Performance Incentives within Firms: The Effect of Managerial Responsibility

Posted: 3 Nov 2003

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

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

Suggested Citation

Aggarwal, Rajesh K. and Samwick, Andrew A., Performance Incentives within Firms: The Effect of Managerial Responsibility. Journal of Finance, Vol. 58, pp. 1613-1650, August 2003. Available at SSRN: https://ssrn.com/abstract=424755

Rajesh K. Aggarwal (Contact Author)

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2893 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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