Agency Theory and Executive Pay (eBook)

Alexander Pepper is Professor of Management Practice at the London School of Economics and Political Science, UK.  He previously had a long career at PwC, where he was a global leader of PwC’s Human Resource Services consulting practice from 2002-2006.  He has authored two books, Senior Executive Reward (2006), and The Economic Psychology of Incentives published by Palgrave Macmillan in 2015.

Preface and Acknowledgements 5
Contents 6
List of Figures 7
List of Tables 8
Chapter 1: Agency Costs, Coordination Problems, and the Remuneration Committee’s Dilemma 9
Introduction 9
The Purpose of This Book 21
References 22
Chapter 2: What’s Wrong With Agency Theory? 23
Introduction 23
The Standard Model of the Firm in Organisational Economics 26
First Premise: Shareholders Own Firms and Directors Are Their Agents 28
Second Premise: Agency Costs Arise at the Level of the Firm Because of the Different Interests of Shareholders and Managers 35
Third Premise: Man Is Rational, Self-interested, and Rent-seeking, and There Is No Non-pecuniary Agent Motivation 39
Conclusion 44
References 47
Chapter 3: What a Public Corporation Really Is 51
Introduction 51
Critical Realism 53
The Social Ontology of Public Corporations 58
Development of Company Law in the UK and the US After 1800 60
Developments in Continental European Jurisprudence After 1800 64
Law and Economics After 1980 68
Arguments for and Against Corporate Realism 70
Corporate Realism and the Public Corporation 76
Why It Matters 78
References 81
Chapter 4: Executive Pay as a Collective Action Problem 85
Introduction 85
Modelling Agency Costs as a Collective Action Problem 87
Study of UK FTSE 100 91
? and ? Factors 99
The Corporation as Commons 101
Proportionality Between Benefits and Costs 105
Collective Choice Arrangements 105
Monitoring 105
Conflict Resolution Mechanisms 105
Local Governance Arrangements 106
Conclusion 106
References 107
Chapter 5: Behavioural Agency Theory 108
Introduction 108
Modifying the Assumptions of Agency Theory 111
Risk and Uncertainty 112
Temporal Discounting 112
Intrinsic Motivation 113
Fairness and Inequity Aversion 115
Goal-Setting, Contracting, and Monitoring 115
Agents’ Job Performance and the Work Motivation Cycle 117
New Design Principles for Executive Compensation 119
References 122
Chapter 6: The Modern Corporation’s Final Chapter 124
Introduction 124
The Aspirin Trap 127
A Third Possible Future for the Public Corporation 128
Final Words 131
References 132
Index 134