This project examined how peer evaluations can be incorporated into incentive compensation without distorting performance assessments or weakening employees’ motivation. Using a controlled experiment, it compared alternative ways of designing and applying peer-based bonus proposals and identified conditions under which delegating bonus allocation to teams can improve both evaluation quality and effort.
Organisations frequently use peer evaluations when determining incentive compensation, yet it remains unclear how such evaluations should be designed and implemented to produce accurate assessments and motivate effort. This project investigated these questions through a controlled laboratory experiment in which team members submitted proposals for allocating performance bonuses.
The study compared peer evaluations that either included or excluded the evaluator from the proposed bonus allocation. It also distinguished between discretionary use, where a manager determined the final allocation, and formulaic use, where bonuses were allocated according to the average of the team members’ proposals.
The findings show that self-excluding proposals were less distorted than self-including proposals, irrespective of how they were used. However, they increased effort only when bonus allocations were determined formulaically by the team. When managers retained discretion, biases in managerial decision-making offset these benefits. Overall, the results demonstrate how the design and use of peer evaluations affect both the quality of evaluations and employee motivation, and they highlight the potential advantages of delegating bonus allocation to teams through formulaic procedures.
