1/29/2005

If I owned a business the principal-agent situation ( http://en.wikipedia.org/wiki/Principal-agent_problem) would be one of my biggest concerns. As I have bounced around from job to job it definitely can be recognized who understands this phenomenon and who doesn't. My first job out of high school I was a salesclerk in a sunglass store. I was paid hourly with no bonus or compensation for selling. Hustling on the job didn’t get me very far and I had no motivation to learn the product or to push sales. On the other hand at my current job success is nicely rewarded; not only with bonus cash, but promotions within the organization. With every promotion the rewards grow increasingly better. Money motivates like nothing else. That is the first step in handling the issue.

5 comments:

sam said...

I agree with Homer. The principal-agent issue is very easy to solve. Every employee I have ever talked to focuses on two things at work. How satisfying the work is and how much they get paid for it. If I didn't like my job, but I was getting paid an obscene amount of money for it, I would most likely stay there for a longer time. The reason is that I am a poor college student who needs the money. Now, I know not everyone fits this bill, but the fact is everyone could almost always use a little extra cash and would be willing to work just a little harder and longer for it.

Lana said...

I have to agree with both Homer and Sam on this one. This very issue comes up when I think about my summer job. Do I return to my former summer job which pays more than I've ever been paid before, but is the most monotonous job I've ever had. Or do I move on to something more fulfilling, but not so satisfying to my wallet?

Rex said...

Commissions and bonuses based on performance, what a concept. The majority of jobs I have had paid minimum wage and I tended to give minimum performance. This concept of paying people based on performance (principal-agent theory) is one that could fit into almost every job out there. If I knew that excelling at my job meant I would receive some extra incentive, I would be willing to put forth more effort.

Emily said...

How a person is perceived to be valued by an employer is an important concept to any individual and that’s how the principal-agent theory comes into play. As was stated in the post and comments if you get paid higher you tend to me more motivated because you feel more valued or at lest the value of the cash is good. The same goes for not being valued or paid right the value of the work goes down.

Dr. Tufte said...

Principal agent theory is a bit broader than laid out here (but I'm glad that you already found the idea useful).

More correctly it applies to situations in which the principal has someone else (the agent) do some work for them. Most commonly in business this involves owner/manager situations, but it exceptionally common in the real world (for example, when you write something on a shopping list, but someone else does the shopping).

Linking pay to performance is just one way to address this problem. So is simply paying attention to what your workers are doing and correcting them if they do it wrong.