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Chapter 5 Conclusion 5.1 Summary, Conclusions and Discussion This thesis set out to take a closer theoretical and empirical look at Relative Performance Evaluation (RPE). RPE is a means to evaluate an employee’s performance by comparing his performance with that of a reference group that consists of individuals facing similar tasks and circumstances. The performance of the reference group functions as a performance benchmark for the evaluated employee. The performance of the reference group constitutes an (explicit or implicit) performance target, to which the employee’s actual performance is evaluated. The resulting performance target incorporates external circumstances. If the performance target is set in absolute terms instead of relative to peer performance, external circumstances can influence how difficult it is for the employee to reach his performance target. A windfall loss would make achieving the preset absolute performance target unlikely, if not impossible. If the employee receives a (financial or non-financial) reward upon achieving a performance target, a windfall loss also reduces the employee’s reward. This outcome is undesirable to the extent that targets and rewards can motivate the employee to maximize his efforts. If external circumstances reduce the achievability of the performance target, the target does not optimally motivate the employee. The opposite situation is also possible. If external circumstances render the performance target easy to achieve, the target does not optimally motivate the employee because easy targets do not require him to maximize his effort. In this case, even with relatively low effort levels, the target can be achieved. In both cases, external circumstances (positively or negatively) limit the organization’s ability to realize its objectives because of the employee’s reduced effort. 117
118 CHAPTER 5. CONCLUSION Although RPE also has other benefits, scholars have primarily described RPE in terms of its ability to reduce the problem of noise in the performance evaluation. The external circumstances described above induce noise in the performance evaluation. This noise reduces the quality of the performance evaluation, which aims to reward the agent for his effort but not for uncontrollable external circumstances. Reasoning from an analytical agency theoretical tradition, Holmstrom (1982) proves that RPE reduces noise in the performance evaluation by incorporating information about peer performance into the performance contract between the superior and the employee. The reference group’s performance is informative because the group is exposed to the same uncontrollable events as the employee. Both the employee’s organization and his peers’ businesses may experience the same windfall losses (or gains) such that everyone experiences lower (or higher) performance. Comparing the performance of the agent with the reference group partially filters out the effects of external uncontrollable factors. By reducing noise, RPE improves the quality of the performance evaluation. The second benefit that the literature ascribes to RPE lies in its opportunism-mitigating characteristics. This opportunism-mitigation perspective on RPE relates to the way in which performance standards are determined. Performance targets can be determined in two main ways. First, they can be set based on internal information by, for example, using prior-year performance or through internal negotiations between higher and lower management. According to Murphy (2001), this ‘internal’ determination of the performance target has an important drawback: it creates room for the evaluated employee to opportunistically influence his performance target. For example, if standards are based on prior-year performance, employees have an incentive to achieve their performance targets but to avoid outperforming them. Outperforming their performance target will result in an increased standard for the next period (Murphy 2001). Performance targets can also be determined ‘externally’ (i.e., outside the evaluated employee’s sphere of influence) (Murphy 2001). External determination implies that the performance target is determined in such a way that the difficulty of the performance standard cannot be easily affected by the evaluated employee. For example, the target may be based on market conditions or peer performance. RPE is an example of an externally determined performance standard because it incorporates information about the performance of an external reference group. According to Murphy, the performance of a peer group lies outside the employee’s sphere of influence. RPE-based targets cannot be easily manipulated by the evaluated employee. These considerations suggest that the room for opportunistic behaviour can be delimited by incorporating the performance of a reference group into the compensation plan and that RPE can aid the standard-setting process. Throughout the thesis, I explain and test the use of RPE with the two perspectives presented above.
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Relative Performance Evaluation in
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NYENRODE BUSINESS UNIVERSITEIT Rela
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Table of Contents Preface 1 General
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Preface Why do people make things h
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2 CHAPTER 1. GENERAL INTRODUCTION I
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10 CHAPTER 1. GENERAL INTRODUCTION
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Chapter 2 The Use of Relative Perfo
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2.1. INTRODUCTION 15 is not a promi
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2.2. THEORETICAL BACKGROUND 17 The
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2.2. THEORETICAL BACKGROUND 19 Sinc
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2.2. THEORETICAL BACKGROUND 21 who
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2.2. THEORETICAL BACKGROUND 23 suff
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2.3. SAMPLE AND MEASUREMENT 25 2.2.
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2.3. SAMPLE AND MEASUREMENT 27 2.3.
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2.3. SAMPLE AND MEASUREMENT 29 can
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2.3. SAMPLE AND MEASUREMENT 31 Comp
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2.3. SAMPLE AND MEASUREMENT 33 this
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2.3. SAMPLE AND MEASUREMENT 35 Emph
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2.4. ANALYSES 37 2.4 Analyses This
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2.4. ANALYSES 39 Table 2.8: RPE use
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2.4. ANALYSES 41 2.4.2 Correlations
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2.4. ANALYSES 43 Concerning the con
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2.4. ANALYSES 45 Table 2.13: Result
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2.4. ANALYSES 47 Table 2.15: Summar
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2.5. CONCLUSIONS AND DISCUSSION 49
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2.5. CONCLUSIONS AND DISCUSSION 51
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2.6. CONTRACTIBILITY MIMIC MODEL (A
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2.6. CONTRACTIBILITY MIMIC MODEL (A
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2.7. ANALYSES FOR FOR-PROFIT BUS (A
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Chapter 3 Does Relative Performance
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3.1. INTRODUCTION 61 Holmstrom’s
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3.2. DEVELOPMENT OF THE MODEL 63 3.
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3.2. DEVELOPMENT OF THE MODEL 65 RP
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Page 90 and 91: 3.4. ANALYSES 81 Table 3.11: Result
Page 92 and 93: 3.4. ANALYSES 83 Larcker & Rusticus
Page 94 and 95: 3.5. CONCLUSIONS AND DISCUSSION 85
Page 96 and 97: Chapter 4 Does Relative Performance
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Page 112 and 113: 4.4. ANALYSES 103 Table 4.8: Items
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Page 118 and 119: 4.4. ANALYSES 109 RPE and RFMO. Mor
Page 120 and 121: 4.4. ANALYSES 111 room for manageri
Page 128 and 129: 5.1. SUMMARY, CONCLUSIONS AND DISCU
Page 134 and 135: 5.2. IMPLICATIONS FOR PRACTICE 125
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Page 138 and 139: Appendix Overview of Questionnaire
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Page 142 and 143: Q14 When serving your clients, how
Page 144 and 145: Q23 Please indicate whether you agr
Page 146 and 147: Noise Q34 NOISE (primary measure) P
Page 148 and 149: References 1. Abernethy, M.A., Bouw
Page 150 and 151: 26. Diamantopoulos, A. & Siguaw, J.
Page 152 and 153: 52. Himmelberg, C.P. & Hubbard R.G.
Page 154: 83. Towry, K. 2003. ‘Control in a
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Page 160 and 161: Biography Hilco van Elten (1979) ho
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