What can firms can do to minimize employees’ potentially dysfunctional behaviour, in particular, their tendency to manipulate their performance measures (show better performance than they actually achieved)?
New research from ESSEC Business School shows that peer monitoring is indeed effective but that its effect depends on the type of information that is observable to peers.
Stefan Linder, Associate Professor and Co-Head of the Accounting & Management Control Department at ESSEC, and Sabra Khajehnejad (Assistant Professor at KU Leuven and former Ph.D. student at ESSEC) conducted two empirical studies among 219 and 268 mid- and lower-level managers in the United Kingdom to understand whether employees’ perceived effort and performance observability to peers affect their decision to manipulate performance measures.
They found that employees engage in lower performance measure manipulation when they see their effort (input) observable to their peers but they engage in greater performance measure manipulation when they see their performance (output) observable to peers. More importantly, the effect of observability of each type of information on performance measure manipulation depends on the observability of the other type of information.
The findings suggest that in environments where employee effort is hard to measure and observe by peers, knowing that your performance is observable to peers makes you more likely to manipulate how well you appear to be performing your job because of increased pressure to perform. Overall, the more you perceive your efforts to be clear for colleagues to see, the less performance pressure you experience when you perceive your performance (output) is observable to them and the more likely you see the chance that your peers will realize if you manipulate your performance measures.
The findings suggest that firms benefit if they use the same information policy regarding sharing effort information and performance information among peers. Performance measure manipulation is minimum when both types of information are observable or neither of them are observable to peers.
According to Linder, with these findings highlighting the complementary nature of perceived effort and performance visibility, practices around sharing information about employee effort or performance should go hand-in-hand.
“Firms, and in particular ones that rely on peer monitoring, should consider what type of information is observable to peers given the work and/or reporting setting in place and what changes in the work or reporting design might be necessary,” Khajehnejad notes.
“This research offers evidence that, in order to minimize performance manipulation, observability of both performance and effort to peers should both be taken into account,” Linder adds.