In this paper, I extend the organizational design literature by examining how the delegation choice is affected by the ability to resolve the incentive problem caused by this delegation. Based on the seminal papers by Grossman and Hart (1986) and Holmstrom and Milgrom (1994), I argue that the ability to resolve the incentive problem depends on the contractibility of financial performance measures versus non-financial performance measures, where the contractibility depends on the performance measure properties sensitivity, precision, and verifiability. The empirical results show that, if financial performance measures are good (poor) incentive measures, i.e., high (low) on sensitivity, precision, and verifiability, then using these measures for incentive purposes increases (decreases) delegation. Overall, the results are consistent with the argument that firms design their organizational structure around the quality of contractible performance measures.

In this paper, I extend the organizational design literature by examining how the delegation choice is affected by the ability to resolve the incentive problem caused by this delegation. Based on the seminal papers by Grossman and Hart (1986) and Holmstrom and Milgrom (1994), I argue that the ability to resolve the incentive problem depends on the contractibility of financial performance measures versus nonfinancial performance measures, where the contractibility depends on the performance measure properties sensitivity, precision, and verifiability. The empirical results show that, if financial performance measures are “good” (“poor”) incentive measures, i.e., high (low) on sensitivity, precision, and verifiability, then using these measures for incentive purposes increases (decreases) delegation. Overall, the results are consistent with the argument that firms design their decision-making process around the quality of contractible performance measures.

In assessing the performance of the CEO, subjectivity by the board of directors is often present in one form or another. We specifically focus on: (1) the ex ante option to ex post override a formula-based contract ("discretionary bonus"), and (2) the ex ante absence of any formula in a contract ("subjective weights"). We argue that the two types of deviations are driven by different contracting problems, which relate to whether post-contract information does or does not affect the agent's optimal action choice. We refer to these different contracting problems as problems of risk and problems of noncongruity, respectively, and hypothesize that discretionary bonuses are used for risk-reduction purposes, while subjective weights on different performance dimensions are used for congruity-improvement purposes. Our results are consistent with our expectations, showing that the use of the different types of subjectivity is consistent with optimal contracting considerations.

Following the theoretical innovations of complementarity theory, management control studies have investigated interdependencies between different management control practices. In this paper, we compare the two dominant statistical specifications to test for the presence of an interdependency. We show theoretically how the power of the demand and the performance specification varies with the level of optimality in the sample and how those specifications are vulnerable to correlated omitted variable bias. Our simulation results reveal that the demand specification is more robust to variations in optimality and correlated omitted variables than the performance specification. We use these results to formulate recommendations for future research into management control interdependencies.

We investigate the determinants and consequences of budget reallocations—that is, corrective changes to the budget made during the year. Using proprietary data from a large consumer goods manufacturer, we analyze the extent to which initial budgeting decisions drive reallocations. Examining this relationship is important because initial budget negotiations are often troubled by power struggles and politicking, which may give rise to the need for reallocations. We hypothesize that one important driver of reallocation decisions is the firm's aim to correct systematic deviations from the optimal initial budget that were driven by lobbying during the initial budgeting process. We find evidence that is consistent with this prediction. In a more exploratory analysis, we show that reallocations do not have the desired effects on market performance. In particular, budget cuts are negatively associated with a product's change in market share. More surprisingly, while budget increases do help product lines achieve their sales targets in the last quarter, they do not boost market share. Our results demonstrate that efficient investment planning is essential to achieve an improvement in market performance.

In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.