On The Use Of Calibration Committees In Subjective Performance Evaluation

Abstract

We analyze the optimal contract when the employer organizes a calibration committee and how the committee affects biases in subjective performance evaluation. We employ a one-period moral hazard model, and the players in our model are the employer, the worker, and his immediate boss. Further, we assume the employer can choose whether to organize the calibration committee with the boss. The main results of this study are as follows. First, the optimal contract when the employer organizes the calibration committee consists of a fixed wage, money-burning, and the cost of organizing the committee, where the amount of money-burning depends on the sensitivity of evaluation to the worker’s effort. Second, organizing the calibration committee is not optimal when the cost of organizing it is high or when it is difficult to differentiate money-burning amounts according to evaluation results. Third, the threshold for whether the employer should organize the calibration committee depends on the probability that the boss or employer will give a high rating. The conditions for organizing a calibration committee become stringent if the probability of high rating increases despite the worker’s lack of effort. Fourth, downward adjustment by the calibration committee occurs more frequently than upward. We can interpret this result as a mitigation of leniency bias. Our findings suggest that the calibration committee may not always be positive for the employer and provide theoretical predictions about the characteristics of firms that organize a calibration committee and offers implications for future empirical research in this area.

Keywords: Calibration Committee, Subjective Performance Evaluation, Money Burning, Compensation Contracts

JEL Classification: D86, M41, M52