Explain the relationship between performance management and incentives using the key findings from the three articles attached to this question. The word limit should be 1500-2000.

The Effects of Biasing Performance Measurement Systems onIncentives and Retention Decisions

Introduction

The Article discusses about a principal-agent scenario where the principal uses a performance measurement system for retention choices as well as for incentive choices. The degree and kind of bias in the system are chosen by the principal, who decides whether the performance report is lenient, neutral, or strict, in comparison to unobservable real result. It is demonstrated that stringency reduces moral hazard when the report is solely used for incentive purposes. Incorporating a fit assessment function into a system fulfilling an incentive function might enhance the requirement of strictness, as more robust incentives can also tangentially enhance retention choices.

Findings:

Agency theory has long recognized the importance of choosing appropriate performance measures to generate the right organizational incentives. Considerable advance on how to prioritize performance metrics according to factors like informativeness and signal-to-noise ratio can be found in this literature . Research indicates that biased performance evaluation may have favorable incentive effects. Organizations however utilize performance assessment systems for more than just assigning tasks and offering incentives. They also use them to determine employee retention and promote employees. Selecting a system with a particular function or decision in mind may have an impact on how effective is It for other roles or decisions.

It is demonstrated that how the moral hazard issue is mitigated by a strict performance evaluation system. Strictness, however, raises the likelihood of negative report. As a result, the principal fires the agent more frequently when using a system to decide whether to keep them on staff. It is advantageous to fire “bad fit “agents more frequently, while it is expensive to fire “good-fit” agents. Putting aside incentive concerns, this tension generates a demand for indulgence from the standpoint of fit evaluation. This would appear that the fit assessment role would modify the need for stringency when a performance evaluation system fulfills both incentive and fit evaluation responsibilities.

Proper data allows principal to better retain fit-agents while also making it easier (but more expensive) to provide necessary effort incentives. It is suggested that the principal must provide incentives to the agent so that they would work in a way that increase the company’s predicted production (incentive provision) and decrease output variation (decision making). Bias is only needed when motivating variables are present, they are not necessary in the absence of effort reward considerations. (Cremier, 1995)

Types of systems.

1. Neutral system: In a neutral system, the chances of both positive and negative reports that the system generates over a given time span match the probability of the actual outcomes.

1. Stringent system: Compared to the actual outcome probabilities, a tight system reduces (increases) the likelihood of positive or negative reporting within a given time frame.

1. Lenient system: Compared to the genuine result probabilities, a lenient system raises (decreases) the likelihood of favourable (unfavourable) reports within a given period.

Making the system more lenient increases the likelihood of incumbent employee being retained. But by requiring more work, tightening the system can also make it more likely that a high productivity agent will stay in the system. It is found that the way the bias influences the probability of keeping the agent determines how much the fit evaluation role emphasizes or lessens the need for stringency. In particular, stringency has two effects on the probability of retention. On one hand, it induces greater effort and thereby increases the likelihood of a favorable outcome on the other hand, all else constant, stringency decreases the likelihood of a favorable report.

The talent retention function is subordinate to incentive role in environments where the nature of work is routine and talent variations have no bearing on productivity. Examples include, service applications involving routine maintenance work and labor intensive, mass production operations like those in garment sector. Stringency- for example, setting a greater production or performance bonus strategies and raising relative incentive payments- benefits organizations in these situations, and that talent or organizational fit are not as important. At top management levels, performance reports apso pay a relatively limited role in talent retention because companies invest a lot of time an energy in finding ideal candidate.