On the Relative Efficacies of Ranking and Absolute Performance Evaluation Systems
50 Pages Posted: 25 Aug 2016
Date Written: August 23, 2016
Using a setting in which an employer seeks information about talent in order to achieve a proper match between talent levels and tasks, we provide a comparative analysis of two performance evaluation systems widely used in practice ― an absolute performance evaluation system (APE) and a tournament or a ranking system (RE). An important consideration in such an analysis is the extent to which these systems are susceptible to performance manipulation, an endemic problem with most systems that are imperfect. Ranking systems are inherently superior to absolute performance evaluation absent performance manipulation. But, as we show, ranking systems are more susceptible to performance manipulation, and, therefore, absolute performance evaluation can dominate ranking systems in some settings. We also find that greater flexibility in task assignments leads to a preference for absolute evaluations. These findings support the use of absolute performance evaluation even though such a system coarsens information about talent.
Keywords: Incentives, Measurement System, Relative Performance Evaluation, Promotion
JEL Classification: D82, G32, G34, M51, M53
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