Understanding and Solving Principal and Agent problems

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Principal and agent problems arise when there is a conflict of Goals and interest of the principal (firm) and the agent (worker). Also it could arise from the difference in attitudes towards risk or when the Agent makes decisions for the Principal. An agency theory concerns the relationship between a principal (firm) and an agent (worker). It involves the cost of resolving problems between the principal and the agent and aligning their interests. An agency relationship arises when one party (the principal) delegates work to the other party (the agent) who carries out the work.

There are five different ways to solve these agency problems and they are as follows: Employee Relations Rewards on employee performance, Work-life balance, job enrichment and treating employees equally and with equity.

Employee Relations is the relationship between employers and employees. Employee relations refers to an assortment of employer's initiatives by improving workplace communications, for engaging employees directly or indirectly in decision making processes and also securing employee compliance through disciplinary actions (Bratton & Gold 2007).Employee relations involves employees voice, employee communication, employee rights and employee. Employee's voice involves employee involvement and employee participation. Employee participation tends to focus more on the collective voice arrangement for consultation while Employee involvement tends to be direct voice initiatives with individual or team employees (ibid). Employee's want to have a sense of belonging, they want to feel important to the organization that is why the organization has to make use of the various ways of employee involvement by using the suggestion scheme (the employees could write down their suggestions and drop it into the suggestion box), team briefing, regular meeting of the entire workforce where employees opinions are sought after and feed-back (Employee feed-back could produce negative or positive effects. It tells the employee whether there is a need to improve or whether their performance at work is good).However, employees can decide to choose a representative to stand in on their behalf probably due to the fact that they are scared of their boss, in that case the representative would be like the intermediary between the employers and the employee but the former is more efficient. Basically the key factor in employee relations is to get the workers involved in decision making .Involving the employees in decision making could improve the psychological contract that in turn could strengthen the employer/employee relationship and at the same time employers may not be willing to give up their power (French and Raven 1958).

Another way of resolving /avoiding principal and agent problem is by rewarding the employees when they perform well on their job. It is a way of recognising efforts and performance. Expectancy theory could be used to explain this method of resolving principal/agent problem. Expectancy theory is based on the expectations that workers bring with them to work, it implies that management needs to demonstrate to employees that efforts would be recognised and rewarded (Marchington and Wilikson 2008). F. w. Taylor suggested that the management motivate the staff through the pay system because he believed that workers were motivated primarily by money (ibid). Also the employers could conduct a weekly appraisal and then reward the employees according to their performance. Herzberg's two factor theory is made up of the hygiene and motivator factors. The motivator factor is made up of achievement, recognition and responsibility while the hygiene factor is made up of job security, pay and physical working conditions (Berry 1998). Herzberg's two factor theory found out that when an employee speaks about having a bad feeling at work it was due to in sufficient pay but when an employee speaks about having a good feeling at work it is because they have been granted recognition at work. The hygiene factor such as pay tends to motivate the employee away from being dissatisfied with the job and the motivator factor such as recognition tends to motivate the employee towards job satisfaction (ibid). Pay and recognition are not the only factors that could motivate the employees they can also be rewarded with non cash items such as cars, promotion, private health insurance, training and development, assistance towards child care. The benefit of rewarding employee performance is that it would increase productivity at work, when employees are rewarded it would make them feel valued causing them to work harder. However there may be no motivating effect if the employee's reasons for coming to work was purely instrumental (that is they come to work just to earn money to enable them enjoy themselves outside the workplace). (Marchington and Wilikson 2008).

Work-life balance can be seen as a motivating factor at work. The term work-life balance refers to the extent to which an individual is equally engaged and satisfied with his or her work role and family role (Greenhaus et al, 2003). Employees want to be able to balance their work life with their family life, their social life and personal commitments. Border theory basically sees work and family as different spheres which influence each other with different practices, behaviours. Employees are the border crossers as they move from work life to family life every day. The role of the organization is to try to alter the boundaries so as to prevent the work life crashing with the family life (http://hum.sagepub.com/content/53/6/747.abstract). The work-life balance could be improved by providing flexible working options such as: part-time working, job sharing, compressed working hours, annual hours, Tele working, Home working. John Lewis is an example of an organisation that uses different flexible working options to satisfy different customers with different flexible working needs. Some of the employees may need to take care of their sick relatives, others may need flexible working options that could enable them study while working while some may need flexible working options that suit their location. The benefit of providing flexible working options is that it reduces stress, which in turn reduces employee absence from work. The downside to using flexible options could be that it would be hard for the managers to manage the employees because if any employee doesn't show up for work it may be hard to look for someone else to cover up him/her. Also those working from home could be earning money from doing little or no work at all therefore betraying the line manager's trust.

Jobs can be restructured to increase employee satisfaction. According to (Warr 2002):'The way jobs are designed has important consequences for individual outcomes such as job satisfaction and stress as well as organizational outcomes such as customer satisfaction'. Because of its impact on organizational outcomes job design has significant implications on employee's health and productivity. Job design has a short-term positive effect on satisfaction but a long-term effect on job performance. Jobs can be redesigned to make the work more challenging and interesting and also to improve opportunities for achievement. Hackman and Oldman proposed five core job characteristics for job satisfaction and job design which are: skill variety, task identity, task significance, autonomy and task feedback (Porteous 1997). For example Peter Warr vitamin model has two effects; the declining effect which is the AD and the constant effect which is the constant effect. If the job variety is increased it would lead to a higher job responsibility which could in turn generate stress and lead to lower level of productivity (declining effect). The task feedback could lead to employee satisfaction more employee feedback would have very little or no change on the employee satisfaction (constant effect).

Employees want to be treated with respect, fairness and they want to be valued. They want to be given the same treatment as other employees. People make social comparisons with people at work which can cause them to feel fairly or unfairly treated. Equity theory is based on this sense of fairness that employees want to feel in the work place (Berry 1998). Employees compare their input and output to the input and output of another employee. Inputs could be: training, educational qualifications and hard work and output could be pay, recognition, benefits. When this comparison is made employees would feel either over paid or under paid. If they feel they are under paid this could reduce their motivation to work and it would in turn reduce their performance at work whereas if they feel over paid they can decide to work harder to increase productivity (ibid). Also, based on Maslow's hierarchy of needs which is made up of psychological, safety, social, self esteem and self actualization needs. The employee wants his/her job to be able to satisfy each level of needs when this is not met it would reduce employee commitment. The key here is to treat each employee equally and with equity.

In conclusion, psychological contract is the perception of the employee and employer about what their mutual obligations are towards each other (Guest et al, 2002). Therefore in order to solve the principal and agent problem the psychological contract should be well understood so as to avoid conflicts that could result from breaching the contract .If the contract is breached it is the job of the employer to try and repair it.


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