Finance has long recognized the importance of designing employment and compensation contracts with an eye toward mitigating agency problems. Many CEOs now have performance-based bonuses and receive a large percentage of total compensation in the form of executive stock options. As the three articles from the McKinsey Quarterly suggest, these employees' major concern is that negative attention is not focused on them. Thus a plant supervisor may have an incentive to spend far too much capital on preventing down-time. Such a supervisor may feel that a plant shutdown would cost his job, for example.
Many companies separate the budgeting process into an operational budget and the capital budget.
In these companies most of the political energy is focused on the operational budget. Head Office spells out revenue and expense expectations for the year, and supervisor bonuses depend entirely on performance relative to the operating budget. The capital budget is almost an afterthought, and often involves an arbitrary rationing across operating divisions, and so on down the line. Of course in this setting, a supervisor's incentive is to spend his entire capital budget, and exert effort to get a bigger ration. Such feelings can disrupt morale and negatively impact operating performance.