Incentive Effects of Subjective Allocations of Rewards and Penalties.

This article investigates the incentive effects of subjectivity in allocating tournament-based monetary rewards and penalties within a Chinese manufacturing firm. Using data where managers combine objective performance metrics with subjective assessments to determine bonuses and penalties—both publicly disclosed to employees—the study finds that subjective rewards (favorable deviations from formula-based expectations) lead to significant subsequent performance improvements, while subjective punishments (unfavorable deviations) result in performance declines. These effects are incremental beyond those of formula-based rewards and penalties and are stronger when subjective outcomes involve actual monetary payoffs rather than mere overrides of expected rewards or penalties. The findings suggest that managerial discretion in rewarding employees can enhance motivation and performance, but subjective punishments may be costly unless accompanied by strong ex ante incentive effects; moreover, observing others' subjective treatment does not significantly affect nonrecipients' performance. The study contributes empirical evidence on the motivational role of subjectivity in incentive contracts and highlights practical implications for designing effective performance evaluation systems.