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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

  • 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)

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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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

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Handle: RePEc:wly:mgtdec:v:30:y:2009:i:3:p:141-153
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Robert Gibbons & Kevin J. Murphy, 1991. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
  2. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. 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.
  5. Efe A. Ok & Levent KoÚkesen, 2000. "Negatively interdependent preferences," Social Choice and Welfare, Springer, vol. 17(3), pages 533-558.
  6. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, vol. 49(4), pages 459-464, October.
  7. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  8. Rauscher, Michael, 1992. "Keeping up with the Joneses : Chaotic patterns in a status game," Economics Letters, Elsevier, vol. 40(3), pages 287-290, November.
  9. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 473-489, September.
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