Lake Wobegon on the Job
By Bryan Caplan
Neat stuff from Baker, Jensen, and Murphy’s “Compensation and Incentives: Practice vs. Theory” (Journal of Finance, 1988):
The lack of financial incentives reported by Medoff and Abraham  and summarized in able I is surprising, but even more surprising is the result that supervisors tend to assign uniform performance ratings and tend not to assign poor performance ratings. Only .2 percent of the 4,788 employees in Company A received the lowest rating; 94.5 percent were rated “Good or “Outstanding”. None of the 2,841 Company B employees received an “Unacceptable” or “Minimum Acceptable” rating, and only 1.2 percent received a rating of “Satisfactory”; 95 percent of the Company B employees are rated “Good” or “Superior”.
The general reluctance of managers to give poor performance evaluations to employees is puzzling but consistent with well-documented evidence that most people believe their performance is better than average. Of several studies cited in Meyer , one indicates that 58 percent of a sample of white-collar clerical and technical workers rated their own performance as falling within the top 10 percent of their peers in similar jobs, 81 percent rated themselves in the top 20 percent. Only about 1percent rated themselves below the median. Another study of 1,088 managerial and professional employees found an even stronger bias: 47 percent rated their own performance in the top 5 percent, 83 percent rated their performance in the top 10 percent, no one rated their performance below the 75th percentile.
The biased perceptions of individuals regarding their own performance may explain why supervisors appear to have a strong aversion to giving subordinates poor evaluations. There will be more dissatisfaction induced by telling someone that he or she is in the bottom 20 percent than there will be satisfaction induced by giving a top-20-percent rating. Telling everyone that they are average will make almost everyone unhappy. Forced-ranking systems will therefore generate considerable conflict in organizations. Similarly, pay-for performance systems that provide large rewards for good performance and small rewards for mediocre performance will be avoided since these schemes force managers to give poor evaluations to a large number of employees. Visible rewards will not be granted for superior performance unless there is significant incentive for superiors to undertake the unpleasant task of telling subordinates that they are poor or even average performers.
Would my pet proposal for improving student evaluations make any difference here?