Artikel Pertemuan 13 - Isu Isu

THE ACCOUNTING REVIEW American Accounting Association
Vol. 93, No. 3 DOI: 10.2308/accr-51890

May 2018
pp. 83–103
Promotion, Relative Performance Information, and the

Peter Principle
Eric W. Chan
The University of Texas at Austin
ABSTRACT: I examine the effects of providing workers with relative performance information (RPI) on employers’
promotion decisions and the impact of those decisions on worker performance. In my experimental setting, the job
after promotion requires higher-level abilities than the current job. I find that workers increase their effort to improve
their current job performance after a promotion opportunity is announced because they expect this to increase their
chances of promotion, even though the new task requires higher-level abilities. Moreover, because employers
anticipate that workers who have RPI will react negatively if they see that the best current job performer is not
promoted, employers promote the best current job performer, rather than the worker best suited for the next job,
more often when workers have RPI than when they do not. Consistent with the Peter Principle, I find that when
workers have RPI, the promoted worker’s performance is lower after promotion because the promoted worker lacks
the ability to perform the new job well. Finally, in a supplemental experiment, I find that providing workers with
feedback on their abilities to perform the next job, in addition to current job RPI, improves the effective sorting of
workers, but it comes at the cost of reduced promotion-based incentives. My results suggest that, notwithstanding
the benefits documented in previous studies, RPI also imposes potential costs that firms should take into account
when deciding whether to provide workers with RPI.
Keywords: promotion; incentives; relative performance information; fairness; performance.
JEL Classiﬁcations: M41; M51; M52.

Data Availability: Contact the author.
I. INTRODUCTION
P
romotions serve two important and distinct roles in organizations (Milgrom and Roberts 1992, 364). The first is to
motivate workers (incentive role), and the second is to sort workers into jobs that best match their abilities (sorting role).
The incentive and sorting roles may conflict when the nature of the tasks changes between job levels, such that workers’
performance in the current job is not fully informative about their performance in the next higher-level job. In such cases, the
best performer at one job level is often not the best candidate for the next job.
This situation occurs quite often, such as when salespersons are promoted to sales managers, engineers are promoted to
project managers, and teachers are promoted to school administrators. In such cases, employers must decide whether to
promote the worker with the best current job performance or the worker with the highest ability to perform the next job.1 Such
This study is based on my dissertation. I thank my dissertation chair, Don Moser, and committee members Willie Choi, Shane Dikolli, Harry Evans, Adam
Presslee, and Dhinu Srinivasan for their guidance and support. I also thank Eddy Cardinaels (editor), two anonymous reviewers, Robert Bloomfield, John
Brozovksy, Pablo Casas-Arce, Vicky Hoffman, Steven Kachelmeier, William Kinney, Lisa Koonce, Robert Libby, Eldar Maksymov, Michael Majerczyk,
Robert Marquez, Lillian Mills, Frank Moers, Mark Nelson, Steve Smith, Ivo Tafkov, Tyler Thomas, Michael Williamson, Brian White, Alex Woods, Flora
Zhou, participants at the 2015 ABO Research Conference, 2016 MAS Midyear Meeting, and 2016 GMARS, workshop participants at Arizona State
University, University of California, Davis, Cornell University, Georgia State University, University of Pittsburgh, The University of Texas at Austin,
Virginia Polytechnic Institute and State University, and The College of William & Mary for their helpful comments. I also thank Xinyu Zhang for her
excellent research assistance. I gratefully acknowledge the financial support provided by the Institute of Management Accountants Research Foundation
Doctoral Student Grant, the Fryrear Doctoral Fellowship, and the Mervis Doctoral Fellowship.
Editor’s note: Accepted by Eddy Cardinaels, under the Senior Editorship of Mark L. DeFond.
Submitted: June 2015
Accepted: August 2017
Published Online: September 2017
1
In this study, the term ‘‘ability’’ represents a relatively fixed individual trait that cannot be easily improved through training and learning, and it affects
one’s effectiveness in performing a certain task (Bonner and Sprinkle 2002).
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promotion decisions are important because they have significant long-term effects on workers’ wages and firm productivity.
The purpose of my study is to examine the effects of providing workers with relative performance information (hereafter, RPI)
on employers’ promotion decisions and the impact of those decisions on worker performance.
Workers often receive RPI either formally from the employer (e.g., Nordstrom, Lorenzi, and Hall 1991; Gino and Staats
2011) or informally by observing their peers (Mas and Moretti 2009). Prior research finds that RPI has a motivational effect on
workers (Hannan, Krishnan, and Newman 2008; Tafkov 2013). However, I predict that an overlooked consequence of
providing workers with RPI is that it allows workers to use RPI to judge the fairness of their employer’s promotion decisions,
which, in turn, will affect the employer’s promotion decisions themselves.
I examine this issue within a setting where employers do not pre-commit to a promotion rule. Various articles in the
financial press and practitioner journals indicate that firms seldom communicate to workers the criteria for promotion and
workers’ promotion prospects (e.g., Kuehner-Hebert 2015; Beeson 2009; Woog 2017; Near 1984). Beeson (2009) explains that
‘‘in most organizations, promotions are governed by unwritten rules’’ that leave workers in the dark about the skills required for
promotion.
When workers are uncertain about their employer’s promotion rule, they will establish their own expectations about who
should be promoted. Based on prior research on deservingness, I expect workers to believe that it is fairer for the employer to
promote the best current job performer, rather than the worker best suited for the next job, because workers’ current job
performance is controllable, but their abilities for the next job are not (Feather 1999a, 1999b).
When workers have RPI, they can identify the best current job performer. If workers who are not promoted see that the
promoted worker was not the best current job performer, then they are likely to perceive the employer’s promotion decision to
be unfair and react negatively (Fehr, Goette, and Zehnder 2009; Fehr and Schmidt 1999). I predict that employers will
anticipate this reaction and promote the best current job performer to avoid such negative worker reactions even when the
promoted worker’s abilities do not best match those required for the new job.
In contrast, when workers do not have RPI, they lack a clear basis on which to judge the fairness of the employer’s
promotion decision. Because workers cannot identify the best current job performer, they are less likely to react negatively
regardless of which worker is promoted. In such cases, the employer can promote the worker with the highest ability to perform
the next job. In summary, I predict that providing workers with RPI could lead to the ineffective sorting of workers, resulting in
the Peter Principle—the observation that workers are often promoted to jobs for which they are not well suited (Peter and Hull
1969).
I conduct an experiment using a setting in which employers and workers interact over multiple work periods. Workers
perform tasks that generate revenue for their employer, who, in turn, pays workers a fixed salary plus an output-based bonus.
There are two levels of workers: higher-level workers perform a more complex task and earn higher pay than lower-level
workers.
I manipulate whether workers have RPI using a between-participants design with two conditions: RPI versus No RPI. In
the RPI condition, lower-level workers receive information about their own current job performance rank and the ranks of other
lower-level workers in the same firm. In the No RPI condition, lower-level workers receive no performance rank information.
During the experiment, workers receive an announcement about an upcoming promotion, and the employer subsequently
promotes one lower-level worker to a new higher-level position. I examine workers’ behavior before and after the promotion
announcement and after the promotion itself, as well as employers’ promotion decisions across the two conditions.
I find that after the announcement of an upcoming promotion, workers in both the RPI and No RPI conditions increase
their effort to improve their current job performance because they expect that this will increase their chances of promotion. I
find that low performers increase their effort to a greater extent than high performers in response to the promotion
announcement, but only when workers have RPI and know their relative position. Moreover, because employers anticipate their
workers’ fairness concerns, employers promote the best current job performer, rather than the worker best suited for the next
job, more often when workers have RPI than when they do not. After being passed over for promotion, non-promoted workers’
performance decreases, and this decrease is greater for workers who have RPI and see that the best current job performer was
not promoted. Consistent with the Peter Principle, I find that the promoted workers’ performance after promotion is lower when
workers have RPI because the promoted worker lacks the ability to perform the new job well.
In addition, I conduct a supplemental experiment in which workers are provided with feedback on their relative abilities to
perform the next job, in addition to RPI on their current jobs. I find that although providing such feedback improves the sorting
of workers and mitigates the Peter Principle, it comes at the cost of reduced promotion-based incentives as workers work less
hard for the promotion. This resulting trade-off could explain why many employers in real-world settings would choose not to
communicate to workers the criteria for promotion.
My study contributes to the literature in several ways. First, I extend the promotion literature by providing an explanation
for the prior mixed empirical evidence on whether firms use promotions primarily to provide incentives for workers or to sort
workers effectively (Baker, Jensen, and Murphy 1988; Gibbs 1995; Campbell 2008; Ederhof 2011; Benson, Li, and Shue 2018;
The Accounting Review

