Has Agency Theory Run its Course?: Making the Theory more Flexible to Inform the Management of Reward Systems

Abstract

AbstractManuscript TypeConceptualResearch Question/IssueIn this paper we discuss three assumptions of agency theory: (1) conflicts of interest between principal and agent, (2) nature of risk, and (3) the proposed internal mechanisms to reduce agency costs. We review criticisms of agency theory's pessimistic assumptions of human behavior and its simplistic view about individual risk preferences to argue how the context may influence both the interest and mechanisms for aligning interest of principals and agents.Research Findings/InsightsWe draw on alternative theoretical perspectives from behavioral and organizational sciences to describe circumstances under which honesty, loyalty, and trust in agents' behaviors are possible and also the development of cooperative rather than contentious relationships.Theoretical/Academic ImplicationsThis study explores the boundary conditions of traditional agency theory in the hope of extending agency theory outside its current contextual boundaries. In doing so, we provide a more robust and exhaustive view of the economic exchange between principals and agents.Practitioner/Policy ImplicationsThis study offers insights to managers about how intrinsic incentives may provide an alternative mechanism of control over agents' behavior to extrinsic incentives prescribed by traditional agency theory. Indeed, intrinsic incentives of personal satisfaction and identification with organizational objects, combined with implicit social obligations and reciprocity may, under certain circumstances, provide stronger restraints on agent opportunism than the use of traditional extrinsic rewards in the form of incentive alignment.