Conflict Resolution within Economic Organizations

Alternatives for reducing goal conflict within an organization are analyzed via a mathematical model. To bring the goals of managers into line with organizational goals, compensation via salary and profit sharing are examined as well as schemes for imposing profit constraints and using transfer pricing. Conclusions of the analysis can be summarized in four propositions. (a) A salary compensation plan will not motivate managers in a decentralized organization to maximize company profits. (b) Profit sharing can be used to increase both division profit and the satisfaction of the manager relative to a simple salary compensation plan. (c) However, a bonus compensation plan cannot yield maximum company profits. (d) The combination of transfer pricing and a profit sharing compensation plan can provide maximization of company profits under decentralization.