Author: Axel Haunschild
Performance Ideologies - A Critical Analysis of Principal Agent Theory from an Employment Systems Perspective
In principal agent theory (PAT), a major stream in the personnel economics literature, we find numerous attempts to develop universal models of 'optimal' incentive systems. The restrictive behavioural assumptions and the self-enforcing character of such models have been subject to diverse critical accounts (Goshal/Moran 1996; Spencer 2011).
This paper seeks to add a new perspective to such critique; a perspective that connects workplace studies to other levels of analysis, namely the employment system level, and that identifies the basic performance ideology behind agency theoretical models. The analytical framework for this analysis will be Marsden's (1999) theory of employment systems. Although based on institutional economics itself, this theory goes beyond a-historical accounts of employment and HRM practices by analysing the institutional embeddedness of such practices. Marsden's focus is on the national societal diversity of employment rules that govern the employment relationship.
PAT regards the employment relationship as a relationship between a principal and an agent in which the principal delegates tasks to an agent who receives compensation. The theory focuses on the problem of monitoring performance, risk allocation and incentives. PAT seeks to establish general principles to understand, develop and (efficiently) design incentive contracts (Milgrom/Roberts 1992). On these grounds an 'optimal balance of the costs of risk bearing against resulting incentives gains is computed' (Milgrom/Roberts 1992: 207).
Marsden argues that each employment system entails institutionalised rules about the relationship between job design and training systems as well as robust and enforceable rules about task assignments. Training can take place predominantly on-the-job (e.g. US or France) or predominantly off-the job (e.g. Germany). Rules of task assignment can imply low (US) or high (Germany) job autonomy and differ regarding individual or group-based accountabilities. His aim is not to explain the whole variety within an employment system but its dominant logic. The sketched examples reveal that the US (on-the-job training combined with narrow task assignments) and Germany (occupational labour market combined with high job autonomy) differ considerably with respect to their basic assumptions about skill development/standards, the definition of a 'good' jobs and job responsibilities. These assumptions have an impact on performance criteria and performance management.
The paper will show that the assumptions of PAT imply ideas about 'good performance' that are ‑ according to Marsden (and other scholars) ‑ typical for the US employment system. It favours individual effort (diligence) as basis for performance pay, regards the definition and the assessment of performance as a technical problem and implicitly (sometimes even explicitly) recommends to increase individual accountability and comparability through incentive measures and job design.
Employment rules and their underlying assumptions can, in a sense, be regarded as ideologies, socially constructed ideas about the exchange relationship between employer and employee, which tend to keep the underlying capitalist labour process in disguise. The view of many personnel economists that their findings based on PAT can easily be transferred to all kinds of employment systems is ideological too. The paper aims at theoretically exploring this ideological basis of principal agent theory.