Relative performance evaluation reduces the labor cost borne by the firm by:
A)ratcheting up each year's performance targets.
B)focusing on the near term while setting incentive pay.
C)using the employee's output for setting the compensation.
D)filtering out common shocks from employee incentive pay.

Question

Quizplus · Accepted Answer

Relative performance evaluation uses a comparison of an employee's performance against that of their peers, which helps in filtering out common shocks from incentive pay. This allows for a more accurate assessment of individual performance and reduces the likelihood of employees being unfairly incentivized or rewarded for factors beyond their control. Thus, D is the correct choice as it explains how relative performance evaluation helps reduce labor costs for the firm.

Relative Performance Evaluation Reduces the Labor Cost Borne by the Firm