Managerial Compensation in Multi-Division Firms

Management Science, Forthcoming

Indian School of Business WP

43 Pages Posted: 17 Mar 2012 Last revised: 12 May 2021

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Date Written: June 18, 2016

Abstract

Using hand collected data on division manager (DM) pay contracts, we document that DM pay is related to the performance of both her division and the other divisions in the firm. There is substantial heterogeneity in DM pay-for-performance. DM pay for her division’s performance is lower in industries with less informative accounting earnings. DM pay is more sensitive to other divisions’ performance if her division is related to the rest of the firm, if her division has fewer growth opportunities and receives less capital from the rest of the firm. Consistent with optimal contracting view, DMs receive greater pay for other divisions’ performance in better governed firms. Overall, our evidence suggests that DM compensation is structured taking into account the information and agency problems in multi-division firms.

Keywords: conglomerates, division managers, incentive contracts, compensation, executive compensation, manager, divisions, business segments

JEL Classification: G30, J33

Suggested Citation

Alok, Shashwat and Gopalan, Radhakrishnan, Managerial Compensation in Multi-Division Firms (June 18, 2016). Management Science, Forthcoming , Indian School of Business WP, Available at SSRN: https://ssrn.com/abstract=2023908 or http://dx.doi.org/10.2139/ssrn.2023908

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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