The interactive effects of performance evaluation leniency and performance measurement precision on employee effort and performance

Research shows that in practice, supervisors without any constraints to their compensation setting behavior often tend to provide lenient performance evaluations to employees. Economic theory criticizes this outcome because leniency is thought to provide lower motivation to exert effort for low and medium as well as high performers. To provide incentives for employees to exert effort, economic theory calls for a distributed compensation approach that ensures employee performance differences lead to compensation differences. This call ignores insights from psychology and specifically from social determination theory (SDT). Using a real-effort experiment, we find that lenient evaluations lead to lower performance than distributed evaluations when performance is measured precisely. However, lenient evaluations lead to higher effort and performance than distributed evaluations when employee performance is measured imprecisely. We show, using a process model, that the positive effect of leniency for imprecise performance measurement on employee performance results from higher levels of task enjoyment, consistent with SDT. Our findings suggest that organizations need to consider the leniency of compensation as well as performance measurement precision jointly to achieve optimal employee effort and performance.