The Effects of Managerial Discretion in Complex Performance Evaluation Settings: Experimental Evidence

Abstract

This study uses an experiment to investigate managerial discretion in multi-task environments. Prior work provides evidence that managerial discretion often affects performance less positively or even negatively in these environments. We identify and analyze three potential drivers for these effects. First, for fairness reasons, employees may not prefer bonus allocations based on efficient effort only. Second, the mere presence of a manager (as opposed to an automatic bonus allocation) may lead employees to be concerned about how bonuses will be allocated. This consumes cognitive resources and may distort effort provision. Finally, managers could deliberately deviate from rewarding efficient effort because their assessment of employees’ fairness preferences for rewarding inefficient effort is biased. In line with our predictions, we find evidence in favor of the second and third driver but not the first. Our results contribute by enhancing our understanding of the effects of managerial discretion in multi-task environments.