AUTHORITY, RISK, AND PERFORMANCE INCENTIVES: EVIDENCE FROM DIVISION MANAGER POSITIONS INSIDE FIRMS

Author: WULF, JULIE

Source: Journal of Industrial Economics, Volume 55, Number 1, March 2007 , pp. 169-196(28)

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Abstract:

I show that performance incentives vary by decision-making authority of division managers. For division managers with broader authority, i.e., those designated as corporate officers, both the sensitivity of pay to global performance measures and the relative importance of global to local measures are larger, relative to non-officers. There is no difference in sensitivity of pay to local measures by officer status. These results support theories suggesting that authority over project selection combined with incentives designed to maximize firm performance, as well as induce effort for the division, are important in incentive design for division managers. Consistent with earlier findings, the evidence strongly supports one of the main predictions of the principal-agent model, that is, a negative tradeoff between risk and incentives.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-6451.2007.00307.x

Affiliations: 1: Wharton School, University of Pennsylvania, 2000 Steinberg-Dietrich Hall, Philadelphia, Pennsylvania 19104-6370, U.S.A., Email: wulf@wharton.upenn.edu

Publication date: 2007-03-01