An Empirical Analysis of a Relative Performance-Based Incentive Plan: Evidence from a Postal Service

Abstract:     
Using 1997-1999 annual performance evaluation data of 214 postal stores in Korea, we find that introduction of a relative performance evaluation (RPE)-based incentive plan is positively associated with financial performance and that under the new incentive plan, the degree of common uncertainty is positively associated with store profitability. We also find evidence that the incentive effect of the RPE-based plan is mitigated in stores at which the level of dysfunctional behavior is likely to be high. Finally, we find that the net benefits of introducing the RPE contract may be highly conditional on the degree of common uncertainty, which appears to be inversely related to the likelihood of dysfunctional behavior attributable to the RPE-based contract.

Number of Pages in PDF File: 50

Keywords: Relative performance evaluation, Incentive plans, Dysfunctional behavior, Common uncertainty

JEL Classification: M12, M41, J33

working papers series