Managerial Compensation in Multidivision Firms

Abstract

Using hand-collected data on division manager (DM) pay contracts, we document that DM pay is related to the performance of both the DM’s division and the other divisions in the firm. There is substantial heterogeneity in DM pay for performance. DM pay for division performance is lower in industries with less informative accounting earnings. DM pay is more sensitive to other-division performance if the DM’s division is related to the rest of the firm, if the DM’s division has fewer growth opportunities, and if the DM’s division receives less capital from the rest of the firm. Consistent with optimal contracting view, DMs receive greater pay for other-division performance in better-governed firms. Overall, our evidence suggests that DM compensation is structured to account for the information and agency problems in multidivision firms. The Internet appendix is available at https://doi.org/10.1287/mnsc.2016.2672 . This paper was accepted by Amit Seru, finance.

Spillovers Inside Conglomerates: Incentives and Capital

“…Our paper also contributes to the debate on the relation between managerial pay and performance outcomes in conglomerates. While some authors find a negative relation between intra-firm convergence in pay and performance outcomes in conglomerates (e.g., Silva 2015 and Gartenberg and Wulf 2015), other researchers find evidence consistent with optimal contracting (Alok and Gopalan 2015). We hope that future work will provide causal evidence in this direction.…”

“…Masulis and Zhang (2014) study compensation gaps between CEOs and other executives and find that these gaps are explained by productivity differentials. Alok and Gopalan (2015) examine pay-performance sensitivity in multidivisional firms and find that it is lower when accounting earnings are less informative. Gartenberg and Wulf (2015) exploit a 1992 change in SEC proxy rules to study the effect of disclosure on wages and find that disclosure compresses the internal distribution of pay.…”

Corporate‐level influences on internal capital allocation: The role of financial analyst performance projections

“…Multidivisional relatedness captures the degree to which there is homogeneity in the divisional assets and outputs within the firm. Business units within a multidivisional firm often possess similar asset structures that create input and output overlaps between them (Hoberg & Phillips, 2018), or what Alok and Gopalan (2018, p. 2857) refer to as “asset complementarity” between the divisions. In other words, divisions rarely have assets and outputs that contribute exclusively to the industry in which they compete, instead often possessing features that align partially and differentially with several industries (Alok & Gopalan, 2018; Fan & Lang, 2000; Hoberg & Phillips, 2018).…”

Internal Labor Markets, Wage Convergence, and Investment

“…This paper adds to the literature by examining how internal labor markets in conglomerates shape the wage-setting process of blue collar workers and, in turn, how this may affect investment. Labor contracts for regular, non-managerial workers are likely to differ from those of managers, suggesting that patterns observed in managerial contracts (like those studied by Alok and Gopalan (2017), Duchin et al (2017), and Gartenberg and Wulf (2017)) may not be generally applicable to workers in lower hierarchical levels. Furthermore, because regular rank-and-file employees take up most of the labor expenses of the firms in the sample, understanding how the wages of these workers are set is crucial to complete the picture of the way labor is remunerated in multi-division firms.…”

“…Some exceptions include Tate and Yang (2015), who analyze the allocation of workers across different segments of conglomerates, 11 and Schoar (2002), who analyzes average compensation in conglomerates. In addition, Alok and Gopalan (2017), Duchin et al (2017), and Gartenberg and Wulf (2017) study the compensation of division managers. The literature has so far also been silent on the interplay between worker compensation and investment policy.…”