A story that highlights The principal-agent problem …
There is a saying which goes “serendipity sometimes better than thousands of arranged appointments”. Well, whether it’s true or not, the story of this article started roaming inside my head one night coincidently when I met randomly CEO of one of the most progressive promising industries in the tech scene. He is a founder of one of the AR/AI companies in China with backing from a lot of investors.
It would be a dream ask to have someone like that in a friendly setup with no agenda being planned. So we had talked about a lot of interesting topics in the startup sphere and many more. Very insightful discussions.
One that has kept my curiosity juggling over and over. It’s the relationship between the principal and agent. The principal meaning the owner or the founder in this matter, and the agent is the employee or someone simply working for the owner.
Mr. CEO shares a problem that he currently solved with one of his talented technical employees. As he described, one day this talented employee had visited him asking for higher pay and some extra shares.
To put things into perspective, this CEO is the founder of the startup and holds a lot of shares in the company with a majority of it had gone to venture capitalists.
Managing expectations is hard, it’s probably harder when they are talented. They are of course driven for some reason. They always look for ways to have a higher gain for the amount of work they put in. logical right. They are smart people, and they know their worth in the market.
They are also smart to choose the right time to press and have leverage over the negotiation for better position and recognition.
He “the CEO” points out that people are driven for two things. Biologically, humans, in general, want to survive. This is the basic instinct.
Now secondly, once they ensured their survival, the next impulse would be to aim for recognition.
When you are looking for a job, you are basically trying to survive to make ends meet. But, when you are highly qualified and have options especially in a good economy. You want to be recognized by your colleagues, boss, and surroundings for your hard work and contribution. Everyone loves a little praise, imagine for someone doing great work in a flourishing industry.
The request from this employee was high and happened in a time where compensation for such position can be difficult, as the CEO claims
The question becomes how you would manage expectations of such demands from your employees, Virtual assistants, subordinates, and so on.
The CEO says it would have been easy to get rid of this employee since they can be replaced, especially in a country like China where highly qualified professionals in the techs are in abundance. In fact, you can pull them out of their companies by offering little more income and some persuasion of a fulfilling work environment and some recognition.
If you don’t know where you are headed, you end up nowhere
I have lived in China enough to know young professionals would quit their job simply because they don’t see where the company is headed (no vision). Not all of them of course. But it is a common thing to witness and hear in a social setting and it’s pretty staggering.
In fact, this employee was one of the employees that were fetched by the CEO himself from another big company with a lower-paying salary, just because he was sold the idea on how can he be part of this exciting company riding the new wave and clear direction.
AI (Artificial Intelligence) is Cool
It’s also cool to say that I work for AI/AR companies these days. Lol. Believe me, I would have been persuaded too.
The CEO planned something and it worked.
He next called for a meeting and basically clarified the position of the company and where they stand with other employees in the finance department specifically explaining in detail with conformity. All this done indirectly to showcase the situation to the employee … and basically telling him back off.
At times we don’t have to play hard and stubborn. Probably the intention was to keep the work atmosphere in peace. Although this employee could be replaced, setting fears and employees questioning their faith in the company won’t do any justice especially when you fire top-performing employees.
It’s easy to fire, but it’s hard to hire
It’s easy to fire but it’s hard to hire. Consider the amount of money spent to find new employees. Hiring is a guessing game, you never know what you get. Principals (founders) should behave as guardians, they should feel sad when someone leaves unless they are starting new companies or a new adventure that makes sense. Otherwise, you should consider these employees quitting you, not quitting their work/job and you must as the “principal” reevaluate.
The psychological stability
It’s important to remember that we are dealing with humans not machines and the psychological stability in the workplace cannot be underestimated.
This gets overlooked a lot. Many employers/owners (Principals) don’t give a fair amount of time to think about the principal-agent problem
The Investopedia Definition of “Principal-agent problem”
Well, according to Investopedia, the principal-agent problem is “a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal.”
Environment you build
What’s more, you want to keep your employees motivated and keep at it at all times. You want them to be the champions and you are the coach helping and providing all sorts of facilities to succeed. The new generations will seek work environments, and if you don’t have a good one, a lot will leave.
That’s the question, how to keep employees motivated or instill the founder’s mentality, in other words, how to get them to think like the principal even though there is no compensation that indicates their ownership?
The best example I can think of, the late Steve Jobs of apple. He made everyone believe his message and how apple was challenging the status quo and how the personal computer would be life-changing and the tool to defeat goliath.
It all starts with a good founder/leader. Having a vision that is clear and concise is important.
Everyone has a mission in life, you just need to communicate yours to inspire and make them aspire their true selves.
