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-divisional performance sensitivity is positive and increasing in the precision of divisional performance and the pay-firm performance sensitivity is decreasing in the precision of divisional performance. These results support principal-agent models with multiple signals of managerial effort.