Evaluating Managerial Performance: Mitigating the "Outcome Effect" [*]

Evaluating performance is an important function in organizations and few decisions are made in organizations that are not subject to some sort of performance evaluation. Although it is possible in some jobs to obtain objective performance information, more typically this is not the case. Instead, organizations frequently rely upon some type of subjective evaluation of performance which, by the very nature of being subjective, is criticized for having errors, biases, and inaccuracies (Borman, 1991). One such bias commonly encountered in evaluations is the "outcome effect," which is a systematic overweigh ting of outcome knowledge by the evaluator in assessing a manager's performance (Hawkins and Hastie, 1990). Thus, when the outcome is positive (negative), evaluators tend to evaluate the manager positively (negatively), regardless of the actual appropriateness of the decision resulting in the outcome. Hence, organizations often end up evaluating managers based upon outcomes over which they may not have contro l. This research first shows the outcome effect and also examines whether this effect can be mitigated during performance evaluation. Organizational members responsible for evaluation should be aware of the outcome effect and how to mitigate it since they influence how managers experience organizational phenomena and learn from that experience. Improper evaluation undermines its influencing and learning roles. The remainder of this article is organized as follows. The next part discusses prior research and develops the hypotheses. The subsequent parts, in order, describe the research method, present the results, and summarize the implications of this research. Theory and Background Evaluation, Information Asymmetry and Cognitive Process. An evaluator cannot observe all aspects of performance of a manager/decision maker (hereafter referred to as DM) because of conflicting demands on the evaluator's attention, or simply because of physical constraints (DeNisi, 1996). Hence, there is always information asymmetry between the evaluator and DM, and when the evaluator has less information than the DM, his or her ability to evaluate the DM's performance accurately is limited (Hershey and Baron, 1992). If, however, this information asymmetry can be reduced, an evaluator can take into consideration DM's information about potential outcomes that existed at the time of the decision to evaluate it (Hershey and Baron, 1992). Three general approaches were adopted by prior research to reduce the information asymmetry between the evaluator and the DM in order to eliminate the outcome effect. However, for reasons discussed below, the applicability of these approaches in the organization remains an open question. The first approach attempts to increase the involvement of the evaluator in the DM's decision-making process. Brown and Solomon (1987) reduced the outcome effect on performance evaluation by prior advisory involvement on the part of the evaluator. Brown and Solomon (1993), however, found that only prior involvement with an ex-ante agreement between the evaluator and DM on the course of action to be adopted by the DM reduced the outcome effect. Finally, Fisher and Selling (1993) found that an ex-ante correct outcome prediction made by the evaluator reduced the outcome effect. But in each of these cases, the evaluator is contracting on foresight or an occurrence predicted to happen. Thus, the outcome effect is reduced because the evaluator is inclined to remain committed to the initial outcome agreed upon based on the outcome predicted, an example of escalation of commitment bias (Bazerman, 1994). Research shows that subjects who choose a particular course of action subsequently filter information selectively to justify remaining committed to that course of action (Caldwell and O'Reilly, 1982). The second approach to mitigate the outcome effect is to make the decision process of the evaluatee observable to the evaluator. …