Negotiated transfer pricing and divisional vs. firm-wide performance evaluation

Article Abstract:

A study examined the use of transfer pricing and management performance evaluation in motivating divisional managers to equilibrate the interests of their divisions and those of the whole firm. Particularly, this analysis looked into the use of divisional and firm-wide performance evaluations, in combination with negotiated transfer pricing, in managerial compensation contracts to encourage balance between divisional and firm-level goals. This investigation portray the conflict between divisional and firm-wide goals as an investment "hold-up" problem. In the model, a firm has two divisions, each being an independent profit-maker managed by a risk- and effort-averse manager. They can also trade an intermediate product with each other. Each division can boost total surplus from interdivisional trade through costly relationship-specific investments. Optimal linear compensation contracts will include divisional as well as firm-wide elements.

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tin

Jan 19, 2012 @ 8:20 pm

Most systems allow use of multiple methods, where appropriate and supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy.

Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between taxpayers and one or more governments regarding mechanisms for setting related party prices.

Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.

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The case for divisional long-term incentives

Article Abstract:

Incentives have long been a sizable portion of executive compensation. These incentives are a powerful motivator, but companies need to consider more carefully both the short- and long-term effects on the company in designing compensation packages. Many companies have made the mistake of emphasizing short-term incentives. This causes executives to focus on maximizing current earnings, often at the expense of long-term corporate health. Large corporations, in particular, also fall into the trap of pitting corporate divisions against each other in competition for short-term rewards, again to the long-term detriment of the company. What is needed is a system of long-term divisional incentives. This article identifies the candidates, measures, and methods for achieving this and shows how it will not only benefit the individual company, but the American economy as a whole. (Reprinted by permission of the publisher.)

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Why CEO compensation is so high

Article Abstract:

Executive compensation in the United States has gotten out of control. There is no longer a level-playing field when a very well informed seller (the CEO) is combined with uninformed buyers (the shareholders and the compensation committee of the board). In an excerpt from his new book, In Search of Excess: The Overcompensation of American Executives, the author describes the upward spiral of executive compensation, the deceptions involved in determining and reporting compensation packages, and the rationalizations used to justify them. He provides a list of the culprits responsible for creating the problem and allowing it to continue - a list that includes compensation consultants, board compensation committees, the Financial Accounting Standards Board, and the Securities and Exchange Commission. (Reprinted by permission of the publisher.)

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