The Geometry of the Deal

So do you want to know what I did this past Saturday night? 

Scratch that, I assure you that you do not, as you would likely become distracted having to navigate the simultaneous emotions of boredom, pity, and incredulity.

So let's pretend for both of our sakes that I didn't spend a good portion of Saturday night re-watching (thank you Amazon Prime), the 1996 HBO movie The Late Shift, a 'based on real events' telling of the late-night TV wars of the 1990s following the retirement of TV legend Johnny Carson, long time host of NBC's The Tonight Show.

(Ok, just between us, this is what I did on Saturday night, don't judge, and roll with me on this)

Quick recap of the movie's key elements: 

1. Johnny announces his plans to retire from TV in May of 1992, giving NBC effectively a full years notice and time to select his successor

2. NBC has to decide who will be the next host of The Tonight Show, an extremely important decisions because (at least in 1992), The Tonight Show was still very popular, and extremely profitable. This was a big deal for NBC, (and their corporate owner at the time, GE).

3. There are only two candidates. One, Jay Leno, who was well-liked, funny, (he was), and had become Johnny's regular guest host in the last few years of Johnny's run. And two, David Letterman, who had been hosting the Late Night Show on NBC, (the 12:30AM show that ran right after Johnny) for the past 10 years, and who was also popular, if slightly more edgy and hip than Leno.

4. The rest of the movie, (I won't spoil it for you, as if I need to worry about dropping a spoiler for a 20 year-old movie), runs through what happens in the run-up to NBC's eventual decision, and the chaos and corporate drama which almost immediately ensues.

I decided to watch this movie again for one specific reason, and that was not because I could not remember who did get The Tonight Show.

No, it was because I recently was in a discussion with a friend regarding a real-life contract negotiation, and during that discussion I wanted to advise my friend to essentially 'think bigger', to not necessarily get bogged down in trying to 'win' on the small items, but rather to try and garner support for something more expansive, something more wide and far-reaching, frankly for a pretty significant re-interpretation and definition of the business relationship altogether.

And then the phrase I was wrestling with trying to articulate finally popped into my head - I wanted him to change 'the geometry of the deal'.

And then, I remembered where I first, (and I am pretty sure the only) time I heard that phrase - the movie The Late Shift.

About a third of the way through the movie, Letterman comes to realize that NBC intends on awarding The Tonight Show host job to Leno, and is frustrated and confused and doesn't really know how to move forward. His ally (and Carson's producer), Peter Lassaly advises Dave to meet with a Hollywood agent, something Dave has in the past had no interest in doing. Lassally does convince Dave to meet with one of the most powerful agents in Hollywood, Mike Ovitz, and the 'geometry' line comes from Ovitz, when he sits down to meet with Letterman and Lassally.

(Note: I can't find a clip of just the Ovitz meeting, below is a YouTube embed of the full movie, fast forward to 35:12 for the meeting, which is only a little over 2 minutes long). Email and RSS subscribers, click through.

Here's the text of the Ovitz speech as well, in case you can't be bothered to mess around with the clip:

Michael Ovitz: Peter, I know Dave's circumstances, and so I know why you're here. Dave is a star of such compelling stature that frankly it makes me personally angry he finds himself this abused. We pride ourselves here at CAA in developing a career plan for our clients that protects them as much as it enriches them. David has set such an incredibly high professional standard and yet he is going disturbingly unrewarded. That just doesn't make any sense; it's simply bad business practice. Obviously, we have an interest in establishing a business relationship with you Dave, and you Peter. Frankly, we have worked out a career plan for David, and it includes securing everything for Dave that he wants. EVERYTHING. Of course that means an 11:30 television show. Dave will be offered an 11:30 show, and he will be offered it by every network. The geometry of the deal will be far larger, the studios will be in, the syndicators, the full range of the entertainment industry. We shall frame a deal that will make you one of the giants. And if you give us the privilege of working with you, CAA will take care of everything your talents deserve, and his spirit desires.

Awesome, right?

And if you did watch the clip in the movie when Ovitz makes the speech you will catch his confidence, his preparedness, ("Peter, I know Dave's circumstances"), and his all-around dominance of the proceedings. Dave leaves the meeting much more confident himself, which is how all the best coaches, agents, teachers, leaders, or bosses make the people they work with feel.

But most of all, and why this is so cool is that phrase - 'The Geometry of the Deal'. It's been in my head for 20 years, and now, hopefully, it's in your head too.

Go kick some a$$ this week.

I will try to as well.

Learn a new word: Asymmetric Information

Let's go with the definition first, a decent example of challenge that asymmetric information causes in a non-HR and workplace context, and then tie this up, (and this is the real reason I wanted to talk about this), with a great example of how this is playing out in HR/Talent and is being exacerbated by a recent legislative change in Massachusetts.

Asymmetric information - In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions, which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly. Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics.

Asymmetric information plays out all of the time, in just about every negotiation or contract that most of us participate in. When sellers know more about the value of products and services than buyers do - say in the case of a used car, or even a hotel room, then often we as buyers can be left uncertain and anxious about the prices we pay. Conversely, when buyers know more about the value of an item than the seller, think of a rare baseball card discovered at a garage sale in a bin offered for $1.00, then sellers can get underpaid for their offerings. 

The internet, social networks, online sites designed to 'uncover' or reveal the true value, (or at least what other people have or would pay for a given good or service), have gone far to reduce the potential negative impact of asymmetric information in many markets. TrueCar provides insight into new and used car prices, SeetGeek aims to let you know if the tickets you are about to buy for the ball game represent a good deal or not, and auction-type sites like Ebay and Priceline put much more power, (if not always perfect information), in the hands of buyers of goods and travel services. 

But even in the age of TripAdvisor and Glassdoor, many of the markets in which we transact are still pretty far from exhibiting so-called 'perfect' information, where buyers and sellers are equally informed, (or can reasonably obtain such information), thus resulting in efficient functioning. Are you really getting a good deal on that refirgerator or car or flight to Phoenix? Who knows.

That's what takes me to the HR/Talent example I mentioned that the top, specifically, the recent move by Massachusetts to prohibit asking candidates about their current or prior salary history during the interview process. This legislation, according to Massachusetts officials, is designed to combat wage inequality - the theory being that if women or other groups have been unfairly underpaid in the past, then making their current salary an anchor point in negotiations for their next salary will simply perpetuate this wage inequality.

And the other, unspoken, impact of this legislation will be to reduce, (but not eliminate), the asymmetric information condition that exists in any salary negotiation. In any potential job offer/negotiation the employer knows certain pieces of information that the candidate has almost no way of determining on their own. The salary budget (or range) for the job, the salary of the last person who had the job, the overall financial/budget situation of the organization, and the 'wiggle room' that the hiring manager has to negotiate the offer.

In this negotiation the candidate has exactly one piece of information that the potential employer can probably guess at anyway - their current, or most recent salary at their prior job, and ostensibly, the baseline to figure out what kind of a bump (fifteen, maybe twenty percent?), it would take to get the candidate to make a move. And lots of recruiters, and even many online job applications, press the candidate to divulge this bit of information, their only potential edge in any negotiation, very, very early in the process.

Recruiters and hiring managers will line up to bemoan the Massachusetts law, (and the others like it in states like New York and California that will almost certainly follow), clinging to the 'Let's not waste everyone's time if the salary for the job is not sufficient for the candidate'. Better to find that out up front, they argue. But figuring out the ballpark range a candidate might be willing to consider is part of your job, Ms. Recruiter. And there are other, less lazy ways that simply demanding that candidates turn this information over to you before you've even spoken to them.

Asymmetric information plays havoc in all kind of markets. It's bad economics, bad policy, and bad for the person who is sitting on the wrong, or less-informed side of the table. And it doesn’t matter how rational, or well-intentioned people are, or how well the process/markets are set up - asymmetric information throws a wrench in the works, one that many candidates can spend a career trying to recover from.

Have a great week!

Should you ask for a 1200% raise?

Hey it's October!  The best month of the year by far. If you don't believe me, check out Months, ranked and get up to speed.

So happy October. 

Hey question for you career-minded folks or for those of you who might sit on the other side of the compensation table, making decisions about comp offers, raises, and bonuses for your teams.

Should you (or anyone) ever have the gumption to ask for a 1200% raise?

Sounds kind of ridiculous in the land of 3% annual salary increases, (maybe 4% if you are a 'top performer'), and with organizations continuing to do everything they can to resist the inevitable upward pressure on wages that an improving economy with falling unemployment will drive.

