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Agency Theory Essay

1291 Words6 Pages

Recent findings on Oasis APAC Ltd about strategic management and business policy has been influenced by agency theory. Research was recently carried out to conclude whether “accounting-based bonus contracts create incentives for executives to select accounting procedures to increase the value of their bonus awards [Collins, Dhaliwal and Rozeff (1981), Watts and Zimmerman (1978) Healy (1982) and Hagerman and Zmijewski (1979)]. However, few studies have examined empirically how these short-term bonus contracts affect executives’ production-investment decisions. Larcker (1983) examines the association between long-term performance plan adoption and corporate capital investments and concludes that growth in capital expenditures for firms adopting performance plans was significantly higher than the growth in capital expenditures for a sample of control firms. Larcker (1983) and Brickley, Bhagat and Lease (1984) find that stakeholders react favourably to long-term performance plan adoption. Hence our goals will be to design a convincing compensation plan to motivate and retain the executives in terms of operational performance and the creation and protection of shareholder value in aligning executives’ and stakeholders’ interests. DISCUSSION Relying upon traditional economic literature (i.e. maximize own wealth), Jensen and Meckling …show more content…

The first component compensates agents for accepting higher levels of risk and transfers the risk from the agent to the principal in the form of greater levels of fixed salaries. Although a fixed salary represents a fundamental change in managerial compensation that could help stop abuses and curb excessive compensation, it can result in executives only applying minimal effort to sustain their jobs. Besides, there will be a lack of direct incentive for the executives to promote the firm’s performance because any gains in the firm value does not benefit them (Lambert & Larcker,

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