Managerial Compensation in Multi-Division Firms

Abstract

Using hand collected data on division manager (DM) pay contracts, we document that DM pay is related to the performance of both her division and the other divisions in the firm. There is substantial heterogeneity in DM pay-for-performance. DM pay for her division’s performance is lower in industries with less informative accounting earnings. DM pay is more sensitive to other divisions’ performance if her division is related to the rest of the firm, if her division has fewer growth opportunities and receives less capital from the rest of the firm. Consistent with optimal contracting view, DMs receive greater pay for other divisions’ performance in better governed firms. Overall, our evidence suggests that DM compensation is structured taking into account the information and agency problems in multi-division firms.

Keywords: conglomerates, division managers, incentive contracts, compensation, executive compensation, manager, divisions, business segments

JEL Classification: G30, J33