Corporate Governance, Pay Equity, and the Limitations of Agency Theory
40 Pages Posted: 18 Feb 2015
Date Written: February 17, 2015
It is well known that recent decades have seen an explosion in levels of senior executive remuneration in public companies, both in absolute terms and in relative terms to ordinary worker pay. However, a conspicuous corresponding trend over recent years has been the development of a range of countervailing regulatory tools designed to mitigate this disparity within various national environments. These include regulatory pay ratio caps, bonus bans, and mandatory pay ratio disclosures. Notwithstanding these salient developments, prevailing legal and economic debates on senior executive and worker pay remain rooted in the dominant principal-agent paradigm of corporate governance, which consistently disputes the relevance of equitable or distributive fairness concerns to the essentially functional challenge of determining effective agent incentives. In this article, I take issue with the orthodox principal-agent perspective on pay equity, by demonstrating the centrality of equitable concerns to effective agent-incentive design, both at senior executive and ordinary worker levels.
Keywords: corporate governance, executive remuneration, inequality, law and economics, theory of the firm, regulation
JEL Classification: G34, G38, K22, N22
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