The CEOs fixed pay among these listed companies had also doubled since the previous 5 years rising to approximately 1.8 dollar million which is increase considerably by 4 times more faster than the ordinary workers pay. This was confirmed by the survey reported by the Super investors Australian Council. According to ACSI, board members in large numbers are requiring an urge of placating unhappy employees with respect to not accomplishing the hurdles laid down in their performance paths (Graham et al 2005). This has also made the executives pay to always remain under risk and because of this the concern of the shareholders was performance pay of short term doubled nearly and the barriers for the performance pay of long term being demanding lesser than the distinct executives at the senior level. The performance pay therefore has disorientations and partiality as most of the accounting firms are unable to say no to their respected CEOs whereas turning down the employees becomes an easier approach.
The paradigm of principal and agent is situated at the corporate finance industries center. The main problem with respect to subordinate motivation delivers a discrete insight within the problems that encircle debts, equity issues, dividend dilemmas, pay for executives and even regulators. In order to understand what risk aversion is, it becomes clear to understand the basic problem of principal agent which occurs when maximization of efforts is chosen as a decision by the Agent (Graham et al 2005). However, on the other hand, what is considered essential by the shareholders is the maximization of profits expected subjected towards two important constraints which as the compatibility of incentive and the constraint of participation by the agent.
It has been suggested by the theory of agency that an organization can be evident as a contracts nexus between holders of resources. A relationship of agency develops between individual groups which are termed as principals and the agents hired by these principals are called as agents (Graham et al 2005). The relationship develops between stockholders and managers along with debt holders and stockholders. Fundamental problems are raised by this agency relationship especially with regard to the behavior of self interest. A manager of a corporate has individuals goals that are required to be competed with the shareholder wealth maximization goals. As the authority of the shareholders in on the managers with regard to administering the assets of firms so there exists a potential interest conflict present between 2 selected groups especially the shareholders and the managers. As the authority to the managers is given by stakeholders, it is important for administering the assets of the firm as there is an existence of conflicting interests.