The Agency Problem: Examining the Dilemma Between Shareholder and CEO Bonus Structures

Abstract

The principal-agent problem is a well-known issue that arises when one party hires another party to act on their behalf, but the interests of the two parties are not perfectly aligned. When there is information imbalance between the principal and the agent, or when one party has more or better information than the other, this frequently occurs. The principal-agent dilemma in relation to information asymmetry is the main topic of this essay, which is a pervasive issue in various industries and has significant impacts on firm performance and dividend policies. By analyzing and synthesizing previous literature, the paper identifies that agency problems can lead to moral hazard and agency-costs-related issues, which in turn can negatively affect the financial outcomes of the firm. To tackle these problems, the paper proposes three potential solutions, equity incentives and debts, external auditors and consultants, and ownership and board structure. These solutions are effective in reducing agency problems. Moreover, the paper discusses how these solutions can be tailored to different contexts and industries. The proposed solutions can effectively alleviate agency problems, but they need to be implemented appropriately and tailored to specific contexts. To investigate the viability and efficacy of these solutions in various contexts, more study is required.