Supporting Underperforming Agents: The Role of Human Capital Development and Relative Performance Information
We study whether principals use management practices directed at human capital development to support underperforming agents. Incentive systems are not effort-inducing for underperforming agents when the performance standards are considered unattainable. Following economic studies, we argue that firms can use management practices such as mentoring and training to augment the ability of underperforming agents, and thus improve the effectiveness of incentive systems in motivating high effort. To attain positive returns on human capital investments, we expect principals to use relative performance information for sorting and only invest in agents whose performance is substandard but better relative to peers. We exploit a unique setting that uses uniform targets for some performance measures. Uniform targets are equal for all agents and thus cannot reflect the dynamic and heterogenous conditions that agents face. We find that principals make human capital investments to support agents whose performance is substandard but better relative to peers. We also show that the human capital investments help underperforming agents improve their performance on the uniform target.