The Determinants and Performance Effects of Managers' Performance Evaluation Biases

Abstract

This study examines the determinants and performance effects of centrality bias and leniency bias. The results show that managers respond to their own incentives and preferences when subjectively evaluating performance. Specifically, information-gathering costs and strong employee-manager relationships positively affect centrality bias and leniency bias. The findings also indicate that performance evaluation biases affect not only current performance ratings, but also future employee incentives. Inconsistent with predictions based on the agency perspective, the results show that managers' performance evaluation biases are not necessarily detrimental to compensation contracting. Although centrality bias negatively affects performance improvement, the evidence does not reveal a significant negative relation between leniency bias and performance. Rather, leniency bias is positively associated with future performance, which is consistent with the behavioral argument that bias can improve perceived fairness and, in turn, employee motivation. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

The Role of Tacit Knowledge in Auditor Expertise and Human Capital Development

“…We thus predict that audit firms now do value inexperienced auditors who are better equipped to perform such tasks, that is, those who possess greater tacit knowledge (Nelson and Tan [2005]). We also predict an interaction stressing that supervisors who determine whether tacit knowledge has value in inexperienced auditors matter, in line with prior research on the importance of supervisor discretion in performance evaluation (e.g., Bol [2011]). Specifically, we predict that higher tacit knowledge supervisors more highly value tacit knowledge in inexperienced subordinate auditors.…”

“…It is critical to consider who performs the assessments when subordinates' value is subjectively evaluated (Bol [2011]). 7 Supervisors' incentives, cognitive limitations, and personal views influence assessments of value beyond subordinates' performance, effort, and ability (e.g., Lipe and Salterio [2000], Bol, Hecht, and Smith [2015], Bol, Kramer, and Maas [2016]).…”

Strategic Manipulation in Peer Performance Evaluation

“…We can also consider this from the perspective of peer difference. Without manipulation, we expect the peer difference to be independent of whether the peer ratee has Discovery of Bias and Strategic Behavior in Crowdsourced Performance Assessment TMC 2019, Alaska, USA 3 passed requirement or not. That is, ∆Peer(1) = ∆Peer(0), which also gives to β3 = 0.…”

“…However, the focus of the literature has been on the traditional top-down managerial appraisal of subordinates [3,4,15,21]. [3] shows that both centrality bias (raters' tendency to compress performance ratings) and leniency bias (tendency to inflate employees' performance ratings) in performance evaluation are managers' defensive mechanisms to alleviate ramifications of truthful ratings. And both centrality bias and leniency bias are positively affected by information gathering costs and strong employee-manager relationships, but they do not necessarily damage employee performance.…”

Delegating performance evaluation

“… Bol () cites studies documenting leniency bias going back to the 1920's, while citations to similar findings in the 1940's can be found in Prendergast (). Berger et al () provide experimental evidence of the leniency bias. …”