Performance Incentives within Firms: The Effect of Managerial Responsibility

Abstract

We show that top management incentives vary by responsibility. For oversight executives, pay-performance incentives are $1.22 per thousand dollar increase in shareholder wealth higher than for divisional executives. For CEOs, incentives are $5.65 higher than for divisional executives. Incentives for the median top management team are substantial at $32.32. CEOs account for 42 to 58 percent of aggregate team incentives. For divisional executives, the pay–divisionalperformance sensitivity is positive and increasing in the precision of divisional performance and the pay–firmperformance sensitivity is decreasing in the precision of divisional performance. These results support principal–agent models with multiple signals of managerial effort.