THEORY OF REMUNERATION -
September 13th, 2010
THEORY OF REMUNERATION
The agency theory focuses on the divergent interests and goals of the organisation's stakeholders and the way that employee remuneration can be used to align these interests and goals. Employers and employees are the two stakeholders of a business unit, the former assuming the role of principals and the latter the role of agents.
The remuneration payable to employees is the agency cost. It is natural that the employees expect high agency costs while the employers seek to minimise it. The agency theory says that the principal must choose a contracting scheme that helps align the interest of the agenis with the principal's own interests.
These contracts can he classified as either behaviour- oriented (e.g. merit pay) or outcome-oriented (e.g. stock option schemes, profit sharing, and commissions).