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Relative Performance Tournaments

In: Business and Management

Submitted By forteng
Words 1601
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Universities aim to increase their junior staff’s productivity by incentivising effort. Junior staff is subject to a relative performance tournament; staff members who perform relatively better than their peers will be rewarded with a prize; a raise and tenure in this case. Studies have shown that relative performance tournaments result in the participants exerting more effort, ultimately increasing productivity (Nalbantian & Schotter, 1997). Nevertheless, there are several detrimental factors to be considered. Relative Performance tournaments are costly and difficult to monitor. Furthermore, they can undermine work ethic and sabotage cooperation (Holmlund, 2009). Finally, faculty members could neglect important objectives of their job to focus on parts that would benefit their performance evaluation. Consequently, it is crucial to realize that while relative performance can increase productivity among junior faculty, its disadvantages can potentially undermine the university’s overall objectives.

The key element of relative performance tournaments is that participants are evaluated “on the basis of their performance relative to their peers” (DeVaro, 2006, p. 5). Potentially receiving a raise and tenure dependent on their relative performance therefore enhances competitive behaviour as not all participants can win. Consequently, relatively better performance is incentivised. Müller and Schotter’s as well as Nalbantian and Schotter’s studies show that relative performance contract do increase productivity (Müller & Schotter, 2003)(Nalbantian & Schotter, 1997). This is beneficial to a university as academic institutions operate under cost-pressure as well and obtaining good performance from inexpensive junior faculty members proves very valuable. Nalbantian and Schotter furthermore point out that competition among peers increases group effort (Nalbantian & Schotter, 1997). Dohmen and Falk’s study further supports the argument; concluding that “productive workers are more likely to self-select” (Dohmen & Falk, 2011, p. 558) into variable-payment schemes; variable payment contracts result in participants exerting more effort; consequently increasing performance. Less-productive workers choose fix-payment schemes instead (Dohmen & Falk, 2011). Therefore, relative performance tournaments can be used as an efficient tool to attract production. Overall, these studies demonstrate that relative performance tournaments can successfully stimulate higher effort levels and therefore serve the objective of increasing productivity.

Despite increasing overall performance levels, relative performance evaluation cannot only be seen positively as it can result in a variety of issues. Effective relative performance evaluation is dependent on efficient and appropriate monitoring of results. However, monitoring activities are expensive. Nalbatian and Schotter observe that participants only exert high levels of effort if they are monitored appropriately (Nalbantian & Schotter, 1997). Without constant monitoring, Nalbatian noticed increasing fluctuation among effort levels (Nalbantian & Schotter, 1997). One could assume that without monitoring, effort levels would eventually decrease thus removing the benefits of relative performance tournaments. Holmlund touches upon another potential issue of the contractual arrangement as he points out that measuring junior faculty’s performance in an academic institution is difficult to measure, as the “most relevant outcome” would be “how much students have learned from a course” (Holmlund, 2009, p. 9). Therefore, one could argue that performance evaluation in an academic institution depends too much on criteria that are hard to evaluate and therefore cannot be as effective. Furthermore, Holmlund points out that junior faculty members are often evaluated based on their students’ evaluation. However, “student ratings of teachers are highly imperfect measures” (Holmlund, 2009, p. 14). Consequently, it is unfair to base faculty’s evaluation on student ratings. Difficulties in monitoring and measuring performance can prove to be detrimental to the academic institution and reduce the positive effects of increased effort levels.

Academic studies have also shown that relative performance tournaments can negatively influence working culture and environment, as they can be harmful to teamwork and cooperation. However, these two features are highly valued in academic institutions and greatly benefit overall research and teaching. Holmlund’s study points out that “workers might find it advantageous to engage in sabotage in order to reduce the likelihood that a competitor wins the promotion contest” (Holmlund, 2009, p. 10). He adds that the greater the prize and more substantial the salary discrepancy is, the more likely dysfunctional outcomes are. This shows that the higher the stakes are, the more likely participants are to engage in opportunistic behaviour. Neglecting of teamwork and cooperation could be incentivised as a result to make peers look relatively worse. Again, this is contradicting to an academic institution’s overall objective. Furthermore, Freeman and Gelber raise the concern that relative performance tournaments incentivise “not only ... legitimate effort but also … misreporting and cheating ” (Freeman & Gelber, 2010, p.152). This further undermines the university’s objectives and could damage its credibility, which can negatively influence the institution’s reputation. Müller and Schotter’s study adds another negative aspect to relative performance tournaments. Their study shows that the contractual structure promotes the widening of the gap between high and low ability workers (Müller & Schotter, 2003). They predict that this widening results in demotivated low ability workers. In the case of academic institutions, one could assume that demotivation might eventually lead to low ability junior staff members to quit their job. Consequently, competition for the high ability participants would decrease and upon realizing this their effort levels are likely to fall as well. This shows that relative performance evaluation can lead to frustration and dissatisfaction at the workplace, which could potentially have far reaching influences within the institution.

