Complementarity in Monitoring and Bonding: More Intense Monitoring Leads to Higher Executive Compensation
- 1 May 2009
- journal article
- Published by Academy of Management in Academy of Management Perspectives
- Vol. 23 (2), 57-74
- https://doi.org/10.5465/amp.2009.39985541
Abstract
Agency theory addresses problems created from the separation of principals and agents in modern corporations. Some agency theorists have investigated the exact relationship between control mechanisms (monitoring and bonding) and suggested that they work as substitutes. We posit that, although monitoring and bonding may be concurrent substitutes in a system of governance, monitoring intensity is positively related to bonding (i.e., compensation) so that over time, they are complements rather than substitutes. In particular, we suggest that increased monitoring intensity shifts risk to managers, who then require greater compensation to offset their increased employment and career risk. Accordingly, they reinforce each other in a negative cycle such that monitoring leads to increased pay, which in turn leads to increased monitoring due to complaints of excessive pay. The result is that in today's economic environment society often criticizes executive pay without realizing that, in part, higher compensation is an outcome of prior increased monitoring intensity. These findings are particularly important as elected officials are increasingly under pressure to monitor and limit executive compensation. An understanding of this relationship also has implications for executive risk taking and entrepreneurial activities.Keywords
This publication has 48 references indexed in Scilit:
- Reflections on CEO CompensationAcademy of Management Perspectives, 2008
- Managerial Agents Watching other Agents: Multiple Agency Conflicts Regarding Underpricing in IPO FirmsThe Academy of Management Journal, 2008
- Executive Compensation and IncentivesAcademy of Management Perspectives, 2006
- Pay without PerformanceAcademy of Management Perspectives, 2006
- Founding‐Family Ownership, Corporate Diversification, and Firm LeverageThe Journal of Law and Economics, 2003
- A Team Production Theory of Corporate LawVirginia Law Review, 1999
- MANAGERIAL COMPENSATION AND FIRM PERFORMANCE: A GENERAL RESEARCH FRAMEWORK.The Academy of Management Journal, 1998
- CEO DUALITY AND FIRM PERFORMANCE - A CONTINGENCY-MODELStrategic Management Journal, 1995
- The Composition of Boards of Directors and Strategic Control: Effects on Corporate StrategyAcademy of Management Review, 1990
- A Concept of Conglomerate DiversificationJournal of Management, 1988