INFORMATION AND INCENTIVES IN RETAIL SALES

Abstract

I examine how managers mitigate the side effects of the overly complicated performance evaluation system in the context of a high-end retail industry. The standard performance evaluation system in the industry has evolved to include multiple performance measures. The detailed measures can incentivize employees to perform multiple performance-relevant activities, but they inevitably increase the complexity of the performance evaluation system. The complexity increases the risk of information overload of the employees, decreasing judgment quality and potentially decreasing their performance. Drawing on psychology literature, I postulate two factors moderating the relationship between information overload and performance: 1) disaggregated feedback provides detailed information on each category of performance measures and compensate for each performance measure rather than for overall performance level; 2) feedforward informs employees about how their actions affect their compensation. Both factors mitigate the negative performance effect of information overload by clarifying causality embedded in the complex performance evaluation system to employees. I conduct two field experiments that implement the disaggregated feedback and the feedforward policies for sales outlets of a high-end retail firm, respectively, and examine whether the policies mitigate information overload problem and improve performance. I find that the treatment group exhibits improvement in performance, suggesting that disaggregated feedback and the feedforward reduce information overload.