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On the impact of managerial bonus systems on firm profit and market competition: the cases of pure profit, sales, market share and relative profits compared

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Author Info
Thijs Jansen (Department of Quantitative Economics, University of Maastricht, Maastricht, The Netherlands)
Arie van Lier (Utrecht School of Economics, University of Utrecht, Utrecht, The Netherlands)
Arjen van Witteloostuijn (Faculty of Applied Economics, Department of Management, University of Antwerpen, Antwerpen, Belgium)
Abstract

By designing remuneration schemes based on a bonus rewarding specific firm-level outcomes, the owners|shareholders of a firm can manipulate the behavior of their managers. In practice, different bonus anchors take center stage: some are profit-based, others use sales as the key yardstick and still different ones focus on relative performance vis-à-vis a peer group. In this paper, we focus on the impact of remuneration schemes on firm-level profitability. The profit effect is investigated for (all possible combinations of) four bonus systems using delegation games. In the context of a linear Cournot model for two or three firms, we model a two- or three-stage decision structure where, in the first stage (or first two stages), an owner decides on the bonus system for his manager and where, in the final stage, the manager takes the daily output decision for her firm. It appears that the bonus system based on relative (profits) performance is superior throughout. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1437
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 30 (2009)
Issue (Month): 3 ()
Pages: 141-153
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:wly:mgtdec:v:30:y:2009:i:3:p:141-153

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen. [Downloadable!] (restricted)
  2. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn. [Downloadable!] (restricted)
  3. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, vol. 49(4), pages 459-464, October. [Downloadable!] (restricted)
  4. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December. [Downloadable!] (restricted)
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  5. Robert Gibbons & Kevin J. Murphy, 1990. "Relative performance evaluation for chief executive officers," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 30-51, February.
  6. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June. [Downloadable!] (restricted)
  7. Efe A. Ok & Levent KoÚkesen, 2000. "Negatively interdependent preferences," Social Choice and Welfare, Springer, vol. 17(3), pages 533-558. [Downloadable!] (restricted)
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  8. Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 51-68. [Downloadable!]
  9. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
  10. Rauscher, Michael, 1992. "Keeping up with the Joneses : Chaotic patterns in a status game," Economics Letters, Elsevier, vol. 40(3), pages 287-290, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2009. "Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment," Working Papers 0905, University of Crete, Department of Economics. [Downloadable!]
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