Agency Theory and CEO Incentives

Abstract

This thesis will consider the question of whether Australian law has kept pace with CEO incentive pay developments in a way that is consistent with the economic rationale behind them.

This thesis will be divided into four sections: One – The thesis will survey CEO incentive pay and explain how it has developed over the last thirty years to where it is today.

Two - The thesis will analyze the economic rationale behind the development of incentive pay with particular attention on the “agency-principal problem”. The incentives have not only been used to protect the principal from the self-interest of the agent, but have also been used to link pay with desirable performance outcomes.

Three- The thesis will discuss black letter law and soft law (such as ASX corporate governance guidelines) that have been introduced to govern and protect shareholders from the risks incentive pay may expose them to.

Four – The thesis will consider whether the law has kept pace with incentive developments in a way that is consistent with the economic rationale behind them.

Keywords: Adam Smith, Mercantilism, Agency Theory, Executive Remuneration, Incentives, Michael Jensen