Solutions to the Agency Problem

There are several actions can be taken by principals to minimize agency problem :

The first is for the owners to pay executives a premium for their service. This premium helps executives to see their loyalty to the stockholders as the key to achieving their personal financial targets.

            A second solution to agency problem is for executives to receive back loaded compensation. This means that executives are paid a handsome premium for superior future performance. Strategic action taken in year one, which are to  have an impact in year three, become the basis for executive bonuses in year three. This lag time between action and bonus more realistically rewards executives for the consequences of their decision making, ties the executive to the company for the long term, and properly focuses strategic management activities on the future.

            Finally, creating terms of executives across different units of a corporation can help to focus performance measures on organizational rather than personal goals. Through the use of executive terms, owner interests often receive the priority that they deserve.

Share it:  Cite

More from this Section

  • Global industry
    Industry in which competition crosses national borders . A global industry is one that ...
  • Diagonal communication
    Diagonal communication is a communication that cuts across work areas and organizational ...
  • Reinforcement theory
    The reinforcement theory says that behavior is a function of its consequences. Reinforcement ...
  • Agency costs
    The cost of agency problems and the cost of actions taken to minimize agency problems ...
  • Readiness
    Readiness refers to the extent to which people have the ability and willingness to accomplish ...