It’s hard to dispute the enjoyment we take from feeling valued and respected at work. Research from Rotman reminds us, however, that subjective performance evaluations are not without risk and can foster feelings of unfairness when they don’t go our way.

This underlines why it’s important for managers to use incentives with a degree of care and caution, as while pay bonuses were shown to improve performance among those awarded them, they resulted in a fall in performance for those who were not.

“Penalties can have disciplining effects, that’s why they’re there in the first place,” the researchers explain. “But we also see negative performance associated with them and a subjective decision has a potentially demotivating effect.”

Mixed returns

The researchers explain that most previous work exploring incentives has focused on circumstances whereby people know the potential rewards and penalties but haven’t actually received them yet. Their research examines what happens to performance after those decisions have actually been made.

They gathered around two years’ worth of data from the company, complete with both objective and subjective performance reviews that either rewarded or penalized workers. For instance, the objective assessments saw monthly goals set for each department in terms of operational performance and general organizational behavior. Each department was awarded a score out of 100 depending on their progress.

The respective departments could each track how they were performing in relation to the other departments via a company dashboard, but managers could override monthly results by awarding individual bonuses to departments that didn’t do so well, or indeed deduct pay from departments even if they performed reasonably. Departments could also be rewarded by not losing pay for ranking last and could be penalized by not getting a bonus despite top ranking.

Subjective returns

The results show that departments that were rewarded via subjective measures by their managers improved their performance by around 18% on average. Those who were penalized on the same count saw their performance drop by around 13% on average.

The money appeared to matter, as the biggest effects, both positively and negatively, were found when tangible financial consequences were on the line. It also appeared to matter what bosses thought, as there was much less movement via objective assessments.

The researchers believe that subjective evaluations are commonly used to augment formula-based metrics, as these struggle to account for all aspects of employee performance. For instance, in this instance, the subjective evaluations would focus on things like application and dedication. The results highlight that caution should be employed before using subjective penalties, especially in multinational firms that rely on smaller suppliers.

“What we’re looking at is an incentive system that suppliers to these multinationals could have,” the authors conclude.