The Weighting of Performance Measures and Performance Outliers in Performance Appraisals: When is it Noise, When is it a Signal?

The purpose of this paper is twofold: First, I investigate whether performance measures reflecting quality aspects, human capital development, as well as sales activities are weighted differently when assessing employees that are at different hierarchical levels. Second, I examine whether a distinctive score on a performance measure changes the weight on the respective performance measure, depending on the relative importance of that measure for the current or next hierarchical level. Using proprietary data from a large international auditor network, I find that quality receives the highest weight from the beginning of the auditor career up the hierarchy. However, the weight on the quality performance measure is decreasing with the advancement in the corporate hierarchy as first the relevance of human capital and subsequently the relevance of sales activities increase. Furthermore, the results indicate that performance measures with a distinctive score and that are relevant for the current rank are interpreted as noise, and hence the weight on this performance measure is reduced. In contrast, outliers on performance measures that are relatively more relevant at the next hierarchical rank are considered as signal, as demonstrated by an increased weight on this measure.