Talk or Pay? - a Field Experiment on Bonuses and Performance Reviews

Abstract: We investigate the causal effect of performance reviews – that is structured meetings between a supervisor and subordinate to discuss performance – and performance pay as well as their interplay implementing a 2x2 field experiment in a retail chain. In the performance pay treatments store managers receive a bonus for profit increases. In the performance review treatments store managers have regular meetings with their supervisors discussing their activities to increase profits. We find that performance reviews raise profits by 5%-8%. However, when additionally receiving performance pay the positive effect of reviews vanishes. Analyzing a simple extension of Bénabou/Tirole (2006), we rationalize this effect formally and provide empirical evidence that the use of bonuses changes the nature of review conversations.