Talking About Performance or Paying for It? A Field Experiment on Performance Reviews and Incentives

We investigate the causal effect of performance pay and conversations about performance in 224 stores of a retail chain implementing a field experiment with a 2x2 factorial design. In the performance pay treatments, managers receive a bonus, which is a simple linear function of the profits achieved above a threshold value. In the performance review treatments, managers have to report their activities undertaken to increase profits in regular meetings. We find that whereas performance pay did not yield significant profit increases, performance review conversations increased profits by about 7%. However, when additionally receiving performance pay, the positive effect of performance reviews vanished. We provide evidence from surveys and meeting protocols that performance pay changes the nature of conversations, leading to a stronger self-reliance of store managers, which undermines the value of the performance reviews. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: Funding from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy [Grant EXC 2126/1 390838866] is gratefully acknowledged. Supplemental Material: Data and the online appendices are available at https://doi.org/10.1287/mnsc.2022.4431 .