- Principal–agent problem - Wikipedia
- Principal = Shareholders of the business
- Agent = Employees of the business
- The agents (employees) are acting on behalf of the principles (shareholders).
- A conflict in priorities between the owner of an asset (Principal) and the person to whom control of the asset has been delegated (Agent).
- The challenge lies in ensuring that the Agent’s actions align with the Principal’s interests, even when the Agent has their own motivations and incentives.
- Designing an effective incentive scheme/model/system is key.
- “Show me the incentives – and I’ll show you the outcome.”
- “You get what you reward for. If you have a dumb incentive, you get dumb outcomes.”
- The goal is to align the interests of both groups and to remove any conflict of interests of both groups.