Performance Measurement and Faculty Pay

1　 Agency TheoryAn agency relationship is presentwheneverone party delegates anotherparty to undertakesome action on the former′s behalf. Examplesof agency are universal,including employer-employees,lawyer-client,buyer-supplier,etc. Agency problem occurs in such arelationship because of informational asymmetry and goal conflictdue to differentattitudestoward risk between the principal and the agent. Adverse selection and moral hazard aretwo main types of agency problems.Agency theory focuse…

Performance Measurement and Faculty Pay

In classic agency models, first best efficiency can't be achieved due to the trade-off between risk and incentives except that agency is risk neutral. Whereas if the principal's objective is not contractible,an alternative objective performance measurement which is contractible is always proposed. However, if the reaction of this objective performance measurement to agency's effort differs from that of the principal's objective, the agent would game performance measures, which leads to loss of efficiency, even if agency is risk neutral. By adding subjective weights on objective measures, or combination of subjective performance measurement with objective performance measurement, efficiency can be regained. Implications for faculty pay are also discussed.