We examine the distribution of incentives across executives with explicit divisional responsibilities, those with broad oversight authority over the firm, and CEOs. Oversight executives have pay-performance incentives that are $1.22 per thousand dollar increase in shareholder wealth higher than those of divisional executives. For CEOs, incentives are $5.65 per thousand higher than for executives with divisional responsibility. The aggregate pay-firm performance sensitivity of the top management team is substantial, at $32.32 per thousand for the median firm. CEO incentives are 42 to 58 percent of the aggregate incentives to the top management team. We match a subset of our divisional executives to the divisions they manage. We document a positive pay-divisional performance sensitivity and show that it is increasing in the precision of the divisional performance measure. The pay-firm performance sensitivity for divisional executives is decreasing in the precision of their divisional performance measure. These results are consistent with a principal-agent model with multiple signals of managerial effort.

Hierarchy can function as an instrument to channel influence activities or power struggles in organizations. Contrary to what has frequently been argued, we show that multi-divisional organizations may involve lower influence costs than single-tier organizations, even though they offer more scope for organizational conflict and have more executives that can be influenced. These benefits derive from two effects. First, part of the conflict in multi-divisional organizations takes place on the division level, where a small number of agents fight over only a fraction of the overall prize. Second, by grouping agents into common divisions, multi-divisional organizations create free-rider problems in rent-seeking. Our model sheds new light on the optimality of divestitures and the transition from the U- to the M-form by

Hierarchy can function as an instrument to channel influence activities or power struggles in organizations. Contrary to what has frequently been argued, we show that multi-divisional organizations may involve lower influence costs than single-tier organizations, even though they offer more scope for organizational conflict and have more executives that can be influenced. These benefits derive from two effects. First, part of the conflict in multi-divisional organizations takes place on the division level, where a small number of agents fight over only a fraction of the overall prize. Second, by grouping agents into common divisions, multidivisional organizations create free-rider problems in rent-seeking. We apply our framework to divestitures and the transition from the U- to the M-form by US corporations in the 1920s.

Abstract: This paper investigates whether or not the EVA ® bonus scheme bypasses the traditional congruence-controllability dilemma ordinarily encountered in compensation schemes. This analysis is done using the framework of incentives theory. EVA systems have two distinguishable features in this respect: the use of an external standard related to the financial market (as opposed to more traditional (budget) internal systems) and the fact that EVA concerns the managers of profit centers and not only top executives. As such it is often considered as an important management innovation. This paper investigates an actual implementation of an EVA system through a case study. The case study provides detailed information on how the performance measure was cascaded down in the organization and how the standards were constructed. After two years in operation the actual bonuses paid by the system, as well as qualitative feedback from the managers involved, were analyzed. Based on this case study, and contrary to the general claims put forward by its advocates, it is argued that EVA systems do not bypass the congruence-controllability dilemma. This analysis is consistent with the empirical limitations of EVA systems as reported in the literature.