Agency problems occur when the incentives and compensation
present themselves to an agent to not act in the full interest of
its principal.
In a corporation, agency problem is the conflict of interest
between shareholders and management.
Management are agents of shareholders and they should act
according to the shareholder's interest.
If compensations are increased, earnings will decrease and in
result dividends, hence it will not be in the interest of the
shareholders.
Therefore, by increasing compensations, management is not
acting as an agent in full interest of its shareholders and hence
increasing the agency problems.