Volume 93, Number 3, 2018
Promotion, Relative Performance Information, and the Peter Principle 85
Grabner and Moers 2013). My study shows that the effectiveness of using promotions to incentivize or sort workers can depend
on whether workers receive RPI on their current jobs.
Second, my study advances our understanding of the possible causes of the Peter Principle. Although there is empirical
support for the Peter Principle’s prediction that workers’ performance declines after promotion, there is debate regarding the
underlying cause (Lazear 2004; Fairburn and Malcomson 2001). My study identifies RPI as a new factor that could help
explain why employers often promote workers to jobs for which they are not well suited.
Finally, my study helps employers better weigh the costs and benefits of providing workers with RPI. Prior studies have
focused on the direct effects of RPI on worker performance (Hannan et al. 2008; Tafkov 2013). My study is the first to suggest
that providing workers with RPI can influence employers’ promotion decisions and lead to the ineffective sorting of workers.
Although employers can mitigate this sorting problem by communicating to workers the criteria for promotion, doing so is
costly because it reduces workers’ promotion-based incentives.
Section II provides background information; Section III develops my hypotheses; Section IV describes the experiment;
Section V reports the results; and Section VI concludes the study.
II. BACKGROUND
Promotions and the Peter Principle

Promotions are arguably the most important form of incentives in many organizations (Gibbs 1996). Promotions are
implicit incentives because they are typically discretionary in nature (Milgrom and Roberts 1992; Prendergast 1999; Gibbs
1994). Such incentives are particularly strong for lower-level workers because each promotion provides an immediate increase
in pay and the option value of being eligible for future pay increases from further promotions (Gibbons and Murphy 1992;
Gibbs 1995; Ederhof 2011).
It is well established in the economics literature that promotions serve two important, yet distinct, roles: (1) to motivate
workers in their current jobs, and (2) to sort workers into jobs that best match their abilities (Milgrom and Roberts 1992).
However, these two roles of promotions are in conflict when the best performer at one job level is not the best fit for the next
job level. In this case, firms must decide either to promote workers based on their current job performance (i.e., incentive rule)
to motivate worker effort, or promote workers based on their abilities to perform the next job (i.e., sorting rule) to ensure
effective sorting. Importantly, DeVaro and Gürtler (2016) show analytically that any promotion rule that a firm pre-commits to
is suboptimal because it cannot perfectly satisfy both the incentive and sorting roles of promotion.
Prior studies provide mixed empirical evidence on whether firms use the incentive rule or sorting rule to promote workers.
Consistent with the sorting rule, Grabner and Moers (2013) find that bank managers place greater weight on the assessments of
their subordinates’ ability to perform the next job and less weight on their current job performance when deciding promotions.
In addition, Campbell (2008) finds that managers at a fast food retailer are promoted primarily based on nonfinancial measures
that are arguably more important at higher job levels.
However, there is also evidence that firms use the incentive rule. Based on sales data from 214 firms, Benson et al. (2018)
find that firms prioritize current job performance over measures of managerial ability when promoting workers. Many other
studies provide consistent empirical and theoretical support for the use of the incentive rule (Gibbs 1995; Milgrom and Roberts
1992; Waldman 2003; Ederhof 2011). In fact, the dominant use of promotions to provide incentives remains a major puzzle in
the compensation literature (Baker et al. 1988).
A consequence of promoting workers based on their current job performance is that the promoted worker may not be well
suited for the new job—a phenomenon known as the Peter Principle (Peter and Hull 1969). Support for the Peter Principle
comes from field evidence that worker performance declines after promotion (Acosta 2010; Medoff and Abraham 1980; Baker,
Gibbs, and Holmstrom 1994a, 1994b). Although there is empirical support for the Peter Principle, there is debate regarding the
underlying cause. Economists have developed different models to argue why it could be optimal for the employer to
intentionally promote less able workers (Bernhardt 1995; Lazear 2004; Waldman 1984).2 In contrast to these studies, I posit
that workers’ fairness concerns can also affect employers’ promotion decisions, which I predict depends on whether workers
have RPI.
2
Bernhardt (1995) argues that when the employer has private information about workers’ abilities and other firms use workers’ job positions and
education as signals of their abilities, employers will strategically promote more educated, but less able, workers to keep workers’ wages low. Lazear
(2004) argues that the Peter Principle may be the result of promoted workers’ performance regressing to the mean because they were promoted based
on their transitory ability or ‘‘luck.’’ While these studies offer plausible arguments for the cause of the Peter Principle, they do not examine the role of
RPI and, thus, cannot explain the results of this study.

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Relative Performance Information

Employers often provide workers with RPI (Nordstrom et al. 1991; Gino and Staats 2011). Economic studies have shown
that there are contracting benefits from evaluating workers based on their relative performance because it filters out common
uncertainty (Lazear and Rosen 1981; Holmstrom 1982; Nalebuff and Stiglitz 1983). While a burgeoning behavioral literature
finds that RPI can have positive motivational effects on worker performance (e.g., Blanes i Vidal and Nossol 2011; Tafkov
2013), such effects can sometimes backfire. For example, RPI can cause workers to adopt risky, ineffective strategies in a
tournament setting (Hannan et al. 2008) and distort workers’ incentives away from taking firm-preferred actions in a multi-task
setting (Hannan, McPhee, Newman, and Tafkov 2013). My study examines how RPI affects workers’ performance indirectly
by influencing the employer’s promotion decisions.
III. HYPOTHESES DEVELOPMENT

I develop hypotheses based on two events that typically occur in a promotion setting: (1) the announcement of an
upcoming promotion (hereafter, promotion announcement), and (2) the actual promotion. In practice, the promotion
announcement could represent any event that increases workers’ expectations that a promotion will occur in the near future.
Worker Performance After Promotion Announcement, but Before Promotion

When an employer announces an upcoming promotion, workers’ response to the announcement depends on their
expectations about the employer’s promotion rule. In my setting, workers are uncertain as to whether their employer will
use the incentive rule or sorting rule. Prior research in psychology finds that people make fairness judgments based on the
consistency between an action and the related outcome (Feather 1999a). That is, people generally believe that those who
take a positive action deserve a positive outcome. Importantly, deservingness only relates to outcomes that are earned as a
result of one’s controllable actions (Feather 1999b). In my promotion setting, workers’ current job performance is
controllable, but their abilities to perform the next job are not. Thus, I expect workers to judge those who perform best in
the current job to be more deserving of a promotion than those with higher abilities to perform the next job. As such, I
predict that workers will expect their employer to promote them based on their relative current job performance because
they perceive it to be fair. Consequently, I predict that workers will increase their effort and performance after the
promotion announcement:
H1a: Workers’ performance increases after the employer announces an upcoming promotion.
Based on H1a, I expect the promotion announcement to trigger an informal tournament in which workers compete in their
current job for the expected reward of promotion. Prior research on tournaments suggests that the extent to which workers exert
effort depends on their relative position, but the directional change in their response can be difficult to predict (Berger, Klassen,
Libby, and Webb 2013; Casas-Arce and Martı́nez-Jerez 2009; Hannan et al. 2008). Specifically, low performers will either
exert high effort because they want to catch up on their competition, or exert low effort because they give up. Likewise, high
performers will either exert high effort because the marginal benefit of their effort is relatively high, or exert low effort because
they become complacent. A unique feature of my setting is that workers can invest in costly overtime work to improve their
performance, which reflects the common practice of workers staying late at work unpaid to impress their superiors. I expect low
performers in my setting to make such costly investments to increase their chances of promotion. Therefore, they are less likely
to give up than in other settings in prior studies. Nevertheless, given the mixed predictions from prior research and my unique
setting, it is uncertain as to whether and how workers will react to the promotion announcement based on their relative position
when workers have RPI.
When workers do not have RPI, I expect low performers and high performers to react similarly because they do not
know their relative position. Based on the reasoning above, I make no directional predictions on the differences in the change
in workers’ performance after the promotion announcement between low and high performers when they have or do not have
RPI:
H1b (null form): The change in workers’ performance after the employer announces an upcoming promotion does not
differ between low performers and high performers, regardless of whether workers have RPI.
The Effect of RPI on Employers’ Promotion Decisions and the Promoted Workers’ Performance After Promotion
H1 predicts that workers expect to be promoted based on their current job performance because they perceive this to be
fair. Thus, when workers see that the promoted worker was not the best current job performer, they will likely perceive the

employer’s promotion decision to be unfair. I posit that there are behavioral and economics reasons for why workers’ fairness
concerns could affect employers’ promotion decision.
First, from a behavioral perspective, I expect some employers will want to be fair or appear fair to their workers (e.g.,
Greenberg 1988, 1990; Pillutla and Murnighan 1995). Prior research finds that individuals are often willing to bear personal
financial costs to maintain the fair distribution of payoffs among others (Kahneman, Knetsch, and Thaler 1986; Fehr and
Fischbacher 2004). In a study by Maas, van Rinsum, and Towry (2012), they find that managers will obtain additional
information regarding their workers’ performance to allocate their workers’ bonuses fairly, even though doing so is costly to the
managers. Similarly, in my setting, I expect some employers to always promote the best current job performer because they
believe this is fair to workers, while others will do so only to appear fair when they know their workers are able to judge the
fairness of their promotion decision.
Second, from an economic perspective, employers will consider how their promotion decision affects the promoted worker
and the non-promoted workers. Prior research has shown that it is important for employers to consider workers’ perceived
fairness of their actions to sustain a long-term employment relationship (Fehr et al. 2009; Fehr and Gachter 2000). If workers
perceive their employer to be unfair, then this could negatively affect their citizenship behavior (Moorman 1991),
organizational commitment (Moorman, Niehoff, and Organ 1993), and job performance (Konovsky and Cropanzano 1991). In
my setting, non-promoted workers who see that the best current job performer was not promoted will likely perceive their
employer to be unfair and could decide to lower their effort in subsequent periods. As such, employers face the competing
incentives of promoting the best current job performer and avoiding workers’ negative reactions versus promoting the worker
best suited for the next job, but risking demotivating the non-promoted workers. The net effects of this trade-off will depend on
the expected relative performance effects of the promoted and non-promoted workers. Because it is not obvious that one
promotion decision dominates the other in my setting, I expect different employers to make different economic trade-offs and
decisions.
Importantly, most of the employer’s considerations explained above are relevant only when workers have RPI. When
workers do not have RPI, they cannot identify the best current job performer and, therefore, have no clear basis on which to
judge the fairness of the employer’s promotion decision. In this case, workers are less likely to react negatively, regardless of
which worker the employer promotes. From the behavioral perspective, some employers could still choose to promote the best
current job performer because they believe this is fair. However, other employers no longer have concerns to appear fair when
workers do not have RPI. Further, from the economic perspective, employers can now also promote the worker best suited for
the next job without concerns of demotivating the non-promoted workers.
Based on the reasoning above, I predict that employers are more likely to promote the best current job performer, rather
than the worker best suited for the next job, when workers have RPI than when they do not. Consequently, the promoted
worker’s post-promotion performance will be lower when workers have RPI than when they do not because of the less effective
matching of the promoted worker’s abilities to the new job. My second hypothesis has two parts:
H2a: Employers are more likely to promote the worker with the best current job performance than the worker with the
highest ability to perform the next job when workers have RPI than when workers do not have RPI.
H2b: Promoted workers’ performance in the higher-level job after promotion is lower when workers have RPI than when
workers do not have RPI.
The Effect of RPI on Non-Promoted Workers’ Performance After Promotion

After workers have been passed over for promotion, their promotion-based incentives will decrease. Consistent with the
findings of prior field studies (Campbell 2008; Gibbs 1995), I expect non-promoted workers’ performance to decrease after a
promotion occurs. Based on H2, I expect workers with RPI who see that the best current job performer was not promoted to
react negatively by further reducing their effort. Thus, I predict that the post-promotion performance of such non-promoted
workers will decline to a greater extent than workers who perceive the employer to be relatively fair, either because they have
RPI and see that the best current job performer was promoted or because they do not have RPI to judge the fairness of the
employer’s promotion decision. In addition, I expect workers’ negative reactions to be strongest for the best current job
performers who have RPI and were passed over for promotion because they have the highest ex ante expectations of being
promoted. My third hypothesis has two parts:
H3a: Non-promoted workers’ performance declines after a promotion occurs.
H3b: Non-promoted workers’ performance declines more when workers have RPI and the employer does not promote the
best current job performer than when either workers have RPI and the employer promotes the best current job
performer or workers do not have RPI.

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FIGURE 1
Examples of Workers’ Slider Tasks in the Experiment
Panel A: Basic Slider Task
Panel B: Advanced Slider Task
IV. METHOD
Overview
I use a 1 3 2 between-subjects experimental design with two conditions: RPI versus No RPI. In the RPI condition, workers
receive feedback about their own current job performance rank and the ranks of other workers in their firm. In the No RPI
condition, workers receive no performance rank feedback.
In my experiment, one employer and four workers form a single firm. Workers perform tasks that generate revenue for
their employer, and workers are paid a fixed salary plus an output-based bonus.3 The employer is the residual claimant who
receives the total revenue generated by the workers less the compensation paid to the workers.
Each firm has two levels of workers: lower-level and higher-level. Higher-level workers earn higher compensation and
generate more revenue per output for the employer than lower-level workers. Lower-level workers perform a ‘‘basic slider task’’
adapted from Gill and Prowse (2011), in which they see a computer screen with a large number of sliders initially positioned at
0 along a scrollbar from 0 to 100. The task is to position each slider at exactly 50 using the computer mouse. Higher-level
workers perform an ‘‘advanced slider task’’ in which they first solve a math problem in their heads and then adjust the slider to
the number position that matches the answer to the problem. Panels A and B of Figure 1 show screenshots of a slider at its
initial position (a) and correct position (b) for the basic and advanced slider tasks, respectively.
The two tasks are designed to require different abilities to capture the conflict between the incentive and sorting roles of
promotion in my setting. The lower-level task requires only mechanical abilities and is more effort-sensitive than the higher-
level task that also requires mental arithmetic abilities. Workers’ performance in each task is measured by the amount of output
they produce, and output is measured by the total number of sliders positioned correctly.
As shown in Figure 2, three key events occur during the experiment: (1) employers assign one worker to the higher-level
job position and the three remaining workers to the lower-level job positions after an initial training period, (2) workers receive
an announcement about an upcoming promotion, and (3) employers promote one of the three lower-level workers.
The initial worker assignment serves two main purposes. The first is to make workers aware that their performance during
the training period represents their employer’s private assessment of their relative abilities to perform each task. The second is
to reduce lower-level workers’ anticipation of a promotion so that their performance during the first two work periods
represents their baseline performance.
At the end of Period 2, workers are informed that one of the three lower-level workers will be promoted to a second higher-
level position by the employer after Period 5. Because this promotion announcement is likely unexpected, any shift in workers’
performance during the next three periods (Periods 3 to 5) reflects their response to the announcement (H1a and H1b).
3
Similar to prior research on RPI (e.g., Tafkov 2013), workers in my setting are not compensated based on their performance rank because the focus of
my study is on the effects of the provision of RPI. If workers were to receive a bonus based on their rank, then I expect workers in both the RPI and No
RPI conditions to fixate on their rank and expect it to be used in employers’ promotion decision, which could amplify the predicted Peter Principle
problem.

