Authority, Monitoring, and Incentives in Hierarchies*†

We study three elements of management control: incentive compensation, performance monitoring, and delegation of authority to managers to contract with lower‐level employees. Using a principal‐agent 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 three‐legged 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.RÉSUMÉDélégation de pouvoirs, suivi et mesures incitatives dans les hiérarchiesLes auteurs étudient trois éléments du contrôle de gestion: la rémunération incitative, le suivi de la performance et la délégation aux gestionnaires du pouvoir d’établir des liens contractuels avec les employés subalternes. À l’aide d’un modèle mandant‐mandataire, ils mettent en lumière les interactions directes et indirectes importantes entre ces éléments de contrôle endogènes, des thèmes qui, dans bien des cas, retiennent tout particulièrement l’attention des chercheurs en économique et en comptabilité qui utilisent l’analogie du « tabouret à trois pattes ». Les auteurs décrivent les circonstances dans lesquelles ces éléments de contrôle jouent le rôle de compléments ou de substituts, et donnent une vue d’ensemble cohérente des pratiques observées. Ainsi, contrairement aux hypothèses classiques selon lesquelles le suivi de la qualité complète de forts incitatifs à l’effort, ils observent que, lorsque l’attribution du pouvoir d’établir des liens contractuels s’adapte aisément aux changements contextuels que connaît l’entreprise, la rémunération incitative et le pouvoir d’établir ces liens se substituent tous deux à la qualité du suivi, alors que la rémunération incitative complète le pouvoir d’établir des liens contractuels. Dans l’ensemble, les constatations des auteurs nous sensibilisent à un grand nombre de conséquences empiriques et alimentent de manière générale les études de plus en plus abondantes traitant de la présence ou de l’absence de complémentarités entre les éléments du contrôle 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

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 difficulty—targets 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