Promotion, Relative Performance Information, and the Peter Principle
Posted: 7 Aug 2015 Last revised: 2 Aug 2017
Date Written: August 1, 2017
I examine the effects of providing workers with relative performance information (RPI) on employers’ promotion decisions and the impact of those decisions on worker performance. In my experimental setting, the job after promotion requires higher-level abilities than the current job. I find that workers increase their effort to improve their current job performance after a promotion opportunity is announced because they expect this to increase their chances of promotion even though the new task requires higher-level abilities. Moreover, because employers anticipate that workers who have RPI will react negatively if they see that the best current job performer is not promoted, employers promote the best current job performer rather than the worker best suited for the next job more often when workers have RPI than when they do not. Consistent with the Peter Principle, I find that when workers have RPI, the promoted worker’s performance is lower after promotion because the promoted worker lacks the ability to perform the new job well. Finally, in a supplemental experiment, I find that providing workers with feedback on their abilities to perform the next job in addition to current job RPI improves the effective sorting of workers, but it comes at the cost of reduced promotion-based incentives. My results suggest that, notwithstanding the benefits documented in previous studies, RPI also imposes potential costs that firms should take into account when deciding whether or not to provide workers with RPI.
Keywords: Promotion, Incentives, Relative Performance Information, Fairness, Performance
JEL Classification: M41, M51
Suggested Citation: Suggested Citation