C agency theory this theory focuses on divergent

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C. Agency Theory —This theory focuses on divergent interests and goals of the organization's stakeholders and the ways that compensation can be used to align these interests and goals. Today, most stockholders are removed from the daytoday operation of companies. This separation has many advantages, but it also creates costs—the interests of the principals (owners) and their agents (managers) may no longer converge. Agency costs are as follows: 1. Although shareholders seek to maximize their wealth, management may spend money on things such as prequisites or “empire building”. 2. Managers and shareholders may differ in their attitudes toward risk. 3. Decisionmaking horizons may differ, since managers will likely emphasize shortterm gains to ensure promotion and visibility, perhaps at the cost of longterm success. D. Agency costs may be minimized by the principal choosing a contracting scheme that helps align the interests of the agent with the interests of the principals. These approaches can be behavior oriented (e.g., merit pay) or outcome oriented (e.g., stock options, profit sharing, commissions).
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