Explore BrainMass

Explore BrainMass

    principal agent problem

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    West German Profit Sharing Case Study

    Please read the West German Profit Sharing Case Study.

    After reading the case study, please answer the following questions in regard to the west German Profit Sharing Case Study:

    1. Why do you believe such incentive programs as profit-sharing help mitigate the principal/agent problem?
    2. Does profit-sharing completely get rid of "shirking"?
    3. What are the pros and cons of incentive programs such as profit-sharing, stock options, bonuses, etc.?

    © BrainMass Inc. brainmass.com October 10, 2019, 8:29 am ad1c9bdddf


    Solution Preview

    I believe that incentive programs such as profit sharing mitigate the principal agent problem because the incentives are linked to the objectives of the organization and they help align the efforts of agents with those of principals. The fundamental cause of principal agent problem is that separate parties in a business relationship have disparate interests. The corporate managers aren't really beholden to dispersed ownership. The principal agency problem arises when agents are motivated to make decisions on behalf of or that impact another person or entity the "principal" (1). This problem exists in circumstances where agents are motivated to act in their own best interests which are against those of the principals. This leads to moral hazard. According to the article "Cooperation, productivity, and profit sharing", motivation of employees can be encouraged through group incentives under assumptions of interdependence. The article proposes that profit sharing a capital sharing have strong positive effects on productivity.

    Profit sharing does not completely get rid of shirking. The reason is that employees who are paid poorly may shirk their responsibilities if there is no incentive rewarding hard work. Similarly, if group incentives under assumptions of interdependence are administered there can be a free-rider problem where some employees in the group may shirk responsibility. They do not work as hard as they otherwise would. If the recommendations of the article "Cooperation, productivity, and profit sharing" are followed and group incentives are administered, profit-sharing will not completely eliminate shirking. Free-riding can adversely affect the motivation of other high performing employees in the team because overall performance depends on team effort. Further, group members expect greater than average rewards, which encourages shirking.
    The pro of incentive programs such as profit sharing, stock options, and bonuses are that employee incentives can generate healthy competition between individuals or teams of employees in a company. These incentives have proved to be especially effective in sales because a significant part of the pay of sales persons depends on ...

    Solution Summary

    The response provides you a structured explanation of case study related to principal agent problem . It also gives you the relevant references.