Subjective versus Objective Incentives and Employee Productivity

A central challenge facing organisations is how to incentivise employees. While high-powered incentives can motivate effort, they can lead employees to distort effort away from non-incentivised outcomes. This is one reason most performance incentives allow for manager subjectivity. However, this subjectivity can introduce new concerns, including favoritism and bias. 

This study examines the effect of subjective versus objective performance incentives on employee productivity using a randomised controlled trial in 234 Pakistani private schools. The study estimates the effect of two performance raise treatments versus a control condition, in which all teachers receive the same raise. The first treatment arm is a “subjective” raise, in which principals evaluate teachers; the second treatment arm an “objective” raise based on student test scores. 

The study shows that both subjective and objective incentives are equally effective at increasing test scores, however, objective incentives decrease student socio-emotional development. Furthermore, it shows that these effects are likely driven by the types of behavior change we observe from teachers during classroom observations. Finally, the study investigates the mechanisms of these effects through the lens of a moral hazard model with multi-tasking.