Up for review: unravelling the link between formal evaluations and performance-based rewards

Abstract

We study whether organizations that reward individual performance should give autonomy or should control how managers evaluate their subordinates. The normal way to establish control is to formalize the evaluations, so that managers cannot choose when and how to evaluate. We argue that organizations face a trade-off because formalization helps reduce biases but also introduces rigidities. Using linked employer-employee data, we study the link between formal performance appraisals and firm financial performance.