But 1200% of a pop? You would have to be really confident to make that kind of a salary demand.

Why is that particular figure on my mind?

From reading recent piece on Business Insider, Vikings part ways with their mascot after he demanded a 1200% raise.

From the piece:

Ragnar, the Vikings' unofficial mascot, and his motorcycle have been a fixture at Minnesota Vikings games for over two decades, but that appears to be over as the two sides have been unable to reach an agreement on a new contract.

Ragnar, whose real name is Joe Juranitch, was seeking a new contract that would pay him $20,000 per game, according to Michael Rand of the Star Tribune. That would translate to an annual salary of $200,000 for eight regular season and two preseason games, and an increase of more than 1,200% from his previous pay of "about $1,500 per game" last season.

I have never been to a Vikings home game, so I am really not too sure what exactly Ragnar brought to the table, and particularly what he thought would be worth about $5,000/hour (game lasts about 3 hours, add 1 hour for pre and post game work). But it is pretty clear from the way the Vikings basically responded to this demand with a 'Thanks Ragnar, it's been really nice working with you. Good luck!' that Ragnar had severely overestimated his value and his leverage.

What can us normals take away from this little viking adventure, even if we are just trying to secure a reasonable bump, say 10% or so?

1. Have some idea of how much actual value, (revenue, increased customer retention, tangible cost savings, etc.), we are directly responsible for creating. 

2. Have some idea how painful it would be to the company if we actually walked out when our crazy demands were not met.

3. Have some idea of the market more generally for folks who do what we do.

Our pal Ragnar pretty much failed on all accounts. He likely did not generate any appreciable revenue for the team. Even though his Facebook page was full of comments from fans expressing support and anger towards the team, it would take an enormous stretch of believability to conclude that any actual fans would refuse to attend games due to his absence. 

He also didn't really grasp that the games would carry on pretty much unaffected once he was no longer a part of the show. The team preparation certainly would not be affected. His absence actually would create less work not more for the game day operations staff. In fact, other than the small number of fans who missed his performance at the game, everyone else lives got a little bit easier.

Finally, there is almost no chance that Ragnar surveyed the landscape of professional sports mascots to come up with market comparables that led him to make a $20K per game demand. If team mascots were really pulling down anywhere near that kind of scratch, there would be line hundreds of people long to try out for those gigs. More than likely, one of Ragnar's buddies got into his head that he was somehow underpaid and under appreciated, (and that he was WAY more important to the product than he was).

Look, I get wanting to make every last dollar you can. We are probably all underpaid for the amount of crap we have to put up with. But the key question is knowing just how much you are really underpaid, and making sure you are honest about your value, how replaceable you are, and your ego.

Happy October.

Learn a new word Thursday: The BATNA

I will admit when prowling around for ideas for the blog that I sometimes get lost in the weeds of Wikipedia. Sort of reminds me of how back in the day a 9-year old me would page through volumes of the Funk & Wagnalls Encyclopedia late at night when I should have been sleeping. Note to the kids out there, that is just one example of how miserable life was before the internet, and smart phones, and Snapchat. When I have some more time I will tell you about the 13-inch TV I had to watch in college. 

But back to the point, (such as it is).

While reading about a pretty interesting article on a Game Theory principle called the Nash Equilibrium, I came across a slightly less interesting but probably more relevant for the HR/Talent pros, an idea called the BATNA, or in the realm of negotiations, the 'Best Alternative to a Negotiated Agreement.' 

From the 'Pedia:

In negotiation theory, the Best Alternative to a Negotiated Agreement or BATNA is the course of action that will be taken by a party if the current negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. A party should generally not accept a worse resolution than its BATNA. 

The BATNA is often seen by negotiators not as a safety net, but rather as a point of leverage in negotiations.

So the BATNA is kind of the fall back plan, the Plan 'B' so to speak if you are unable to reach a negotiated agreement - whether it is for the price of a new car, the starting compensation package for that new job, or if you are unable to convince your significant other that eating at Chili's does, in fact, constitute a 'night out.'

But the idea that the BATNA isn't a safety net, or a 'bottom-line' is key to the entire concept.

