The Influence of Social Identity on the Performance Effects of Relative Performance Evaluation

Abstract

This study examines performance effects from the use of relative performance evaluation (RPE) as a sorting mechanism for promotion decisions within the organizational labor market. Organizations routinely use RPE to reduce common uncertainty and increase contracting efficiency. However, owing to the discrete and persistent increase in compensation that occurs when an individual is promoted, incentive effects of RPE are likely to be most pronounced when RPE is used as the basis for promotion decisions. We use proprietary archival and survey data from a large internal audit organization and find that RPE increases performance to a greater extent for junior auditors who have higher opportunities for promotion relative to senior auditors who have fewer opportunities for promotion. Indeed, we find that RPE is negatively associated with performance for senior auditors. These results suggest that RPE is not only less effective at higher levels of the organization, but may also be dysfunctional.