It has been documented that firm hierarchies are flattening. CEO span of control has increased significantly over time while the number of levels in the hierarchy has declined. In this paper, we establish a causal effect of competition, from trade liberalization and changing trade costs on various characteristics of organizational design. We exploit a unique panel dataset of large US firms with detailed information on firm hierarchies and managerial positions over the period 1986-1999. We find that increasing foreign competition leads to flatter firms: (i) firms reduce the number of positions between the CEO and division managers, and (ii) increase the number of positions reporting directly to the CEO. We also find that competition increases performance-based pay for division managers and affects the reporting relationships of senior officers including Chief Financial Officers and Legal Counsel. The results are generally consistent with the explanation that intensified competition increases the value of delegation and fast decision-making, causing multidivisional firms to redesign their organizations to be more adaptive to local information while simultaneously coordinating activities across divisions.

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We study the effects of non-competition agreements by analyzing time-series and cross-sectional variation in the enforceability of these contracts across U.S. states. We find that tougher noncompetition enforcement promotes executive stability. Increased enforceability also results in reduced executive compensation and shifts its form towards greater use of salary. We further show that stricter enforcement reduces research and development spending and capital expenditures per employee. These results are consistent with a model in which enforceable non-competition contracts encourage firms to invest in their managers ’ human capital. On the other hand, our findings suggest that these contracts also discourage managers from investing in their own human capital and that this second effect is empirically dominant.

More than 30 years ago, Armen Alchian (1969) posited that replacement of an inefficient division head would be “quicker ” within a conglomerate firm than if the division were a standalone firm. He ended his discussion of the issue with “But what the truth is, I do not know. ” Despite the considerable progress that has been made on organizational structure, both theoretically and empirically,

We survey more than 1,000 CEOs and CFOs to understand how capital is allocated, and decision-making authority is delegated, within firms. We find that CEOs are least likely to share or delegate decision-making authority in mergers and acquisitions, relative to delegation of capital structure, payout, investment, and capital allocation decisions. We study capital allocation in detail and learn that most companies allocate funds across divisions using the net present value ranking rule. Allocation is also affected by other factors including the reputation of the divisional manager, the timing of a project’s cash flows, and senior management’s gut feel. Corporate politics and corporate socialism are more important in foreign countries than in the U.S. Finally, we find that CEOs are more likely to delegate decision authority when the firm is large or complex. Delegation is less likely when the CEO is particularly knowledgeable about a project, when the CEO has an MBA degree or long tenure, and when the CEO’s pay is tilted

We investigate the relationship between CEO centrality – the relative importance of the CEO within the top executive team in terms of ability, contribution, or power – and the value and behavior of public firms. Our proxy for CEO centrality is the fraction of the top-five compensation captured by the CEO. We find that CEO centrality is negatively associated with firm value (as measured by industry-adjusted Tobin's Q). Greater CEO centrality is also correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) greater tendency to reward the CEO for luck in the form of positive industry-wide shocks, (iv) lower likelihood of CEO turnover controlling for performance, and (v) lower firm-specific variability of stock returns over time. Overall, our results indicate that differences in CEO centrality are an aspect of firm management and governance that deserves the attention of researchers.

We study the effects of non-competition agreements by analyzing time series and cross-sectional variation in the enforceability of these contracts across U.S. states. We find that increased enforceability reduces executive compensation and shifts its form towards greater use of salary. We also show that tougher non-competition enforcement reduces research and development spending and capital expenditures per employee. Non-competition agreements promote executive stability and board participation, but higher quality managers apparently shun firms in high-enforcement jurisdictions. Our results have implications for theories of executive compensation and firm organization.

This paper extends the literature on executive compensation by developing and testing a principal-agent model in the context of project selection. The model’s focus on executive project selection decisions highlights the multidimensional nature of executive choices that affect the value of the firm. An executive not only makes an effort choice that determines the quality of information on which to base a decision but also sets the decision criteria for selecting projects. A project selection framework is also shown to introduce endogenous uncertainty into compensation that can influence the executive’s effort choice. Using an extensive data set, our empirical work supports the main hypotheses of the model, including the significance of executive rank in determining the extent of use of incentive pay in general and equitybased incentive pay in particular.

Work hard, not smart: Stock options in

Much of the research on management compensation focuses on the level and structure of executives ’ pay. In this study, we examine a compensation element that has not received so far considerable research attention—the dispersion of compensation across managers—and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion—tournament vs. equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behaviour among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin’s Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion.