Category - Economics and Politics

After speaking with Mark Turansky about the original Performance v. Effort post and he gave his impression that my post is confusing because it delivers arbitrary numbers with no explanation of how I arrive at those numbers or what they mean.

Ultimately the post is saying this:
You can’t expect to hire based upon an industry or market standard and end up with a solid company. You must understand your needs (weights) and the abilities (ranks) of candidates in order to find individuals who are a proper fit for your company at any given time.

The numbers are arbitrary because they are used to illustrate a theoretical situation. The rankings and weights assigned to each individual are fictional numbers that are at the discretion of each theoretical company to arrive at. In this case I have illustrated a scenario where Company A places the most value on productivity, sociability, then effort while Company B values fall in the order of sociability, effort, then productivity. These numbers could just as easily fall in any other number of combinations and, in a real world situation, would involve far more parameters than the three listed here. Likewise, the weights are indicative of a simplistic scenario where everyone in the company who’s opinion counts feels the same way. In a situation where there are conflicting views on weights the scenario would be far too complex to model easily. Once again, the weights used were arbitrary and illustrative in nature.

This confusion, I think, arises from my neglect to include an obligatory reference to ceteris paribus. The concept that this is a limited scenario with a very focused view should be qualified and my original post was truly intended to work on a finite and unchanging model. Without focusing on a situation qualified by ceteris paribus you would find yourself in a situation much too complex to illustrate easily.

There is a fine line between performance and effort. While effort is great it doesn’t make money. I recently watched the movie Knocked Up, which has a perfect example of this. A group of guys are creating “the next big thing” website and have spent years working on it. However, the years they have spent have been unfruitful because while they exerted large amounts of effort they didn’t actually produce anything.

People all have an intrinsic value, whether we choose to realize it or not. This value is made up of many things – skill, talent, attitude, values, relationships, etc. If we were to step back and assign a total value to each person, taking into account all things, including personal feelings and relationships, we would be able to create a scale of best to worst. We can now look at this through the economic principles of scarcity and opportunity cost.

The concept of scarcity basically states that demand rises when there is a scarcity of goods and falls when there is a surplus. When we apply this concept to people, taking into account their rating, we will see a gray area as the scarcity levels of highly valued employees shifts. If there is a surplus then companies are likely to focus primarily on performance and will place little value on effort – after all there are plenty of substitutes. However, as high value employees become more scarce we will see companies begin to shift their evaluations to be more inclusive of high effort, regardless of output.

The opportunity cost comes into play when companies have employees of similar total value but have different aggregations of composite values. For example, one person, Bilbo, may have great relationships with management, may exert total effort, but may not produce anything. Another person, Enrique, may be a top producer, exert a small amount of effort, but not get along with management at all. The opportunity cost for choosing one versus the other is the traits you will give up in one to acquire the other. If you choose Bilbo then you will have an opportunity cost of giving up a high level of production. Likewise, if you choose Enrique you will be giving up a margin of effort and harmony with management.

What this means in the end is that companies must choose the traits that are of the most value to them and analyze employees with respect to their total weighted value. Let’s illustrate with two fictional companies and the traits mentioned above.

Table 1: Weighted values of company desires mixed with employee traits.

So when we value just Bilbo and Enrique with no weights it is clear that Bilbo is the stronger of the two choices. However, this does not accurately reflect the desires of the company. To do this we will need to assign weights that represent the specific traits that are most important to each organization. For simplicity we simply assigned a value of 1 through 3 but it could have just as easily been a value of 1 to 1,000. Once we have these weights we then multiply the trait of each individual by the weight the company has assigned it. We can then sum the multiplied values to arrive at a total weighted value for each employee. The above scenario illustrates that Bilbo is the stronger choice when analyzed on pure traits but that he is only the better weighted choice for Company B. Likewise, Enrique proves to be more valuable in the eyes of Company A.