Transfer pricing as a means for motivating management of profit centers

Abstract

The main objective of this study is to analyze the role and potential of transfer pricing as a means of management control in large organizations. The special emphasis is on analyzing the potential of transfer pricing when we are motivating the profit center managers. The research approach is theoretical and literature reviews include studies about profit center organizations, performance measurement and analysis, incentive systems, transfer pricing techniques and agency theory. Based on the analysis, it seems that transfer pricing is a suitable tool for controlling, motivating and managing profit center managers. This requires that the performance measurement can be done fairly and transfer prices are set using fair assumptions. The motivating effects of transfer pricing can be enhanced if the reward system is connected to performance measurement system. In synthesis there is presented effects of transfer pricing to profit center managers behavior. There is also presented opinion about fair transfer pricing policy.