Evidence on Incentive Effects of Subjective Performance Evaluations

Abstract

The authors investigate the effect of managerial performance evaluation styles on employee work effort. Using panel data on 4,080 employees in a Swiss unit of an international company for the period 1999–2002, they test two hypotheses using paid and unpaid overtime work as effort indicators. The company applies two performance-based remuneration mechanisms: an individual “surprise” bonus and one in which salary is affected by the extent to which an individual has reached personalized targets. The authors hypothesize that effort is higher in departments in which individual performance evaluations are more flexible over time as well as when surprise bonuses are used more frequently. Both hypotheses are supported, and the estimated effects are substantial. Increases in rating flexibility or bonus payments by one standard deviation above the mean increase average overtime hours by more than 20%. The findings are robust and suggest that surprise bonuses and flexible performance evaluations over time provide effective incentives.