How to Mitigate Bias in Performance Evaluations: An Analysis of the Consequences of Supervisors’ Evaluation Behavior

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While prior research on performance evaluation bias has mainly focused on the determinants and consequences of rating errors, we investigate which mechanisms firms use to actively reduce these errors. We empirically examine in how far firms create implicit incentives to supervisors to provide more accurate and thus, more useful performance ratings of their subordinates. In particular, we analyze the extent to which the calibration committee incorporates supervisors’ evaluation behavior with respect to their subordinates in their performance evaluation outcomes, i.e., performance ratings and promotion decisions. We argue that supervisors’ opportunistic behavior to strategically inflate subordinates’ performance ratings is punished through a decrease in the supervisor’s performance rating, while the supervisor’s ability to provide more differentiated, thus less compressed performance ratings will be rewarded through a higher likelihood of promotion. Using panel data of a professional service firm, we find evidence consistent with our predictions.