Executive Compensation and Agency Problem

Abstract

Agency problem exists in every business because of the interest conflicts between managers and shareholders. There is a need to find a balanced method to increase the business’ profit and ensure managers’ working efficiency. Employees can reach their potential ability under this harmonious environment that everyone can show their talents on their own stages. A compensation package is one of the solutions to maintain the balance and provide mutual benefits between those two parties. Businesses can choose different compensation applications with their stock ownership guidelines to achieve their goal because the compensation package varied in different markets. Each fields will have specific requirements for managers. The incentive plan can encourage managers’ motivation and protect the shareholders’ interest from overpaying or underpaying. The performance related evaluation gives the manager the opportunities to challenge themselves on earning business profit. Their performance will be compared with their colleagues which gives the company a competitive environment.