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Managers' Choices of Performance Measures in Promotion Decisions: An Analysis of Alternative Job Assignments

Authors


  • Accepted by Christian Leuz. We are grateful to the senior managers at the company that supplied data for the analysis and granted us extensive access to the research site and its employees. We also gratefully appreciate the comments and suggestions made by Thomas Dohmen, Timothy Keune, Ken Merchant, Gerhard Speckbacher, Kristy Towry, an anonymous referee, and workshop participants at Maastricht University School of Business and Economics, Tilburg University, WU Vienna, the 2011 ERMAC Conference in Vienna, the 2012 Management Accounting Section Midyear Meeting in Houston, and the 2012 GMARS Conference in Copenhagen. The project was financially supported by a WU Vienna research grant. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal/onlineappendices.aspx.

ABSTRACT

In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.

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