Strategy Organizations Sep 7, 2017

When Pick­ing the Wrong Per­son for the Job Is the Right Move

Some­times build­ing cred­i­ble rela­tion­ships with your employ­ees and sup­pli­ers is more impor­tant than find­ing the per­fect” fit.

Lisa Röper

Based on the research of

Daniel Barron

Michael Powell

When there’s an impor­tant job to fill, it seems obvi­ous that an offer should go to the best per­son for the role. Dit­to when there is a big con­tract to be award­ed, or cap­i­tal to be real­lo­cat­ed across an orga­ni­za­tion: whichev­er sup­pli­er or divi­sion will serve the firm best ought to win the opportunity.

That’s just good busi­ness. Right?

Yet there is a wrin­kle, accord­ing to new research by Daniel Bar­ron, an assis­tant pro­fes­sor of strat­e­gy at the Kel­logg School, and Michael Pow­ell, an asso­ciate pro­fes­sor in the same depart­ment: some­times it might be in a firm’s inter­est to pro­mote the wrong per­son, or sign a con­tract with the wrong sup­pli­er, because that par­ty has per­formed very well previously. 

This allows the firm to ful­fill an ear­li­er promise that excel­lent work would be reward­ed in the future. This is cru­cial for a firm try­ing to estab­lish cred­i­bil­i­ty with its employees. 

That means from the per­spec­tive of today, I’m going to be doing stuff that’s real­ly weird,” Bar­ron says. I may be pro­mot­ing some­one that I know is not going to be that great of a man­ag­er. But I need to because that’s the only way to cred­i­bly reward them for their past efforts.” 

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Yet, pick­ing the wrong can­di­date or sup­pli­er comes at an obvi­ous cost, so there are trade-offs to consider. 

The Impor­tance of Cred­i­bil­i­ty

Why is cred­i­bil­i­ty so impor­tant? Because it is motivating. 

Say you are an auto man­u­fac­tur­er. You want to install a new audio sys­tem in your next mod­el — some­thing impres­sive, some­thing tru­ly inno­v­a­tive. And you would like one of your sup­pli­ers to devel­op and pro­duce the part for you. How do you design the con­tract with your sup­pli­er so you actu­al­ly get what you want? It’s a trick­i­er prob­lem than it sounds. After all, it is hard to include terms like impres­sive” or inno­v­a­tive” in a for­mal contract.

Fur­ther­more, if I wrote, here’s exact­ly what it should look like,’ I’ve already designed the part for them and they have noth­ing to do,” says Bar­ron. I don’t just want them to check all the box­es and be done. I real­ly want them to exert their best effort in this. Their best effort is, fre­quent­ly, very tough to moti­vate with a for­mal contract.”

It is sim­i­lar­ly hard to draw up a for­mal employ­ment con­tract that spec­i­fies the care, effort, and inge­nu­ity you want out of a top-notch employee. 

So instead, firms dan­gle promis­es — implic­it­ly or even explic­it­ly: Lead a high-per­form­ing ana­lyt­ics team, and the next pro­mo­tion is yours. Knock that audio sys­tem out of the park, and you will have our busi­ness for the next five years. 

The key, how­ev­er, is that these promis­es are infor­mal. There’s no court back­ing that up,” says Bar­ron. This means that the promis­es are only effec­tive moti­va­tors if they are viewed as credible. 

Plen­ty of Trade-offs

To explore the impor­tance of these cred­i­ble promis­es to a firm, the researchers used game the­o­ry to mod­el the firm’s con­tracts with its employ­ees and sup­pli­ers. The con­tracts includ­ed for­mal terms, but they also includ­ed the promise that per­for­mance that went above and beyond these terms would be reward­ed. With mul­ti­ple con­tracts up for grabs over time, each par­ty had the chance to reward or pun­ish the oth­er based on its pre­vi­ous actions. In the mod­el, these rewards and pun­ish­ments were mon­e­tary — but in prac­tice, they might take the form of good or bad terms in future con­tracts,” says Barron.

