Performance Incentives within Firms: The Effect of Managerial Responsibility

Posted: 7 Apr 1998

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)

Multiple version iconThere are 3 versions of this paper

Date Written: November 14, 1997


Empirical research on the principal-agent model has focused almost exclusively on the incentives provided to chief executive officers. However, the model is also directly relevant to the incentives provided to other top executives. Furthermore, the extent to which other executives will be provided with high-powered incentives to maximize firm profits depends critically on the other measures of their performance that are observable to the shareholders. Top managers who have important divisional responsibilities within the firm have more precise signals of their effort than the overall performance of the firm. Consequently, the compensation of this group of executives will be less sensitive to firm performance than will the compensation of top managers with broad oversight authority. We find robust empirical support for this proposition using a comprehensive panel dataset of executives at large corporations. We also show that the aggregate pay-performance sensitivity of the top management team is quite substantial. These findings are consistent with a principal-agent model in which shareholders optimally utilize multiple signals of executive effort in determining compensation. Our results suggest that the principal-agent model is an appropriate characterization of the internal organization of the firm.

JEL Classification: G30, J33, L22, D23

Suggested Citation

Aggarwal, Rajesh K. and Samwick, Andrew A., Performance Incentives within Firms: The Effect of Managerial Responsibility (November 14, 1997). Available at SSRN:

Rajesh K. Aggarwal

Northeastern University ( email )

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

Andrew A. Samwick (Contact Author)

Dartmouth College - Department of Economics ( email )

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


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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