IDEAS home Printed from https://ideas.repec.org/p/zur/iewwpx/187.html
   My bibliography  Save this paper

Yes, Managers Should be Paid Like Bureaucrats

Author

Listed:
  • 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.

Suggested Citation

  • Bruno S. Frey & Margit Osterloh, "undated". "Yes, Managers Should be Paid Like Bureaucrats," IEW - Working Papers 187, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:187
    as

    Download full text from publisher

    File URL: https://www.zora.uzh.ch/id/eprint/52083/1/iewwp187.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    2. Joseph Henrich, 2001. "In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies," American Economic Review, American Economic Association, vol. 91(2), pages 73-78, May.
    3. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    4. Matthias Benz & Bruno S. Frey, "undated". "Corporate Governance: What can we Learn from Public Governance?," IEW - Working Papers 166, Institute for Empirical Research in Economics - University of Zurich.
    5. Becht, Marco & Bolton, Patrick & Roell, Ailsa, 2003. "Corporate governance and control," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 1, pages 1-109, Elsevier.
    6. Peter J. Lane & Albert A. Cannella & Jr. & Michael H. Lubatkin, 1999. "Ownership structure and corporate strategy: one question viewed from two different worlds," Strategic Management Journal, Wiley Blackwell, vol. 20(11), pages 1077-1086, November.
    7. Fischbacher, Urs & Gachter, Simon & Fehr, Ernst, 2001. "Are people conditionally cooperative? Evidence from a public goods experiment," Economics Letters, Elsevier, vol. 71(3), pages 397-404, June.
    8. Richard N. Langlois, 2002. "Modularity in Technology and Organization," Chapters, in: Nicolai J. Foss & Peter G. Klein (ed.), Entrepreneurship and the Firm, chapter 2, Edward Elgar Publishing.
    9. Bruno S. Frey, 1997. "Not Just for the Money," Books, Edward Elgar Publishing, number 1183.
    10. Sliwka, Dirk, 2003. "On the Hidden Costs of Incentive Schemes," Bonn Econ Discussion Papers 12/2003, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    12. Ledyard, John O., "undated". "Public Goods: A Survey of Experimental Research," Working Papers 861, California Institute of Technology, Division of the Humanities and Social Sciences.
    13. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 409-425, December.
    14. Ferraro, Fabrizio & Pfeffer, Jeffrey & Sutton, Robert I., 2003. "Economics Language and Assumptions: How Theories Can Become Self-Fulfilling," Research Papers 1849, Stanford University, Graduate School of Business.
    15. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    16. repec:bla:kyklos:v:54:y:2001:i:2-3:p:317-42 is not listed on IDEAS
    17. Bebchuk, Lucian Arye & Fried, Jesse M. & Walker, David I., 2001. "Executive Compensation in America: Optimal Contracting or Extraction of Rents?," Berkeley Olin Program in Law & Economics, Working Paper Series qt1x24r7st, Berkeley Olin Program in Law & Economics.
    18. Raghuram G. Rajan & Luigi Zingales, 1998. "Power in a Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 387-432.
    19. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 653-691.
    20. Bruno S. Frey & Stephan Meier, "undated". "Pro-Social Behavior, Reciprocity or Both?," IEW - Working Papers 107, Institute for Empirical Research in Economics - University of Zurich.
    21. Uri Gneezy & Aldo Rustichini, 2000. "Pay Enough or Don't Pay at All," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 791-810.
    22. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Nature, Nature, vol. 422(6928), pages 137-140, March.
    23. David Sally, 1995. "Conversation and Cooperation in Social Dilemmas," Rationality and Society, , vol. 7(1), pages 58-92, January.
    24. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
    25. Bruno S. Frey & Reto Jegen, 2001. "Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
    26. Ernst Fehr & Simon Gaechter, "undated". "Do Incentive Contracts Crowd out Voluntary Cooperation?," IEW - Working Papers 034, Institute for Empirical Research in Economics - University of Zurich.
    27. Ernst Fehr & Urs Fischbacher, 2003. "The nature of human altruism," Nature, Nature, vol. 425(6960), pages 785-791, October.
    28. Brian J. Hall, 2003. "Six Challenges in Designing Equity-Based Pay," NBER Working Papers 9887, National Bureau of Economic Research, Inc.
    29. Bruce Kogut & Udo Zander, 1996. "What Firms Do? Coordination, Identity, and Learning," Organization Science, INFORMS, vol. 7(5), pages 502-518, October.
    30. Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2001. "Executive Compensation in America: Optimal Contracting or Extraction of Rents," CEPR Discussion Papers 3112, C.E.P.R. Discussion Papers.
    31. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    32. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
    33. Charles Rowley & Anne Rathbone, 2013. "The political economy of antitrust," Chapters, in: Manfred Neumann & Jürgen Weigand (ed.), The International Handbook of Competition – Second Edition, chapter 6, pages 169-206, Edward Elgar Publishing.
    34. Herbert A. Simon, 1991. "Organizations and Markets," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 25-44, Spring.
    35. Siegwart Lindenberg, 2001. "Intrinsic Motivation in a New Light," Kyklos, Wiley Blackwell, vol. 54(2‐3), pages 317-342, May.
    36. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
    37. Aidan R. Vining, 2003. "Internal Market Failure: A Framework for Diagnosing Firm Inefficiency," Journal of Management Studies, Wiley Blackwell, vol. 40(2), pages 431-457, March.
    38. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
    39. Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-755, September.
    40. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
    41. Bruno S. Frey & Reto Jegen, 2000. "Motivation Crowding Theory: A Survey of Empirical Evidence," CESifo Working Paper Series 245, CESifo.
