Effects on Strategy Development of Including Relative Performance Information in Incentive Scheme

Abstract:     
Strategy development is important in complex, multi-period tasks, as it likely improves long-term performance. Firms commonly either provide Relative Performance Information (RPI) or contract on RPI to improve performance. However, we know little about how the different uses of RPI affect strategy development. We investigate how providing RPI vs. contracting on RPI affects strategy development in complex, multi-period tasks with short-term incentives. The results of our experiment show that only providing RPI reduces strategy development, as participants direct more of their current-period effort toward the task. However, contracting on RPI mitigates this effect and increases strategy development compared to only providing RPI. Our results suggest a potential cost to providing RPI. They suggest that if employers want to provide RPI without discouraging strategy development in complex, multi-period tasks, they should contract on RPI instead of providing it as ex post information only.

Number of Pages in PDF File: 30

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

JEL Classification: M40, M46

working papers series