Foreign Subsidiary Compensation Strategy: An Agency Theory Perspective

Abstract

This study extends agency theory to explain the design of compensation strategy in foreign subsidiaries competing within global industries. Results from 100 subsidiaries in five countries indicate that compensation strategy is influenced by the agency problem, defined by the subsidiary's cultural distance from its headquarters market, lateral centralization, and senior management's commitment to the parent. In addition, the association between the overall design of the compensation strategy and perceived subsidiary effectiveness was examined. An incentive structure aligned to the agency state was positively related to subsidiary effectiveness.