FIGURE 2
Timeline of Key Events in the Experiment
At the end of Period 5, the employer promotes one of the three lower-level workers to the higher-level position (H2a). For
the remaining three periods (Periods 6 to 8), the promoted worker performs the higher-level task and receives higher pay, and
the two non-promoted workers perform the same lower-level task and receive the same pay. This allows me to examine the
post-promotion performance of the promoted and non-promoted workers (H2b, H3a, and H3b).
Detailed Procedures
Participants are recruited from the participant pool of an experimental economics laboratory at a large U.S. public
university.4 Participants are randomly assigned to either the role of employer or worker, and they remain in the same roles and
in the same firm throughout the session. In total, 220 individuals participated in 23 sessions and formed 44 unique firms.
Participants received a $5 fee, in addition to the payoffs they earned during the experiment.
Participants begin by reading the instructions for both roles and completing a short quiz. They then learn their randomly
assigned roles and complete the experiment described below. At the end of the session, participants complete a post-
experimental questionnaire and receive their payments. The experiment is conducted entirely using the z-Tree software
(Fischbacher 2007).
I next describe the steps for both conditions simultaneously. The procedures for the RPI condition are the same as for the
No RPI condition, except in Step 7, as noted below:
1. All workers begin with a training period in which they perform both the basic slider task and advanced slider task for 60
seconds each.
2. The employer receives a private training rank report that ranks workers from highest to lowest based on their output for
each task during the training period.
3. At the end of the training period, the employer assigns one worker to the higher-level position and the other three
workers to the lower-level positions.
There are a total of eight work periods, and Steps 4 to 8 below are repeated for each period:
4. Workers perform their respective tasks for 90 seconds during the regular period.
4
Both the main and supplemental experiments have been approved by the appropriate Institutional Review Board.

90 Chan
5. Workers choose whether to work overtime. Workers who choose to work overtime incur a personal cost and perform
the same task for an additional 30 seconds.
6. Workers receive a private performance summary of the total units of output they produced in that work period and
cumulatively for all work periods completed so far.
7. In the RPI condition, both lower-level workers and the employer receive a performance rank report that ranks the
workers from highest to lowest based on their cumulative output up to that point. This report does not specify whether
workers chose to work overtime. In the No RPI condition, only the employer receives this report.
8. Workers are shown the compensation they earned and their impact on the employer’s profit for that work period. The
employer is shown his or her profit for that work period.
Before making the promotion decision at the end of Period 5, the employer is shown two different sets of information: (1) each
worker’s training ranking on the higher-level task at the end of the training period (Step 2), and (2) each worker’s cumulative
performance rank in the lower-level task at the end of Period 5 (Step 7). This design allows me to determine whether the
employer wants to promote the best current job performer or the worker with the highest ability to perform the next higher-level
job. Employers only know workers’ relative rank, rather than their absolute performance, to simplify their promotion decisions.
Payoffs
The monetary amounts in my experiment are expressed in terms of an experimental currency, Lira, which is converted to
U.S. dollars at a rate of 1,000 Lira per U.S. dollar.
Worker compensation is accumulated over eight work periods and calculated as follows:
Worker Compensation ¼ Fixed Salary þ ðOutput 3 Bonus per OutputÞ Overtime Cost
Lower-level workers receive a fixed salary of 800 Lira per period, a variable bonus of 10 Lira per unit of output (i.e., each
correctly positioned slider), and incur overtime cost of 150 Lira per period. Higher-level workers receive a fixed salary of 1,800
Lira per period, a variable bonus of 30 Lira per unit of output, and incur overtime cost of 250 Lira per period. The overtime
option captures workers’ willingness to take costly actions to improve their performance.5 The overtime cost parameters are
chosen such that any bonus earned by workers during the overtime period will most likely be lower than the personal cost
incurred.6 The increase in pay for the higher-level workers reflects the benefits of being promoted and ensures that even
workers with low intrinsic motivation to perform the higher-level task (e.g., disutility of doing math problems) still have high
extrinsic motivation to be promoted. Because workers’ compensation includes a variable bonus component, wealth-maximizing
workers can maximize their current period compensation by maximizing their task output without working overtime.
Employer profit is accumulated over eight work periods and calculated as follows:
Employer Profit ¼ ðWorker Output 3 Revenue per OutputÞ Worker Compensation
Workers’ output includes all output generated during the regular and overtime periods. Each unit of output from the lower-
level and higher-level tasks generates 40 Lira and 200 Lira of revenue for the employer, respectively. The higher revenue per
output rate for the higher-level task reflects the greater impact higher-level workers typically have on their firms. This setting
highlights the importance for employers to sort workers effectively to maximize their profit.
Design Choices
Several design choices warrant further discussion. First, the assessment of workers’ relative abilities to perform the next
job is relatively objective in my setting. It is clear to workers that the employer benefits from promoting workers based on their
abilities to perform the next job, which works against my prediction that workers instead expect their employer to promote
them based on their current job performance. If employers’ assessment of workers’ abilities had been more subjective, then they
are more likely to justify their reliance on current job performance when workers have RPI, amplifying the Peter Principle.
Second, workers receive a bonus for their current job performance before any consideration of a promotion. This provides a
strong test of my prediction because I can examine whether workers expect to be promoted based on their current job
performance despite the fact that they are already being rewarded for their current job performance.
5
To capture the notion that effort is costly, prior studies have participants either perform a real effort task or choose an effort level from an effort cost
schedule. I use a hybrid approach by having participants perform a real effort task and providing them with an option to work overtime at a cost. This
approach helps capture changes in workers’ effort and their willingness to incur a personal cost to increase their performance.
6
My results showed that there are only 17 out of 274 (6 percent) and 12 out of 90 (13 percent) instances in which lower-level and higher-level workers
earned higher compensation as a result of working overtime, respectively. Thus, the overtime option is almost always costly for workers.

V. RESULTS
Participants
Participants, on average, are 21 years old, 56 percent are female, and 89 percent are undergraduate students. There are no
significant differences across conditions for gender, age, and student status (all p . 0.23). Participants earned an average of
$18.50.
Task Difference Between Job Levels

As described earlier, a key feature in my setting is that the tasks between job levels require different worker abilities. To
verify this, I performed a Pearson correlation test between workers’ output in the lower-level and higher-level tasks during the
training period and found a low correlation (r174 ¼ 0.14, p ¼ 0.07). Participants’ responses to a post-experimental question
confirm that they believe the two tasks require different abilities.7
Hypotheses Tests
In my hypotheses tests below, I analyze workers’ performance by groups of related work periods based on the key events
that occur in the experiment as described earlier. The work period groups I analyze are: (1) Periods 1 and 2, which capture
workers’ baseline performance (Pre-Announcement period), (2) Periods 3 through 5, which capture performance after the
promotion announcement, but before the promotion (Post-Announcement period), and (3) Periods 6 through 8, which capture
performance after the promotion (Post-Promotion period).
As explained earlier, the employer assigns one worker to the higher-level position after the training period. Across both
experimental conditions, 39 out of 44 employers (18 of 22 in the No RPI; 21 of 22 in the RPI condition) assign the worker with
the highest rank on the higher-level task during the training period to the higher-level position. This result indicates that
employers understand the importance of sorting workers into jobs that best match their abilities. Because the assigned higher-
level workers are unaffected by the subsequent promotion, I exclude these workers’ performance from my analyses below.
H1a and H1b

