Abstract
This paper explores how to construct a fair and optimal compensation system between the principal and the agent in the face of financial compensation agency problems during a limited period in relation to the concept of sustainability. In the construction of the principal’s compensation system, the agent’s degree of operational financial effort will affect the overall revenue function for reaching sustainability. Both the principal and the agent have a maximum expected utility in the negative exponential pattern of the general hyperbolic absolute risk aversion (HARA) utility function that satisfies their respective objective functions. The proposed model and numerical example analysis results prove that the compensation system for sustainability can provide a fair and optimal financial system, from a sustainability perspective. The main contribution of this study is the construction and development of an optimal compensation agency model for risk management, which is derived by considering the effect of risk aversion utility on revenue. The proposed model can provide a fair and feasible approach within the issue of compensation, from the viewpoint of sustainability, for an optimal compensation agency problem.
Highlights
The purpose of this paper is to construct and develop an optimal agency problem, from a risk management perspective
This paper aims to determine the sustainability effort-compensation strategy for generalizing the hyperbolic absolute risk aversion (HARA) utility function, i.e., within a limited range, the maximum sustainability effort and sustainability optimal compensation agency system can be measured according to the expected utility, as defined by the principal and the agent, respectively
We developed a fair and reasonable principal–agent optimal sustainability model as a principal–agent solution mechanism, which separates ownership from management rights for sustainability
Summary
The purpose of this paper is to construct and develop an optimal agency problem, from a risk management perspective. The basic application model is derived by considering the influences of risk aversion, in terms of the social, economic, and environmental aspects for sustainability considerations. The mathematical model provides fair, reasonable, and feasible performance compensations for sustainability, to help the principal and agent make decisions concerning an optimal compensation agency problem. In the proposed analysis method, the agents organize the theoretical framework of economic responsibility and financial decisions in a rational, logical, and clear manner, based on risk aversion for the social, economic, and environmental responsibilities of sustainability. A fair and optimal compensation system is constructed for the compensation agency problem. In terms of the construction of the principal’s sustainability compensation system, the agent’s operational efforts influence the overall revenue of sustainable social responsibility, and its feasibility and applicability are proved using a sensitivity analysis
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