We face many dynamic, strategic decisions. This happens regularly when we both cooperate and compete among multiple agents. Each agent wishes to negotiate the best individual outcomes. Each agent's decision motivations and incentives may vary. This makes reaching a single agreement meeting everyone’s needs very challenging.
We will explore strategic and dynamic decision-making when the decision agents likely have different incentives. The corporate new hire decision will be presented as a common example. It will be shown how risk-taking may be used positively to achieve the best outcome. This occurs by deploying appropriate skin in the game and alignments of accountability and responsibility across the agents. However, risk-taking requires energy and willingness to accept uncertainty. Not all agents are willing to trade uncertainty for upside. It will be shown how risk-taking can be a great benefit but requires organizational and individual willingness. The noose and get-out-of-jail-free card game will be explored as a great indicator of the degree to which the environment and the decision-maker are open to reasonable risks.
About the author: Jeff Hulett is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Table Of Contents:
Introduction
You need to make a new hire
Would you rather have the noose or the get-out-of-jail-free card?
Conclusion
Resources and Notes
Next, hiring someone in a corporate environment is investigated. The corporate hiring scenario is a prototypical example of a common dynamic decision process -- when the decision agents likely have different incentives. The agents are shown in 3 different labor categories -- labor supply, labor demand, and labor market:
Labor Supply
The prospective hire
The prospective hire agent – if relevant
Support systems, like family, friends, college, high school, non-profit advocates, etc.
Labor Demand
The hiring manager -- Labor demand primary or the user buyer
The peers of the position being hired doing the interviewing -- Labor demand support or the secondary user buyers
The group executive -- Labor demand economic buyer
HR / corporate policy -- Labor demand control to support the buyers
Labor Market
The recruiter - either internal or external -- a labor market broker is typically paid by labor demand.
Recruiting tools - Handshake, LinkedIn, Definitive Choice, etc -- Labor market tools to facilitate the best employment decision for both labor supply and labor demand.
The incentives of each one of these agents vary, some more than others. For example, an external recruiter usually gets paid a percent of the candidate’s salary. So their incentive is to close the deal and move on to the next opportunity. Whereas the hiring manager will live with the hire, presumably, for years. The long-term value of the employee is in the hiring manager’s incentive set. The hiring manager's incentives are impacted by:
a) The quality of the new hire's work, and
b) The amount of work it will take the hiring manager to get the new hire productive.
Thus, the recruiter and the hiring manager have very different incentives. By the way, this is not such a bad thing. Agents with different incentives aligned with important aspects of the hiring process may facilitate the best decision. However, each agent should be aware that the behavior of the other agents likely differs from their own because of the incentives. Also, for those designing the incentive environment, getting this right is very important and dynamic.
2. You need to make a new hire
Let’s say you are a hiring manager and need to hire someone new for your group. This is an important hire. This person needs to be smart, good with people, well-networked, analytical, and a great team player. Sound familiar?
Like most big corporations, there are salary ranges for every position.
You start the process with a recruiting partner. An appealing job description is posted on LinkedIn and other recruiting websites. You very quickly come to realize the person that you really need is going to be more expensive than the role allows. So you let your boss know and the recruiting people now. Their first response? Sorry, you’ll just have to make it work under the salary cap.
You go through the process and the recruiters provide several solid candidates. But one is amazing and stands out from the rest. This person is in your network, so they are a known quantity. This person checks all the boxes and then some. Looking at your goals, you appreciate that a person like this will be a rockstar in your group and help you and your whole team meet goals. Your other teammates have interviewed the candidates and agree, the rockstar is above all other alternatives. The challenge is that the rockstar’s salary is above the corporate range. Not ridiculously so, but still above the salary range.
You have a couple of other challenges:
The labor market is very tight and the other alternatives are not nearly as good as your first pick.
For you to hit your goals this year, you need to get the new person hired as soon as possible. Delay will significantly hurt your chances of meeting your and your team’s goals.
