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Yes, Managers Should Be Paid Like Bureaucrats

University of Zurich, Switzerland, bsfrey{at}iew.unizh.ch

Margit Osterloh

University of Zurich, Switzerland, osterloh{at}iou.unizh.ch

Corporate scandals, reflected in excessive management compensation and fraudulent accounts, cause great damage. Agency theory’s insistence to link 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, serving 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.

Key Words: agency theory • intrinsic motivation • crowding theory • management compensation pay for performance • organizational citizenship

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