Research Model
A foundational concept of contingency theory is strategy, organization, and environment
must align for incentives to be effective (Balkin & Gomez-Mejia, 1987b; Milkovich, 1987).
Holmstrom (1979) argued an implication of expectancy theory is that an agent must control or
influence outcomes that affect contingent pay or the agent may withhold effort or take riskreducing
actions. Therefore, for compensation incentives to align principal and agent goals, risk
tolerances, and time horizons, the agent must control the environment sufficiently to be able to
achieve the goals within the principal’s desired time and risk tolerance. Balkin and Gomez-
Mejia (1987a) posited flaws in compensation system design and poor rewards administration as
two explanations for compensation plans that do not motivate executives to behave as desired by
the principals. The model in Figure 1 reflects alignment of principals’ goals, time horizons, and