Controllable Incentive Contracting for Ambidextrous Principal/Agent Relations

• In Event: Management Accounting: Incentives and Evaluations

Abstract

In this paper, I extend the organizational design literature by examining how individual ambidexterity—effort allocation for increasing productivity while simultaneously learning fundamentally new managerial abilities—is affected by incentive contracts. Based on the seminal papers by Antle and Demski (1988) and Feltham and Xie (1994), I argue that the ability to resolve multiple control problems depends on the adherence versus non-adherence to controllability, where controllability depends on the informational properties of congruence, sensitivity, and noisiness of performance measures to managerial choices. Using proprietary survey data from a sample of 118 managers at a business-unit level, the empirical results show that, if firms motivate exploitation (exploration) efforts, then high (low) sensitivity, precision, and congruity, are perceived. The results also show that if effort spillovers exist, it can be optimal for an agent's pay to depend on uncontrollable but informative performance measures. Overall, these findings are consistent with the argument that multidimensional tasks are structured around the controllability underlying incentive contracts.

Author

• Stefan Edlinger-Bach, University of North Carolina at Chapel Hill