User:Noa Rahh/Performance appraisal

Principle - Agent Framework
The Principal-agent framework is a model describing the relationship of information held between an employer and an employee. It is used to forecast responses from employees and strategies at finding resolutions against misaligned incentives that interfere with the goals of the employer. The model makes two assumptions: the principals wants agents to work for the principal's best interest, but the agents possess different goals than the principals; and, the agents have more information than the principals resulting in the asymmetry of information between the two parties. This paradigm creates adverse selections and moral hazards for the hiring company in deciding how to effectively minimize the potential threat of shirking, disruption to daily operations, and loss in output margins due to actions of the employee.

Incentive Conflict Resolutions
Incentive pay leads to the increase of agents awareness of their own actions and seek to maximize their pay by considering the best possible actions that can be taken for the success of the firm and actively explore several options to minimize opportunity costs. The issue with this form of resolution is the firm must compensate the agents for bearing a risk premium and inequitable pay.

Fixed payment ensures a safer, standardized mode of contract that delivers reassurance in spite of performance fluctuations and external environment volatility. However, lack of motivation occurs more readily and incurs shirking and adverse selections.