Executive Compensations to Address Agency Problems and the Income Strategy Impact

The general acceptance of the agency theory and the parallel research on executive compensation began in the early 1980s.



It was the evolution of the modern corporation with ownership separation and control that undermined the agency theory. Early studies in this area focused on documenting the relation between CEO pay and firm performance. The discussion of executive compensation must proceed with the fundamental agency problem afflicting management decision-making as background. According to Jensen and Murphy (1990), there is an optimal contracting approach, which is when boards use design compensation schemes to maximize shareholder value with efficient incentives (Jensen and Murphy 1990). Continue reading