The Impact of the Choice of Performance Evaluation System on the Magnitude of the Outcome Effect

Abstract

This dissertation examines whether the magnitude of the outcome effect is impacted by the type of performance evaluation system (subjective versus formula-based). The outcome effect is a phenomenon that occurs when an evaluator overemphasizes the outcome of a decision and ignores essential information that is available to the evaluator (e.g., market information, information about the decision-making process). This outcome focus leads to a more positive (negative) performance evaluation when the outcome exceeds (fails to meet) expectations. Prior studies have not examined whether the type of evaluation system (formula-based versus subjective) has an impact on the magnitude of the outcome effect. In a formula-based evaluation system, outcome measures are pre-weighted and an overall variance measure is easily calculated. Conversely, there are no predefined weights or overall variance measures in a subjective system. Instead, evaluators weight the importance of outcome information themselves. For this dissertation, I conducted an experiment in which 99 business professionals enrolled in a MBA program evaluated the performance of a retail store manager. Their evaluation was based on information that they received about the manager's decision, along with situational factors that may have impacted the decision outcome. The results demonstrate that although the magnitude of the outcome effect was larger when a formula-based system was employed relative to a subjective system, this difference was not statistically significant. Nonetheless, this study provides initial evidence that managers using formula-based evaluation systems should be particularly aware of the outcome effect when conducting performance appraisals. In addition, this study documents the perceived controllability of four financial and four non-financial measures that are commonly employed to evaluate performance in the retail industry. As hypothesized, the non-financial measures were perceived to be more controllable than the financial measures. This suggests that non-financial measures should be included in the mix of performance measures used in a performance appraisal system.