Equity-Based Incentives and Collaboration in the Modern Multibusiness Firm

Strategic Management Journal, Forthcoming

Rotman School of Management Working Paper No. 2592157

16 Pages Posted: 10 Apr 2015 Last revised: 20 Jun 2015

See all articles by Joanne E. Oxley

Joanne E. Oxley

University of Toronto - Joseph L. Rotman School of Management

Gurupdesh S. Pandher

University of Windsor, Odette School of Business

Date Written: April 4, 2015

Abstract

This paper examines the role of equity-based incentives in fostering cross-business-unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business-unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers’ efforts with the firm’s growth prospects and organization structure, and managing the dual risk in profits and firm market value. The inclusion of equity incentives elicits higher levels of own-unit and collaborative efforts over the profits-only contract. Our results suggest that equity-based incentives are most beneficial when profitability is uncertain relative to long-term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets.

Keywords: multibusiness firms, collaboration, equity and profit incentives, organizational design, total firm returns

JEL Classification: D2, L2, G3, D8, J3, J42

Suggested Citation

Oxley, Joanne E. and Pandher, Gurupdesh S., Equity-Based Incentives and Collaboration in the Modern Multibusiness Firm (April 4, 2015). Strategic Management Journal, Forthcoming, Rotman School of Management Working Paper No. 2592157, Available at SSRN: https://ssrn.com/abstract=2592157

Joanne E. Oxley

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-0305 (Phone)

Gurupdesh S. Pandher (Contact Author)

University of Windsor, Odette School of Business ( email )

401 Sunset Avenue
Windsor, Ontario N9B 3P4
Canada
519-253-3000 ext 3091 (Phone)

HOME PAGE: http://www1.uwindsor.ca/odette/gurupdesh-pandher

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