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Behavioral agency theory: new foundations for theorizing about executive compensation

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  • Pepper, Alexander
  • Gore, Julie

Abstract

This article describes new micro-foundations for theorizing about executive compensation, drawing on the behavioral economics literature and based on a more realistic set of behavioral assumptions than those that have typically been made by agency theorists. We call these micro-foundations “behavioral agency theory.” In contrast to the standard agency framework, which focuses on monitoring costs and incentive alignment, behavioral agency theory places agent performance at the center of the agency model, arguing that the interests of shareholders and their agents are most likely to be aligned if executives are motivated to perform to the best of their abilities. We develop a line of argument first advanced by Wiseman and Gomez-Mejia and put the case for a more general reassessment of the behavioral assumptions underpinning agency theory. A model of economic man predicated on bounded rationality is proposed, adopting Wiseman and Gomez-Mejia’s assumptions about risk preferences, but incorporating new assumptions about time discounting, inequity aversion, and the trade-off between intrinsic and extrinsic motivation. We argue that behavioral agency theory provides a better framework for theorizing about executive compensation, an enhanced theory of agent behavior, and an improved platform for making recommendations about the design of executive compensation plans.

Suggested Citation

  • Pepper, Alexander & Gore, Julie, 2015. "Behavioral agency theory: new foundations for theorizing about executive compensation," LSE Research Online Documents on Economics 47569, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:47569
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    File URL: http://eprints.lse.ac.uk/47569/
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    References listed on IDEAS

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    Cited by:

    1. Pepper, Alexander & Gore, Julie, 2014. "The economic psychology of incentives: an international study of top managers," LSE Research Online Documents on Economics 51655, London School of Economics and Political Science, LSE Library.
    2. Pepper, Alexander, 2017. "Applying economic psychology to the problem of executive compensation," LSE Research Online Documents on Economics 79675, London School of Economics and Political Science, LSE Library.
    3. Kemal Saygili & Serkan Kucuksenel, 2018. "Other-Regarding Preferences in Organizational Hierarchies," ERC Working Papers 1802, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    4. Sariol, Ana M. & Abebe, Michael A., 2017. "The influence of CEO power on explorative and exploitative organizational innovation," Journal of Business Research, Elsevier, vol. 73(C), pages 38-45.
    5. repec:bla:jomstd:v:54:y:2017:i:6:p:854-875 is not listed on IDEAS
    6. repec:bla:stratm:v:38:y:2017:i:6:p:1268-1286 is not listed on IDEAS
    7. repec:bla:stratm:v:38:y:2017:i:10:p:2080-2102 is not listed on IDEAS

    More about this item

    Keywords

    agency theory; behavioral theory; compensation; bonuses and benefits; motivation; top management teams;

    JEL classification:

    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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