The Agency problem

When a salesman (by whatever name called – Financial Consultant, certified financial consultant, financial advisor, relationship manager, etc.) he feels he should get more commission than what he is currently getting. However, his immediate manager (from the manufacturer’s side or in his own company) feels – I helped him, so I deserve more credit. The Chairman of the distributing company and the Chairman of the manufacturing company feel, if they did not create the product this guy could not have sold anything after all.

So right from the Chairman to the rookie salesman everybody feels he/she is the only person who should be compensated – all others are overheads! The truth of course lies in-between the two extreme views. The product manufacturer (let us say a life insurance company) employs actuaries, underwriters, doctors, accountants, auditors, trainers, operations people etc. and everybody plays a role. Who should be paid how much is a very difficult question to answer especially in an industry where most of the manufacturers are only losing money! So who decides how much should each person get? Well in Economics this is called the ‘Agency problem’. Solution for this comes from the markets. Jobs which people do not like get compensated better to ‘price’ the inconvenience. Sales salaries are low, but incentives are high. In most cases the person gets rewarded for selling well, selling regularly, stickiness, client retention etc.

The problem however in real life arises when the Chairman is looking to do political deals. The Managing Director is looking to make the balance sheet look good for the next 2 quarters, the new head of Sales is keen on increasing ‘his’ people in the company. The branch manager in one district is busy filling up excel sheet with false sales calls, the head of Training is busy creating a training force from his community only, and the planning manager is capturing all this in complicated MIS!

Now if you are a shareholder hoping that all these guys will see eye to eye, you are wrong. The commissioned sales force is screaming because the last year sales figure was a disaster. The trainers feel that much more training is required. The sales guys think the trainers are a bunch of guys who cannot do any sales – therefore they are in training! The competition is selling far, far more because they have a better geographic and product reach. Every company has a different story – which is packaged for the ultimate investor meets.

One attempt to solve the agency problem is to create a congruence between the employee, product user and the shareholder. To a great extent this is done by issuing ESOPs. However if a person earning Rs. 15 lakhs is given 5000 shares @ Rs. 10/- saying it will list at Rs. 100, frankly he does not care. Pricing of ESOP should be fair to the other shareholder and the amount should be big enough for the employee to worry about. If it does well he should be able to move to another orbit and if it does not, it should cut to his / her bone. In the current scenario it does neither.

Amidst all this you get reports saying how great this company is. As a shareholder you can only sell the shares of the company which is funding all this confusion…!! The solution for the agency problem is currently under suspension!

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

One Response to “The Agency problem”

  1. subra:
    More insights needed here. Please honour our request.. your’s is a distance learning mba for many..:)


Leave a Reply

This blog is kept spam free by WP-SpamFree.