Michael Wolfe stated, "According to agency theory, agents of an organization
will make decisions which are in the agent's interests rather than the
organization's interests.
The theory concludes that compensation must be designed to align the agent's
interests with the organization's interests. And the debate about how to
achieve this alignment continues."
As I understand principal-agency theory, it is concerned with situations in
which 1) the agent's interests are in fact different from the principal (or
organization) and 2) the agent has information to which the principal does not
have free access. Examples might be the company's employee stationed in
Timbuktu or employees doing work that is not monitored. The key "solution" of
agency theory is the lowest cost way to ensure that agents always act in the
principals' interest.
Therefore the debate theoretically should be "how to achieve this alignment"
AT THE LOWEST COST. However, I personally like to consider 1) under what
circumstances it is possible to achieve alignment (I assume not always), 2)
how long the alignment can be sustained (all party's interests change over
time), and 3) long-term vs short-term costs (because some "low cost" solutions
seem penny wise and pound foolish in terms of morale, distrust, turnover,
etc.)
Note that all agent's interests are not always at odds with the
organization's. Some interests may be coaligned most of the time and some may
be coaligned some of the time. Rather than design compensation to align
agent's interests to the organization, in some circumstances it might be
cheaper to realign the organization's interests with the agent's and save on
the compensation. Flexible work hours and self-managed teams might be steps
in that direction.
- Prof. John Naman
Katz Graduate School of Business
University of Pittsburgh