Source Themes

Incorporating Observable Luck into Discretionary Evaluations: Employee and Supervisor Perspectives

Using an experiment, I examine whether middle-level supervisors incorporate observable good and bad luck into discretionary evaluation decisions, and how this affects employee behavior. Although the controllability principle asserts supervisors should not incorporate observable luck, I find that supervisors incorporate observable luck partially because they find it fair to do so. Although supervisors correctly anticipate that employees find it fair to be rewarded for good luck more than they are punished for bad luck, I find no evidence that supervisors reward good luck more than they punish bad luck. Employees' effort is lower when supervisors incorporate observable luck but only after employees learn how supervisors evaluate them through repeated interactions. My results suggest fairness concerns can diminish one of the main theoretical 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.

Reporting Frequency and Learning from Experience

Using two experiments, I investigate whether increasing reporting frequency affects supervisor evaluation decisions and employee experiential learning in a discretionary evaluation setting. Employees learn by either exploring new knowledge or exploiting existing knowledge. Supervisors may be unable to distinguish exploration from shirking as the cause of a low result because exploration frequently produces low outcomes. Anticipating this, employees can explore below optimal levels because they are uncertain whether supervisors will reward unsuccessful exploration. Increasing reporting frequency improves supervisors’ ability to distinguish exploration from shirking. Thus, I predict and find that supervisors award bonuses that provide stronger incentives for employees to explore when reporting frequency increases. Contrary to my prediction, employees do not appear to anticipate this and do not explore more when reporting frequency increases. My results suggest employees can fail to anticipate which actions supervisors will reward, making supervisors less effective at directing employee effort towards desirable actions.

The Effects of Reporting Structure and Reporting Frequency on Discretionary Rewards and Employee Effort

We examine whether supervisors' discretionary award allocations are affected by two features of the organizational control system: span of control and reporting frequency. In addition, we examine whether employees anticipate supervisors' reward allocations, and adjust their effort levels based on their supervisor's span of control and the frequency with which their performance is reported. In an online experiment, we examine supervisors' behavior. We confirm our theory that span of control increases the rewards allocated to top performers and decreases the rewards allocated to the weakest performers. We find no effect of reporting frequency on supervisors' reward allocations. In a laboratory experiment, we examine employees' behavior. We find no support for our hypotheses that employee effort is affected by span of control and reporting frequency. Our study contributes to the management accounting literature on discretionary performance evaluation and control system design and has important implications for practice.