The Effects of Explicit Versus Implicit Targets on Worker Performance, Reciprocity, and Trust, and the Role of Peer Benchmarking

Abstract

We examine the relative effects of managers using binding targets to reward workers before observing their performance (explicit targets) versus managers deciding whether to reward workers after observing their performance (implicit targets) in the common setting where managers cannot directly observe workers’ effort and ability. In a multiperiod interactive experiment, we find that workers’ performance, positive reciprocity, and trust toward their managers are lower under explicit targets than implicit targets. Evidence suggests that workers under explicit targets withhold effort because managers often set ineffective targets, while workers under implicit targets provide close to maximum effort because they trust managers to reward them accordingly. Importantly, providing managers with peer performance benchmark information improves the effectiveness of explicit targets by decreasing target variance and increasing workers’ perceived fairness of the target-setting process. Our results highlight how the type of performance targets and peer performance benchmarking can motivate worker performance and build trust.