Agency Cost: Everything you need to know about Agency Cost
What is Agency Cost? In the Marketing industry, do you thoroughly understand the concept of Agency Cost? Explore with CleverAds right below!
1. What is Agency Cost?
Agency Cost is an internal cost of the company. It originates from an agent acting on behalf of someone authorized.
Inefficiencies mainly cause Agency Costs at the core, dissatisfaction, dissatisfaction, or disruption (for example, conflicts of interest between shareholders and management). The Agency Cost will then be paid to the agent.
Agency Cost can also be understood as an aggregate related to the costs of an organized contract, including one (owner) hiring another person (representative) who can perform the duties on his behalf. (master). Here, the owner will directly make decisions and authorize the representative.
2. Some reasons for generating Agency Cost
After understanding what Agency Cost is, CleverAds will provide you with a few typical causes of Agency Cost, such as:
- The lack of productivity, lack of effort at work, and unfounded, inefficient investment decisions lead to low monthly and annual income or the purchase of assets with no productive value.
- Shareholders or business owners cannot manage everything, so hiring employees is necessary to manage the business.
- Policies related to salary and bonuses have yet to motivate and encourage the Board of Directors as well as members of the Supervisory Board.
- Managers and business owners need more consensus on goals, decisions, or views. For example, the owner always sets plans to make the capital he spends the most profitable.
- Investors are concerned about the possibility of loss when inefficiently using the resources provided to the business. Therefore, investors will tend to want to gain control of all activities. Thus, in this case, the board of directors or members with critical roles and positions will need to be more flexible with operating decisions.
- Enterprises have higher free cash flow than necessary, so an imbalance occurs.
Read more: What is an Agency? All about Marketing Agency
Lack of transparency in information disclosure: Although the financial statements are strictly controlled according to regulations, there is still some critical information that enterprises need to provide to the board to audit fully.
Disagreements and conflicts occur in the relationship between investors and managers: The most classic case is that both parties aspire to maximize their profits. However, the conditions for maximizing the gain of the two sides are different. Investors want to maximize through increasing business value. As for the management, they put the benefits directly tied to the income received.
3. Agency Cost Formula
Agency Cost = (M) + (B) + (R)
Meaning of each symbol:
- (M): are the costs of tracking the agent. This expense ensures that the agent’s interests are tied to the principal’s. In addition, directors senior managers, or key players will have to continue to think of many improvement measures to encourage and motivate the employees under them to work harder and harder. All staff members represent higher-level managers.
- (B): is the binding agent cost. It can be understood simply that the representative will bear the cost to promise that their side will not infringe on any owner’s rights.
- (R): are financial losses—costs associated with an outcome that is not entirely beneficial and serves the owner.
4. Conclusion
Agency Cost is an expense that should not be present in the business. Through the above article, CleverAds aims to partly answer the question of what Agency Cost is and equip readers with the necessary knowledge and information about Agency Cost.
CleverAds belongs to Clever Group. CleverAds is currently the leading agency in the Philippines and is the first Premium partner of Google, Priority partner of Facebook, and TikTok partner. With nearly 10 years of experience, we are always a place for businesses to have complete faith in bringing the products, services, and brand image of the company to “widespread” to the target customers.
