agency costs

Agency costs

The incremental costs of having an agent make decisions for a principal.

Agency Costs

Costs that arise from the inefficiency of a relationship between an agent and a principal. In a publicly-traded company, agency costs may arise because the company's executives (the agents) may act in their own interest in a way that is detrimental to shareholders (the principals). For example, they may raise their own salaries to an unrealistic level. Agency costs are best reduced by providing appropriate incentives to align the interests of both agents and principals.

agency costs

the failure of employees (as ‘agents’), hired by the owners (the ‘principals’) of a business, to fully comply with the terms and responsibilities stipulated in their CONTRACT OF EMPLOYMENT. For example, operatives may ‘shirk’, indulging in time wasting (long tea breaks etc) thus leading to a loss of potential output. The companies executive directors may fail to put shareholder interests first and pursue other BUSINESS OBJECTIVES of more ‘value’ to themselves. See PRINCIPAL-AGENT THEORY.

Strategists are concerned not only with agency costs (internal to the firm) but also with the TRANSACTION COSTS of using external markets. Together these can be important considerations in influencing the extent of VERTICAL INTEGRATION/DISINTEGRATION.

References in periodicals archive ?
"The Trust is also incurring additional agency costs due to the well-publicised issues related to the NHS Pension Scheme, where senior clinical staff are incurring significant unplanned tax liabilities.
And NHS chief executive Jeff Ace highlighted the problem to Holyrood's health committee saying: "The biggest cost improvement that we can make is addressing our recruitment challenges because we're paying a considerable premium at the moment for locum medical staff and nurse agency costs."
He said: "This is a significant overrun by any standard and shows the failure to control agency costs has become endemic."
Recruiting permanent staff "helps reduce agency costs and provides greater continuity of care for patients", she added.
The pilot project addresses the Sustainable Health Review's recommendation for immediate action to cut red tape, hasten the recruitment of staff and reduce unnecessary agency costs through the exploration of an innovative approach to recruitment by using digital technology.
"We'd also highlight our agency costs are significantly higher, having doubled in the last year.
The report outlines that the plan would have significant benefits for future recruitment at the hospital, which has struggled and been faced with large agency costs for short term workers.
Also, we would like to clarify that the scheduled contribution rate hikes under the new charter are meant to cover past additional benefit payouts to SSS members due to the 2017 P1,000 additional benefit paid to pensioners, and not 'agency costs' as stated in the article.
"In contrast to medical agency, nurse agency costs are at the highest level for the year to date due to increased costs seen in Wrexham."
Thus, shareholders use certain mechanisms that will lead to reduction in the agency costs. One such mechanism is the use of leverage in the capital structure of a firm.
Figures show that in 2015/16, the 'Eliot forked out PS14,431,861 on agency costs, followed by PS9,788,490 in 2016/17 and PS8,318,527 in 2017/18.
The governing contract unconditionally obligates contractors to pay agency costs regardless of water deliveries and provides that a failure to pay by one or more customers would have to be covered by the others through the following year's rate-setting process.

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