The Anatomy of a Complex Performance-Dependent Incentive System

Abstract

This paper reports the findings of an archival and field study that explores the details of the design and functioning of a complex performance evaluation and incentive system, one that bases incentive payouts on both organizational and individual performance ratings. The archival data include the annual performance ratings of over 700 high- and mid-level managers and professionals over a two-year period. We find a small correlation between the organizational and individual performance ratings, which suggests no performance evaluation halo effect. There is a tendency toward leniency in both rating elements, but the leniency is greater in the organizational portion of the plan because the individual rating is constrained by a prescribed SBU-level maximum. Because the key financial performance measure is EVA, there is no reluctance to setting performance targets below zero. There is some evidence of biases related to employee roles and ranks. And the field study portion of our study revealed great within-company variation in practice and some of the reasons for it.