Internal Capital Markets and Firm‐Level Compensation Incentives for Division Managers | Zendy

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Internal Capital Markets and Firm‐Level Compensation Incentives for Division Managers

Author(s) -

Julie Wulf

Publication year - 2002

Publication title -

journal of labor economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 8.184

H-Index - 109

eISSN - 1537-5307

pISSN - 0734-306X

DOI - 10.1086/338713

Subject(s) - incentive , profitability index , compensation (psychology) , business , capital allocation line , division (mathematics) , investment (military) , capital (architecture) , industrial organization , division of labour , labour economics , microeconomics , economics , finance , market economy , psychology , arithmetic , mathematics , archaeology , politics , political science , psychoanalysis , law , history

Do multidivisional firms structure compensation contracts for division managers to mitigate incentive problems in their internal capital markets? I find evidence that compensation and investment incentives are substitutes: firms providing a stronger link to firm performance in incentive compensation for division managers also provide weaker investment incentives through the capital budgeting process. Specifically, as the proportion of incentive pay for division managers that is based on firm performance increases, division investment is less responsive to division profitability. These findings are generally consistent with a model of influence activities by division managers in interdivisional capital allocation decisions.

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