Abstract
In the fields of Strategic Human Resources Management and Personnel Economics, much attention has been devoted to motivation and incentives. Research in recent years has conceptualized compensation as a motivational tool, relating motivation to performance evaluation. This leads to predict that employees tend to frame their effort in a way that they believe will lead to their most valued work-related rewards and outcomes. However, noise in firm-level performance measures may deter the efficacy of compensation. Evaluation errors may occur that cause a mismatch between effort, performances, and rewards. In line with expectancy-theory and goal-setting theory, in this paper we design a principal-agent model about the impact of type-I and type-II evaluation errors on employees’ motivation. Through results from experimental treatments, we contribute to the debate about incentives and organizational performance.