Do Supervisors Reward Observable Luck

Abstract

Using an experiment, I examine whether middle-level supervisors reward observable good and bad luck in their evaluation decisions, and how this affects employee behavior. Although the controllability principle asserts supervisors should not reward observable luck, I find supervisors reward observable luck because they find it fair to do so. Further, I predict that employees’ self-serving fairness perceptions cause supervisors to reward good luck more than they punish bad luck. I find the opposite. Although supervisors anticipate employees’ self-serving fairness perceptions, supervisors punish bad luck more than they reward good luck. Employees’ contribution is lower when supervisors reward observable luck but only after employees learn how supervisors evaluate them through repeated interactions. My results suggest fairness concerns can diminish one of the intended benefits of allowing discretionary evaluations. Specifically, fairness concerns can prevent supervisors from using all available non-contractible information to decrease the weight of luck in employees’ compensation.

Razvan Ghita
Razvan Ghita
Accounting PhD Student

My research interests include lab and online experiments in the management accounting field.

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