Division managers\u27 compensation in related diversified firms: The contingencies of centralization and directionality of intracorporate sharing

This dissertation develops and tests a model of implementation of related diversification strategies which focuses on design of effective compensation plans for division general managers. Prior authors have found greater use of discretionary and group-performance bonuses in association with greater magnitudes of divisional sharing to have a positive impact on effectiveness. However, seminal works in the strategy implementation area suggest that, besides magnitude of sharing (which reflects corporate choices about strategy), the relative centralization and directionality of resource sharing flows to and from a focal division (which reflect corporate choices about structure) win also have important compensation design implications. The purpose of the present study was to investigate the role of magnitude, centralization, and directionality of intra-corporate sharing as contingency factors in the design of effective compensation systems for division general managers. To be able to consider the joint implications of these three factors, the dissertation proposed, first, to classify divisional sharing activities into three organizational types: centralized, decentralized-inflow , and decentralized-outflow forms of sharing and, then, to measure magnitude for each of these types. A theoretical model was developed which accounts for the different challenges involved in the control of division managers under each form of sharing. Next, formal results from the theory of contracts literature in economics were integrated into the analysis, and a series of testable hypotheses were formulated about the impact that different combinations of compensation features and resource sharing forms would have on divisional effectiveness. Hypotheses were tested with a sample of 106 divisions of large, related diversified, manufacturing firms. Results were largely supportive of the hypotheses and strongly suggest that effective implementation of different forms of sharing require the use of different compensation solutions at the division manager\u27s level. Consistent with extant theory of corporate strategy implementation, effective implementation of decentralized-outflow sharing was found to be positively related to the use of discretionary and group-performance bonuses. However, contrary to accepted theory, effective implementation of decentralized-inflow sharing was found to be negatively related to the use of either discretionary or group-performance bonuses. Effective implementation of centralized sharing, in turn, was found to be associated with the use of lower levels of incentive pay, but not with the use of either discretionary or group-performance bonuses