If I’m a work­er and I know that Dan is not going to pro­mote me even if I do a good job because of some­one else who would be a bet­ter fit for that posi­tion, then I’m not going to do a good job.” — Michael Powell

In the mod­el, a firm’s cred­i­bil­i­ty — and thus its abil­i­ty to moti­vate excel­lent per­for­mance — comes from reward­ing past suc­cess­es, regard­less of whether a giv­en employ­er or sup­pli­er is the best choice for new work mov­ing forward.

If I’m a work­er and I know that Dan is not going to pro­mote me even if I do a good job because of some­one else who would be a bet­ter fit for that posi­tion, then I’m not going to do a good job,” says Powell. 

But the real­i­ty is that it isn’t always pos­si­ble — or wise — to keep every infor­mal promise that good work will be reward­ed. After all, some­times the costs of assign­ing work to the wrong par­ty are just too high. 

And there are rarely enough rewards to go around. If I allo­cate more cap­i­tal to one divi­sion, it might be hard­er to allo­cate cap­i­tal to anoth­er divi­sion,” says Pow­ell. Or if I pro­mote one work­er and I only have one slot, that means I’m not pro­mot­ing anoth­er worker.” 

We need to bal­ance out who real­ly needs the cred­i­bil­i­ty,” says Bar­ron. Which rela­tion­ship needs the cred­i­bil­i­ty at each moment in time?” It is pre­cise­ly this bal­ance that the mod­el was designed to identify. 

So when is the ben­e­fit of moti­vat­ing some­one today big­ger than the cost of demo­ti­vat­ing some­one else, as well as the cost of pass­ing over the best per­son for the task? That is the key trade-off,” says Powell. 

Their mod­el sug­gests that reward­ing past excel­lence is most ben­e­fi­cial when an employ­ee or sup­pli­er has tru­ly excelled pre­vi­ous­ly, while com­pet­ing par­ties have not, and when the costs of favor­ing the par­ty that has pre­vi­ous­ly excelled are rel­a­tive­ly low. These con­di­tions are like­li­est to moti­vate future excel­lence from the win­ning employ­ee or sup­pli­er, while being least demo­ti­vat­ing for the los­ing ones. 

Take­aways for Firms

The broad­er take­away, says Bar­ron, is that there are some sit­u­a­tions where the ben­e­fits of reward­ing past per­for­mance are so strong that they can over­come the ben­e­fits of actu­al­ly giv­ing the job to the right per­son. That is where you pro­mote the wrong guy,” says Barron.

Doing some­thing that looks like it might not be effi­cient today may actu­al­ly help to cul­ti­vate long-term rela­tion­ships.” — Daniel Powell

His advice for firms: If you’re going to do the best thing going for­ward, under­stand what implic­it promis­es you may be break­ing and how that’s going to affect people’s incen­tives going for­ward. Are peo­ple no longer going to trust you in the future because you promised to pro­mote Mike, and now it seems best to pro­mote some­one else?”

His­toric evi­dence from the auto indus­try hints at the impor­tance of keep­ing these promis­es in mind.

In the late 1980s and ear­ly 1990s, U.S. man­u­fac­tur­ers gen­er­al­ly held open auc­tions, where sup­pli­ers bid on each con­tract with­out the expec­ta­tion that strong per­for­mance on one con­tract would give them an edge in future bids. Japan­ese man­u­fac­tur­ers, on the oth­er hand, were able to moti­vate their sup­pli­ers to go above and beyond the terms of their con­tracts by restrict­ing them­selves to a fair­ly small set of long-term sup­pli­ers. They did so in a way that was his­to­ry depen­dent,” says Bar­ron. That is, over time, a sup­pli­er could break into this closed sup­ply chain — if they per­formed well.” 

Ulti­mate­ly, this arrange­ment allowed the Japan­ese man­u­fac­tur­ers to pro­cure bet­ter work from their sup­pli­ers than the US man­u­fac­tur­ers, and at low­er costs, he says. Doing some­thing that looks like it might not be effi­cient today may actu­al­ly help to cul­ti­vate long-term rela­tion­ships — start­ed in the past — going for­ward, and there­fore actu­al­ly be more efficient.”

About the Writer

Jessica Love is editor in chief of Kellogg Insight.

About the Research

Barron, Daniel and Michael Powell (2017). Policies in Relational Contracts. Working Paper.

Read the original

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