Objective versus Subjective Performance Evaluations
Why does incentive pay often depend on subjective rather than objective performance evaluations? After all, subjective evaluations entail a credibility issue. While the most plausible explanation for this practice is lack of adequate objective measures, I argue that subjective evaluations might sometimes also be used to withhold information from the worker. I furthermore argue that withholding information is particularly important under circumstances where the credibility issue is small. The statements are derived from a two-stage principal-agent model in which the stochastic relationship between effort and performance is unknown.
D83 - Search, Learning, Information and Knowledge ; D86 - Economics of Contract: Theory ; M12 - Personnel Management ; M52 - Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs)