Reducing Strategic Uncertainty in Teams by Combining Team and Individual Relative Performance Evaluations

Many firms require their employees to coordinate when working in interdependent teams. However, employees often fail to coordinate due to the difficulty in predicting their team members’ behavior, i.e., strategic uncertainty. In this paper, we consider the effects of team-level RPE (“team RPE”) and individual-level RPE (“individual RPE”) on strategic uncertainty in teams. We hypothesize that combining these forms of RPE reduces strategic uncertainty and ultimately improves team outcomes. Using an experiment involving an effort coordination game, we find strategic uncertainty is lowest when both forms of RPE are combined. Furthermore, strategic uncertainty mediates the increase in team performance from combining team RPE and individual RPE relative to when only team RPE or only individual RPE are used. We also document that participants’ strategic uncertainty about their team member’s indirect helping and hurting actions (direct effort) is reduced when team (individual) RPE are used and these effects are strongest when both forms of RPE are combined. Despite claims that individual incentives harm team outcomes, our study provides empirical evidence that such incentives can be beneficial when combined with team incentives as each form of RPE plays a key role in reducing employees’ strategic uncertainty.