Managers’ Self-Serving Incentives: Information Avoidance in Performance Evaluation

Abstract

In many organizational contexts, managers might have self-serving incentives whereby giving high evaluations to employees comes at the expense of their own payoff. In this study, I examine the impact of managers’ self-serving incentives on the collection and use of information for the purpose of subjective performance evaluation. I find that managers with self-serving incentives collect less information than managers with no self-serving incentives. When managers do collect all available information, I find that managers with self-serving incentives interpret that information in a more self-interested way by giving lower upward adjustments to employees’ compensation than do managers with no self-serving incentives. However, information avoidance under self-serving incentives is mitigated when employees propose self-evaluations and managers observe these self-evaluations afterwards. My findings increase our knowledge about the role of subjective performance evaluations in modern organizational contexts where managers might have self-serving incentives, such as business units operating as profit centers and profit-accountable teams.

Keywords: Self-Serving Incentives, Information Collection, Information Interpretation, Employee Self-Evaluations

JEL Classification: M52, M12, M40, M41