The effect of bias in relative performance appraisal

Abstract

This study examines how managers’ biases affect the performance of their employees under relative performance appraisal. First, in case that performance cannot be measured quantitatively (as for administrative work), given a small reward, the findings suggest that the manager’s bias increases the employees’ level of effort and given a large reward, the bias decreases efforts. Examining cases over two periods, usually, bias toward an employee who performed better in the first period increases the total profit. Moreover, a bias leads to lower efforts in cases where performance can be measured quantitatively (as for sales). Furthermore, by establishing harsh conditions such as dismissing employees with lower evaluations, overall efforts may be increased by a bias against an underperforming employee.  The overall findings suggest that the organizational performance improves through implementing a bias toward better performing employees.