I think that, oftentimes, the reason a principal-agent
problem occurs is when the agent believes there isn’t enough incentive for them
to do a certain task. In class, we have talked in detail about how something
such as a being paid on commission affects the teamwork aspect within a company
or job, but thinking closely I think that this would also have a major impact
on this concept of the principal-agent problem.
When an employee’s actions are partially or fully correlated
with their pay, I think that it’s fair to say that the employee is more likely
to work hard and shirk less because it directly affects them and their living.
In a sales position, for example, those employees are typically go-getters who
are relentless in their goal of making that sale. Clearly, they want to make
that sale for the good of the company, but they are much more focused on the
commission they will get from that sale.
While I think that this assumption holds true in many
situations, I believe that the idea that the task isn’t worth the pay happens
in commission-based jobs as well. One example I was able to think of is the
relationship with a realtor and the seller that hired them. A realtor earns
their income by selling homes and the more that the house sells for, the more
they themselves will make since realtors make commission based on a percentage
of the selling price of the home. Now, thinking about this, you would think
that a realtor would, similar to the sales employee I previously mentioned,
would be relentless in getting that highest asking price for the home of the
person(s) that hired them.
Most of the time I would think this is true, but in this
scenario the marginal benefit for the agent is far less than that of the
principal. By that, I mean that the principal, or the person selling the home,
would probably want their realtor to negotiate for every dollar they could
because they would are the ones receiving the bulk of that selling price. While
the selling price does have an impact on the realtor’s pay, they probably don’t
care about renegotiating with a prospective buyer for a couple hundred, maybe
even a couple thousand, dollars because the realtor might value their time more
than the slight increase in commission they would receive. This situation has
clear moral hazard, because the principal hired the agent, in this case the
realtor, to help them receive the highest sale price possible for them and the
realtor can not exert as much effort as they should because they don’t find the
commission worth their time.
I think that this same kind of moral hazard would occur even
more so in companies that have employees that aren’t paid based off of
commission. Many, possibly even more, people feel that they aren’t paid enough
for the job that they do. Now, whether or not that is in fact true, a person
would be less likely to do more work or do anything innovative for the company
if they don’t think they are going to get properly incentivized. I heard this
sort of thing from a couple people that I worked with this summer at my
internship.
One thing that the company I interned for implemented I believe as a way to counteract the principal-agent problem is a bonus system, which I have talked about in a previous post. To reiterate, the bonus system was based off of specific tasks and numbers that would reflect your and your division’s work. In terms of teamwork, it created an environment that promoted a lot of collaboration since your bonus could be affected by the work of someone else’s. In terms of the principal-agent problem, I think that it also helps counteract this because it gives specific numbers and tasks for each employee to meet that benefit the company, but also benefit them since a bonus is based off of it. Now the question about this system is what if the employee could actually go further than the numbers but choose not to because they already met their “quota.” I’m sure this happens in some cases, which is a moral hazard and a principal-agent problem, but I think that if the goals are assessed properly between the principal and agent at the beginning of the bonus term that this shouldn’t be a major issue or conflict.
One thing that the company I interned for implemented I believe as a way to counteract the principal-agent problem is a bonus system, which I have talked about in a previous post. To reiterate, the bonus system was based off of specific tasks and numbers that would reflect your and your division’s work. In terms of teamwork, it created an environment that promoted a lot of collaboration since your bonus could be affected by the work of someone else’s. In terms of the principal-agent problem, I think that it also helps counteract this because it gives specific numbers and tasks for each employee to meet that benefit the company, but also benefit them since a bonus is based off of it. Now the question about this system is what if the employee could actually go further than the numbers but choose not to because they already met their “quota.” I’m sure this happens in some cases, which is a moral hazard and a principal-agent problem, but I think that if the goals are assessed properly between the principal and agent at the beginning of the bonus term that this shouldn’t be a major issue or conflict.
Let's consider a few different angles to what you said. First on sales - it is quite different with a new customer than with a repeat customer. You seemingly have the new customer in mind. My experience with sales people is that some are actually laid back because they understand that the nature of the customers they will be dealing with appreciate that. This is true both for people selling to the university and financial advisers dealing with people my age about managing their retirement savings. The hard sell doesn't win in this case. It might, however, win elsewhere.
ReplyDeleteNext, on the real estate front, the agent is more of a go between - relaying the latest offer from the buyer. The agent may have an ultimate price in mind and communicate it to the seller, but the seller has the final say on this - and then even when there is an agreement, things might be renegotiated before the closing, particularly if some odd contingency happens in between.
Several of your classmates wrote about the real estate situation. The research literature says the moral hazard of the agent is seen not so much in the price, but rather in how many properties the buyer sees before the buyer's realtor encourages the buyer to choose one and make and offer. The realtor wants that to happen rather quickly. The buyer's interests may be better served by looking at more alternatives.
I'm glad you liked the way your company implemented its bonus scheme. When group productivity can be readily measured, that's a good thing to reward. Let's note that bonuses are not the only type of incentive employees have. If there are promotions that might be earned that is a different incentive and it might kick in to motivate employees even after the quota has been reached.
I would agree that sales people have become more laid back than their previous personas. I think that over the years sales people have gotten a bad reputation for sometimes being too aggressive and it's an off-putting personality. I think that by acting more laid back with the customer, they are certainly more likely to get along with the customer. However, as you mentioned, a hard sell might be a better approach in some scenarios. As for real estate, I had never thought about looking at alternatives as a moral hazard. I can see where a realtor would want a quick and easy sell or find and they would value their time enough where they would pressure a client to pick one.
DeleteBonuses and promotions I think are both good ways to keep employees on track. The promotional idea I think could be a way to motivate employees pass a certain quota. I think that something else that could help is by having meetings throughout the year to keep track of where they are with their goals. This could be a way to see if the goal needs to be fluctuated and possibly the bonus increased if they are doing exceedingly well.
I think it is wise for a company to meter employees and give them bonus based on the production they are providing to the company. In my experience in sales, I have always worked my tail off and limited shirking, this is because I know that the less I shirk the more I produce and the more I will get compensated.
ReplyDeleteI found your analysis of the realtor interesting. I think they weigh the risk of wether or not to accept an offer before they do so. They realize that offers take time, and time is money, so they might be willing to take a discounted offer to ensure that they can go on to their next house to sell. Do you think people would be better off it they sell house independently? Do you have any ideas on how to make sure realtors are maximizing profit before they sell?
It was interesting reading your viewpoints on the different types of jobs within selling. I have worked as a sales person at Abercrombie and Fitch but we never got any commission on the products that we convinced the buyers to actually buy which made me not want to put in much effort. But then again the job description wasn't truly the same as of an actual sales person that makes a living off of selling.
ReplyDeleteI have always wondered how the realtors maximize their profits and make sure that they invest their time in the right customer. I have never thought of how the different types of jobs in sales can be so different, like Grant explained in his post about how most of his salary came from the commission but people were still shirking meanwhile when the commission can be more substantial which is the case for the realtors people tend to shirk less and be more productive. Also, I am wondering if it is because the jobs that make less commission tend to have more teenagers working where people that make more commission in their job tend to have more adults working.