H1a predicts that workers’ performance increases after the employer announces an upcoming promotion. Recall that
workers’ performance is measured by total output produced during the regular period and an optional overtime period. To test
H1, I compare lower-level workers’ output during the Post-Announcement period to their output during the Pre-Announcement
period, pooled across conditions.8 Consistent with H1, as shown in Table 1, lower-level workers’ regular period, overtime
period, and total output increased significantly (all p , 0.01) from the Pre-Announcement period (33.67, 3.03, and 36.70,
respectively) to the Post-Announcement period (36.20, 5.58, and 41.78, respectively), and the proportion of workers who
worked overtime increased significantly (p , 0.01) from 25 percent to 44 percent over the same period. Although learning
effects potentially contributed to the increase in workers’ regular period output from the Pre-Announcement period to the Post-
Announcement period, learning effects cannot explain the increase in workers’ overtime period output, which captures workers’
willingness to incur a cost to increase their performance. In addition, I find no association between the change in workers’
output after the promotion announcement and their actual and perceived abilities in the higher-level task.9
To better understand workers’ behavior, I examine their responses to a post-experimental question in which workers
indicated, on a seven-point scale with endpoints of ‘‘No influence’’ (1) and ‘‘Very high influence’’ (7), the extent to which their
motivation to perform well on their task is influenced by their desire to (1) increase their chances of promotion in the future, (2)
increase their current performance rank, and (3) maximize their current period compensation. Workers answered the same
question for each work period group in the post-experimental questionnaire. As shown in Table 1, workers’ desires to increase
their chances of promotion and performance rank increased significantly (both p , 0.01) from the Pre-Announcement period
7
Participants indicated on a seven-point scale, with endpoints of ‘‘Not at all different’’ (1) and ‘‘Very different’’ (7), the extent to which they believe the
underlying ability necessary to perform the lower-level and higher-level tasks is different. The mean response of 5.50 is significantly greater than the
midpoint of 4 (t219 ¼ 17.3, p , 0.01).
8
Lower-level workers’ average total output is not significantly different between the No RPI and RPI conditions during the Pre-Announcement period
(36.95 versus 36.47, t130 ¼ 0.41, p ¼ 0.68) or Post-Announcement period (42.13 versus 41.43, t130 ¼ 0.49, p ¼ 0.63). Therefore, I pooled the data across
the two conditions in my analyses above. I discuss these results further in the additional analysis section on the direct effects of RPI on workers’
performance.
9
Separate regression analyses show that workers’ training period output in the higher-level task, as well as their self-reported abilities in the higher-level
task, are not associated (all t131 , 1.28, p . 0.20) with the change in their regular period, overtime period, and total output from the Pre-Announcement
period to the Post-Announcement period.

92 Chan
TABLE 1
Workers’ Performance After Promotion Announcement (H1a)
Pre-Announcement Post-Announcement
Period (1–2) Period (3–5) (Paired t-test/
[n ¼ 132] [n ¼ 132] Chi-square test)
Lower-level workers’ regular period outputa 33.67 36.20 Diff. ¼ 2.53
(4.65) (4.57) (t131 ¼ 13.02, p , 0.01)
Lower-level workers’ overtime period outputb 3.03 5.58 Diff. ¼ 2.55
(4.04) (5.55) (t131 ¼ 5.34, p , 0.01)
Lower-level workers’ total outputc 36.70 41.78 Diff. ¼ 5.08
(6.60) (8.17) (t131 ¼ 9.39, p , 0.01)
Percentage of lower-level workers who choose to work overtime 25% 44% Diff. ¼ 19%
(v21 ¼ 12.94, p , 0.01)
Increase chances of promotiond 2.86 5.49 Diff. ¼ 2.63
(1.96) (1.81) (t131 ¼ 11.98, p , 0.01)
Increase performance ranke 4.07 5.61 Diff. ¼ 1.54
(2.02) (1.80) (t131 ¼ 7.95, p , 0.01)
Maximize Compensationf 6.31 5.87 Diff. ¼ 0.44
(1.09) (1.47) (t131 ¼ 3.44, p , 0.01)
a
Workers’ regular period output is the average task output produced by workers during the regular period of each work period.
b
Workers’ overtime period output is the average task output produced by workers during the overtime period of each work period.
c
Workers’ total output is the average task output produced by workers during the regular and overtime period of each work period.
d
Increase chances of promotion measures the extent to which workers’ motivation to perform well on their task is influenced by their desire to increase
their chances of promotion in the future, on a seven-point scale with endpoints of ‘‘No Influence’’ (1) and ‘‘Very High Influence’’ (7).
e
Increase performance rank measures the extent to which workers’ motivation to perform well on their task is influenced by their desire to increase their
performance rank relative to other workers, on a seven-point scale with endpoints of ‘‘No Influence’’ (1) and ‘‘Very High Influence’’ (7).
f
Maximize Compensation measures the extent to which workers’ motivation to perform well on the slider task is influenced by their desire to maximize
their compensation of the current periods, on a seven-point scale with endpoints of ‘‘No Influence’’ (1) and ‘‘Very High Influence’’ (7).
(2.86 and 4.07, respectively) to the Post-Announcement period (5.49 and 5.61, respectively), but their desire to maximize
current period compensation decreased significantly (6.31 versus 5.87, respectively, p , 0.01). The latter result is consistent
with workers making the trade-off between lower pay in the current periods and possible higher pay from receiving a promotion
in the future.
Overall, these results provide support for H1a, that workers increased their effort after the promotion announcement
because they expect their employer to promote them based on their relative current job performance. Importantly, workers have
these same expectations regardless of whether they receive RPI and despite the fact that they know their employers have private
information about their relative abilities to perform the higher-level task.
The null form H1b tests for differences in the change in workers’ performance after the promotion announcement between
low performers and high performers when they have or do not have RPI. For ease of interpretation of the results, I exclude the
medium performers and define workers as low (high) performers if their cumulative performance rank at the end of the Pre-
Announcement period is the lowest (highest) among their peers in the same firm.10
As shown in Panels A and B of Table 2, I find that the increase in overtime period and total output from the Pre-
Announcement period to the Post-Announcement period for low performers is significantly greater (both p , 0.10) than high
performers when workers have RPI, but not significantly different (both p . 0.38) when workers do not have RPI. These
results suggest that when workers have RPI, low performers increase their effort to a greater extent than high performers by
working more overtime because they want to catch up on their competition, while high performers may be exhibiting
complacency. Consistent with expectations, when workers do not have RPI, low and high performers increase their effort to a
similar extent because they do not know their relative position. I find no significant differences (both p . 0.36) in the increase
in regular period output between low and high performers under both the RPI and No RPI conditions, which I attribute to
10
Untabulated tests indicate that the increase in medium performers’ total output after the promotion announcement is not significantly different from low
performers (t40 ¼ 0.03, p ¼ 0.97), but significantly greater than high performers (t40 ¼ 1.83, p ¼ 0.07) in the RPI condition, and not significantly
differently from both low and high performers (both p . 0.31) in the No RPI condition. These results are consistent with those presented above,
suggesting that workers react to the promotion announcement differently based on their relative rank only when they have RPI.

TABLE 2
Workers’ Performance After Promotion Announcement (H1b)
Panel A: RPI
DPre-Announcement Period (1–2) to
Post-Announcement Period (3–5)
Low Performersb High Performersb
[n ¼ 22] [n ¼ 22] (t-test)
a
Lower-level workers’ regular period output 2.90 2.10 Diff. ¼ 0.80
(3.19) (2.47) (t42 ¼ 0.93, p ¼ 0.36)
Lower-level workers’ overtime period outputa 3.20 0.53 Diff. ¼ 2.67
(4.21) (6.12) (t42 ¼ 1.68, p ¼ 0.10)
Lower-level workers’ total outputa 6.10 2.63 Diff. ¼ 3.47
(5.25) (7.11) (t42 ¼ 1.84, p ¼ 0.07)
Panel B: No RPI
DPre-Announcement Period (1–2) to
Post-Announcement Period (3–5)
Low Performersb High Performersb
[n ¼ 22] [n ¼ 22] (t-test)
a
Lower-level workers’ regular period output 2.55 2.69 Diff. ¼ 0.14
(2.04) (1.70) (t42 ¼ 0.24, p ¼ 0.81)
(4.90) (4.91) (t42 ¼ 0.90, p ¼ 0.38)
(5.60) (5.03) (t42 ¼ 0.74, p ¼ 0.46)
a
See variable descriptions in Table 1.
b
Low (High) performers are lower-level workers whose cumulative performance rank at the end of the Pre-Announcement period is the lowest (highest)
among all workers in the same firm. Medium performers (n ¼ 44; n ¼ 22 in the RPI condition and n ¼ 22 in the No RPI condition) are excluded from the
analyses.
workers already maximizing their effort during the regular period because of the output-based bonus embedded in their
compensation scheme.
In summary, I reject the null form H1b and find that low and high performers respond differently to the promotion
announcement, but only when workers have RPI. Overall, the combined results of H1a and H1b suggest that workers expect to
be promoted based on their relative current job performance and respond accordingly based on whether they have RPI.
H2a and H2b

H2a predicts that employers are more likely to promote the best current job performer when workers have RPI than when
they do not. To test H2a, I compare employers’ promotion decisions across the No RPI and RPI conditions. I define the ‘‘best
current job performer’’ as the worker with the highest cumulative performance rank in the lower-level task at the end of the
Post-Announcement period, and the ‘‘best candidate for the next job’’ as the worker with the highest rank in the higher-level
task during the training period. Because my hypotheses are based on the assumption that the best current job performer is not
also the best candidate for the next job, I exclude seven firms (four in the No RPI; three in the RPI condition) for which the best
current job performer was also the best candidate for the next job from my subsequent tests.11
Consistent with H2a, Figure 3 shows that 12 out of 19 employers (63 percent) in the RPI condition promoted the best
current job performer, rather than the best candidate for the next job, versus three out of 18 (17 percent) in the No RPI
11
Including the 14 lower-level workers who were passed over for promotion from these seven firms does not change any of the statistical inferences
reported for my tests of H3a and H3b.

