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Is Asking Employees to Assess Their Performance as Part of the Compensation Setting Process Beneficial or Detrimental to Employer Welfare?

Bernhard E. Reichert (Virginia Commonwealth University, USA)

ISBN: 978-1-83608-489-1, eISBN: 978-1-83608-488-4

Publication date: 6 September 2024

Abstract

This study examines how asking employees to self-assess their performance during the compensation setting process, when they are unaware of their marginal contribution to firm profit, affects employer welfare. Previous research suggests that giving employees a voice in the compensation setting process can positively affect employee performance and firm profit (Jenkins & Lawler, 1981; Roberts, 2003). However, the study proposes that asking employees to assess their own performance as part of the compensation setting process can have unintended consequences that ultimately lead to higher employee compensation demands. This is because asking employees to assess their performance increases their overconfidence in their own performance and their compensation demands. As a result, employers may face the dilemma of whether to meet these higher compensation demands or risk economic losses due to employee retaliation if their demands are not met. Through experimental evidence comparing a control condition without self-assessments and three self-assessment reporting conditions, the study provides evidence that supports the notion that eliciting employee self-assessments as part of the compensation process reduces employer welfare. Data on employee perceptions of performance further support the notion that asking employees to evaluate their performance leads to an inflated perception of their performance. These findings provide a theory-based explanation of why, in practice, many companies disentangle employee performance assessments from the compensation setting process and that companies are well advised in doing so.

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Acknowledgements

Acknowledgments

This paper is based on my dissertation at the University of Texas at Austin. I appreciate the valuable guidance from my cochairs Steve Kachelmeier and Michael Williamson, as well as from the members of my dissertation committee Urton Anderson, Janet Dukerich, and Lisa Koonce. I also thank Jasmijn Bol, Kendall Bowlin, Margaret Christ, Harry Evans, Barbara Grein, Vicky Hoffman, Scott Jackson, Don Moser, Mark Peecher, Steve Smith, and Jennifer Winchel for helpful suggestions. This paper has greatly benefited from workshop comments at the University of Alberta, University of Berlin, Drexel University, ESSEC Paris, HEC Paris, University of Illinois Urbana-Champaign, Kennesaw State University, Maastricht University, McMasters University, University of Pittsburgh, University of South Carolina, University of Texas at Austin, and University of Wisconsin. I gratefully acknowledge funding from the Institute of Management Accountants and the Eugene and Doro Bonham Research Fund.

Citation

Reichert, B.E. (2024), "Is Asking Employees to Assess Their Performance as Part of the Compensation Setting Process Beneficial or Detrimental to Employer Welfare?", Akroyd, C. (Ed.) Advances in Management Accounting (Advances in Management Accounting, Vol. 36), Emerald Publishing Limited, Leeds, pp. 27-56. https://doi.org/10.1108/S1474-787120240000036002

Publisher

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Emerald Publishing Limited