CHAPTER ONE
INTRODUCTION
1.1Â Â Â Â Background to the Study
According to Jensen (2006), an agency relationship is a contract under which one or more persons (principal) engages another person (the agent) to perform some services on their behalf which involves delegating some decision-making authority to the agent. The cornerstone of agency theory is the assumption that the interests of principals and agent diverge. According to agency theory, the principal can limit divergence from his/her interest by establishing appropriate incentives for the agent, and by increasing monitoring costs designed to limit opportunistic action by the agent. Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely defined) between the resource holders. Agency relationship arises whenever one or more individuals hire one or more individuals called agent to perform some services and then delegate decision making authorities to the agent. The primary agency relationships in business are those:
1.      between stockholders and managers; and
2.      between debt holders and stockholders.These relationships are not necessarily harmonious; indeed, agency theory is concerned with agency conflict or conflict of interest between agent and principal and this has implication for among other things, corporate governance and business ethics. When agency theory occur, it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship (e.g., offering management performance bonuses to encourage managers to act in the shareholder’s interests). Anderson and Macie (2006) said there will be continual diverging interests between the principal and the agent, unless an effort is made in order to align these interests. According to Ilaboya (2008), two of the contents of financial statements required by CAMA 2004 to be prepared by company directors, provided each for the interest of the shareholders (principal) and that of the management/employees.The profit and loss account shows the level of profit of a firm and is in line with the shareholders’ profit maximization interest, while the value added statement which shows the wealth created and how it is distributed to all stakeholders, shows the portion of the wealth created that goes to the management/employee the (the agent) as well as treat the agent as a team member in the wealth creation process.The primary focus of this study is on how the various reward systems especially the financial reward systems helps to resolve the conflicts between the principal and agent without compromising the accounting policies, standards (accounting standards) and regulations.
