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ABSTRACT: This study investigates the effects of relative performance feedback and incentive compensation method on performance. We examine whether the presence and the content of relative performance feedback have different effects on performance when participants are compensated via a tournament or an individual incentive scheme. Our experimental results show a disordinal interaction between incentive scheme and feedback. Specifically, providing relative performance feedback improves the mean performance of participants compensated under an individual incentive scheme regardless of the precision or specific content of the feedback. In contrast, providing relative performance feedback deteriorates the mean performance of participants compensated under a tournament incentive scheme, but only if the feedback is sufficiently precise. Supplementary analysis suggests that this deterioration in performance is due to ineffective task strategies rather than reduced effort. We also find that in the absence of relative performance feedback, participants compensated under a tournament incentive scheme perform better, and their performance improves to a greater extent over time, compared to participants compensated under an individual incentive scheme. These results have implications for the design of accounting, control, and reporting systems in firms.
Hannan et al. (Tue,) studied this question.