Rankings, Performance and Sabotage : The Moderating Effects of Target Setting

Competitive incentive systems that rely on performance rankings are widely used in today's organizations. These systems enable agents to improve their performance rank not only by increasing their own performance, but also by reducing their competitors' performance. While accounting studies have stressed the positive effect of ranking systems on managerial effort, this paper investigates when and how such ranking systems may induce sabotage. We report on a laboratory experiment designed to study the incidence, and potential mitigation, of this negative effect of performance rankings. Specifically, we investigate whether relative performance information increases an agent's inclination to disrupt competitors' efforts, in a case in which ranking has no effect on compensation. We find that rankings caused both higher performance and higher sabotage. Adding an absolute performance standard appeared to reduce the dysfunctional effects of ranking. As performance in presence of an absolute target was higher without than with a ranking, our results overall suggest that performance benefits from the use of either a relative or an absolute performance benchmark, but not of using both simultaneously