Has Agency Theory Run its Course?: Making the Theory more Flexible to Inform the Management of Reward Systems
Version of Record online: 1 OCT 2012
© 2012 Blackwell Publishing Ltd
Corporate Governance: An International Review
Special Issue: Executive Compensation
Volume 20, Issue 6, pages 526–546, November 2012
How to Cite
Cuevas-Rodríguez, G., Gomez-Mejia, L. R. and Wiseman, R. M. (2012), Has Agency Theory Run its Course?: Making the Theory more Flexible to Inform the Management of Reward Systems. Corporate Governance: An International Review, 20: 526–546. doi: 10.1111/corg.12004
- Issue online: 4 NOV 2012
- Version of Record online: 1 OCT 2012
- Corporate Governance;
- Agency Theory;
- Board Policy Issues;
- Executive Compensation
In this paper we discuss three assumptions of agency theory: (1) conflicts of interest between principal and agent, (2) nature of risk, and (3) the proposed internal mechanisms to reduce agency costs. We review criticisms of agency theory's pessimistic assumptions of human behavior and its simplistic view about individual risk preferences to argue how the context may influence both the interest and mechanisms for aligning interest of principals and agents.
We draw on alternative theoretical perspectives from behavioral and organizational sciences to describe circumstances under which honesty, loyalty, and trust in agents' behaviors are possible and also the development of cooperative rather than contentious relationships.
This study explores the boundary conditions of traditional agency theory in the hope of extending agency theory outside its current contextual boundaries. In doing so, we provide a more robust and exhaustive view of the economic exchange between principals and agents.
This study offers insights to managers about how intrinsic incentives may provide an alternative mechanism of control over agents' behavior to extrinsic incentives prescribed by traditional agency theory. Indeed, intrinsic incentives of personal satisfaction and identification with organizational objects, combined with implicit social obligations and reciprocity may, under certain circumstances, provide stronger restraints on agent opportunism than the use of traditional extrinsic rewards in the form of incentive alignment.