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The Role of Supervisor Incentives

Subjective Performance Evaluation and Forward-Looking Implications: The Role of Supervisor Incentives  2020 Journal of Management Accounting Research

Many organizations reward employees based on subjective performance ratings. Subjectivity entails judgments based on personal impressions, feelings, and opinions rather than on external facts.

In this study, the author examines whether supervisors respond to their own preferences in subjective performance evaluation under a forced distribution system.

Many organizations reward employees based on subjective performance ratings.

Subjectivity can improve incentive contracting by allowing supervisors to incorporate dimensions of performance that are not easily measured objectively. In addition, discretion in performance evaluation allows supervisors to incorporate new information that may have unduly influenced performance in a manner beyond the employees’ control. On the other hand, the inclusion of subjectivity is susceptible to limitations. Different supervisors are likely to have different performance standards, resulting in inconsistencies across the ratings of different supervisors. Moreover, supervisors may let their personal incentives and preferences determine the evaluation outcome, resulting in systematic biases.

Using a proprietary, archival dataset from a major car dealership in Taiwan, the author finds that subjective evaluations are higher when longer supervisor-subordinate relationships exist, whereas subjective evaluations tend to be lower when larger supervisor-subordinate age differences exist. These findings show that managers take their own incentives and preferences into account when appraising subordinates.

Furthermore, the empirical results indicate that subjective evaluations (after controlling for objective performance) are positively associated with promotions and future performance of the employees, implying that the use of subjectivity reflects forward-looking information regarding employee performance. Taken together, the findings of this study suggest that, although the use of subjectivity is susceptible to supervisor biases, it also allows supervisors to incorporate forward-looking information about employee performance that cannot be measured objectively.

The results of this study have important implications regarding the use of subjectivity in incentive contracting. First, the author shows that supervisors respond to their own preferences when evaluating subordinates, resulting in systematic biases in the performance appraisal process. While such biases can make subjective evaluations less precise and less preferable, it is important to note that subjectivity also allows supervisors to incorporate forward-looking information that is unlikely to be captured by objective measures. Second, the findings are also relevant to the design of management control systems in aligning the interests of agents with those of shareholders. This study highlights the impact of supervisor incentives on subjective evaluations of employee performance; hence, companies should consider the influences of supervisor incentives on the design of internal control systems.