UTA’s big bonuses suggest principal-agent problem

Recent news headlines have disclosed that the Utah Transit Authority spent approximately $1.74 million last year on manager bonuses, doubling the total amount from 2012. On top of the bonus windfall, UTA is also seeking an increase in sales tax to fund additional bus service they claim had to be reduced as a result of the recession.

Individual bonuses for executives skyrocketed as high as $30,000 on top of the already $300,000 plus in compensation packages some of the highest ranking executives already receive on a yearly basis. Utah’s head honcho, Gov. Gary Herbert, only receives a total compensation package of $151,000.

UTA has claimed that these bonuses are used as a tool to attract top talent and reward performance, but I believe this is a prime example of the principal-agent problem.

For those not familiar with this, I’ll provide a quick definition:

The principal-agent problem arises when one party (agent) agrees to work in favor of another party (principal) in return for various incentives. Such an agreement may incur huge costs for the agent, thereby leading to the problems of moral hazard and conflict of interest. Owing to the costs incurred, the agent might begin to pursue his own agenda and ignore the best interests of the principal, thereby causing the principal-agent problem to occur.

The public sector will always operate differently than the private sector. Services provided to citizens are different than services that are provided to paying customers. Private entities get to choose their own customers and success is largely measured by profits. Public entities serve all citizens with the responsibility of providing services that generate a public good or interest.

But differences in the role and purpose of government and business go beyond the mere drive for profits.

The economist Arthur Okun, in his book, “Equality and Efficiency: The Big Tradeoff,” states that

a democratic capitalist society will keep searching for better ways of drawing boundary lines between the domain of rights and the domain of dollars. And it can make progress. To be sure, it will never solve the problem, for the conflict between equality and economic efficiency is inescapable. In that sense, capitalism and democracy are really a most improbable mixture. Maybe that is why they need each other — to put some rationality into equity and some humanity into efficiency.

Government is about creating equality and serving the greater good. To avoid the principal-agent problem, public servants must refrain from seeking their own self interests and instead seek to be faithful agents of taxpayers and voters by exclusively serving the public interest.

This should always be the goal of anyone desiring to work in public service. If UTA executives and managers want private sector salaries and bonuses, they should go find a job in the private sector.

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