Introduction

It may be only a slight exaggeration to suggest that the topic of incentives in organizations – particularly managerial incentives – has received more sustained attention from a more diverse set of scholars, consultants, and business reporters than any other topic relevant to the functioning of organizations. For example, some economists have gone so far as to maintain that “incentives are the essence of economics” (Lazear, 1987), and interest in this topic has recently spawned a substantial literature drawing from agency theory (Beatty & Zajac, 1994; Jensen & Murphy, 1990a, 1990b; Lewellen, Loderer, & Martin, 1987; Murphy, 1985). Similarly, the topic of incentives and motivation has long been a central area of research for psychologists and micro-organization behavior researchers (Kerr, 1975; Tosi, House, & Dunnette, 1972). Sociologists, organization theorists, and strategic management researchers have also devoted considerable effort to the study of managerial incentives in organizations (Finkelstein & Hambrick, 1988; Kerr & Bettis, 1987; Westphal & Zajac, 1994; Zajac, 1990). Finally, the popular business press has persistently tracked, publicized, and, most recently, critiqued the compensation of top managers (Business Week, 1992; Crystal, 1991; Time, 1993).

Given these circumstances, we must be clear regarding the objective of this chapter. We do not intend to provide a comprehensive review of research on managerial incentives. On the contrary, the discussion to follow reflects our biases, prior writings, and research preferences. Our objective is to explain what appears to be a fundamental paradox: namely, that the massive amount of attention devoted to the topic of managerial incentives in organizations has not led to any corresponding growing consensus.