Performance Measures and Intra-Firm Spillovers: Theory and Evidence

49 Pages Posted: 11 May 2013

See all articles by Jan Bouwens

Jan Bouwens

Amsterdam Business School

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Laurence van Lent

Frankfurt School of Finance and Management

Date Written: April 18, 2013

Abstract

We revisit the question of how performance measures are used to evaluate business unit managers in response to intra-firm spillovers because prior studies have documented conflicting empirical evidence. Specifically, we are interested in variation in the relative incentive weightings of aggregated “above-level” measures (e.g., firm-wide net income), “own-level” business unit measures (e.g., business unit profit), and specific “below-level” measures (e.g., R&D expenses) in response to spillover arising from either the focal manager’s effect on other business units’ performance or the other units’ effect on the focal manager’s performance. Our theory highlights existence of an interaction between the two directions of spillovers. In our empirical work, we account for the interaction effect. Based on a purpose-developed survey of 122 business unit managers, we report that the incentive weighting on above-level measures increases by approximately 50 percentage points when managers face both types of spillovers (as opposed to one type of spillover).

Keywords: Contracting, Business unit performance measurement, Organizational design, Interdependencies

JEL Classification: D23, L22, M12, M4

Suggested Citation

Bouwens, Jan and Hofmann, Christian and van Lent, Laurence, Performance Measures and Intra-Firm Spillovers: Theory and Evidence (April 18, 2013). Available at SSRN: https://ssrn.com/abstract=2263136 or http://dx.doi.org/10.2139/ssrn.2263136

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Laurence Van Lent (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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