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Performance Measurement, Compensation Schemes,and the Allocation of Interdependence Effects

In: Operations Research Proceedings 2008

Author

Listed:
  • Michael Krapp

    (University of Augsburg, Faculty of Business Administration and Economics)

  • Wolfgang Schultze

    (University of Augsburg, Faculty of Business Administration and Economics)

  • Andreas Weiler

    (University of Augsburg, Faculty of Business Administration and Economics)

Abstract

Summary In practice, firms often exhibit divisionalized structures in which headquarters delegate decision rights to divisional managers. In this paper, we examine the problem of allocating interdependence effects stemming from interdivisional trade. For this, we analyze a model in which a divisionalized firm contracts with two managers to operate their divisions and to make relationship-specific investment decisions. Contracts can be based on both divisional profits and hence depend on the allocation of interdependence effects. In line with transfer pricing literature, we discuss a centralized as well as a decentralized setting with respect to the allocation authority. Issues of mechanism design concerning divisional trade are extensively discussed in the literature. Most related to our paper is [1] which shows that profit sharing induces managers to make first-best investment decisions in a decentralized setting. However, profit sharing imposes extra risk on the managers and therefore may not be optimal. Our paper extends the analysis of [1] by incorporating moral hazard problems with respect to investment decisions. Further, we distinguish between different organizational designs.

Suggested Citation

  • Michael Krapp & Wolfgang Schultze & Andreas Weiler, 2009. "Performance Measurement, Compensation Schemes,and the Allocation of Interdependence Effects," Springer Books, in: Bernhard Fleischmann & Karl-Heinz Borgwardt & Robert Klein & Axel Tuma (ed.), Operations Research Proceedings 2008, pages 15-20, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-00142-0_3
    DOI: 10.1007/978-3-642-00142-0_3
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