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Author's profile photo Nenad Lazarevic

What’s a Principal-Agent Problem and How Can Time Tracker Software Help to Solve It?

Whenever you have task and asset delegation to subordinate entities, issues could ensue. And this is exactly what the business world and nearly every company are based on – work delegation. The business owner typically transfers a part of their resources, technology, and finances onto their employees, who, in a perfect world, use them to perform their designated jobs in order to improve the company’s profits, reputation, visibility, or whatever the owner’s ultimate goal is.


However, in reality, we have something called the principal-agent problem.


Defining the Principal-Agent Problem


Although the term was coined and the theory of the principal-agent problem was formulated in the 1970s, this issue is much older than that. The concept revolves around the cost arising from the nature of the relationship between the principal and an agent and the problem stems from the separation of ownership and control. Let’s make this explanation a bit more clear by applying it to the business world.


In a company, the principal is the owner. They own all the assets and are the party that suffers the most in case of any losses. But they can’t perform all the work that needs to be done, so they need to hire employees, or agents. And the employees are the ones who are supposed to use these assets in the company’s best interest. So, they have much of control over them.


Now, both the owner and employees have their goals, and the principal-agent problem arises when these goals are not aligned. In other words, employees are using the company’s assets to work towards their own goals and not in the best interest of the whole company.


These assets could be financial in case the agents are upper management executives, which could have devastating consequences such as in the infamous case of Enron, but a much more common issue is the difference in how owners think their company’s time should be used and how employees actually tend to use it.


In other words, the management wants employees’ time to be dedicated to the progress of the business and employees typically just want to punch in enough hours to earn their salary. This could be manifested as slacking off, spending office time unproductively or intentional time theft.


Fortunately, there are ways to overcome this problem, but the prerequisite for any progress towards resolution is goal alignment. The company needs to ensure that employees’ personal goals and their values are aligned with the organizational goals.


Once this is in place, you can employ other methods to ensure that principal and agent goals stay in sync. Most notably, you can do it by increasing employees’ motivation and control over their activities. And time tracking software can help in better realizing both of these efforts.


Solving the Principal-Agent Problem with Tracker Software


Work time track software is a program that monitors employees’ computer activities and tracks the time they spend on their tasks. You can track and time their use of different apps and even different websites, so you know exactly what programs your employees are using, which websites they’re visiting and how much time they spend there.


The fact that a time tracker for work provides this information about each member of your workforce can complement your efforts to avoid the principal-agent problem in two ways – by providing reports that could affect employees’ motivation and attitude, and by increasing control over how they spend office time.




Arguably the most effective way to combat the principal-agent problem is to bridge the gap between managers’ and employees’ goals by getting the workers to align their goals to business owner’s expectations and work towards the company’s interests. This can only be done with proper organization and management, as well as by ensuring a good value fit. From that point forward, you can only continue to develop and incentivize this motivation.


Setting achievement-based or performance-based financial benefits for employees is a sure way to keep them on the same page as you. And an app for recording hours worked is one way to measure this accurately.


All the features of a time tracker work together to create a very detailed picture of employees’ performance. You can set targets for employees depending on what you’re hoping to achieve and then use the time registration app reports to determine whether those goals are met. You can, for instance, give bonuses based on the time employees spend doing a certain task that helps you achieve one of your business goals.


This way, employees directly profit from acting in your company’s best interest, wasting time on distractions and procrastination is minimized, and their motivation to improve their performance is aligned with your goals.




Another way to curb the principal-agent issue is by way of increased control and deterrence. Knowing that activities such as any form of time theft, including buddy punching, or doing anything against the good of the company will be punished can discourage employees from these practices.


Simply being aware that computer tracking is in place can be a powerful deterrent. The software detects every computer activity and measures how much time was spent doing work and how much time was wasted on unproductive activities. This makes employees consider more carefully how they use their time and many case studies have shown that employees’ productivity dramatically increases immediately after the implementation of the system.


Just like with motivation, this increased level of control will prompt your employees to adjust their performance so that it conforms to the manager’s business goals, but only if their personal goals and values are already in line with the organization.




Principal-agent problem is a very old issue that could cost companies a lot of money at best. But if good management and organization try to align the personal goals and values of everyone that’s a part of it with their own agenda, this gap between principal and agent goals can be bridged. Once this happens, a software solution that tracks employees’ time and computer activities can allow employers to set expectations and then track employees’ performance in order to ensure that it complies with their standards, thus ensuring that a well set-up company continues to prosper.

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