Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance

Abstract

This study extends the literature on the tradeoffs associated with subjectivity in tournament incentive systems by describing the effects of implicit penalties (rewards), whereby workers ranked at the top (bottom) of objective performance rankings fail to receive the reward (penalty) due to management's subjective performance evaluations. Using data from a field setting where incentive contracts are structured as repeated tournaments, we find that workers respond differently to subjective versus objective awards of rewards and penalties. Additionally, workers subject to implicit rewards (penalties) exhibit performance reactions that counterbalance those of workers receiving subjective penalties (rewards), with net effects indistinguishable from zero. However, while the effects of subjective rewards and penalties reverse in the subsequent period, the performance effects of implicit rewards and penalties persist. Our study documents consequences of subjectivity that might alter the effectiveness of tournament incentives, and is relevant for the practice of incentive design.