management-utility maximization

management-utility maximization

a company objective in the THEORY OF THE FIRM that is used as an alternative to the traditional assumption of PROFIT-MAXIMIZATION. The FIRM is assumed to seek to maximize management's utility or satisfactions, and the managerial preference function comprises three principal components: utility = F (staff, emoluments, investments).

Salaried managers prefer spending company money on these three things (an ‘expense preference’ for them, as Oliver Williamson puts it) because:

  1. additional staff can lead to managers getting more salary since extra staff generally necessitates more tiers in the organization's hierarchy and so (given the traditional salary differentials between tiers) will increase the salaries of those at the top of the organization. In addition, extra staff are a source of power, status and prestige, and may contribute to job security, insofar as larger departments in a company are less likely to be closed down;
  2. managerial emoluments, or ‘perks’, such as big expense accounts, generous travel budgets and company cars, are valued as both are (low-taxed) sources of indirect material income and because they boost status and prestige;
  3. discretionary investments over and above those that are strictly economically essential allow managers to pursue ‘pet projects’ and afford them status, prestige and security through the amount of physical plant and equipment that they control. See also MANAGERIAL THEORIES OF THE FIRM, DIVORCE OF OWNERSHIP FROM CONTROL, PRINCIPAL-AGENT THEORY, FIRM OBJECTIVES.
Full browser ?