Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management

Maria   Guadalupe; Hongyi  Li; Julie  Wulf

Article | Management Science | April 2014

Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management

by Maria Guadalupe, Hongyi Li and Julie Wulf

Abstract

Top management structures in large U.S. firms have changed significantly since the mid-1980s. While the size of the executive team—the group of managers reporting directly to the CEO—doubled during this period, this growth was driven primarily by an increase in functional managers rather than general managers, a phenomenon we term "functional centralization." Using panel data on senior management positions, we show that changes in the structure of the executive team are tightly linked to changes in firm diversification and IT investments. These relationships depend crucially on the function involved: those closer to the product ("product" functions, e.g., marketing, R&D) behave differently from functions further from the product ("administrative" functions, e.g., finance, law, HR). We argue that this distinction is driven by differences in the information-processing activities associated with each function and apply this insight to refine and extend existing theories of centralization. We also discuss the implications of our results for organizational forms beyond the executive team.

Keywords: communication; organizational design; functions; centralization; M-form; hierarchy; top management team; C-Suite; information technology; activities; diversification; Organizational Change and Adaptation; Diversification; Managerial Roles; Organizational Design; Information Technology; Organizational Structure; Management Teams; United States;

Format: Print

39 pages

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Citation:

Guadalupe, Maria, Hongyi Li, and Julie Wulf. "Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management." Management Science 60, no. 4 (April 2014): 824–844.

This study suggests that peer comparison affects both wage setting and productivity within firms. We report three changes in division manager compensation following a 1991–1992 controversy over executive pay. We argue that this controversy increased wage comparisons within firms, particularly those with geographically dispersed managers—managers with the greatest information frictions. Following the controversy, pay in dispersed firms co-moves more and is less sensitive to individual performance. Relatedly, pay disparity between managers located in different states decreases relative to that of co-located managers. Finally, division productivity falls in dispersed firms, particularly among managers at the low end of the wage distribution.

For decades, management consultants and the popular business press have urged large firms to flatten their hierarchies. Flattening (or delayering, as it is also known) typically refers to the elimination of layers in a firm's organizational hierarchy and the broadening of managers' spans of control. The alleged benefits of flattening flow primarily from pushing decisions downward to enhance customer and market responsiveness and to improve accountability and morale. Has flattening delivered on its promise to push decisions downward? In this article, I present evidence suggesting that while firms have delayered, flattened firms can exhibit more control and decision making at the top. Managers take note. Flattening can lead to exactly the opposite effects from what it promises to do.

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Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management

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