Ratee Incentive and Performance Distribution

To design and implement effective performance evaluation systems, it is crucial to establish relevant performance targets (Murphy 2001). Empirical research in performance-based compensation, however, provides limited insights on the impact of target performance on the agent incentive. This study approaches how ratees respond to targets with respect to performance distributions. We find that there is a discontinuity in performance distributions on the targets: a large jump from the right below the target to the right above the target. We interpret that when performance is expected to be realized right below the target, ratees encounter stronger incentive to increase effort to pass the threshold performance level to secure bonus compensation. On the other hand, if ratees perceive that there is very little chance to meet their target performance, they are likely to give up working hard because there would be no incremental rewards as far as the performance is below the target. We also find that this shape of performance distribution around the target prevails with unique measures but lapses with common measures. Our findings suggest that, in order to successfully implement performance-evaluation system in accordance with the motivational purpose, raters should understand how ratees alter their exertion level in response to characteristics of target setting mechanism. .