Making a Good Impression: The Incentive Effects of Employee Myopia on Employer Supervision

Abstract

What determines how much supervision employees receive? We show that the employees' keenness to make a strong 'first' impression on the top management -- myopia -- characterizes the level of supervision. An employee can always impress the employer by generating 'high' output. However, supervision allows the employee to make a 'first' impression via his report about his performance on the task. A more hands-on supervision style is valuable since top management can advise a faltering employee. Hands-on supervision also reduces compensation costs since the employee's desire to impress the supervisor motivates him to work hard. However, greater myopia can reduce the value of hands-on supervision when the employee might misreport his performance. Greater myopia incentivizes the employee to misreport more and, in conjunction with hands-on supervision, work hard, since he wants to impress the supervisor. The increased misreporting reduces the advice value of supervision since the employer's advice is unlikely to be helpful. However, the stronger effort incentive reduces the employer's compensation costs and increases the value of hands-on supervision. We show that when the internal controls are (weak) strong, the (first) second effect dominates, and the employer chooses (lesser) greater supervision.