Published on: 25 Jan 2010
Agency theory (included in papers such as ACCA F9) occurs when one party (the principal), employs another party (the agent), to perform a task or tasks on their behalf. Within this theory there is always a danger that the objectives of the two parties may not coincide and there may be problems with what is known as goal congruence.
Typically agency theory would apply to the relationship between shareholders and management. However, there is an argument that a form of agency theory could apply between management as the principal and an employee as the agent.
I’m a keen follower of football (soccer) and the contracts of professional players are becoming ever more complicated. In the “old days” the contracts would be very simple affairs with a monthly salary, a time limit to the contracts and maybe a team bonus if the team won a competition.
Nowadays football is big business. For example, Cristiano Ronaldo’s move last year from Manchester United to Real Madrid was for a new world record in terms of transfer fees (£80m) and his annual remuneration from Real Madrid alone will be in the region of £11m per year.
I’ve no idea what Ronaldo’s contract is like but my guess is that most professional football contracts have various measures built in to ensure that there is goal congruence.
Ideas for items that could be included within football contracts to help goal congruence include:
– Bonuses based on number of games played (i.e. the player will only get these if he is performing well and is in the team),
– Bonuses based on international appearances (this is independent confirmation that he is performing well)
– Penalty provisions for undertaking activities that could cause injuries (e.g. bungee jumping or extreme sports).
All of the above would help in ensuring goal congruence.
Always keep an eye open in real life for any situations where goal congruence is present. If you can link real life situations you come across with the exam syllabus it will help you retain the knowledge needed for exam success.