An eternal question for recruiters and hiring committees is: “Is this person really the right fit?” Recent research suggests how to use performance evaluation to attract employees who identify strongly with the organization’s objectives and deter those who do not.
Even when a candidate possesses the skills for the job, recruiters and hiring committees may still wonder whether the candidate’s personality fits the company culture and the candidate’s goals align with those of the organization. Since the selection process is short, it is challenging to get to know the person behind the mask and answer these questions. However, the research study “The Sorting Benefits of Discretionary Adjustment to Performance-based Pay“ suggests a simple, subtle way to attract the right person for the job. The study proposes a means of filtering for candidates who identify strongly with organizational goals and are willing to go the extra mile.
The study shows that when potential employees expect managerial discretion to be used to evaluate them, they are more likely to sort themselves into organizations with which they identify in regards to objectives. In other words: When an employee knows that their manager will discretionarily adjust their performance evaluation - and consequently their pay - they will think more carefully about how that discretion will be used in the future. Managers use discretion as a supplement to objective performance measures. In this way, they can adjust and correct the insights provided by objective performance indicators with difficult-to-measure information, such as their observations of the employee’s daily behavior, willingness to share knowledge with colleagues, and unsolicited suggestions to improve the organization’s performance.
The research study tested this prediction using an elaborate scenario-based experiment comprising of three steps. In the first step, the researchers gave participants a task to elicit their identification (or not) with an organizational objective; in this case, the objective was carbon emission reduction. In the second step, they assigned the role of an employee to a portion of the participants. Next, they gave employee-participants a choice between a fixed-wage contract and a performance-based wage contract, with or without the possibility of a discretionary adjustment by a manager. In the third step, they asked employees to indicate, on a scale of 1 to 10, how much extra effort beyond their regular job they were willing to put into meeting the organizational goal, that is, finding ways to reduce carbon emissions. This effort was factored directly into their wage calculations in the performance-based model, and all employee-participants had access to those calculations.
Results of the research study show that those employee-participants who identified strongly with the organizational goal were indeed willing to expend more effort towards finding ways to reduce carbon emissions. As expected, these employee-participants were more likely to choose performance-based pay when given the possibility of discretionary adjustment. Conversely, under the discretionary adjustment condition, those employee-participants who did not strongly identify with the organizational goal were more likely to choose the fixed-pay model.
The bottom line is that the discretionary adjustment component is designed to reward employees for going above and beyond their roles to help the organization meet its goals. However, if an employee does not care for these goals, a fixed-pay model offers a better prospect.
Working for an organization with objectives with which one identifies, has not just benefits for the organization as such but also for employee health and society overall. Hence, the idea put forward by the study provides a clever yet simple solution for attracting the ‘right’ person for the job and deterring those who would not fit the bill in the long run.
Tips for practitioners
- Applying discretion can help organizations adjust employee performance evaluations for difficult-to-quantify information revealed during employment. As a manager, make use of your discretion but also make sure that the evaluation is free of bias and favoritism.
- Besides being a helpful tool during employment, managerial discretion can also help you select the “right” employee. Use managerial discretion during performance evaluations to attract potential employees who identify with the organization’s goals while it deters those who do not!
- Communicate the details of performance evaluation and compensation clearly during the hiring process! When potential candidates learn about the use of managerial discretion, they will think carefully about the correlation between their goals and those of their prospective organization.
Literature reference and methodology
The research study “The Sorting Benefits of Discretionary Adjustment to Performance-based Pay” discussed in this article was conducted by Prof. Dr. Bart Dierynck and Dr. Victor van Pelt. The study examines the employment contract decisions of 179 business economics students. The predictions were tested under highly controlled circumstances. Further research potential lies with the examination of the effects of managerial discretion under various conditions of employment.
- Dierynck, B./van Pelt, V. (2021): The Sorting Benefits of Discretionary Adjustment to Performance-based Pay, in: Management Accounting Research,52: 100755. Available at: https://doi.org/10.1016/j.mar.2021.100755
Professor Dr. Bart Dierynck
Bart Dierynck is Full Professor of Accounting at Tilburg University. Bart is mainly interested in developing a better understanding of business problems at the intersection between management accounting on the one hand, and organizational behavior, operations management, and corporate responsibility on the other. Bart has publications in top journals in the fields of accounting, operations management, and organizational behavior. He has won several teaching awards for his teaching on management accounting and corporate responsibility.
Dr. Victor van Pelt
Victor van Pelt is an Assistant Professor who applies experimental research methods to accounting topics and questions. His research predominantly focuses on understanding how people produce, use, and respond to disclosure, accounting information, performance measures, and controls.