- 20 Nov 2012
- Working Paper Summaries
This paper demonstrates how horizontal wage comparisons within firms and concerns for "pay harmony" affect firm policies in setting pay for executives. Using a rich dataset of pay practices for the senior-most executives within divisions, Gartenberg and Wulf ask whether horizontal comparisons between managers in similar jobs affect pay. The authors also evaluate evidence in support of a tradeoff between pay harmony and performance pay. Findings are consistent with the presence of peer effects in influencing pay policies for executives inside firms. These results contribute to the ongoing policy debate on the consequences of transparency and mandatory information disclosure and potential ratchet-effects in executive pay. For practitioners involved in designing the structure of executive compensation and pay disclosure policies for firms -- including compensation committee directors, senior human resource executives, and compensation consultants -- it is important to recognize the tradeoff between the incentive effects of performance-based pay and costs of peer comparison that arise from unequal pay when designing executive wage contracts. The research also raises questions on the costs of pay disclosure and on labor markets more generally. Key concepts include: Pay policies of firms respond to concerns about internal equity. An SEC ruling in 1992 led to greater awareness of pay and greater peer comparison throughout all managerial ranks, particularly in geographically-dispersed firms that had natural information barriers prior to the ruling, as well as in firms with less ex ante pay disclosure. From the perspective of firms, the consequences of increased pay disclosure may range from pay ratcheting to aggregate shifts in worker effort or firm-specific investments and turnover. From the perspective of employees, increased pay disclosure may influence decisions to join firms and shift the relative importance of internal and external benchmarks, thereby having larger labor market consequences. Closed for comment; 0 Comment(s) posted.
- 10 May 2012
- Working Paper Summaries
For decades, management consultants and the popular business press have urged large firms to flatten their hierarchies. Flattening (or delayering, as it is also known) typically refers to the elimination of layers in a firm's organizational hierarchy, and the broadening of managers' spans of control. While flattening is said to reduce costs, its alleged benefits flow primarily from changes in internal governance: by pushing decisions downward, firms not only enhance customer and market responsiveness, but also improve accountability and morale. But has flattening actually delivered on its promise and pushed decisions down to lower-level managers? In this paper, Julie Wulf shows that flattening actually can lead to exactly the opposite effects from what it promises to do. Wulf used a large-scale panel data set of reporting relationships, job descriptions, and compensation structures in a sample of over 300 large U.S. firms over roughly a 15-year period. This historical data analysis was complemented with exploratory interviews with executives (what CEOs say) and analysis of data on executive time use (what CEOs do). Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy. In sum, flattening at the top is a complex phenomenon that in the end looks more like centralization. Yet it is crucial to consider different types of decisions and activities and how they vary by level in the hierarchy. Key concepts include: Firms may flatten structure to delegate decisions, but doing so can lead to unintended consequences for other aspects of internal governance. For instance, a manager may flatten structure to push decisions down and then hire and develop division managers suited to "being the boss." If flattening actually pushes decisions up, division managers are now out of sync with the organization: They don't have autonomy to make decisions and there is a mismatch between managerial talent and decision rights. A change in structure has implications not only for who makes decisions, but also for how decisions are made. Flatter structures involve different roles for the CEO and the senior team. Closed for comment; 0 Comment(s) posted.
- 12 Mar 2012
- Research & Ideas
It's not lonely at the top anymore—today's CEO has an average of 10 direct reports, according to new research by Julie M. Wulf, Maria Guadalupe, and Hongyi Li. Thank a dramatic increase in the number of "functional" managers for crowding in the C-suite. Key concepts include: The number of managers reporting directly to the CEO has doubled, from an average of 5 direct reports in 1986 to an average of 10 today. In 2008, companies averaged 2.9 general managers, compared with 1.6 in 1986, according to data from several surveys. The average number of functional managers reporting directly to the CEO increased much more dramatically, from 3.1 in the late 1980s to 6.7 in 2008. Two main factors have driven the C-suite sea change: an overall increase in IT investments and an overall decrease in firm diversification. As hierarchical flattening occurs, companies are pushing some decisions toward the top, casting doubt on the common idea that firms flatten in order to push ideas down the organization. Closed for comment; 13 Comment(s) posted.
