The impact of organisational structures on management compensation packages and investment decisions - a principal-agent approach investigating formula apportionment and separate accounting

This study investigates managerial effort choices, compensation and investment decisions by differentiating between: 1) centralised and decentralised organisational structures; 2) corporate income taxation schemes [separate accounting and formula apportionment (FA)]; 3) different FA schemes, which has not been undertaken hitherto. A principal-agent approach of a LEN model is applied within the framework of a multijurisdictional entity. The outcomes reveal the neutral impact of separate accounting on investment decisions, agents' efforts and compensation packages under both organisational structures, whereas investment decisions under centralised structures and management compensation packages (under both organisational structures) show distortions caused by FA. The extent of these distortions depends on the apportionment factors used and organisational structures. Interestingly, the Massachusetts formula signals that the formula allocation factors used not only distort firm-internal contracts on management compensation packages, but can also affect the extent of decisions delegated.