Yes, Managers Should Be Paid Like Bureaucrats

39 Pages Posted: 8 Jun 2004

See all articles by Bruno S. Frey

Bruno S. Frey

CREMA; University of Basel

Margit Osterloh

University of Basel; Professor (em.) University of Zurich

Date Written: January 2005

Abstract

Corporate scandals, reflected in excessive management compensation and fraudulent accounts, cause considerable damage. Agency theory's insistence on linking the compensation of managers and directors as closely as possible to firm performance is a major reason for these scandals. They cannot be overcome by improving variable pay for performance, as selfish extrinsic motivation is reinforced. Based on the common pool approach to the firm, institutions are proposed which serve to raise intrinsically motivated corporate virtue. More importance is to be attributed to fixed pay and strengthening the legitimacy of authorities by procedural fairness, relational contracts and organizational citizenship behavior.

Keywords: Agency theory, intrinsic motivation, crowding theory, management compensation, pay for performance, organizational citzenship

JEL Classification: D21, D23, H11, J30

Suggested Citation

Frey, Bruno S. and Osterloh, Margit, Yes, Managers Should Be Paid Like Bureaucrats (January 2005). CESifo Working Paper Series No. 1379; IEW Working Paper No. 187. Available at SSRN: https://ssrn.com/abstract=555697

Bruno S. Frey (Contact Author)

CREMA ( email )

Südstrasse 11
Zurich, CH 8008
Switzerland
+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

Margit Osterloh

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Professor (em.) University of Zurich ( email )

Südstrasse 11
Zürich, CH-8008
Switzerland

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