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Are Employee Self-evaluations Helpful or Harmful When Employees Are Unaware of Their Marginal Contribution to Firm Welfare?

This study examines whether eliciting self-evaluations from employees in a compensation setting context leads to higher or lower employer welfare when employees are not aware of their marginal contribution to firm welfare. The literature suggests that providing employees with a voice in the compensation setting process leads to greater employee satisfaction with compensation and higher productive employee effort due to such factors as increased employee perception of procedural fairness. Contrary to this position I propose that providing employees a voice in the compensation setting process when employees are not aware of their marginal contribution to firm welfare has the unintended effect of leading to less employee satisfaction with compensation, which results in lower employer welfare. Such an effect is due to self-evaluations leading to greater employee overconfidence in their performance resulting from a motivated reasoning process. I present experimental evidence from comparing a control condition without self-evaluations to three different self-evaluation reporting conditions, finding evidence consistent with the premise that self-evaluations lead to lower employer welfare. Data on employee perception of performance when self-evaluations are elicited supports the proposed motivated reasoning process. My findings show a cost to self-evaluations that thus far has not been sufficiently considered in the literature and provide an explanation for why this cost occurs.