EconPapers    
Economics at your fingertips  
 

Performance Incentives Within Firms: The Effect of Managerial Responsibility

Rajesh Aggarwal and Andrew Samwick

No 7334, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Empirical research on executive compensation has focused almost exclusively on the incentives provided to chief executive officers. However, firms are run by teams of managers, and a theory of the firm should also explain the distribution of incentives and responsibilities for other members of the top management team. An extension of the standard principal-agent model to allow for multiple signals of effort predicts that executives who have other, more precise signals of their effort than firm performance will have compensation that is less sensitive to the overall performance of the firm. We test this prediction in a comprehensive panel dataset of executives at large corporations by comparing executives with explicit divisional responsibilities to those with broad oversight authority over the firm and to CEOs. Controlling for executive fixed effects and the level of compensation, we find that CEOs have pay-performance incentives that are $5.85 per thousand dollar increase in shareholder wealth higher than the pay-performance incentives of executives with divisional responsibility. Executives with oversight authority have pay-performance incentives that are $1.26 per thousand higher than those of executives with divisional responsibility. The aggregate pay-performance sensitivity of the top management team is quite substantial, at $30.24 per thousand dollar increase in shareholder wealth for the median firm in our sample. Our work sheds light on the alignment of responsibility and incentives within firms and suggests that the principal-agent model provides an appropriate characterization of the internal organization of the firm.

JEL-codes: G3 J3 (search for similar items in EconPapers)
Date: 1999-09
New Economics Papers: this item is included in nep-cfn, nep-ind and nep-lab
Note: CF LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Published as Journal of Finance, Vol. 58, no. 4 (August 2003): 1613-1649

Downloads: (external link)
http://www.nber.org/papers/w7334.pdf (application/pdf)

Related works:
Journal Article: Performance Incentives within Firms: The Effect of Managerial Responsibility (2003) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:7334

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w7334

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2022-05-27
Handle: RePEc:nbr:nberwo:7334