Using Relative Performance Information in Complex Tasks

Abstract

Companies commonly use income as the basis for short-term incentives designed to motivate performance. Managing income is a complex task, particularly in multi-period settings. Strategy development is necessary to maximize income in a complex task, and requires trade-offs between current and future periods. In addition, Relative Performance Information (RPI) is often provided, or available as feedback, to motivate performance. While firms have the option of taking the additional step and contracting on RPI, many do not. We separately investigate how providing RPI and contracting on RPI affect strategy development in a multi-period experimental setting where income is the basis for short-term incentives. The results show that only providing RPI reduces strategy development and performance. However, contracting on RPI mitigates these effects. Our results suggest a potential cost to this ‘middle ground’ between eliminating RPI and contracting on RPI. We conclude that employers incenting their managers to maximize income in a multi-period setting should avoid the dissemination of RPI as ex post information only.

Keywords: Strategy development, learning, comparative feedback, goals, rank-order tournaments

JEL Classification: M40, M46