Goal congruence is the term which describes the situation when the goals of different interest groups coincide. A way of helping to achieve goal congruence between shareholders and managers is by the introduction of carefully designed remuneration packages for managers which would motivate managers to take decisions which were consistent with the objectives of the shareholders. Agency theory sees employees of businesses, including managers, as individuals, each with his or her own objectives. Within a department of a business, there are departmental objectives. If achieving these various objectives also leads to the achievement of the objectives of the organization as a whole, there is said to be goal congruence.
Achieving Goal Congruence
Goal congruence can be achieved, and at the same time, the ‘agency problem’ can be dealt with, providing managers with incentives which are related to profits or share price, or other factors such as:
- Pay or bonuses related to the size of profits termed as profit-related pay.
- Rewarding managers with shares, e.g.: when a private company ‘goes public’ and managers are invited to subscribe for shares in the company at an attractive offer price.
- Rewarding managers with share options. In a share option scheme, selected employees are given a number of share options, each of which gives the right (after a certain date) to subscribe for shares in the company at a fixed price. The value of an option will increase if the company is successful and its share price goes up.
Such measures might encourage management in the adoption of “creative accounting” methods which will distort the reported performance of the company in the service of the managers own ends. However, creative accounting methods such as off-balance sheet finance present a temptation to management at all times given that they allow a more favorable picture of the state of the company to be presented than otherwise, to shareholders, potential investors, potential lenders and others. An alternative approach is to attempt to monitor managers behavior, for example, by establishing ‘Management audit’ procedures, to introduce additional reporting requirements, or to seek assurance from managers that shareholders’ interests will be foremost in their priorities.