Holmlund specifies another problem of applying relative performance tournaments to academic institutions. Standard agency theory “portrays individuals as agents who dislike work” (Holmlund, 2009, p. 10) and are only motivated by the prize. However, one could argue that this is not applicable to junior faculty members. These individuals are motivated by more than monetary rewards; their drive is partly based on intrinsic rewards and other benefits, such as “publication in top journals… and awards which do not necessarily involve money” (Holmlund, 2009, p. 9). One could assume that monetary benefits are more incentivising in other working environments, e.g. in the investment sector. However, academics potentially are more motivated by intrinsic rewards. Consequently, a potential raise and promotion might not be as important as recognition among their peers and teaching community. Adding to these shortcomings, those junior faculty members who are highly motivated by the prize might shift their focus towards performing well in areas that are important for their evaluation. This can result in them neglecting areas that are vital to the academic institution but are not subject to relative performance evaluation. This becomes especially important under the consideration that junior faculties’ performance often is compared across faculties. That makes it increasingly more difficult to objectively compare individual’s performance, as some academic areas might require the participants to exert more effort in order to achieve the same results. Furthermore, Dohmen and Falk point out that relative performance tournaments attract a fairly similar type of employee; women are more attracted to less risky fixed payment contracts (Dohmen & Falk, 2011). Therefore, relative performance tournaments could potentially lead to a less diverse group of faculty members. This can be argued to be detrimental when applied to an academic institution’s setting, as the importance of bringing together a variety of viewpoints cannot be underestimated when striving to produce teaching and research of the highest level.

To conclude, there is substantial evidence that relative performance tournaments incentivise the exertion of higher levels of effort among participants. This indisputably leads to increased productivity, as participants are more motivated to perform well relative to their peers in order to win the prize. Consequently, overall team performance increases as well (Nalbantian & Schotter, 1997). However, relative performance tournaments also result in a variety of features which can be highly detrimental to academic institutions’ overall objectives. Firstly, these tournaments are only efficient and reach the desired effect when subjected to high levels of monitoring. Monitoring however is difficult due to the nature of academic work. Furthermore, monitoring is expensive and the academic institution would be wasting resources, which could be used to enhance the student’s experience. Secondly, work ethic and environment can be negatively impacted. Sabotage and cheating might be rewarded and therefore encourage opportunistic behaviour (Müller & Schotter, 2003). Thirdly, simply relying on the contractual structure to incentivise effort disregards the importance of intrinsic motivation. Intrinsic motivation is of vital importance to academic institutions as it results in high quality work and is one of the main motivating factors for academics. Lastly, relative performance tournaments potentially prohibit a diverse workforce as the contractual arrangements attract individuals with fairly similar preferences. These factors can be very unfavourable to an academic institution’s overall objectives and might result in problems in the long run. Therefore, it is crucial for a University to be aware of these disadvantages in order counteract potential negative effects of relative performance tournaments.

Word Count: 1442

Reference List
DeVaro, J. (2006). Strategic promotion tournaments and worker performance. Retrieved [March 11th, 2014], from Cornell University, School of Industrial and Labor Relations site: articles/108/
Dohmen, T., & Falk, A. (2011). Performance pay and multidimensional sorting: Productivity, preferences, and gender. The American Economic Review, 101(2), 556-590.
Freeman, R. B., & Gelber, A. M. (2010). Prize structure and information in tournaments: Experimental evidence. American Economic Journal: Applied Economics, 2(1), 149-164.
Holmlund, B. (2009). Incentives in business and academia, Working Paper, Department of Economics, Uppsala University, No. 2009:9, urn:nbn:se:uu:diva-105990
Müller, W., & Schotter, A. (2003). Workaholics and drop outs in optimal organizations. Tilburg University.
Nalbantian, H. R., & Schotter, A. (1997). Productivity under group incentives: An experimental study. American Economic Review, 87(3), 314-341.
Schotter, A., & Weigelt, K. (1992). Behavioral consequences of corporate incentives and long-term bonuses: An experimental study. Management Science, 38(9), 1280-1298.

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