A Framework of Excessive Executive Compensation – An Obscured Breach in Corporate Governance Agency Contract

Abstract

Excessive executive compensation is tantamount to a breach of agency contract. There are two main problems with excessive executive compensation: excessive compensation is stealing from a shareholder’s standpoint; excessive executive compensation is demoralizing to the other workers in the organization. Purpose. This paper aims to provide a conceptual framework of the antecedent and postcedent of excessive executive compensation. Approach. The paper inclines on agency theory and the attendant principal-agent contract. The paper follows a critical deconstruction approach, culminating in the development of an original conceptual framework. Finding. Through a critical deconstruction of agency theory postulation of optimal agent’s response to corporate compensation structure, it emerges that this postulation may not hold in all instances given that gargantuan compensation structure has a high propensity to nurture irresistible executive financial misdemeanours to inflate profit or share price, which are the performance index of reaping the excessive compensation. This incubates ancillary agency costs to the detriment of the principal and corporate survival. Theoretical and practical value. The paper offers insight into corporate governance strategy for accounting and business law theory and practice in university business schools and for further research. In addition, corporate boards may draw insights from the theory developed in this paper, which portrays the antecedents and postcedents of executive excessive compensation. This theory will catalyse debate and rethinking of corporate compensation policies within the boards of directors. The paper offers an original contribution to the contentious agency cost issues by developing a conceptual framework of the antecedent and postcedent of excessive executive compensation – depicting obscured additional agency costs.

Keywords

• principal-agent contract
• corporate governance
• agency costs
• agency theory
• breach of contract