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What is performance management and what is its purpose?
Evaluations might emphasise measuring innate abilities A, skills H, or effort e, depending on what the evaluation is used for.
Explain Quantitative Performance Measurement and name one benefit and potential pitfall.
Numeric outcomes can be tied to compensation more easily, as these measures are more objective, however they can be manipulated more easily.
What is subjective evaluation and why should it be used?
A good incentive system should provide positive and negative feedback. It can reduce the risk of being perceived as unfair and may improve employee's effectiveness and the working relationships with supervisors.
How frequently should evaluations be made?
Evaluations should occur less frequently when firm specific human capital is more important. The frequency should decline with workers ́ experience, through sorting.
Who should evaluate whom?
Manager’s incentives might be imperfect, 360-degree evaluations might be effective to foster open communication.
What is a cap and why might a firm use a cap?
A cap is a maximum amount of bonus. Firms use it so employees don't earn too much, which might reduce incentives and reduce firm profits.
Please explain the "yes men" phenomenon.
The "yes men" phenomenon refers to a situation in which employees, tend to agree with their superiors or managers even when they may have a different opinion or perspective, because there is some chance that a worker’s dissenting opinion will be viewed as a mistake, even if correct.
Employees are ____ and measures are ____ so actual incentives tend to be ____.
Employees are risk averse and measures are imperfect so actual incentives tend to be weaker.
Name the three outcomes that incentives can have?
1. Incentives can break social norms of trust
2. Incentives frame social interaction and affect social norms
3. Incentives reduce image motivation
According to Gneezy et al., what is the law of behaviour?
The law of behaviour states that higher incentives will lead to more effort and higher performance.
Finish the sentence and explain what the firm should do.
If the risk is uncontrollable, the measure
If the risk is uncontrollable, the measure imposes risk on the employee.
Then the firm should weaken incentives, pay a risk premium, or choose a more narrow performance measure or subjective evaluation.
Monetary incentives have two kinds of effects:
1. Standard direct price effect: makes the incentivized behavior more attractive
2. Indirect psychological effect: in some cases, it works in an opposite direction to the price effect and can crowd out the incentivized behavior