What is an incentive conflict in a firm that reduced firm value? Did this make one or more of the legs of the organizational stool unbalanced, and if so, how did that contribute to the conflict?

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An incentive conflict occurs when a person or multiple people within a firm lack motivation to perform their jobs with the necessary level of efficiency and care. An incentive conflict might happen, for instance, when employees don't feel that their wages are high enough to properly compensate them for the...

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An incentive conflict occurs when a person or multiple people within a firm lack motivation to perform their jobs with the necessary level of efficiency and care. An incentive conflict might happen, for instance, when employees don't feel that their wages are high enough to properly compensate them for the work they are doing. When this happens, they don't work as hard, and the value of the firm is reduced in efficiency, amount of work accomplished, and perhaps even profit, if such a situation is allowed to continue. Much of the value of a firm lies it its employees, and if the employees are not motivated and satisfied, the firm may well suffer.

The three legs of the organizational stool do become unbalanced when an incentive conflict arises. The three legs are properly motivated and rewarded people; performance evaluation; and decision-making rights. We can see how an incentive conflict can weaken one or more of these legs and also how a weakened leg can give rise to an incentive conflict.

In the example we looked at above, employees are not being properly rewarded for their work. The organizational stool, therefore, becomes weak in one leg. Perhaps, though, this situation arose out of poor decision-making on the part of the management. Perhaps managers did not bother to talk to their employees to find out whether they felt their pay was fair and simply made decisions based on their own agendas. This failure in decision-making also weakens the stool.

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