94 Chan
FIGURE 3
Effect of RPI on Employers’ Promotion Decision (H2a)
a
RPI is manipulated as a between-subjects factor at two levels: No RPI and RPI. Workers in the No RPI condition are not provided with any RPI. Workers
in the RPI condition are provided with their current job performance rank at the end of each work period.
b
Best current job performer promoted represents the cases in which the employer chooses to promote the lower-level worker with the highest cumulative
performance rank at the end of Period 5.
c
Best candidate for the next job promoted represents the cases in which the employer chooses to promote the lower-level worker with the highest training
rank in the higher-level task during the training period.
condition. The difference in the employers’ promotion decisions across the two conditions is significant (v21,n¼37 ¼ 8.29, p ,
0.01).
I interpret the 17 percent of employers who promoted the best current job performer in the No RPI condition as being
motivated by behavioral reasons and believe their decision is fair to workers, even though it reduces their profits and workers
are unaware of the promotion rule they used. Extrapolating these results to the RPI condition, the incremental 46 percent (63
minus 17) of employers who promoted the best current job performer in the RPI condition are either motivated by concerns to
appear fair to their workers, or they decide it is economically more beneficial to avoid demotivating the non-promoted workers
despite the negative effects of promoting a worker who is not best suited for the higher-level job. Because the data do not allow
me to directly determine the employers’ motives, I next perform additional analyses to test the validity of the underlying
theoretical argument that not promoting the best current job performer when workers have RPI demotivates workers because
they perceive this to be unfair.
To test this, I examine non-promoted workers’ responses to a post-experimental question in which they indicated the extent
to which they believe the promoted worker deserved to be promoted (Deservingness Judgment) on a seven-point scale with
endpoints of ‘‘Not at all’’ (1) and ‘‘Very much’’ (7). In addition, they indicated their reactions to their employer’s promotion
decision (Promotion Reaction) on a seven-point scale with endpoints of ‘‘Very disappointed’’ (3) and ‘‘Very pleased’’ (þ3).
Because I expect an ordinal interaction between RPI and the employer’s promotion decision, I performed separate planned
contrasts with non-promoted workers’ Deservingness Judgment and Promotion Reaction as the dependent measures and
assigned contrast weights of 3 for the RPI condition when the best candidate for the next job was promoted, þ1 for the RPI
condition when the best current job performer was promoted, and þ1 for the No RPI condition (Buckless and Ravenscroft
1990).
Consistent with the underlying logic of H2a, untabulated planned contrast results indicate that non-promoted workers’
Deservingness Judgment (t70 ¼ 2.94, p , 0.01) and Promotion Reaction (t70 ¼ 1.82, p ¼ 0.07) are consistent with the pattern
described above. Panels A and B of Figure 4 depict these results. As expected, untabulated simple effects tests indicate that
when the best current job performer was not promoted (i.e., best candidate for the next job was promoted), non-promoted
workers believe the promoted worker is less deserving of the promotion (F1,70 ¼ 5.06, p ¼ 0.01) and are more disappointed

FIGURE 4
Non-Promoted Workers’ Response to Promotion Decision (H2a)
Panel A: Non-Promoted Workers’ Deservingness Judgments
Panel B: Non-Promoted Workers’ Promotion Reactions
a
See variable descriptions in Figure 3.
b
Deservingness Judgment measures the extent to which workers believe the lower-level worker their employer chose to promote deserved to
be promoted, on a seven-point scale with endpoints of ‘‘Not at all deserved’’ (1) and ‘‘Very much deserved’’ (7).
c
Promotion Reaction measures workers’ reaction to their employer’s promotion decision, on a seven-point scale with endpoints of ‘‘Very
disappointed’’ (3) and ‘‘Very pleased’’ (þ3).
(F1,70 ¼ 2.18, p ¼ 0.07) when workers have RPI (3.29 and 1.50, respectively) than when they do not have RPI (4.47 and
0.90, respectively). However, when the best current job performer was promoted, the corresponding responses are not
significantly different (both F1,70 , 0.90 and p . 0.35) when workers have RPI (5.04 and 0.46, respectively) versus when
they do not have RPI (4.83 and 1.00, respectively).
H2b predicts that the promoted workers’ post-promotion performance in the higher-level job is lower when workers have
RPI than when they do not because of the differential matching of the promoted workers’ abilities to their new job. To test H2b,

96 Chan
TABLE 3
Promoted Workers’ Post-Promotion Performance in the Higher-Level Job (H2b)
Panel A: No RPI versus RPI

Post-Promotion Period (6–8)
No RPIa RPIa (t-test/
Promoted higher-level workers’ regular period outputa 16.41 12.96 Diff. ¼ 3.45
(3.37) (3.09) (t35 ¼ 3.24, p , 0.01)
Promoted higher-level workers’ overtime period outputa 0.83 0.84 Diff. ¼ 0.01
(1.96) (1.35) (t35 ¼ 0.02, p ¼ 0.99)
Promoted higher-level workers’ total outputa 17.24 13.80 Diff. ¼ 3.44
(4.71) (3.60) (t35 ¼ 2.50, p ¼ 0.02)
Percentage of promoted workers who choose to work overtime 13% 16% Diff. ¼ 3%
(v21 ¼ 0.18, p ¼ 0.67)
Maximize Compensationa 6.56 6.32 Diff. ¼ 0.24
(1.15) (1.06) (t35 ¼ 0.66, p ¼ 0.51)
Panel B: RPI—Best Current Job Performer versus Best Candidate for the Next Job Promoted
Post-Promotion Period (6–8)
RPIa
Best Candidate
Best Current for the
Job Performer Next Job
Promoteda Promoteda (t-test/
Promoted higher-level workers’ regular period outputa 11.53 15.43 Diff. ¼ 3.90
(1.98) (3.20) (t17 ¼ 3.31, p , 0.01)
Promoted higher-level workers’ overtime period outputa 0.58 1.29 Diff. ¼ 0.71
(0.88) (1.93) (t17 ¼ 1.10, p ¼ 0.29)
Promoted higher-level workers’ total outputa 12.11 16.71 Diff. ¼ 4.60
(2.29) (3.69) (t17 ¼ 3.38, p , 0.01)
Percentage of promoted workers who choose to work overtime 11% 24% Diff. ¼ 13%
(v21 ¼ 1.61, p ¼ 0.20)
(1.00) (1.22) (t17 ¼ 0.53, p ¼ 0.60)
a
See variable descriptions in Table 1 and Figure 3. Note that promoted higher-level workers perform the advanced slider task during the Post-Promotion
period.
I compare promoted workers’ output during the Post-Promotion period across the No RPI and RPI conditions. Consistent with
H2b, Panel A of Table 3 shows that the promoted workers’ regular period output and total output in the higher-level task during
the Post-Promotion period are significantly higher (both p , 0.02) in the No RPI condition (16.41 and 17.24, respectively) than
in the RPI condition (12.96 and 13.80, respectively). As expected, I find no significant differences in workers’ overtime period
output (0.83 versus 0.84, p ¼ 0.99) and an equally low likelihood of working overtime (13 percent versus 16 percent, p ¼ 0.67)
across the two conditions because there are no future benefits for workers to work overtime after promotion.
To provide further evidence that the employer’s promotion decision is driving these results, I compare workers’ output
within the RPI condition based on the employer’s promotion decision. Consistent with expectations, as shown in Panel B of
Table 3, the promoted workers’ regular period output and total output during the Post-Promotion period are significantly lower
(both p , 0.01) when the best current job performer was promoted (11.53 and 12.11, respectively) than when the best
candidate for the next job was promoted (15.43 and 16.71, respectively). These results provide additional support for H2b.

