Evaluation Errors and Incentives: An Experimental Assessment of Individual Motivation

In the fields of Strategic Human Resources Management and Personnel Economics, much attention has been devoted to motivation and incentives. Research in recent years has conceptualized compensation as a motivational tool, relating motivation to performance evaluation. This leads to predict that employees tend to frame their effort in a way that they believe will lead to their most valued work-related rewards and outcomes. However, noise in firm-level performance measures may deter the efficacy of compensation. Evaluation errors may occur that cause a mismatch between effort, performances, and rewards. In line with expectancy-theory and goal-setting theory, in this paper we design a principal-agent model about the impact of type-I and type-II evaluation errors on employees’ motivation. Through results from experimental treatments, we contribute to the debate about incentives and organizational performance.