Improving Coordination in Teams: Combining Team and Individual Relative Performance Evaluations

Employees working in teams often fail to coordinate because of strategic uncertainty, i.e., difficulty predicting their colleagues’ actions. Using an incentivized economic experiment, we examine the potentially beneficial effects of a ubiquitous competitive incentive—individual relative performance evaluations (RPE)—in reducing strategic uncertainty and improving team output. When employees work in highly interdependent teams and are motivated by team incentives, we predict that individual RPE reduce employees’ strategic uncertainty and, in doing so, improve coordination. Consistent with our theory, we find that the use of individual RPE reduces employees’ strategic uncertainty about both their team members’ direct effort and indirect actions (i.e., helping or hurting). Furthermore, by reducing each component of strategic uncertainty, we find that firms can effectively improve coordination and team output. Contrary to claims that competitive, individual-level incentives harm team outcomes, our study highlights that individual RPE play an important role in reducing strategic uncertainty such that their use in interdependent teams motivated by cooperative team incentives yields superior outcomes. This paper was accepted by Ranjani Krishnan, accounting. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.01870 .