Do managers distinguish between effects of luck and effort on employees' performance outcomes? Evidence from a high-stakes field setting

Abstract

To investigate whether managers' subjective performance evaluations and personnel decisions distinguish between effects of luck and effort on employees' performance outcomes, I use a regression discontinuity design that compares the performance ratings and contracting outcomes of professional football players involved in narrow victories (‘lucky’ outcomes) with those of players involved in narrow defeats (‘unlucky’ outcomes). Although the informativeness principle shows that supervisors' evaluations should filter out the effect of luck on subordinates' outcomes, theory in psychology suggests that random variation in outcomes may nonetheless affect evaluators' judgments. In line with this theory, I show that unlucky losses cause coaches to lower their subjective player performance ratings and, in turn, drop more players from the team's starting line-up. To shed light on the mechanisms that give rise to these results, I present evidence that suggests that these effects are driven by managers explicitly conflating luck and effort, and by managers' use of outcome-based search heuristics. Overall, my findings extend research on the degree to which firms' use of subjectivity in evaluating and rewarding employees can effectively reduce incentive problems in practice.