Managerial economics and organizational architecture 5e ch016

Performance Evaluation• Evaluations provide employees feedback on achievement and ways to improve • Evaluations are used to determine rewards and sanctions • Performance evaluation ent

Managerial Economics and Organizational Architecture, 5e

Chapter 16: Individual

Performance Evaluation

Performance Evaluation

• Evaluations provide employees feedback

on achievement and ways to improve

• Evaluations are used to determine

rewards and sanctions

• Performance evaluation entail evaluating

employees as well as subunit of the firm

Incentive Compensation Again

• Principal-agent model

performance measure

differential

Implicit Assumptions

• Principal knows agent’s production function

• Output is single quantitative measure of

performance

• Output can be observed at zero cost

• Employee cannot game the measure

• Employee produces a single output

• Mutually beneficial contract is feasible

• Employee works independently

Setting Performance Benchmarks

• Time and motion studies

– Engineers estimate the amount of time a task

requires – Determines most effective work method

• Past performance and ratchet effect

– Employees have incentives to only meet the

goal and not exceed it

Measurement Costs

• Accounting system may need to be

developed

• Information systems improved

• Value-maximizing firm improves measures

as long as incremental benefits justify

costs

• Gaming

– Employees may engage in dysfunctional

activities to improve their evaluations

• Horizon problem

– Short-run objective performance measure

may cause employees to focus on results that

influence their evaluation only over their

remaining time with the firm

Relative Performance Evaluation

• Evaluate worker output relative to their

co-workers in the same job

• Within the firm

– jobs not always identical

– group has incentive to punish “rate busters”

– incentive to hire less competent workers

• Across firms

– data hard to obtain

Subjective Performance

Evaluation

• Firms often use subjective evaluation

along with objective measures

• Multiple tasks and unbalanced effort

– Workers have incentives to concentrate on

activities that are easily measured

– The subjective measure will allow the

supervisor to determine cooperation and

Subjective Evaluation Methods

• Standard rating scales

– Rank employees on various performance

factors

• Goal-based systems

– Set annual goals and then measure whether

the employee achieved them

• Frequency

– Often more frequent reviews are too costly

– May be beneficial with new hires

• Supervisor shirking

• Forced distribution

– May result in good employees being

evaluated poorly

• Influence costs

• Reneging

Combining Performance

Measures

• Few job performance measures are purely

objective or subjective

• Both types can be inaccurate

– increasing inaccuracy of either places greater

weight on other

– inaccuracies increase employee risk

• Both can induce dysfunctional behaviors

Team Performance

• Team production

• Team evaluation

– peer evaluations to alleviate free-rider

problems

Comparing Individual and Team

Output

25

Conrad and Dina’s team output

Q

e

Sum of Conrad’s and Dina’s individual outputs

Government Regulation

of Labor Markets

• Anti-discrimination regulations dictate

clear performance evaluation systems

• May be inconsistent with value

maximization