TABLE 4
Non-Promoted Workers’ Post-Promotion Performance (H3a)
Post-Announcement Post-Promotion
Non-promoted lower-level workers’ regular period outputa 35.65 36.04 Diff. ¼ 0.39
(4.33) (6.58) (t147 ¼ 0.61, p ¼ 0.54)
Non-promoted lower-level workers’ overtime period outputa 5.18 1.69 Diff. ¼ 3.49
(5.52) (3.91) (t147 ¼ 5.59, p , 0.01)
Non-promoted lower-level workers’ total outputa 40.84 37.73 Diff. ¼ 3.10
(8.05) (8.40) (t147 ¼ 3.35, p , 0.01)
Percentage of non-promoted lower-level workers who choose to 41% 13% Diff. ¼ 28%
work overtime (v21 ¼ 14.37, p , 0.01)
Increase chances of promotiona 5.39 1.91 Diff. ¼ 3.48
(1.74) (1.42) (t147 ¼ 14.01, p , 0.01)
Increase performance ranka 5.65 3.11 Diff. ¼ 2.54
(1.53) (2.03) (t147 ¼ 9.50, p , 0.01)
(1.24) (1.48) (t147 ¼ 0.20, p ¼ 0.84)
a
See variable descriptions in Table 1.
H3a and H3b

H3a predicts that non-promoted workers’ performance declines after a promotion occurs. To test H3a, I compare non-
promoted workers’ output during the Post-Promotion period to the Post-Announcement period, pooled across conditions.12
Consistent with H3a, Table 4 shows that their overtime period output and total output decreased significantly (all p , 0.01)
from the Post-Announcement period (5.18 and 40.84, respectively) to the Post-Promotion period (1.69 and 37.73, respectively),
mainly because fewer workers chose to work overtime (41 percent versus 13 percent, p , 0.01). Post-experimental
questionnaire results indicate that non-promoted workers are less motivated to work overtime because future promotion is less
likely.13
H3b predicts that non-promoted workers’ performance declines more when they have RPI and see that the best current job
performer was not promoted than when they either have RPI and see that the best current job performer was promoted or do not
have RPI. To test this, I use the same planned contrasts described earlier, with the change in non-promoted workers’ total
output from the Post-Announcement period to the Post-Promotion period as the dependent measure and assigned contrast
weights of 3 for the RPI condition when the best candidate for the next job was promoted and þ1 for the remaining three
conditions.
Untabulated planned contrast results are directionally consistent with the pattern predicted by H3b, but are not significant
at conventional levels (t70 ¼ 1.53, p ¼ 0.13). Because the subset of workers expected to react most negatively are the best
current job performers in the RPI condition, I repeated the same test with only the best current job performers in the group of
workers who have RPI and were not promoted. Consistent with H3b, untabulated planned contrast results are significant (t63 ¼
1.95, p ¼ 0.06). As expected, untabulated simple effects tests indicate that when the best candidate for the next job was
promoted, the decrease in total output is significantly greater (F1,63 ¼ 1.62, p ¼ 0.10) when workers have RPI (8.01) than when
they do not have RPI (3.72). However, when the best current job performer was promoted, the corresponding changes in
output are not significantly different (F1,63 ¼ 0.83, p ¼ 0.37) when workers have RPI (2.13) versus when they do not have RPI
12
Because I find that non-promoted workers’ regular period, overtime period, and total output are not significantly different (all p . 0.13) across the RPI
and No RPI conditions during the Post-Announcement and Post-Promotion periods, I pooled the data across the two conditions.
13
As shown in Table 4, non-promoted workers’ desire to increase their chances of promotion and increase their performance rank decreased significantly
(both p , 0.01) from the Post-Announcement period (5.39 and 5.65, respectively) to the Post-Promotion period (1.91 and 3.11, respectively). Although
workers are not explicitly told whether there will be another promotion in the future, a second promotion is unlikely because there are only three work
periods left after the promotion. Workers’ desire to maximize their current period compensation is relatively stable (6.03 to 6.07, p ¼ 0.84) as workers
remain motivated to earn their output-based bonus.

98 Chan
(1.28). Further analyses show that workers who are more disappointed about being passed over for promotion subsequently
reduce their total output to a greater extent, providing further theoretical support for H3b.14
Additional Analyses—Direct Effects of RPI on Worker Performance

The result that lower-level workers’ average total output is not significantly different between the No RPI and RPI
conditions during the Pre- and Post-Announcement periods appears to be inconsistent with prior research that finds that RPI
motivates increased performance (Hannan et al. 2008; Tafkov 2013). Although I do not document the direct positive effects of
RPI in my setting, there is no reason to believe that this affects any other results that are the primary focus of my study. In fact,
one possible explanation for my result is that, unlike the prior studies in which there were no employers and it was made
explicit that workers’ pay is unaffected by RPI, there is an employer in my setting who monitors workers’ performance rank
over time. I posit that the presence of an employer likely motivated workers in the No RPI condition to increase their effort and
performance because they know their employers are likely evaluating them based on their rank. Consistent with this, I find no
significant differences in workers’ desires to maximize their current period compensation, increase their chances of promotion,
and increase their rank in both the Pre-Announcement and Post-Announcement periods (all p . 0.16) across conditions. Future
research can further investigate whether an informal monitoring control could dampen the motivational benefits of RPI
documented in prior studies.
Additional Analyses—Employer’s Profit

I next examine how RPI affects the employer’s profit in my setting. In untabulated tests, I find that the employer’s total
profit is significantly higher (t36 ¼ 2.18, p ¼ 0.04) in the No RPI condition (11,568) than in the RPI condition (9,026). As
depicted in Figure 5, this result is driven by the Post-Promotion period in which the employer’s average profit is significantly
higher (t36 ¼ 2.37, p ¼ 0.02) in the No RPI condition (1,841) than in the RPI condition (1,167), which can be directly attributed
to the promoted workers’ post-promotion performance (see H2b). In addition, I find that within the RPI condition, the
employer’s average profit during the Post-Promotion period and total profit are significantly lower (both p , 0.05) when the
employer promotes the best current job performer (848 and 7,624, respectively) rather than the best candidate for the next job
(1,714 and 11,430, respectively). However, a caveat to these results is that they are sensitive to the parameters of my setting,
which are designed to capture the importance of sorting workers into jobs based on their abilities. Thus, in other settings in
which sorting is less important, employers could be better off promoting the best performer when workers have RPI.
The question, then, is why many employers chose to promote the best current job performer when workers have RPI
despite receiving lower profit. As explained earlier, some employers are likely motivated to appear fair, knowing that workers
will judge the fairness of their decision based on the RPI. Other employers likely underestimated the negative impact of
promoting a worker who is not best suited for the next job and/or overestimated the negative impact of the non-promoted
workers’ negative reactions. Importantly, such employers could continue to promote the best current job performer if they fail
to appreciate the counterfactual because they cannot directly compare the outcomes of making different promotion decisions.15
Supplemental Experiment
Recall that in my primary experiment, workers do not receive feedback on their relative abilities to perform the next job.
There are several important reasons why employers may not want to provide such feedback. First, and perhaps most
importantly, it can reduce workers’ promotion-based incentives if they believe their current job performance has no effect on
their chances of promotion (Waldman 2003; DeVaro and Gürtler 2016). Second, workers’ abilities to perform the next job are
often irrelevant to their current jobs, and providing feedback on it can distract workers’ effort away from their current jobs
(Hannan et al. 2013). Third, the assessments of workers’ abilities for the next job are often subjective and, thus, are subject to
managerial biases that workers can perceive to be unfair (Grabner and Moers 2013; Bol 2008). However, a potential benefit of
providing such feedback is that it can alleviate workers’ fairness concerns and improve sorting by providing employers with an
alternate means to justify their decision to promote the worker best suited for the next job instead of the best current job
performer.
14
An untabulated multiple regression analysis shows that non-promoted workers’ Promotion Reaction (b ¼ 2.35, t73 ¼ 3.01, p , 0.01) is significantly and
positively associated with their subsequent change in total output. Although Deservingness Judgment (b ¼ 0.42, t73 ¼ 0.71, p ¼ 0.24) is not significant
at conventional levels, it is positive and directionally consistent with expectations.
15
Consistent with the argument that employers will likely make the same promotion decision in the future, 92 percent (11/12) of employers in the RPI
condition who promoted the best current job performer responded in the post-experimental questionnaire that they would make the same promotion
decision even if their workers receive no RPI.

