Do the incentive effects of relative performance measurement vary with the ex ante probability of promotion?

Abstract

This study examines performance effects arising from the use of relative performance measurement (RPM) for promotion decisions in the organizational labor market. We use proprietary archival and survey data from the internal audit department of a large organization to document that the use of RPM positively interacts with the ex ante probability of promotion to influence performance. Thus, our study shows that while RPM may benefit employees by reducing uncertainty in incentive compensation as predicted by theory, the incremental performance benefits derived from the use of RPM as a promotion mechanism depend on the employee’s promotion prospects. Specifically, we find greater (lower) performance benefits associated with the use of RPM when an employee’s probability of promotion is greater (lower). Our findings suggest that RPM may be more effective in firms where there are opportunities for promotion at each organizational level.