Author Abstract
We examine the performance consequences of managerial discretion when compensation payoffs are interdependent; that is, when rewards or penalties given to some employees cause others not to get them. Using proprietary data from a company that gives monthly rewards and penalties based on a combination of objective metrics and subjective performance assessments, we document both a nominal and an opportunity effect of managerial discretion. The former refers to performance consequences associated with workers who receive rewards or penalties due to managerial discretion (actual recipients). The latter refers to performance consequences associated with workers who would have received rewards or penalties had there been no managerial discretion (would-be recipients). Our study is, to our knowledge, the first to provide empirical evidence of performance consequences associated with the opportunity effect of managerial discretion. In additional tests, we explore theory-consistent explanations of our results. Our findings contribute to the literature on subjectivity in performance evaluations and have important practical implications for the design of incentive systems.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: January 2020
- HBS Working Paper Number: HBS Working Paper #20-075
- Faculty Unit(s): Accounting and Management
