Do the Incentive Effects of Relative Performance Measurement Vary with the Ex Ante Probability of Promotion?

Posted: 16 Aug 2010 Last revised: 19 Jan 2018

See all articles by B. Demere

B. Demere

University of Missouri at Columbia - School of Accountancy

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Karen Sedatole

Goizueta Business School

Alex Woods

College of William and Mary

Date Written: 2015

Abstract

This study examines performance effects arising from the use of relative performance measurement (RPM) for promotion decisions in the organizational labor market. We use proprietary archival and survey data from the internal audit department of a large organization to document that the use of RPM positively interacts with the ex ante probability of promotion to influence performance. Thus, our study shows that while RPM may benefit employees by reducing uncertainty in incentive compensation as predicted by theory, the incremental performance benefits derived from the use of RPM as a promotion mechanism depend on the employee’s promotion prospects. Specifically, we find greater (lower) performance benefits associated with the use of RPM when an employee’s probability of promotion is greater (lower). Our findings suggest that RPM may be more effective in firms where there are opportunities for promotion at each organizational level.

Keywords: Relative performance evaluation, tournaments, promotions, incentive contracting

Suggested Citation

Demere, Will and Krishnan, Ranjani and Sedatole, Karen and Woods, Alex, Do the Incentive Effects of Relative Performance Measurement Vary with the Ex Ante Probability of Promotion? (2015). Management Accounting Research, Vol. 30, 2015, Available at SSRN: https://ssrn.com/abstract=1659756 or http://dx.doi.org/10.2139/ssrn.1659756

Will Demere

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

Karen Sedatole

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Alex Woods (Contact Author)

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,753
PlumX Metrics