You go back to your boss and work hard to sell the best new hire alternative. You walk through your in-depth business case analysis. You show a compelling business case as to why a salary cap exception is warranted. Your boss has not changed his mind. He just says sorry.
You’re not sure why your boss won’t budge. Perhaps the company is tight on expenses, perhaps the boss is risk-averse, perhaps the boss doesn’t have time to advocate to his bosses, or maybe it’s all this or something else. As we discussed earlier, there are many agents with different incentives. But the bottom line for you is that the risk to you and your team of meeting or exceeding goals is increasing rapidly.
So, you decide to deploy the noose and get-out-of-jail-free card strategy.
3. Would you rather have the noose or the get-out-of-jail-free card?
At your next meeting with your boss, you bring two props, a miniature replica of a noose, and a Monopoly set get-out-of-jail-free card. You set them on your meeting table. Naturally, your boss looks inquisitively at the props, and then back at your face, and then down to the props again. He then looks back up and says, “What’s this?!”
You say, “These represent two choices - you get to choose one, either the noose or the card, and then I will automatically get the other. That’s the way the game works. But first, let me define the noose and the get out of jail free card choices.”
If your boss chooses the get out of jail free card, you will be holding the noose:
If your boss chooses the get-out-of-jail-free card, then they are choosing to advocate for an exception to make the higher-cost hire. They appreciate your case and want to help you be successful. For your boss, the get-out-of-jail-free card provides business performance upside but takes energy and handling the uncertainty today.
Boss upside: If you hit your goals, great, the boss looks good for helping you hire the best talent. It was clearly worth the extra expense. Your holding the noose, creates two important advantages for the boss:
1) They create skin in the game for you. You are now motivated to hit your goals because the boss went to bat for you to provide high-quality resources.
2) They have aligned accountability and responsibility with your success, which leads to the boss’s success.
It is a “get out of jail free card” for your boss because they hold it as a free option that can be exercised when needed. If you do not hit your goals with the new hire, they will exercise their get-out-of-jail-free card by reprimanding or firing you. Thus, this means you are holding the noose. If your boss does not hit their goals, they can always blame you and have plausible deniability for you being the cause of their not hitting the goal. Your boss will look decisive since they reprimanded or fired you and are moving forward to find another way to hit that goal.
Boss cost: Your boss will need to “run the traps” to get a hire exception approved. This may or may not be a big deal. Also, there is uncertainty. They are trading a certain higher salary cost for uncertain future performance.
If your boss chooses the noose, you will be holding the get-out-of-jail-free card:
If your boss chooses the noose, they are refusing to help you by making a salary exception for the new hire.
Boss downside: Now, the risk of your not hitting your goals is on the boss. If you do not hit your goals, your “get out of jail free card” is that you can always blame the boss for refusing to hire the best talent, even with a solid business case. Thus, your boss is effectively protecting your downside by accepting the risk associated with not advocating for the hiring exception. Your boss is now holding the noose and those that are concerned about company performance will question the boss as to why the hire was not made. The boss may try to put it off on “policy.” This will cause corporate policy to be appropriately updated OR your boss will be questioned as to why they did not make a warranted exception.
Boss cost: Your boss will have no current period costs as they will not need to spend any energy since the inferior new hire is within corporate standards. They are still making an uncertainty trade – as they are trading a standard salary cost for uncertain future performance. However, as an important point, this uncertainty trade is the corporate standard. It is the path of least resistance for the boss.
The boss needs to make trade-offs between the noose or the get-out-of-jail-free card. The weight of costs and uncertainty are on one side and the weight of business success and your skin in the game is on the other side. Of course, the best outcome is that the hiring exception is made and you hit your goals! A win/win for all. However, even if you do not hit your goals, you may be respected for bringing in great talent. Also, even if you get fired, you are sending a market signal that you are willing to take reasonable risks to achieve great success. Companies that believe reasonable risk is appropriate to drive higher returns will find your behavior attractive! Your reasonable risk-taking behavior will be self-selecting for similarly aligned companies. That is how the invisible hand works. Thanks, Adam Smith!
