Williamson's Model of Managerial Discretion
Williamson argues that managers have discretion in pursuing policies which maximise their own utility after a minimum profit level is attained. A minimum profit level is necessary for job security of the manager.
The managerial utility function includes variables such as salary; security, power, status, prestige and professional excellence. Of these variables, only salary is measurable. Non-measurable variables are expressed in terms of expense preference to make them operational. The expense preference is the satisfaction derived out of certain types of expenditures and ready availability of funds. In particular" staff expenditures on emoluments (slack payments), and funds available for discretionary investment give managers a positive satisfaction (utility), because these expenditures are a source of security and reflect the power, status, prestige and professional achievement of managers. The managerial utility function is expressed as
U = f (S, M, ID)
where S is staff expenditure (including managerial salaries the administrative and selling expenses), M depicts managerial emoluments and ID is discretionary investment.
Staff increases are a symbol of power, status and prestige. A progressive and increasing staff implies successful expansion of the particular activity for which a manager is responsible within the firm.
Emoluments or slack (payments or other perquisites to the managers above the minimum necessary to retain them in the firm) received in form of expense accounts, luxurious offices, company cars, etc., generally reflect prestige, power and status of a manager. They have tax advantage and are less visible. They are discretionary expenditures which are earned due to the strategic position of the manager in running the business.
Discretionary investment refers to the discretion managers have in undertaking investments beyond those required for the normal operation of the firm. They give satisfaction to the managers so as to fulfill their projects. These discretionary investments are included in the minimum profit constraint together with the amount of profits required for a satisfactory dividend policy.
Williamson's model, like other models, is not free from criticism. It does not deal with the core problem of oligopolistic interdependence and of strong oligopolistic rivalry.
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