Incentive Compensation and Promotion-Based Incentives of Mid-Level Managers: Evidence from a Multinational Corporation

Abstract

ABSTRACT: This study re-examines the hypothesis that explicit, compensation-based incentives of mid-level managers are adjusted to the level of implicit incentives provided by the possibility of moving to higher-level positions. Using compensation data from a large multinational corporation, I find that, after controlling for the position’s scope and level of accountability, bonus-based incentives are stronger for managers who (1) have fewer organizational levels left to climb, (2) face weaker implicit incentives from getting promoted to the next level, and (3) face weaker implicit incentives from getting promoted to the top of the organization. The findings are consistent with the notion that implicit incentives are taken into consideration in the design of explicit incentive contracts. In particular, the results support the prediction that explicit incentives are optimally stronger in situations with weaker implicit incentives.