the manager-worker principal-agent problem.
When we introduced the principal-agent problem. the owner of the firm was viewed as having different objectives from the manager. There is nothing special about the owner-manager relationship that gives rise to the principal-agent problem;indeed,there is a similar problem between the manager and the employees she or he supervises.
To see this. suppose the manager is being paid a fraction of profits and thus has an incentive to increase the the firm's profits. The manager cannot be in several places at the same time and thus cannot monitor every worker even if he or she wanted to The workers,on the other hand,would just as soon gossip and drink coffee as work. How can the manager(the principal) induce the workers(the agents) not to shirk?
solutions to the manager-worker principal-agent problem.
profit sharing
one mechanism the manager can use to enhance workers'efforts is profit sharing making the workers'compensation dependent on the underlying profitability of the firm. offering workers compensation that is tied to underlying profitability provides an incentive for workers to put forth more effort.
revenue sharing
another mechanism for inducing greater effort by workers is revenue sharing linking compensation to the underlying revenues of the firm. examples of this type of incentive scheme include tips and sales commissions. food servers usually receive a very low wage,plus tips. tips are simply a commission paid by the person being served. if the server does a terrible job,the tip is low;if the server does an excellent job,the tip usually is higher. similarly ,car salespeople and insurance agents usually receive a percentage of the sales they generate. the idea behind all these compensation schemes is that it is difficult, if not impossible,for the manager to monitor these people's efforts, and there is uncertainty regarding what final sales will be. by making these workers'incomes dependent on their performance, the working harder,they benefit both the firm and themselves.
revenue sharing is particularly effective when worker productivity is related to revenues rather than costs. for example,a restaurant manager can design a contract whereby servers get some fraction of a tip; the tip is presumed to be an increasing function of the servers' quality (productivity). the manager of a sales firm can provide incentives to employees by paying them a percentage of the sales they generate.