human capital development and incentive contracting literatures in accounting.
23 citations
Posted Content•
20 Sep 2019
TL;DR: In this article, the authors argue that a balance between subjectivity and discretion is required, and that transparency is definitely not always desirable or desirable, and discuss how discretion relates to the way in which managers are held accountable.
Abstract: Objectivity and transparency are often considered to be desirable attributes of a performance measurement and incentive system. Subjectivity, on the other hand,
is typically equated with bias and has a negative connotation. But accounting research
shows us that a degree of subjectivity, in other words, allowing leeway for supervisors’
judgments in evaluations, is usually optimal. I argue that we should switch to the term
‘discretion’, to be better able to communicate its benefits. Moreover, I discuss the
benefits and costs of discretion and of transparency. I surmise that a balance between
objectivity and discretion is required, and that transparency is definitely not always
desirable. Furthermore, I discuss how discretion relates to the way in which managers
are held accountable. Holding managers accountable for outcomes is not always
optimal, yet pervasive. Finally, I outline future research opportunities on discretion
and accountability, apply the insights about performance measurement to the
academic working environment, and promote the use of new research methods.
10 citations
TL;DR: This article examined the importance of initial assessments in subsequent promotion decisions and found that after the first year on the job, initial assessments of ability have no predictive value for future performance, while the relative weight on the initial assessment vs. observed performance for promotion decisions is significantly greater than the corresponding relative weight for future future performance up to eight years after the initial assessor was made.
Abstract: This paper examines supervisors’ use of performance measures to update initial beliefs about employee ability over time. Using archival performance and job assignment data, we examine the weighting for promotion decisions of assessments made before employees begin working, and objective performance measures collected over time. We find that employers’ initial assessments about employee ability predict workers’ future career attainment. While economic theory predicts signals should be weighted according to informativeness, our results suggest the importance of initial assessments in subsequent promotion decisions is driven instead by confirmation bias. Controlling for performance, managers continue to rely on initial assessments for promotion decisions for at least six years after the initial assessment was made. However, after the first year on the job, initial assessments of ability have no predictive value for future performance. Moreover, the relative weight on the initial assessment vs. observed performance for promotion decisions is significantly greater than the corresponding relative weight for future performance up to eight years after the initial assessment was made. Thus, it appears that managers in our setting over-rely on initial assessments long after they are useful for sorting employees on ability. Prior research has documented career “fast tracks,” whereby firms identify high-quality employees early and promote these workers quickly. Our findings suggest that workers may be placed on fast tracks even before they start working and are promoted more quickly, at least in part, due to biased performance evaluations and not on merit alone.
9 citations
TL;DR: In this article, the authors examine how managers assess performance and promotion prospects, and the conditions under which these assessments diverge, and they find that divergence is conditional on the professional's eligibility for promotion.
Abstract: In this study, we examine how managers assess performance and promotion prospects, i.e., ex ante likelihood of promotion, and the conditions under which these assessments diverge. While prior literature focuses on the positive association between these two subjective assessments, we focus on their differences. We argue that performance assessments capture subordinates’ contributions in their current roles, while promotion prospects assessments capture potential future contributions at higher job levels. To the extent that a non-contractual signal provides different information about positive future versus current contributions, assessed performance and promotion prospects are likely to diverge. Moreover, we predict that divergence is conditional on the professional’s eligibility for promotion. In an experiment, experienced managers made subjective assessments consistent with our predictions. By finding that promotion prospects improve with behavior that does not improve current performance, this paper extends the understanding of promotions beyond the broad conclusion that promotion necessarily is the consequence of superior performance. We argue that these differences arise because managers apply different cognitive schemas when they make different assessments.
8 citations
References
More filters
TL;DR: In this article, the role of imperfect information in a principal-agent relationship subject to moral hazard is considered, and a necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived.
Abstract: The role of imperfect information in a principal-agent relationship subject to moral hazard is considered. A necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived, and a characterization of the optimal use of such information is given.
7,964 citations
TL;DR: In this paper, a model that integrates job assignment, human capital acquisition, and learning can explain several empirical findings concerning wage and promotion dynamics inside firms, and they further argue that task-specific human capital is a realistic concept and may have many important implications.
Abstract: In previous work, we showed that a model that integrates job assignment, human capital acquisition, and learning can explain several empirical findings concerning wage and promotion dynamics inside firms. In this article, we extend that model in two ways. First, we incorporate schooling and derive further testable implications that we then compare with the available empirical evidence. Second, and more important, we show that introducing “task‐specific” human capital allows us to produce cohort effects. We further argue that task‐specific human capital is a realistic concept and may have many important implications. We also discuss limitations of our (extended) approach.
216 citations
TL;DR: In this article, the authors examine the sensitivity of promotion and demotion decisions for lower-level managers to financial and non-financial measures of their performance and investigate the extent to which the behavior of lowerlevel managers reflects promotion-based incentives.
Abstract: In this paper, I examine the sensitivity of promotion and demotion decisions for lower-level managers to financial and nonfinancial measures of their performance and investigate the extent to which the behavior of lower-level managers reflects promotion-based incentives. Additionally, I test for learning versus effort-allocation effects of promotion-based incentives. I find that promotion and demotion decisions for store managers of a major U.S.-based fast-food retailer (QSR) are sensitive to nonfinancial performance measures of service quality and employee retention after controlling for financial performance. The likelihood of demotion in this organization is also sensitive to nonfinancial performance on the dimension of service quality, while the probability of exit is primarily sensitive to financial performance measures rather than nonfinancial performance measures. I also find evidence that the behavior of lower-level managers is consistent with the incentives created by the weighting of nonfinancial performance measures in promotion decisions. Managers in locations where there is a higher ex ante probability of promotion and a higher potential reward upon promotion demonstrate significantly higher levels and rates of performance improvement in service quality. Finally, consistent with promotion-based incentives inducing both effort-allocation and learning effects, I find that performance-improvement rates for service quality: (1) are higher in prepromotion periods in markets where promotions occur, (2) decrease immediately after the occurrence of a promotion in the same market area, and (3) remain higher than in markets where promotions do not occur. These findings provide some of the first empirical evidence on an alternative to the explicit weighting of nonfinancial metrics in compensation contracts as a mechanism for generating improvements in nonfinancial dimensions of performance.
134 citations
Posted Content•
TL;DR: In this paper, the authors analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority and the use of bureaucratic rules.
Abstract: Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism arbitrary rewards and less productive job assignments against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority and the use of bureaucratic rules.
127 citations
Book•
01 Jan 2007TL;DR: In this article, the authors examine discretionary bonus payments by firms to senior-level executives and find empirical support for the notion that discretionary bonuses are paid based on non-contractible performance measures that are related to future financial performance.
Abstract: This study examines discretionary bonus payments by firms to senior-level executives. Interpreting discretionary bonuses as the result of implicit incentive contracts, I analyze an analytical model that includes a contractible and a non-contractible performance measure. The model yields the primary hypothesis that discretionary bonuses occur when the outcome of the contractible measure is either low or high, but not when the contractible outcome falls in the medium range. Based on a sample collected from public sources, I find empirical support for the notion that discretionary bonuses are paid based on non-contractible performance measures that are related to future financial performance. Moreover, discretionary bonus payments occur significantly more often when the contractible performance measure falls in the tails of the distribution. In contrast, I do not find support for the predictions that discretionary bonus payments are related to the manipulability of the contractible performance meas...
87 citations