Secondly, you need to be truthful. Most founders lie because they want talents working for them forever. You should want the same thing for your employees that you loved for yourself and that’s being a founder or starting a company. So next time, you hire someone, tell them truthfully why they should work for you and that you the best environment for them to grow and learn for the time being. And if they decide to start up their own company, you will be the first one to help and support all the way because that ‘s what you would have loved for yourself.
The common solution to the problem
The common solution to the principal-agent problem is the incentive system. Systematically incentivizing and rewarding hardworking individuals in any firm. It makes sense, an employee would work hard to achieve these rewards, and what a way to celebrate your dedication by the end of the month.
Being a good servant trying to give all you have every month is very honorable and definitely gets you places. Hard work always pays. Most companies give these rewards according to key performance indicators, the highest basically gets rewarded.
Is that what we want though? Becoming good servants or having good servants under us. If yes then the reward system might work.
Generally, there are simple people that are happy to go with the flow and not willing to take on more responsibilities and wait for the system machine to guide them. Personally I don’t have any objection as long as they are happy. Remember consistency is key for every success and moving slowly is better than moving at pace but with inconsistent actions.
No problem if you moving slow, but…
Another thing to take into account with this attitude is “The No Control” over your destiny. The challenge might be the reluctant attitude towards the future and no goal settings. The struggling nature of life will blur your vision and direction. To overcome it, set goals and move slowly and follow the status quo as you like. It is probably a simpler life and a calm one. The key though is to keep consistent.
Consider this happening too …
Consider also some of your colleagues might leapfrog to better positions faster than you. This is important to eradicate any envious nature later on. Envy can be good at times. Otherwise, it’s almost all the time destructive. Be aware.
On the other hand, An agent with a principal attitude
A better mindset is when the agent thinks and behaves as if he/she is the principal. This mindset will give you a unique perspective and better glance as to what is happening at work. You then will persevere when times are hard and flourish when things are going in the right direction.
These people jump the ladder without taking the steps one at the time, the moment the real principal sees such a character with this mentality, promotion, and higher positions follow. These are high achievers and surpassing everyone becomes inevitable.
You are a Diamond shining … It’s about time.
Now Imagine. You act as a leader in your own space. You are focused on your own task and aim for progress, and not just blindly looking at performance as a dictated process that is given to you. You begin to look at things as to how they came into existence, meanings and purposes are manifested. In the end, you have the motivation to work hard. This way you have disregarded any future disappointments from the incentive system and not feeling appreciated. Your energy is driven differently, and eventually, you will shine brightly and everyone will be there to witness it.
It’s not you, it’s everything around you. But you can control you
This inner drive is better than any reward system. The reward might not do you justice sometimes.
As a result, you become a problem solver, adjuster, an adaptor, with great insights to help you become the best version of you. Now no matter how big is the tide, you are solid standing still. Confidence and agility will run in your veins. You could turn into a believer. A believer that we want. Someone who can adhere to the circumstance of life and the natural cyclic features of it and understand that even the greatest sometimes fall. Believer that seeks patience through the hard times, and a giver at all cost whether blessings are in abundance or not.
Do yourself a favor and be sincere to yourself at least. If you are not satisfied, look for things that interest you and begin to incorporate them with your life and work. Things might change.
The agent should think as the principal, and just as well the principal, on the other hand, must put himself in the shoes of his agents/employees.
It’s easier for the principal
Now there is a reason why it’s difficult to act as a principal if you have never been one. It’s difficult to reflect when you have no experience. That’s why it’s very rare to see an agent acting as though they are the principal. However, most principals have been in one way or another, agents.
For the principal, It easier to understand agents’ behavior and could trigger agents’ inner champion, because they have been there.
For example, if you like Nike shoes, then it’s easier to comprehend what other Nike lovers think. We are more similar than unique in so many ways. No one is alien or possesses unheard of behavior.
Ultimately, it’s always the job of the principal to think about it over and over because he got things at stake. Two things that should always occupy the mind of the principal, financial asset management part of the business and the other is the principal-agent problem with his employees. Finally, just lead.
Wrapping up with questions
Agent question: Which way would you follow, just slowly growing at your own pace but consistent, or leapfrog your jump by pushing and learning at a pace which comes as a result of acting as though you are the principal?
Principal question: how much of your time is dedicated to cheer and provide rather than just commanding your agents? What is it? Is it making sure everything is in order when you see your agent or asking them how can you be in service to help do their job better? Do you see your agents as KPI devices, or you have empathy towards him or her and always thinking about how to unlock his inner motive and find opportunities to reward(make them feel appreciated)?