Employee Learning Dynamics under the Introduction of Relative Performance Information: a Theoretical Model

The empirical literature is generally supportive of a positive effect on employees’ performance of the introduction of relative performance information (RPI). However, different studies give different explanations for this result. The thrust of this paper is to theoretically introduce a learning dynamic which may offer an alternative, non-psychological, explanation. We consider both the case where employees do and do not expect RPI to be provided at some intermediate stage. We also take into account different forms of RPI and show that the level of refinement of RPI is of consequence. Although placed in a piece-rate pay context, we argue that the learning dynamic is equally valid in other pay contexts. Finally, we look at the dynamic from an employer perspective and develop an optimal feedback policy.