To tell or not to tell: the incentive effects of disclosing employer assessments

Alexandra Lilge () and Abhishek Ramchandani ()
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Alexandra Lilge: Leibniz Universität Hannover
Abhishek Ramchandani: The University of Texas at Austin

Review of Accounting Studies, 2024, vol. 29, issue 3, No 22, 2832-2870

Abstract: Abstract Should employers disclose their assessments of their employees? Popular managerial advice suggests that telling employees that they are assessed to have high potential leads to greater effort and engagement, boosting firm profits. However, some employers still choose to withhold employee assessments. What explains this paradoxical observation? We show that disclosing a positive assessment to an employee increases his incentive to appear successful. Success can be achieved by working hard or by misreporting. If the internal controls are sufficiently weak, the employee excessively substitutes misreporting for effort, thereby decreasing firm profits. Consequently, our model predicts that employers withhold assessments when internal controls are weak. Other predictions are that, all else equal, employers with an experienced human resources (HR) function will be more likely to disclose assessments, and employers who hire from “prestigious” target schools will be less likely to disclose assessments.

Keywords: Talent management; Potential assessment; Internal controls; Misreporting (search for similar items in EconPapers)
JEL-codes: D21 D23 D82 D86 J24 J53 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-023-09769-6

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