not capture synergies among groups unless a super group level structure is

Not capture synergies among groups unless a super

This preview shows page 3 - 4 out of 4 pages.

not capture synergies among groups unless a super group-level structure is imposed on top of the group structure. Instead of adding groups, divisional managers with significant synergies can link their pay to each other’s performance. For example, if two divisions have joint costs or joint benefits, each divisional manager’s pay can be based on say 70 percent of own division performance and 30 percent of the other division’s performance. Determining the “right” percentages is tricky. Eastman Chemical tried and abandoned this approach. When three or four divisions interact, the system becomes overly complicated. Another method companies often use to give divisional managers incentives to cooperate to capture interdependencies is to combine both objective and subjective performance measures. For example, divisional EVA is an objective performance measure. Also rewarding managers through extra pay, non-pecuniary compensation, and promotions
Image of page 3
Written Home Assignment 4 based on them being a “team” player as perceived by their superior is a subjective metric. “360˚ peer review” systems or basing some fraction of a manager’s bonus on the subjective evaluation of those who interact with the manager creates incentives to cooperate to capture synergies. Unfortunately, such systems also create incentives for managers to lobby for higher ratings from those providing the subjective evaluations. Another often overlooked method for inducing cooperation among divisions is allocating corporate-level advertising and overhead. While some accountants argue that allocating corporate overhead is a tax on profitable divisions that can distort profitability, such allocations also have desirable incentive properties. For example suppose there are five divisions each with its own performance metric such as EVA. Corporate overhead is $100 million. If this overhead is allocated to the divisions based on the percentage of that division’s EVA to firm-wide EVA, then the divisions have incentives to cooperate. If one division’s EVA goes up so does the amount of overhead allocated to that division and the other divisions’ allocated corporate overhead goes down. Each division manager has incentive to increase the other divisions’ EVA so each manager’s own overhead goes down and EVA after allocated overhead increases. This type of allocation does not insulate each division’s cost allocation from the other divisions’ performance. In fact, if the synergies among divisions arise mainly from shared benefits such as brand-name capital, corporate overhead can be allocated based on divisional revenues instead of division profits or EVA. Chapters 7 and 8 discuss the incentive effects of cost allocations in greater detail. Finally, if the synergies between two divisions become large, these two divisions can be combined into one EVA or profit centre controlled by a single manager. However, as with all other possible “remedies,” reorganizing also has costs. In particular, local managers of the merged divisions no longer have profit responsibility for their organization.
Image of page 4

You've reached the end of your free preview.

Want to read all 4 pages?

  • Fall '18
  • RRC

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors