How the realized measure of a worker’s performance affects their perception of their compensation

Abstract

Workers often struggle to fully appreciate the quality of their performance. Rather, workers use the measure of their performance that is realized from their firm’s measurement system, which is typically imperfect, as a guide to do so. This study examines how workers’ perceptions about their compensation depend on the realized measure of their performance. Our experimental results suggest that before performing a task, workers display a fairness sentiment whereby they expect compensation to decrease as the measure of performance suggests worse performance. However, once the measure of their performance is realized, workers’ fairness sentiments weaken, and they request higher-than-expected compensation, with this deviation increasing as the realized measure worsens. Thus, a realized measure of performance distorts workers’ perceptions about their compensation and their fairness sentiments. This suggests that the benefits of perceived “fair” worker compensation are less likely to occur once workers have realized measures of performance.