A recent study of Kienbaum Human Resource Consultancy analysed the development of sal-ary increases of Top Managers in the past 30 year. (Author unknown, 20071, p.23). The result: The income of Top Managers in the 100 biggest German stock companies increased on aver-age from 1976 till 2005 from € 225,000 to € 1,8 millions, representing a compound annual growth rate of 7.45%. [...] Salaries like the ones from the previous illustration, as well as big premium packages are worldwide a subject of criticism among investors. Even in the United States, some of the so-called “Fat Cats” are already seen as shysters (Eberle, M. Heilmann, D. Fockenbrock, D., 2007, p.15). Being rich and having a high income is part of the American Dream and as such not a big subject of jealousy. However, the Americans do also appreciate fairness, which is the reason why many Americans react allergically to such high incomes, especially when they assume, that the income doesn’t match with achievements of those receiving the money. Un-der consideration of the accounting scandals in the previous years (e.g. Enron), high rates of unemployment and poor wage agreements, the income level of top managers has to become in line with their achievements and results (Riecke, T. 2007, p.2).
The present assignment will discuss the potential problems between owners and managers of organisation and how gaps between the specific interests can be closed. The following part will lay the theoretical foundation, by highlighting the Principal-Agent Theory. Part three of this assignment will evaluate approaches of how the already mentioned gap can be closed. By doing so, special attention will be paid to share-ownership programmes. Finally, the author of this assignment will summarise the findings and draw his conclusions.
Table of Contents
1. Introduction
2. Principal-Agent Theory
3. Solving the Principal-Agent Problem
3.1. Mechanisms to align the interests of the Principal and the Agent
3.2. Shared-Ownership Programmes
4. Summary and Conclusions
Bibliography
Textbooks / Handbooks / Encyclopaedias
Journal Articles
Websites
Objectives and Key Themes
This paper examines the inherent conflict of interests between corporate owners and managers, primarily focusing on the misalignment of objectives in large enterprises. It explores theoretical agency frameworks and evaluates practical mechanisms to bridge these gaps, specifically analyzing the effectiveness and perception of share-ownership programmes as a tool for incentive alignment.
- Analysis of Principal-Agent Theory as the foundational conflict model.
- Evaluation of compensation structures and their influence on management behavior.
- Investigation of financial participation schemes including profit and equity sharing.
- Assessment of employee attitudes towards share-ownership programmes.
- Critical reflection on the efficacy of share-based incentives in preventing misalignment.
Excerpt from the Book
3.2. Shared-Ownership Programmes
With regard to Lenne, Mitchel and Ramsay (2006, pp. 3-12), shared-ownership programmes (SOP’s) can be defined as an indirect way in which employees can participate in the results of an enterprise on the basis of ownership. They come along in different formats, such as fully paid shares, funded by the company, or funded by profits, remuneration sacrifice or bonus. Furthermore, so-called partly paid share or stock option plans exist. If the enterprise where the employee is working for offers shares in another enterprise, it is called a replicator share plan. Key features of SOP’s are:
1. the transfer of equity (shares) to employees
2. in general a favourable term for the employer, as well as for the employee
3. the equity recipient is an employee of the equity provider
As can be taken from the different formats in which SOP’s come along and from the key features, shared-ownership programmes involve a board-approved process of transforming employees into shareholders of the enterprise where they are working for.
Following WIKIPEDIA (20072), the main objective of those implementing SOP’s might be to increase productivity and profitability by improving employees’ dedication and sense of ownership. Evidence to this statement can be given by Richardson who performed a research among all firms with a Stock Exchange listing. They found out, that 60 percent of the responders tried to achieve some form of attitude change among workers and nearly 50 percent of the responders wished to use the SOP’s to encourage workers to identify more with the aims of the firm. Hence, SOP’s seem to be a solution for the principal-agent problem, but how do the employees evaluate such kind of systems and can evidence be given to the before mentioned wishes of the managers?
Summary of Chapters
1. Introduction: This chapter contextualizes the growing concern regarding top manager compensation and outlines the objective of investigating owner-manager interest alignment.
2. Principal-Agent Theory: This chapter defines the core agency relationship and the inherent structural challenges arising from divergent objectives and asymmetric information.
3. Solving the Principal-Agent Problem: This chapter explores various financial instruments and management mechanisms, specifically focusing on payment schemes and share-ownership programmes, designed to reduce agency costs.
4. Summary and Conclusions: This chapter synthesizes the research findings, highlighting the potential benefits of share-ownership programmes while cautioning against the risks of misaligned incentive structures.
Keywords
Principal-Agent Theory, Shared-Ownership Programmes, Corporate Governance, Management Compensation, Agency Costs, Financial Participation, Incentive Alignment, Profit Sharing, Equity Sharing, Stock Options, Employee Ownership, Business Economics, Corporate Strategy, Shareholder Value, Incentive Effects.
Frequently Asked Questions
What is the core subject of this assignment?
The assignment addresses the fundamental conflict of interests between corporate owners and managers, particularly focusing on the rising levels of executive compensation and the potential for goal misalignment.
What are the central themes discussed in this work?
The central themes include the Principal-Agent Theory, corporate remuneration structures, mechanisms for employee financial participation, and the effectiveness of shared-ownership programmes in changing employee attitudes.
What is the primary goal of this research?
The primary goal is to evaluate how the gap between owner and manager interests can be closed, with a specific focus on the role of share-ownership programmes as an incentive mechanism.
Which scientific method does the author employ?
The author conducts a theoretical analysis based on established economic literature and evaluates empirical findings from studies (such as the research by Dewe, Dunn, and Richardson) to assess the impact of financial participation on the workforce.
What is covered in the main section of the paper?
The main section details the Principal-Agent Theory, categorizes different types of financial participation schemes, and performs a critical analysis of shared-ownership programmes, including an examination of how employees perceive these schemes.
Which keywords characterize this paper?
Key terms include Principal-Agent Theory, Agency Costs, Shared-Ownership Programmes, Corporate Governance, and Management Compensation.
How does the author define the agency relationship?
Following Jensen and Meckling, the author defines it as a contract where a principal engages an agent to perform services on their behalf, involving the delegation of decision-making authority.
What does the empirical evidence suggest about the success of share-ownership programmes?
The evidence is mixed; while some data indicates that such schemes can make employees feel more integrated into the company, there is no consistent scientific consensus that they significantly improve overall firm performance.
Why is the example of Juergen Schremp relevant to the study?
The example serves as a critical warning, illustrating how poorly designed stock option schemes can lead to massive executive gains even when the company's performance declines, thus exacerbating rather than solving the agency problem.
- Citation du texte
- Dipl.-Kfm. (FH), MBA Martin Wenderoth (Auteur), 2008, How can basic differences in interest and objectives be solved? Potential problems between owners and managers, Munich, GRIN Verlag, https://www.grin.com/document/122118