    42. Robert D. Tollison, 1982. "Rent Seeking: A Survey," Kyklos, Wiley Blackwell, vol. 35(4), pages 575-602, November.
    43. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    44. Samuel Bowles & Robert Boyd & Colin Camerer & Ernst Fehr & Herbert Gintis & Joseph Henrich & Richard McElreath, 2001. "In search of homo economicus: Experiments in 15 small-scale societies," Artefactual Field Experiments 00068, The Field Experiments Website.
    45. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    46. Michael C. Jensen & Kevin J. Murphy, 2010. "CEO Incentives—It's Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 64-76, January.
    47. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future Directions," NBER Working Papers 6957, National Bureau of Economic Research, Inc.
    48. Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Incentives, Decision Frames, and Motivation Crowding Out – An Experimental Investigation," IZA Discussion Papers 1758, Institute of Labor Economics (IZA).
    49. Ferraro, Fabrizio & Pfeffer, Jeffrey & Sutton, Robert I., 2003. "Economics language and assumptions: How theories can become self-fulfilling," IESE Research Papers D/530, IESE Business School.
    50. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
    51. Joseph Fuller & Michael C. Jensen, 2010. "Just Say No to Wall Street: Putting a Stop to the Earnings Game," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 59-63, January.
    52. Brian J. Hall, 2003. "Six Challenges In Designing Equity‐Based Pay," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 21-33, March.
    53. Margit Osterloh & Bruno S. Frey, "undated". "Corporate Governance for Crooks? The Case for Corporate Virtue," IEW - Working Papers 164, Institute for Empirical Research in Economics - University of Zurich.
    54. Frey, Bruno S & Oberholzer-Gee, Felix & Eichenberger, Reiner, 1996. "The Old Lady Visits Your Backyard: A Tale of Morals and Markets," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1297-1313, December.
    55. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Margit Osterloh & Bruno S. Frey, "undated". "Corporate Governance for Crooks? The Case for Corporate Virtue," IEW - Working Papers 164, Institute for Empirical Research in Economics - University of Zurich.
    2. Margit Osterloh, 2005. "Human Resources Management and Knowledge Creation," CREMA Working Paper Series 2005-09, Center for Research in Economics, Management and the Arts (CREMA).
    3. Rebitzer, James B. & Taylor, Lowell J., 2011. "Extrinsic Rewards and Intrinsic Motives: Standard and Behavioral Approaches to Agency and Labor Markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 8, pages 701-772, Elsevier.
    4. Sliwka, Dirk, 2003. "On the Hidden Costs of Incentive Schemes," IZA Discussion Papers 844, Institute of Labor Economics (IZA).
    5. Block, Jörn Hendrich, 2008. "Are CEOs in family firms paid like bureaucrats? Evidence from Bayesian and frequentist analyses," SFB 649 Discussion Papers 2008-033, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    7. Margit Osterloh, 2007. "Psychologische Ökonomik: Integration statt Konfrontation," Schmalenbach Journal of Business Research, Springer, vol. 59(56), pages 82-111, January.
    8. Vatn, Arild, 2009. "Cooperative behavior and institutions," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(1), pages 188-196, January.
    9. Irlenbusch, Bernd & Ruchala, Gabriele K., 2008. "Relative rewards within team-based compensation," Labour Economics, Elsevier, vol. 15(2), pages 141-167, April.
    10. Dickinson, David & Villeval, Marie-Claire, 2008. "Does monitoring decrease work effort?: The complementarity between agency and crowding-out theories," Games and Economic Behavior, Elsevier, vol. 63(1), pages 56-76, May.
    11. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
    12. Margit Osterloh & Bruno S. Frey, "undated". "Shareholders Should Welcome Employees as Directors," CREMA Working Paper Series 2005-02, Center for Research in Economics, Management and the Arts (CREMA).
    13. Samuel Bowles & Sandra Polania-Reyes, 2011. "Economic incentives and social preferences: substitutes or complements?," Department of Economics University of Siena 617, Department of Economics, University of Siena.
    14. Irlenbusch, Bernd & Ruchala, Gabriele K., 2006. "Relative Rewards within Team-Based Compensation," IZA Discussion Papers 2423, Institute of Labor Economics (IZA).
    15. Armin Falk & Michael Kosfeld, "undated". "Distrust - The Hidden Cost of Control," IEW - Working Papers 193, Institute for Empirical Research in Economics - University of Zurich.
    16. Osterloh, Margit & Rota, Sandra, 2007. "Open source software development--Just another case of collective invention?," Research Policy, Elsevier, vol. 36(2), pages 157-171, March.
    17. Margit Osterloh & Sandra Rota, 2005. "Open Source software development ? just another case of collective invention?," CREMA Working Paper Series 2005-08, Center for Research in Economics, Management and the Arts (CREMA).
    18. Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Incentives, Decision Frames, and Motivation Crowding Out – An Experimental Investigation," IZA Discussion Papers 1758, Institute of Labor Economics (IZA).
    19. Margit Osterloh & Bruno S. Frey, 2000. "Motivation, Knowledge Transfer, and Organizational Forms," Organization Science, INFORMS, vol. 11(5), pages 538-550, October.
    20. Margit Osterloh & Bruno S. Frey, 2009. "Research Governance in Academia: Are there Alternatives to Academic Rankings?," CREMA Working Paper Series 2009-17, Center for Research in Economics, Management and the Arts (CREMA).

    More about this item

    Keywords

    Agency theory; intrinsic motivation; crowding theory; management compensation pay for performance; organizational citzenship;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zur:iewwpx:187. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Severin Oswald (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.