Performance effects of setting targets and pay–performance relations before or after operations

► Timing of targets and profit sharing ratios (PSRs) is experimentally investigated. ► Targets and PSRs reflect economic conditions when set ex post. ► Ex post targets lead to greater employer residual profit than ex ante targets. ► Ex post PSRs do not result in greater employer residual profit than ex ante PSRs. This study investigates both theoretically and experimentally whether and how ex post use of relative performance evaluation (RPE) information in determining performance target levels and profit sharing ratio (PSR) levels affects employer profit performance. Our findings show that employers use RPE information, i.e. peer performance, to adjust performance target levels and PSR levels to reflect economic conditions. More importantly, we find that ex post use of RPE information, i.e. peer performance, improves profit performance. However, ex post adjustment of target levels and PSR levels based on peer performance have different performance implications. Specifically, we find that ex post target contracts improve employer residual profit over ex ante target contracts, while ex post PSR contracts do not improve employer residual profit over ex ante PSR contracts. Our supplemental analyses suggest that this difference is likely because employees are more sensitive to prior period compensation determined by ex post PSRs than ex post targets. Compared to ex post targets that are likely perceived to be fair based on peer performance, ex post PSRs based on the peer performance can be used opportunistically by employers and/or are perceived so by employees, which leads to future repercussions manifested in lower employee effort and employer residual profit.