Usually, a bottom line signifies the worst possible outcome of a negotiation that you are still willing (or are forced to), accept. The bottom line is meant to act as the final barrier after which a negotiation will not proceed. It is a means to defend yourself against the pressure and temptation that sometimes exists to simply end a negotiation, even if the conclusion is self defeating. Although bottom lines definitely serve a purpose, they also inflexible, can eliminate more creative solutions, and decrease the likelihood of long-term satisfaction with the agreement.

Let's go back to the salary negotiation example to see the difference between the BATNA and the 'bottom-line'.

Candidate: I am looking to start at $125,000 with 5 weeks vacation.

Employer: Our offer is a starting salary of $105, 000 plus 3 weeks vacation.

Candidate BATNA - $115,000 with 4 weeks vacation

Candidate 'Bottom Line' - probably something like $110,000 with the 3 weeks. 

Notice the difference between the BATNA and the Bottom Line though. The BATNA gives up a little on the salary number, but represents a gain on the vacation number. It really is a 'Best Alternative' scenario for the candidate, and not just a surrender. The 'Bottom-line' however, is more or less a total loss from a negotiation standpoint. The candidate might be able to live with that outcome, (say if their current salary was $95,000), but if they accept the bottom-line deal they are going to be immediately dissatisfied with the outcome. But if they have the BATNA defined walking in to the negotiation, then settling on it will still represent a good outcome.

It is a small, maybe even a subtle difference, but understanding the difference between the BATNA and the Bottom-line could be the key to drive better overall outcomes.

So there it is, your new word of the day - BATNA - The Best Alternative to a Negotiated Agreement.

Happy haggling.

On ZOPA and striking first in negotiations

Meandering through the internet on a long cross-country flight yesterday, and I came across a piece on the Harvard Law blog from 2011 (I know, in internet years that sounds like 1924, but hang with me on this), about the concept of anchors in negotitations and something called the ZOPA, or the Zone of Possible Agreement.

You should check out the piece from 2011, as it really does a great job of debunking a pretty common perception when it comes to power dynamics in negotiations: namely that the person who puts the first offer on the table puts him/herself in a position of weakness. Obviously I have not read ALL the terabytes of salary negotiation advice that has been written, but I feel like the wide majority of said advice for the candidate counsels them to avoid putting an actual salary number on the table, as it reduces their further negotiating power. Once they set a number like, "I would like $89,000 in salary", then the only place the negotiation can proceed is down (in terms of that number). 

But as the Harvard piece points out, that starting number (whomever puts it out there), sets an effective anchor on the rest of the negotiation. Here is the gist of the argument around anchors and the ZOPA from the piece:

It is desirable to anchor first in many negotiations, for several reasons. In negotiation, you are trying to both learn about the zone of possible agreement(ZOPA) and influence the other side’s perception of the ZOPA. While advance research can help you reduce your uncertainty about the ZOPA, you typically will have more to learn about the ZOPA once talks begin. As such, you will be vulnerable to being anchored. Therefore, anchoring first in price-oriented negotiations can be both good offense and good defense.

An overly aggressive offer, however, risks derailing negotiations if it causes the other side to question your credibility or to wonder whether agreement is even possible. Because it is hard to know what your counterpart will view as absurd, anchoring with a relatively inflexible, extreme offer increases the probability of reaching a stalemate. Anchoring instead with a flexible but extreme offer gives you a lower-risk opportunity to favorably shape your counterpart’s perceptions of the ZOPA.

Additional research done by Adam Galinksy at Northwestern University backs up the Harvard findings. According to Galinsky:

My own research also shows that the probability of making a first offer is related to one's confidence and sense of control at the bargaining table. Those who lack power, either due to a negotiation's structure or a lack of available alternatives, are less inclined to make a first offer. Power and confidence result in better outcomes because they lead negotiators to make the first offer. In addition, the amount of the first offer affects the outcome, with more aggressive or extreme first offers leading to a better outcome for the person who made the offer. Initial offers better predict final settlement prices than subsequent concessionary behaviors do.

So it seems pretty clear, if you find yourself in a salary/bonus/some other type of compensation negotiation with your employer, seizing the upper hand by putting the first, aggressive number on the table is likely to lead to the best outcome from your perspective.

It almost seems similar to the advantage the serving player has in a tennis point - every subsequent shot of the rally is influenced and impacted by that first serve. 

And it seems in salary negotiations, as in tennis, it's better to be the one serving.

Have a great week!