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The Agency Theory and Concepts - Online Term Paper

The Agency Theory and Concepts

The Agency Theory

The agency theory is suggested to be a derivative of the research on risk sharing conducted by economists. According to the theory, every firm has a principal and an agent. The assumptions of are that agents are motivated by self-interest, are rational actors, and are averse to taking risks. Therefore, principals can motivate agents by controlling their incentives (Gomez-Mejia & Balkin, 1992).
A dilemma occurs in the theory, when a principal is unable to adequately monitor or assess an agent' s behavior (Lambert et al., 1993). This situation results when the agent's task is less programmable when accomplishing the task entails risks, or when the goals of the ...

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choose between fixed and variable pay by determining how easy it is to monitor job performance (behaviors). However, considering the interrelationship between the agent and the principal it becomes problematic to organize the relationship due to the moral hazards involved (Jensen and Meckling, 1976).One factor related to the ability to monitor performance is task programmability.
According to agency theory, task programmability will be positively related to the use of behavior-based compensation contracts (fixed salary) and negatively related to the use of outcome- based contracts (variable pay). This is because programmable tasks allow the principals (in this case, organizations) to specify the behaviors that the agents (in this case, managers) need to perform.
Gomez-Mejia and Balkin (1992) used the example of work performed by university faculty members to suggest that when work behaviors are inherently nonprogrammable, an organization is forced to monitor behavior by ...

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PAPER DETAILS

Added: 9/12/2015 04:16:43 AM
Category: Economics
Type: Premium Paper
Words: 637
Pages: 3

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