ABSTRACT
Employee motivation and compensation are important governance issues.
Two different approaches on these issues have been developed, representing different expectations of employee behavior. Principal-agent theory focuses
on the moral hazard aspects of labor contracts; employees are expected to
prefer leisure to work, they want to free ride on others’ efforts and need to
be motivated by financial stimuli. Management and labor have different
goals and are portrayed as antagonists. Principal-agent theory also pre-
sumes that employee behavior is not fully determined by either routine or
discipline, but allows some discretion; obedience is not automatic and needs
to be evoked by providing incentives. The other approach views the firm as a goal-oriented, unitary organization. Management theory, as taught in
corporate strategy and management of change classes in business schools,
often adopts this approach. The different views on employee attitudes ensue
diametrically opposite hypotheses with regard to the relationship between
uncertainty and incentive pay; the character of discourse and the role of
subjectivity in hiring and promotion decisions.
