The Determinants and Performance Effects of Supervisor Bias

This paper examines the determinants and performance effects of leniency and centrality bias. An empirical analysis of a compensation plan for low-level employees with both objective and subjective performance measures leads to two key results. First, the causes of supervisor bias include: employee performance, the difference between the organizational level of the supervisor and the employee, the financial position of the firm, the duration of the employee-supervisor relationship, and supervisor characteristics. This indicates that supervisors take their own personal preferences into account when appraising employee performance. Second, supervisor bias affects future employee incentives. Contrary to previous assumptions, the results show that biased performance ratings can have both positive and negative effects on incentives. Leniency bias positively affects performance improvement, while centrality bias has a negative effect on performance. Acknowledgements: I want to thank Stan Baiman, Antonio Davila, Henri Dekker, Chris Ittner, Frank Moers, Fernando Penalva, Joan Enric Ricart, Stan Veuger and seminar participants at the 2006 Global Management Accounting Research Symposium in Copenhagen, the 2006 AAA Annual Meeting in Washington D.C., the University of Pennsylvania, the London School of Economics, the University of Colorado at Boulder, the University of Illinois at UrbanaChampaign, the London Business School, the Harvard Business School and the University of Southern California for their comments and suggestions.