Abstract:

Shareholders delegate daily operation to their agents with the assumption that they would work totally for their benefit. However, individual efforts of agents are not directly observable by the principal (shareholders). To align the interests of agents and those of shareholders, compensation schemes are based on either market or accounting measures (or a combination of the two). This paper, using longitudinal data of 151 listed Turkish firms over the years of 2006 to 2015, found that total compensation amount paid to executives and directors is sensitive to both accounting and market measures. It is revealed that current year net profit and lagged total shareholder value created played important role in the determination of compensation level of executives. The estimations revealed that TL 10,000 return provided to shareholders in the previous year caused TL 5 increase in executives’ total compensation, whereas TL 2 of TL 1000 current year net profit of the firms is given to the executives. It is believed that compensation contracts which are sharing only a fraction of created shareholder value with the agent cannot align the interests of both parties and fully mitigate the agency problem.

Keywords: