Divisional Versus Company-Wide Focus: The Trade-Off Between Allocation of Managerial Attention and Screening of Talent

In this paper, we analyze why managers are sometimes induced to maximize local objectives rather than adopt a company-wide perspective. A narrow managerial focus is perplexing in view of the argument that at top managerial levels, effort aversion is often unlikely to be a serious concern. Why would top-level managers, typically described as hard working, not simply be asked to do what is best for their companies? In particular why are division managers often induced to focus on maximizing divisional performance measures? We focus on the trade-off between allocation of managerial attention and screening of talent and show that it alone can explain the above puzzle. We assume that top managers are not effort averse but differ in ability (referred to as "type"). When managerial type differs and is unobservable, the principal has to design a compensation scheme that possibly screens managerial types and induces optimal allocation of effort. We identify circumstances under which the principal finds it optimal to sacrfice desired effort allocation for better screening of managerial type.