Delegation and Incentive Compensation

Posted: 4 Oct 2001

See all articles by Venky Nagar

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Abstract

Top management faces two key organizational design choices: (1) how much authority to delegate to lower-level managers, and (2) how to design incentive compensation to ensure that these managers do not misuse their discretion. Although theoretical accounting literature has emphasized the joint nature of these two choices, there is virtually no supporting empirical evidence. Capitalizing on a unique database of branch manager practices in retail banks, this study provides some of the first evidence on the joint nature of the delegation and incentive compensation choices for lower-level managers. A simultaneous model of these two choices indicates that high-growth, volatile, and innovative banks delegate more authority to branch managers. In turn, branch managers with more authority receive more incentive-based pay. However, in contrast with principal-agent theory, I find that the extent of incentive compensation does not play a significant role in explaining the extent of delegation.

Keywords: Delegation; Incentive compensation

JEL Classification: D23, M40, M46, J33, L22, L23

Suggested Citation

Nagar, Venky, Delegation and Incentive Compensation. The Accounting Review, April 2002. Available at SSRN: https://ssrn.com/abstract=283830

Venky Nagar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

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