MANAGERIAL PERFORMANCE EVALUATION: A DECISION MODEL FOR STOCKHOLDERS

Managerial ability is influenced by many factors: personal attributes (like leadership, creativity, aggressiveness, communication skills, etc….), education, and experience. The paper proposes a model that links the managerial ability to the firm's capacity to grow and the external environment. The intention scale technique mostly used by economists and market researchers for demand prediction and product selection is introduced as a tool to test managerial ability. The paper develops an analytical model to help stockholders in evaluating the manager's potential and derives an optimal rule for the hiring decision. Managers are classified into three categories namely type‐I, type‐II, and type‐III managers. Type‐I managers meet most of the firm's criteria. They are hired immediately. Type‐II managers are those who fall short of the firm's ideal criteria for a manager, but, meet some of its criteria. Their abilities cannot be determined without the ability test. They are hired only if they pass the screening test. Type‐III managers do not meet the firm's criteria and are, therefore, rejected without some additional screening. The current practice of managerial screening allows only two choices: either hire a manager or reject him. This practice is valid for type‐I and type‐III managers only. Type‐II managers need additional screening as proposed in this paper.