Chapter 8 And 9 RPE And SPE

Question 1

Definition of Relative Performance Evaluation

Answer 1

RPE exists if the compensation of an agent depends on his own performance and additionally depends on the performance of (an)other agent(s).”

Question 2

RPE based. On internal benchmarks (examples)

Answer 2

• bonuses based on relative performance
• promotions
• forced ranking systems

Question 3

RPE based on external benchmarks (examples)

Answer 3

• Evaluation of investment managers ( market index)
• Benchmarking (want to be cost-leaders)

Question 4

RPE should be optimally used whenever the information about the other employees is available without additional costs and the correlation

Answer 4

Correlation is not 0 between the employees
- example for positive correlation is sales personal
- example for negative correlation is substitute products within the firm

Question 5

How to prevent employees from shirking jointly in a forced ranking f.e.

Answer 5

• Set absolute standard for a bonus.

Question 6

Herding

Answer 6

• Is the tendency of individuals to do very similar or the same things at the same time
• Buy or sell stocks, Choose same product or price strategy

Question 7

Sabotage in RPE

Answer 7

• RPE may encourage employeesto manipulate the performance of their colleagues: Sabotage
  incentives if good performances of colleagues decreases an employee’s own compensation! Þ Be relatively better!
• Sabotage incentives are the larger:
• the larger the wage differences between high and low performers - the fewer the number of winners (e.g.insportcontests)
• the lower the costs of sabotage are compared to the costs of effort.
• Examples:
• Who is most likely sabotaged?

Question 8

Benchmarking Structure

Answer 8

• Identify comparable areas (Cluster)
• Create benchmark report for each
cluster
• Assign ranks
• Find out best practices in comparable areas (Cluster)
• Compare systematically the performance potential of each area with best practice to identify potentials for improvements

Question 9

Benchmark Prerequisites

Answer 9

• Acceptance
• Comparability
• Compare and evaluate the total performance of areas based on a larger number of qualitative and quantutatuve performance measures
• Make processes part of the daily work

Question 10

Subjective performance evalutation

Answer 10

SPE = performance evaluation based on a principal’s discretionary assessment of the agent’s
performance in a subjective evaluation.
- Based on personal impressions, feelings, and opinions, rather than on external facts.
- Correctness of SPE can not be determined by a third party.
Þ SPE is unverifiable for contracting purposes.
- Vs. objective evaluation = performance evaluation based on an objective (pre-determined) measure (e.g., net income, customer satisfaction, number of units produced)

Question 11

Ways of introducing performance measures

Answer 11

1. use totally subjective performance measures
2. allow for ex post flexibility in the weighting of objective performance measures specific ex ante
3. allow for ex post adjustmenst

Question 12

Benefits of SPE

Answer 12

1. Risk reduction
2. MItigation of incentive distortions
3. Inducement of adaptive behavior
4. Limitations of vulnerability to manipulate
5. Inaccurate assessments

Question 13

Costs of SPE

Answer 13

1. Reneging ( hold up) incentive to underreport because of bonus
2. Influence activities (sucking up)
3. Uncertainty about measurement criteria

Question 14

Consequences of overconfidence:

Answer 14

• “Overuse” of SPE
• Potential negative reciprocal reactions from employees feeling unfairly treated.