Long-Term Incentives, Managerial Effort and Supervisor Evaluation Bias

Abstract

We study the incidence of supervisors’ evaluation biases in a biannual incentive system in an Italian public administration. Using performance reports for 106 employees over three biannual evaluation periods (2001-2006), we analyze supervisors’ intertemporal evaluation biases. We find evidence for lenient and compressed performance ratings especially in the second year of each biannual evaluation period. We explain these biases, and their intertemporal variation, by supervisors’ relative emphasis on subjective and objective performance metrics. We further analyze the effect of performance categorization and find that leniency is enhanced for ratings closer to the lower boundary of each performance category. The results have important implications for understanding the trade-offs supervisors face when enhancing their subordinates’ long-term performance, and short-term performance measure accuracy.

Keywords: performance evaluation, leniency bias, centrality bias, long-term performance

JEL Classification: C12, M52