Designing and Implementing the Employee Evaluation System in Agricultural Corporations

A Case Study Based on Agency Theory

Abstract

This study explores a method to design and operate an employee evaluation system that is intended to curb moral hazards in agricultural corporations, through deductive inference, based on the agency theory. It also tests the effectiveness of the system through a case study.

According to the agency theory, moral hazard arises because the principal cannot accurately assess an employee’s effort, as the latter’s choices of action constitute asymmetric information for the former. In this study, we showed that evaluating employees’ choices of actions as symmetric information, even if only partially, was more likely to curb employee moral hazard. We did this by using a game tree, with one employee and one principal as the basis of the mechanism that causes moral hazard between them, when the principal possesses only asymmetric information about the employee’s choices of action.

Using a case study of agricultural corporation A, which introduced a system that evaluates a part of employees’ choices of actions as symmetric information, we explored the operation and effectiveness of the evaluation system. We established that an evaluation system can be realized using indicators that contribute to improving employees’ performance for the principal, based on symmetric information to determine their actions. The addition of such a bonus would result in greater financial savings than an evaluation method based only on asymmetric information.