Alexander Pepper
Palgrave Macmillan (August 2015)
The intellectual underpinning of much contemporary executive pay practice is to be found in agency theory, made famous by various scholars in the 1970s. Yet standard agency theory has been found wanting in various respect and has been criticised for supporting pay practices which may have contributed to the financial crisis.
The Economic Psychology of Incentives proposes a revised theory of agency, drawing on ideas from behavioural economics and built on more robust assumptions about human behaviour than the standard principal-agent model. Incorporating evidence from a unique empirical study of executives from around the world, the book explains the mechanisms which link the performance of an individual senior executive, the performance of other executives who are part of the same top-management team, and corporate performance. The book proposes new design principles for executive pay, but also explains the difficulties in changing current executive pay practices.
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Alexander Pepper is Professor of Management Practice in the Department of Management at LSE.
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