Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance

by Wei Cai and Susanna Gallani

Overview — Analyzing data from a Chinese manufacturing company, this study explores side effects of subjective performance evaluations in a setting where workers are rewarded based on performance rankings and subject to both rewards and penalties. Among other contributions the paper highlights factors that could impact the overall effectiveness of incentive systems.

Author Abstract

This study explores the effects of subjective adjustments of objective performance rankings in a tournament incentive contract including both rewards and penalties. While prior research focuses predominantly on ex-ante incentive effects of tournament systems, we explore the consequences of awarding rewards and penalties subjectively. We extend the literature on the tradeoffs associated with subjectivity in performance evaluations by describing the effects of implicit penalties (rewards), whereby workers ranked at the top (bottom) of objective performance rankings fail to receive the reward (penalty) due to management's subjective performance evaluations. Using data from a field setting where incentive contracts are structured as a repeated tournament with no carryover of performance across periods, we predict and find that workers subject to implicit rewards (penalties) exhibit performance reactions that counterbalance those of workers receiving subjective penalties (rewards). While the net performance effect of subjective rewards and implicit penalties is not significantly different than zero, we find that the net performance effect of subjective penalties and implicit rewards is significantly positive. Our study documents effects of subjective evaluations that might alter the effectiveness of tournament incentive systems and are relevant for the practice of management accounting.