Internal labour markets/ motivating the workforce - Essay Example

This essay will analyse and discuss the principal-agent problem in labour markets with regard to five motivating factors specified in employee motivation theory. The principal-agent problem is an outcome of the truism, “If you want something done right, you have to do it yourself” (Ritter & Taylor 1997, 3).The dilemma facing the business owner is how to formulate compensation systems that will motivate the employees to do their jobs properly or, more accurately, to perform or act in a manner that maximises the profits of the organisation (Ritter & Taylor 1997).

This is a case of what economists refer to as an ‘agency problem: A principal (in this case the firm’s owner or manager) designs incentives for an agent or agents (the workers), who take actions that affect the principal’s well-being’ (ibid, p. 3). The principal-agent problem originates from the reality that there is a diverse relationship between the behaviour and interest of the agent than between the behaviour of the agent and the interest of the principal (Gupta 1998). For instance, it is in the interest of the organisation for an employee to work diligently (the behaviour favoured by management), but the employee may want to work part-time.

If the principal-agent problem is associated with the productivity of employees, there is an evident way of solving it: create a strong relationship between the productivity of the employee and his/her pay. This section will discuss the relationship between principal-agent problem and five employee motivating factors, namely, (1) good wages, (2) good working conditions, (3) promotions and growth in the organisation, (4) job security, and (5) feeling of work-related fulfilment. A vast number of employees are compensated in manners that bear a resemblance to piece rates: farmers whose income relies on the quantity of harvest, auto mechanics whose compensation is moderately on a per-repair basis, sales employees compensated on commission, factory