Managerial Behaviour and the goals of management have long been identified by many as independent of the goals of shareholders . Two models have attempted to explain why the goals are different and how these goals are achieved; Baumol’s Theory of Revenue Maximisation and Marris’s Model of Managerial Enterprise . Initially the Two models will be briefly explained. Then, by reference to determinants of managerial remuneration, the empirical evidence of the occurrences of the determinants, the two models will be examined. This is to come to a conclusion on which model is best supported by the empirical evidence.
Marris’s model of managerial enterprise is based on the goal of the manager to increase the balanced growth of the firm . This balance is achieved by offsetting two opposite goals; Maximisation of the growth of demand for goods/services of the firm and maximisation of growth of capital. Both of these goals require opposite treatment of retained profit.
To maximise growth in capital the management must distribute as much profit as possible back to the shareholders. This keeps the shareholders content with their investment and they will not sell shares or remove the directors. It can result in rising share values and reduce the risk of the firm being taken over. This therefore appeals to the management’s main aims, job security by not being taken over or removed.
The flip side of the coin is to increase the demand customers have for the firm’s goods or services. This is achieved by using as much of the firms profits for investment and increase the firms growth. This would increase the management’s utility at the sacrifice of shareholder utility.
Marris’s model requires that these to aims be balanced to achieve the maximum use of retained profit use for investment and still keeping the shareholders content. To achieve this balance it is necessary to employ two constraints; Managerial constraint and Job security constraint.
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