21 research outputs found
Transparency in Hierarchies
We use an agency model to address the benefits and costs of transparency in a hierarchical organization in which the principal employs a manager entrusted with contracting authority and several workers, all under conditions of moral hazard. We define the principal's transparency choices as a decision to allow workers to observe their coworkersâ performances (observability) and as an investment in monitoring worker performance (precision). We find that whereas precision alleviates agency conflicts as expected, observability can exacerbate agency conflicts, especially if the manager's interests are misaligned sufficiently with those of the principal. Our results suggest several testable hypotheses including predictions that opaque performance measurement practices are well suited for small organizational units at lower hierarchical ranks, and in settings where the sensitivity-precision of the available measures is low, workersâ performances are correlated positively, and managerial productivity is modest
Authority, Monitoring, and Incentives in Hierarchies*â
We study three elements of management control: incentive compensation, performance monitoring, and delegation of authority to managers to contract with lowerâlevel employees. Using a principalâagent model, we highlight important direct and indirect interactions between and among these endogenous control elements, themes often emphasized in the economics and accounting literatures using the analogy of a threeâlegged stool. We identify circumstances in which control elements are complements or substitutes and exhibit a coherent pattern of practices observed together. For instance, contrary to typical predictions that quality monitoring complements steep effort incentives, we find that when contracting authority adjusts easily to changes in firm circumstances, then both incentive pay and contracting authority substitute for monitoring quality, while incentive pay complements contracting authority. Overall, our findings suggest a number of empirical implications and generally inform a growing literature that documents the presence or absence of complementarities among management control elements.RĂSUMĂDĂ©lĂ©gation de pouvoirs, suivi et mesures incitatives dans les hiĂ©rarchiesLes auteurs Ă©tudient trois Ă©lĂ©ments du contrĂŽle de gestion: la rĂ©munĂ©ration incitative, le suivi de la performance et la dĂ©lĂ©gation aux gestionnaires du pouvoir dâĂ©tablir des liens contractuels avec les employĂ©s subalternes. Ă lâaide dâun modĂšle mandantâmandataire, ils mettent en lumiĂšre les interactions directes et indirectes importantes entre ces Ă©lĂ©ments de contrĂŽle endogĂšnes, des thĂšmes qui, dans bien des cas, retiennent tout particuliĂšrement lâattention des chercheurs en Ă©conomique et en comptabilitĂ© qui utilisent lâanalogie du « tabouret Ă trois pattes ». Les auteurs dĂ©crivent les circonstances dans lesquelles ces Ă©lĂ©ments de contrĂŽle jouent le rĂŽle de complĂ©ments ou de substituts, et donnent une vue dâensemble cohĂ©rente des pratiques observĂ©es. Ainsi, contrairement aux hypothĂšses classiques selon lesquelles le suivi de la qualitĂ© complĂšte de forts incitatifs Ă lâeffort, ils observent que, lorsque lâattribution du pouvoir dâĂ©tablir des liens contractuels sâadapte aisĂ©ment aux changements contextuels que connaĂźt lâentreprise, la rĂ©munĂ©ration incitative et le pouvoir dâĂ©tablir ces liens se substituent tous deux Ă la qualitĂ© du suivi, alors que la rĂ©munĂ©ration incitative complĂšte le pouvoir dâĂ©tablir des liens contractuels. Dans lâensemble, les constatations des auteurs nous sensibilisent Ă un grand nombre de consĂ©quences empiriques et alimentent de maniĂšre gĂ©nĂ©rale les Ă©tudes de plus en plus abondantes traitant de la prĂ©sence ou de lâabsence de complĂ©mentaritĂ©s entre les Ă©lĂ©ments du contrĂŽle de gestion.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/170242/1/care12672_am.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/170242/2/care12672.pd
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Executive Target Bonuses and What They Imply about Performance Standards
We provide evidence that CEOs' and lower-level business unit executives' target bonuses are negatively associated with a proxy for measurement noise in accounting-based performance measures, and positively associated with proxies for firms' growth opportunities and the extent of executives' decision-making authority. Non-CEO executives' target bonuses are also positively associated with their CEO's target bonus. In addition, we compare executives' actual and target bonuses over two consecutive periods to draw inferences about how firms revise executives' performance standards. If firms adjust performance standards to fully reflect executives' past performance, then we expect an executive's chances of earning an above-target bonus to be independent of his past performance. We find evidence to the contrary; an executive is more likely to receive an above-target bonus if he received an above-target bonus in the prior year than if he did not. This suggests that firms do not adjust standards to fully reflect executives' past performance, consistent with agency-theoretic arguments that a firm can better motivate its executives if it discounts executives' past performance in setting their future compensation
Earnings targets and annual bonus incentives
We examine the extent to which firms use past performance as a basis for setting earnings targets in their bonus plans and assess the implications of such targets for managerial incentives. We find that high-profitability firms commonly decrease earnings targets when their managers fail to meet prior-year targets but rarely increase targets. Conversely, we find that low-profitability firms commonly increase earnings targets when their managers meet or exceed prior-year targets but rarely decrease targets. This targetrevision process yields a serial correlation in target difficultyâtargets remain relatively easy (or difficult) through time. We also find that firms are reluctant to revise earnings targets below zero, resulting in an unusually high frequency of zero earnings targets that are abnormally difficult to achieve. Collectively, our findings suggest that firms incorporate past performance information into targets, yet they do so only to a limited extent. This is consistent with theoretical arguments that highlight the benefits of contractual commitments