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Yes, Managers Should be Paid Like Bureaucrats

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  • Bruno S. Frey
  • Margit Osterloh

Abstract

Corporate scandals, reflected in excessive management compensation and fraudulent accounts, cause great damage. Agency theory’s insistence to link the compensation of mangers and directors as closely as possible to firm performance is a major reason for these scandals. They cannot be overcome by improving variable pay for performance as selfish extrinsic motivation is reinforced. Based on the common pool approach to the firm, institutions are proposed, serving to raise intrinsically motivated corporate virtue. More importance is to be attributed to fixed pay and strengthening the legitimacy of authorities by procedural fairness, relational contracts and organizational citizenship behavior.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 187.

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Handle: RePEc:zur:iewwpx:187

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Keywords: Agency theory; intrinsic motivation; crowding theory; management compensation pay for performance; organizational citzenship;

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