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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-�-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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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 30 (2009)
Issue (Month): 3 ()
Pages: 141-153

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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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  1. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(3), pages 473-489, September.
  2. Robert Gibbons & Kevin J. Murphy, 1991. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
  3. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 927-40, December.
  4. Efe A. Ok & Levent KoÚkesen, 2000. "Negatively interdependent preferences," Social Choice and Welfare, Springer, Springer, vol. 17(3), pages 533-558.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Rauscher, Michael, 1992. "Keeping up with the Joneses : Chaotic patterns in a status game," Economics Letters, Elsevier, Elsevier, vol. 40(3), pages 287-290, November.
  7. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, Elsevier, vol. 49(4), pages 459-464, October.
  8. Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(2), pages 51-68.
  9. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(3), pages 531-539, June.
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Cited by:
  1. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2009. "Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment," Working Papers, University of Crete, Department of Economics 0905, University of Crete, Department of Economics.
  2. Fanti, Luciano & Gori, Luca, 2011. "Stability analysis in a Cournot duopoly with managerial sales delegation and bounded rationality," MPRA Paper 33828, University Library of Munich, Germany.
  3. Luciano Fanti & Nicola Meccheri, 2013. "Managerial Delegation under Alternative Unionization Structures," LABOUR, CEIS, CEIS, vol. 27(1), pages 38-57, 03.
  4. Fanti, Luciano & Gori, Luca & Sodini, Mauro, 2012. "Nonlinear dynamics in a Cournot duopoly with relative profit delegation," MPRA Paper 37834, University Library of Munich, Germany.
  5. Evangelos Mitrokostas & Emmanuel Petrakis, 2011. "Organizational structure, strategic delegation and innovation in oligopolistic industries," Working Papers, Economics Department, Universitat Jaume I, Castellón (Spain) 2011/09, Economics Department, Universitat Jaume I, Castellón (Spain).
  6. Chirco, Alessandra & Scrimitore, Marcella, 2013. "Choosing price or quantity? The role of delegation and network externalities," Economics Letters, Elsevier, Elsevier, vol. 121(3), pages 482-486.
  7. Berr, Fabian, 2011. "Stackelberg equilibria in managerial delegation games," European Journal of Operational Research, Elsevier, Elsevier, vol. 212(2), pages 251-262, July.
  8. Nicola Meccheri & Luciano Fanti, 2012. "Managerial delegation schemes in a duopoly with endogenous production costs: a comparison of sales and relative profit delegation under centralised unionisation," Discussion Papers, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy 2012/137, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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