FIGURE 5
Effect of RPI on Employers’ Profit
a
See variable descriptions in Figure 3.
b
Employer’s average profit is the average profit earned by the employer in each work period.
To test how providing workers with feedback on their relative abilities to perform the next job could affect my earlier
findings, I conduct a supplemental experiment with a new condition that is identical to the RPI condition described earlier,
except workers are also provided with feedback on their relative performance rank in the higher-level task during the training
period. Like the employers, workers receive the training rank report at the end of the training period and again immediately
before the employer makes the promotion decision.
A total of 90 students, with demographics similar to those in the primary experiment, participated in seven sessions of the
supplemental experiment. Because the supplemental experiment was conducted at a different laboratory that used smaller
monitors with lower resolution, the slider tasks are more difficult in the supplemental experiment than in the primary
experiment. Therefore, for parsimony, I do not compare the level of workers’ output and the employer’s profit between the two
experiments. Instead, I compare the changes in workers’ output after the promotion announcement to capture the incentive
effect of promotion and examine the employer’s promotion decisions to capture the sorting effect.
There are two main findings. First, as shown in Panel A of Table 5, although workers’ regular period and total output
increased significantly (both p , 0.01) from the Pre-Announcement period (29.28 and 33.33, respectively) to the Post-
Announcement period (32.46 and 36.62, respectively), I find no significant change in workers’ overtime period output (4.06
versus 4.16, p ¼ 0.88) and in the proportion of workers who worked overtime (39 percent versus 36 percent, p ¼ 0.61).16 That
is, the promotion announcement did not increase workers’ willingness to incur a cost to increase their current job performance.
This result indicates a reduction in promotion-based incentives for workers in the supplemental experiment, as compared to the
primary experiment, for both the RPI and No RPI conditions.
Second, as shown in Panel B of Table 5, most employers (71 percent) chose to promote the best candidate for the next job.
This proportion is significantly greater than that in the RPI condition (p ¼ 0.05), but not different from the No RPI condition (p
¼ 0.42) of the primary experiment. I interpret the 29 percent who promoted the best current job performer as employers who
16
The proportion of workers who worked overtime in the supplemental experiment (39 percent) during the Pre-Announcement period is higher than that
in the primary experiment (25 percent). Further analysis shows that this result can be explained by four workers in the supplemental experiment who
worked overtime every period, likely because they believed the bonus they earned during the overtime period would be greater than the overtime cost
they incurred.

100 Chan
TABLE 5
Supplemental Experiment Results
Panel A: Workers’ Performance After Promotion Announcement in the Supplemental Experimentb

Pre-Announcement Post-Announcement
Lower-level workers’ regular period outputa 29.28 32.46 Diff. ¼ 3.18
(3.85) (4.09) (t106 ¼ 8.48, p , 0.01)
(4.24) (4.39) (t106 ¼ 0.15, p ¼ 0.88)
(5.88) (7.38) (t106 ¼ 3.68, p , 0.01)
Percentage of lower-level workers who choose to work overtime 39% 36% Diff. ¼ 3%
(v21 ¼ 0.27, p ¼ 0.61)
Panel B: Employers’ Promotion Decisions in the Supplemental Experimentc

Supplemental Experimental
Condition RPI Condition No RPI Condition
a
Best candidate for the next job promoted (10/14) 71% (7/19) 37% (15/18) 83%
Chi-square test v21 ¼ 3.86 v21 ¼ 0.65

p ¼ 0.05 p ¼ 0.42
a
See variable descriptions in Table 1 and Figure 3.
b
Panel A shows the changes in lower-level workers’ regular period, overtime period, and total output, and the change in the average percentage of lower-
level workers who choose to work overtime from the Pre-Announcement period to the Post-Announcement period in the supplemental experiment.
c
Panel B compares the employer’s promotion decisions in the supplemental experiment (with feedback on workers’ abilities to perform the next job)
against those in the RPI condition and the No RPI condition of the primary experiment.
either want to be fair, or believe that some workers will still react negatively when they see the best current job performer was
not promoted.
Taken together, these results suggest that although providing workers with feedback on their abilities for the next job
improves the sorting of workers, it comes at the cost of reduced promotion-based incentives. To the extent that employers are
unwilling to make the trade-off between improved sorting and reduced promotion-based incentives, this could explain why
many employers in real-world settings choose not to provide workers with such feedback.
VI. CONCLUSIONS
I investigate the effects of providing workers with relative performance information (RPI) on employers’ promotion
decisions and the impact of those decisions on worker performance over time. In my experimental setting, the job after
promotion requires higher-level abilities than the current job and there is uncertainty about the employer’s promotion rule. I
find that workers generally expect their employer to promote them based on their current job performance because of fairness
concerns, resulting in greater worker effort after a promotion opportunity is announced. Moreover, employers promote the best
current job performer rather than the worker best suited for the next job more often when workers have RPI than when they do
not, resulting in the ineffective sorting of workers and the Peter Principle. Finally, using a supplemental experiment, I find that
providing workers with feedback on their abilities to perform the next job, in addition to RPI on their current job, improves the
effective sorting of workers, but it comes at the cost of reduced promotion-based incentives.
My study has several limitations that provide opportunities for future research. First, my setting has a short, finite number
of periods and, thus, I cannot capture all long-term effects of the employers’ promotion decisions. However, an extended time
horizon is unlikely to change my main finding that not providing workers with RPI gives employers the flexibility across time
to make any promotion decision without reducing workers’ promotion-based incentives or possibly demotivating them.
Second, workers cannot improve their abilities in my setting. Prior research finds that promotions can provide incentives for
workers to invest in human capital for their next job (Prendergast 1993; Grabner and Moers 2015). A drawback of this
investment is that it could shift workers’ efforts away from their current jobs toward developing their abilities for the next job,

which could lower their current job performance. Third, my setting allows workers to invest in costly overtime work, which
provides low performers the opportunity to increase their performance. Thus, the observed performance results in my setting
could be more nuanced in settings in which workers cannot take costly actions to overcome their low abilities. Finally, the
promotion decisions are made by residual claimants in my setting. When the decision-makers are not the residual claimants,
they are likely to be more highly influenced by their biases (Bol 2008). My results show that even when the decision-makers
are residual claimants, fairness concerns still play a key role in influencing employers’ promotion decisions.
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THE ACCOUNTING REVIEW American Accounting Association

Vol. 93, No. 3 DOI: 10.2308/accr-51890

Promotion, Relative Performance Information, and the

JEL Classiﬁcations: M41; M51; M52.

The Accounting Review

Promotions and the Peter Principle

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Relative Performance Information

III. HYPOTHESES DEVELOPMENT

Worker Performance After Promotion Announcement, but Before Promotion

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The Effect of RPI on Non-Promoted Workers’ Performance After Promotion

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Panel A: Basic Slider Task

Panel B: Advanced Slider Task

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Task Difference Between Job Levels

H1a and H1b

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H2a and H2b

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Panel A: Non-Promoted Workers’ Deservingness Judgments

Panel B: Non-Promoted Workers’ Promotion Reactions

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Panel A: No RPI versus RPI

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H3a and H3b

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Additional Analyses—Direct Effects of RPI on Worker Performance

Additional Analyses—Employer’s Profit

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Panel A: Workers’ Performance After Promotion Announcement in the Supplemental Experimentb

Panel B: Employers’ Promotion Decisions in the Supplemental Experimentc

Chi-square test v21 ¼ 3.86 v21 ¼ 0.65

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