Boss considerations: First - Not all organizations are tolerant of risk-taking. A startup is likely to be very tolerant of this kind of risk-taking. A government organization likely has little or no tolerance for out-of-the-box risk. The government's standard for "reasonable risk" is likely VERY low. Then, the boss’s personality will impact their risk-taking willingness. This involves the boss dealing with unknowns and applying energy to advocate for an exception. Not all bosses have either the energy or the risk profile to manage the uncertainty. Unfortunately, many bosses weigh the very salient but smaller downside costs more than the less salient but larger upside, future-based benefits. You may need to sell your boss on the merits of the new hire exception multiple times.
Why persistence matters: The boss and all those in the organization are people. While the organization has policy, structure, and rules for how to operate, people are still people. Depending on mood, time of day, recent challenges, and many other personal factors, your new hire exception business case may be received differently depending on those local factors. In fact, behavioral science has a name for those personal factors that create a 'failure of invariance,' called NOISE. [i] Also, persistence is a signal of your conviction. So, if you believe the hiring exception is a risk worth taking and you have the evidence to support the exception, BE PERSISTENT.
They need to know how serious you are. A boss is more likely to match their advocacy energy to your advocacy energy. Notice the risk and uncertainty are higher today (The red box) for the boss to accept the noose. The boss's noose or card decision is a great tell if you are a person who wants to take reasonable risks for the chance of great success. This decision will help you understand if this boss or company is a good fit for you.
Also, notice the risk gets transferred to you when the boss chooses the noose. This is a good thing for you! By taking a more reasonable risk, you have more return potential. Skin in the game is a powerful motivator to help you achieve your goals. It is a worthy risk assuming your organization rewards reasonable risks. Again, if it turns out you are willing to accept reasonable risks but your company will not allow OR reward reasonable risks, then this company is likely not for you. Certainly, how you behave and feel about these risks is also a tell for you! You may or may not have a personality comfortable with reasonable risk-taking.
4. Conclusion
We explored strategic and dynamic decision-making. These are the kinds of decisions involving many agents and with the agents having potentially conflicting incentives. As an example, the corporate new hire decision was presented. We showed how risk-taking may be used positively to achieve appropriate skin in the game and alignments of accountability and responsibility. But risk-taking takes energy and willingness to accept uncertainty. Not all people are willing to trade uncertainty for upside. It is shown how risk-taking can be a great benefit but requires organizational acceptance. The noose and get-out-of-jail-free card game can be a great indicator as to whether the environment is open to reasonable risks.
5. Resources
For more information on job decision-making, please see the article:
Definitive Choice is an app decision solution to help you make many life and personal finance decisions, including job decisions.
It provides a straightforward user experience. The number-crunching occurs in the background by time-tested decision science algorithms. It uses a proprietary "Decision 6(tm)" approach that organizes the preference criteria (what is important to you?) and alternatives (what are the choices?) in a series of bite-size ranking decisions. Since it is on your smartphone, you can use it while you are curating data to support the decision. It is like having a decision expert in your pocket. The results dashboard provides a rank-ordered list of recommended "best choices," tailored to your preferences.
Also, Definitive Choice comes pre-loaded with many decision templates. You will want to customize your own preferences (aka criteria) and alternatives, but the preloaded templates provide a nice starting point. Definitive Choice provides dashboards to help the hiring team manage its recruiting pipeline AND provide for the best decisions. The Definitive process eliminates potential bias associated with the hiring process.
The Definitive platform may be used by either the employer or the recruit.
Using decision process solutions enables DECISION A-C-T:
Accelerated: faster, less costly decisions. It enables a nimble decision environment.
Confidence-inspired: process causes people to be more confident in the decision, increasing buy-in, and decision up-take.
Transparency-enabled: reporting, documentation, and charts to help communicate the decision.
Notes
[i] Kahneman, Sunstein, Sibony, Noise: A Flaw in Human Judgment, 2021
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