The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies

Raghuram Rajan, Julie Wulf

NBER Working Paper No. 9633
Issued in April 2003
NBER Program(s):   CF   LS

Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms we find that the number of positions reporting directly to the CEO has gone up significantly over time. We also find that the number of levels between the lowest managers with profit center responsibility (division heads) and the CEO has decreased and more of these managers are reporting directly to the CEO. Moreover, more of these managers are being appointed officers of the company. It does not seem that divisional heads are handling larger tasks making them important enough to report directly. Instead, our findings suggest that layers of intervening management are being eliminated and the CEO is coming into direct contact with more managers in the organization, even while managerial responsibility is being extended downwards. Consistent with this, we find that the elimination of the intermediate position of Chief Operating Officer accounts for a significant part (but certainly not all) of the increase in CEO reports. It is also accompanied with greater authority being given to divisional managers. The structure of pay is also different in flatter organizations. Pay and long term incentives are becoming more like that in a partnership. Salary and bonus at lower levels are lower than in comparable positions in a tall organization, but the pay differential is steeper to the top. At the same time, employees in flatter organizations seem to have more long term pay incentives like stock and stock options offered to them. Drawing on theories, we offer some conjectures to explain these patterns.

(273 K)

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Published: Rajan, Raghuram G. and Julie Wulf. "The Flattening Firm: From Panel Data On The Changing Nature Of Corporate Hierarchies," Review of Economics and Statistics, 2006, v88(4,Nov), 759-773.

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