- 25 Jan 2012
- Working Paper Summaries
Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management
Executive Summary — 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.
This paper shows that top management structures in large US firms radically changed since the mid-1980s. While the number of managers reporting directly to the CEO doubled, the growth was driven primarily by functional managers rather than general managers. Using panel data on senior management positions, we explore the relationship between changes in executive team composition, firm diversification, and IT investments-which arguably alter returns to exploiting synergies through corporate-wide coordination by functional managers in headquarters. We find that the number of functional managers closer to the product ("product" functions i.e., marketing, R&D) increase as firms focus their businesses, while the number of functional managers farther from the product ("administrative" functions i.e., finance, law, HR) increase with IT investments. Finally, we show that general manager pay decreases as functional managers join the executive team suggesting a shift in activities from general to functional managers-a phenomenon we term "functional centralization."