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Current production targets and strategic decisions by corporate managers
Author(s) -
Hughes John S.,
Thevaranjan Alex
Publication year - 1995
Publication title -
journal of operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.649
H-Index - 191
eISSN - 1873-1317
pISSN - 0272-6963
DOI - 10.1016/0272-6963(95)00009-h
Subject(s) - production (economics) , moral hazard , profitability index , incentive , business , affect (linguistics) , principal (computer security) , compensation (psychology) , industrial organization , marketing , microeconomics , risk analysis (engineering) , economics , finance , computer science , psychology , linguistics , philosophy , psychoanalysis , operating system
This article considers the potential role of current production targets in providing corporate managers with incentives for allocating their efforts toward operational and strategic decisions. Operational decisions relate to current production, while strategic decisions affect both current production and future profitability. A moral hazard exists to the extent that manager effort allocations are not observable. Of interest is the design of compensation contracts which efficiently resolve that hazard. Attention is mainly focused on distortions in current production away from targets which would be optimal if manager effort allocations were observable. The principal insight is that an increase in current production targets may, paradoxically, be motivated by a desire to induce a greater allocation of effort to strategic decisions.