pdf - Nyenrode Business Universiteit

2.5. CONCLUSIONS AND DISCUSSION 49
2.5 Conclusions and Discussion
As one of the first empirical studies on the use of Relative Performance Evaluation (RPE)
at the middle-management level (see also: Dekker et al. 2012), this research examines why
and to what extent RPE has empirical relevance for the performance evaluation praxis
of business unit managers. RPE is a means of determining the performance standard by
using a peer group benchmark. The performance of an employee (or: business unit manager)
is compared with the performance of a peer group. Peer performance functions as an
(implicit or explicit) performance target. The peer group typically consists of individuals
facing similar tasks and circumstances. The rationale behind this comparison is that the
performance of the reference group provides information on the performance potential of
the employee. RPE can be used as an explicit performance target or budget based on peer
performance. However, RPE can also be used more implicitly in the background, where
peer performance is used as a point of reference for the performance evaluation.
Prior literature has extensively studied RPE from both analytical and empirical standpoints.
Despite ample analytical proof of the benefits of RPE, the empirical support for
RPE is scarce. Focusing on the executive level, prior studies provide mixed results concerning
organizational reliance on RPE. In contrast to the extant literature, the current
study does not examine executive compensation praxis with archival data. Instead, I use
detailed survey data to study the use of RPE at the lower echelons. I find that RPE is
widely used to evaluate business unit managers, as more than half of the 325 respondents
in this study claim to use RPE to a large or very large extent.
This study explains the use of RPE along two theoretical lines. The first line of reasoning
is the noise-reduction perspective. The noise-reduction perspective on RPE is common in
the literature and states that RPE filters out noise due to external events from the overall
performance evaluation (Holmstrom 1982). These external events (e.g., rising prices of raw
materials or declining market demand) affect not only the performance metrics of the employee
but also the performance metrics of the reference group. This effect increases noise
in the performance metrics, which no longer reflect only effort. Instead, the metrics also reflect
the performance effects of uncontrollable external events. Comparing the performance
of a manager to the performance of peers informs the superior about the quality of the
employee’s performance, given the external events that have occurred. This comparison
reduces the noise levels in the performance evaluation. This study finds support for this
noise-reducing effect of RPE by analysing whether increased levels of common uncertainty
(as a proxy for shared external events) positively affect the reliance on RPE.
The second explanation for RPE use is its ability to reduce the evaluated manager’s room
for opportunistic behaviour. This opportunism-mitigating perspective has received little