Performance Measures, Motivated Reasoning, and Subjective Performance Evaluation

Abstract

We provide theory-based evidence that potentially costly disagreements between subordinates and superiors is larger when a profit measure and an additional (non-redundant) performance measure are provided, rather than a profit measure only, as the basis for subjective performance evaluations. Specifically, we predict and find that when a profit measure and an additional performance measure are provided, subjective performance evaluations are less effective in inducing subordinates to make management decisions that superiors prefer and evaluate highly. In addition we predict and find that, controlling for subordinates’ management decisions, subordinates and superiors disagree more about the subordinates’ performance evaluations when a profit measure plus an additional performance measure is provided, rather than a profit measure only. Our study provides a potential explanation for why organizational policies sometimes limit the performance measures to be used for subjective performance evaluations, thus excluding potentially relevant information.