- 07 Feb 2012
- Working Paper Summaries
Many studies as well as anecdotes document a link between the structure of chief executive officer (CEO) compensation and various measures of earnings manipulation. In this paper, HBS professors Oberholzer-Gee and Wulf analyze all components of compensation packages for CEOs and for managers at lower levels in a large sample of firms over more than 10 years, between 1986 and 1999. Results suggest that the effects of incentive pay on earnings management vary considerably by both type of incentive pay and position. Overall, it appears that the primary focus of compensation committees on equity incentives for CEOs overlooks a critical component in curbing earnings manipulation. If one wanted to weaken incentive pay to get more truthful reporting, diluting bonuses-particularly that of the chief financial officer (CFO)-would be the place to start. This may be the first study to analyze the relationship between CEO, division manager, and CFO compensation and earnings management. Key concepts include: It is important to look at positions below the CEO because it is unclear if all or even most financial misreporting is decided at the top. In addition to division managers, the importance of the CFO's role in financial reporting and the numerous recent corporate fraud cases suggest that CFOs can significantly affect accounting quality. Companies report significantly higher discretionary accruals and excess sales and have a higher incidence of future lawsuits when CFOs are paid larger bonuses. Importantly, the magnitudes of these effects are much larger for CFOs in comparison to both CEOs and division managers. Since the quality of financial reporting is difficult to assess, the researchers have used various measures of earnings manipulation in this study, including discretionary accounting accruals, end-of-year excess sales, and class action litigation. Closed for comment; 0 Comment(s) posted.
- 25 Jan 2012
- Working Paper Summaries
The size of a CEO's executive team has increased dramatically in recent decades, but little has been known about its composition. Using a rich dataset of US firms from 1986 to 2006, this paper documents the dramatic increase in the number of functional managers in the executive team. The size of the team in these firms doubled over the time period from five to 10 positions, with approximately three-fourths of the increase attributable to functional managers (such as Chief Financial Officer, Chief Marketing Officer, and so on) rather than general managers. The paper explores the drivers of these changes. Findings are critical for practitioners, and specifically CEOs, as they structure their executive teams and more generally as they make decisions to implement or execute strategy. Key concepts include: Standard classifications of firms as being either "centralized" or "decentralized" are too simple to accurately represent the organizational changes firms undergo at the top level. Evidence suggests that firms are doing both. General managers of business units perform more activities as they move closer to the CEO, which is reflected in higher pay and a higher fraction of firm-performance based pay—consistent with decentralization or delegation to general managers. Yet, as shown in this paper, there are also more functional managers in the executive team coordinating across business units and performing some activities of the general manager's job, which is reflected in lower pay for general managers—consistent with centralization of certain functional activities within headquarters. In addition, CEOs seem to be more involved in internal operations in firms with broader spans of control—again a form of centralization. CEOs should design the structure of their top teams based on firm scope and the opportunities for synergies, while recognizing the distinction between different types of functions and the importance of the nature of the information that is required to perform different activities. Closed for comment; 0 Comment(s) posted.
- 02 Apr 2009
- Working Paper Summaries
Corporate hierarchies are becoming flatter: Spans of control have broadened, and the number of levels within firms has declined. But why? Maria Guadalupe of Columbia University and HBS professor Julie M. Wulf investigate how increased competition in product markets—and, in particular, product market competition resulting from trade liberalization—may be fundamentally altering how decisions are being made. Guadalupe and Wulf also shed light on the possible reasons behind certain organizational choices and on the importance of communication and decision-making processes inside firms. Key concepts include: As firms become flatter, they also fundamentally alter how decisions are made. Greater international competition following trade liberalization leads to flatter firms. When competition increases the value of quick and responsive decision-making, firms eliminate layers to improve the quality and speed of the transmission of information or increase the authority of division managers to become more adaptive to local information. U.S. firms in manufacturing industries more exposed to the trade liberalization reduce the number of hierarchical levels, broaden the span of control for the chief executive, and increase total pay and incentive-based pay for division managers. Closed for comment; 0 Comment(s) posted.