Julie Wulf

Innovation and Incentives: Evidence from Corporate R&D

Beginning in the late 1980s, American corporations began increasingly linking the compensation of central research personnel to the economic objectives of the corporation. This paper examines the impact of the shifting compensation of the heads of corporate research and development. Among firms with centralized R&D organizations, a clear relationship emerges: more long-term incentives (such as stock options and restricted stock) are associated with more heavily cited patents. These incentives also appear to be associated with more patent awards and patents of greater originality. Short-term incentives appear to be unrelated to measures of innovation.

The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies

Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms, we find that firm hierarchies are becoming flatter. The number of positions reporting directly to the CEO has gone up significantly over time while the number of levels between the division heads and the CEO has decreased. More of these managers now report directly to the CEO and more are being appointed officers of the firm, reflecting a delegation of authority. Moreover, division managers who move closer to the CEO receive higher pay and greater long-term incentives, suggesting that all this is not simply a change in organizational charts with no real consequences. Importantly, flattening cannot be characterized simply as centralization or decentralization. We discuss several possible explanations that may account for some of these changes.

*Authority, Risk, and Performance Incentives: Evidence from Division Manager Positions Inside Firms

I show that performance incentives vary by decision-making authority of division managers. For division managers with broader authority, i.e., those designated as corporate officers, both the sensitivity of pay to global performance measures and the relative importance of global to local measures are larger, relative to non-officers. There is no difference in sensitivity of pay to local measures by officer status. These results support theories suggesting that authority over project selection combined with incentives designed to maximize firm performance, as well as induce effort for the division, are important in incentive design for division managers. Consistent with earlier findings, the evidence strongly supports one of the main predictions of the principal-agent model, that is, a negative tradeoff between risk and incentives.

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

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.

The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization

This paper establishes a causal effect of competition from trade liberalization on various characteristics of organizational design. We exploit a unique panel dataset on firm hierarchies (1986-1999) of large U.S. firms and find that increasing competition leads firms to become flatter, i.e., (i) reduce the number of positions between the CEO and division managers (DM), (ii) increase the number of positions reporting directly to the CEO (span of control), (iii) increase DM total and performance-based pay. The results are generally consistent with the explanation that firms redesign their organizations through a set of complementary choices in response to changes in their environment.

Influence and inefficiency in the internal capital market

Is the investment behavior of multi-divisional firms driven in part by influence activities in the internal capital market? Using Compustat Segment data, I find that models of influence activities may have considerable value in predicting capital allocation decisions of multi-divisio nal firms. Headquarters decides how much to invest in small divisions based on the investment committees recommendation (private signal) and observable characteristics (public signal) of the small division. Using a standard moral hazard model, I show that large, established division managers have an incentive to bias private information about investment opportunities in small divisions and skew capital budgets in their favor. Headquarters can reduce these incentives to engage in costly influence activities, by designing contracts which alter the sensitivity of investment to private and public signals. In evaluating optimal contracts, firms face a trade-off between the value of an accurate signal and the cost of mitigating influence problems. This trade-off and the resulting implications for investment sensitivity to both private and public signals depends on the severity of the firms influence problem and the quality of the public signal. Using division profits as a proxy for the public signal, firm attributes as proxies for the severity of the influence problem, and the informativeness of profits in predicting firm value as a proxy for the quality of the public signal, I show that manufacturing firms allocate capital to smaller divisions in a way that suggests that influence problems lead to inefficient capital allocation. Moreover, firms with operations in related or less predictable businesses, flatter organizational structures, and tighter financial constraints appear to be more vulnerable to these problems and, as a result, suffer from greater inefficiencies in their internal capital markets.

How Do Acquirers Retain Successful Target CEOs? The Role of Governance

The resource-based view argues that acquisitions can build competitive advantage partially through retention of valuable human capital of the target firm. However, making commitments to retain and motivate successful top managers is a challenge when contracts are not enforceable. Investigating the conditions under which target chief executive officers (CEOs) are retained in a sample of mergers in the 1990s, we find greater retention of better-performing and higher-paid CEOs---both measures of valuable human capital. We also show that the performance-retention link is stronger when the acquirers governance provisions support managers and when the acquirers CEO owns more equity. Although it is not common for acquirers to retain target CEOs, we argue that they are more likely to do so when their governance environment maintains managerial discretion. Based on a joint analysis of retention and governance, our findings are largely consistent with a managerial human capital explanation of retention. This paper was accepted by Bruno Cassiman, business strategy.

Measuring the Effect of Multimarket Contact on Competition: Evidence from Mergers Following Radio Broadcast Ownership Deregulation

Abstract This paper examines the effects of multimarket contact on advertising prices in the U.S. radio broadcasting industry. While it is in general difficult to measure the effect of multimarket contact on competition, the 1996 Telecommunications Act substantially relaxed local radio ownership restrictions, giving rise to a major and exogenous consolidation wave. Between the years of 1995 to 1998, the average extent of multimarket contact in major U.S. media markets increased by 2.5 times. Importantly, the extent of change in multimarket contact varies across markets, and the change in multimarket contact varies separately from the change in concentration. Using a panel data set on 248 geographic U.S. radio broadcast markets, 1995-1998, we find that multimarket contact has little effect on advertising prices. This paper contributes to the empirical literature on multimarket contact by analyzing a different industrial context and using longitudinal data surrounding an ownership deregulation.

Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms

Our study presents evidence that social comparison influences both the level of pay and the degree of performance sensitivity within firms. We report pay patterns among division managers of large, multibusiness firms over a 14-year period. These patterns are consistent with employees comparing pay against both their peers (horizontal comparison) and the chief executive officer (vertical comparison) within their firm. Horizontal comparison also appears to reduce pay–performance sensitivity, in accord with prior theory proposing that performance pay can lead to perceived pay inequity among employees. Taken together, our evidence suggests that agency costs and social comparison jointly influence pay within firms. The evidence also supports the notion that managers of multibusiness firms are constrained in the degree to which they can incentivize employees, given the firm-imposed reference group.The online appendix is available at https://doi.org/10.1287/orsc.2017.1109 .

Span of Control and Span of Attention

Using novel data on CEO time use, we document the relationship between the size and composition of the executive team and the attention of the CEO. We combine information about CEO span of control for a sample of 65 companies with detailed data on how CEOs allocate their time, which we define as their span of attention. CEOs with larger executive teams do not save time for personal use, or to cultivate external constituencies. Instead, CEOs with broader spans of control invest more in a “team” model of interaction. They spend more time internally, specifically in pre-planned meetings that have more participants from different functions. The complementarity between span of control and the team model of interaction is more prevalent in larger firms.