The Agency Theory and Concepts

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choose between fixed and variable pay by determining how easy it is to monitor job performance (behaviors). However, considering the interrelationship between the agent and the principal it becomes problematic to organize the relationship due to the moral hazards involved (Jensen and Meckling, 1976).One factor related to the ability to monitor performance is task programmability.
According to agency theory, task programmability will be positively related to the use of behavior-based compensation contracts (fixed salary) and negatively related to the use of outcome- based contracts (variable pay). This is because programmable tasks allow the principals (in this case, organizations) to specify the behaviors that the agents (in this case, managers) need to perform.
Gomez-Mejia and Balkin (1992) used the example of work performed by university faculty members to suggest that when work behaviors are inherently nonprogrammable, an organization is forced to monitor behavior by ...

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