If you’re in the market for a new home, what precautions do you need to take to ensure that you’re making the best financial decision?
Who do you have on your team to support you when it’s time to make an offer that’s rational while also competitive in this market?
According to Howard Marks, “There’s only one form of intelligent investing, and that’s figuring out what something’s worth and buying it for that price or less. You can’t have intelligent investing in the absence of quantification of value and insistence on an attractive price. Any investment movement that’s built around a concept other than the relationship between price and value is irrational.”
That’s where your team of advisors comes in. They support you when your susceptibility to the “fear of missing out” has the potential to override your logical self.
When you make an offer, your agent factors in the costs of a new roof, French drain, and hardwood floors whereas the seller’s agent requests your “best and final” offer without revealing other bids. Your agent also advocates for you, highlighting why you're the most qualified buyer and will close the deal, reducing the seller's risk aversion.
Your mortgage broker reviews your financial situation to get a better understanding of your household income and the source of down payment to help you get pre-approved for a loan. This ensures that your offer is competitive against the others that may be paying all cash or be pre-approved.
You may also hire your own inspector or appraiser to perform their evaluation of the home to look for potential problem areas and compare it against the seller’s inspection report.
This team of people you’ve hired is there to support your decision-making and help you through the home-buying process. Why? Because you are making a huge financial decision – one that will affect many aspects of your life. You want, and need, a team of experts that is there to advocate for you and help you make the best decision for you and your family.
Navigating Your Career Path: Who's in Your Corner?
If you use this analogy as you navigate your career in the business world, who is really in your corner, supporting you during times of uncertainty when pivotal decisions need to be made?
Whether it's navigating the challenges of the latest reduction in force at your current job, crafting a framework to evaluate new job opportunities, or sifting through multiple job offers, who is there to help you?
Do the friends that you turn to who anecdotally know your situation have a large enough vested interest to help you make the best decision?
Herein lies the Principal Agent Problem.
This theory, established in the 1970s by a group of economists and theorists, explores the common pitfalls that arise when one person or group, the "agent," represents another, referred to as the "principal." Agents often have stakes or receive rewards that differ from those of the principal, creating imbalances that can complicate negotiation strategies.
Whether consciously aware or not — and research suggests that most are not — agents, even those with the best intentions, frequently face conflicts of interest. They must navigate between recommending what is genuinely best for the principal and what might yield them the greatest financial return.
Navigating the Principal-Agent Problem During Job Interviews
Consider when a recruiter contacts you about a prospective leadership role. While they aim to find a leader who can solve a variety of their client’s organizational, leadership, technical, and strategic challenges, it is important to acknowledge that the recruiter, acting as the "agent," primarily acts in the interests of the hiring manager and employer — the "principal." Here, you, the candidate, are not the principal – but rather another stakeholder with potentially conflicting interests.
Recruiters, acting as agents, are primarily driven by their self-interests and the constraints of their principals' (employers') requirements. Their goals and incentives include:
Creating Efficiency in the Hiring Process: Align internal stakeholders on the job requirements, candidate qualifications, compensation range, interview panel and process
Evaluating a Select Group of Candidates: Teams aim to evaluate a small pool of candidates who are not only qualified but also available and affordable within the confines of their budget. Due to high requisition (req) loads, teams will tend not to exceed evaluating 10 people for any given position at any given time.
Time to Fill: Their goal is to close the req as quickly as possible to reduce their workload.
Negotiating Acceptable Offers: Their objective is to secure an offer that meets their principals' approval, rather than striving for the highest possible offer for the candidate.
Compensation: If you are working with a third party recruiter or recruiter that works for an employer or recruiter that works for an employer, their compensation is directly tied to you accepting the offer. Looking back at Time to Fill, they are interested in closing the req as soon as possible to get paid.
Conversely, recruiters are generally not incentivized to:
Engage with Every Applicant: They typically do not respond individually to each candidate who applies for a position. Think about it, if a recruiter is managing 15 reqs and managing 10 candidates for each req, that’s 150 unique relationships.
Provide Detailed Coaching: They are not motivated to coach each candidate on marketing themselves effectively, maximizing their marketability, or improving their success rate during the interview process. Oftentimes, candidates will not receive feedback about their interview performance due to concerns about legal liability.
Maximize Candidate Compensation: They are unlikely to advise candidates on strategies to maximize potential compensation during negotiations, as this can conflict with the interests of their company.
Clarify Financial and Career Risks: Ensuring that candidates fully understand the financial risks of joining that startup with a fresh round of funding is not typically within a recruiter’s incentivized duties. Legally, they may not be able to weigh-in on the tax ramifications of exercising stock options.
Reflect on this representation model: Who is the recruiter primarily representing? What conflicts of interest might exist within the recruitment and interview team when they claim to advocate for your best interests?
How to Counteract the Principal-Agent Problem in Your Job Search
Understanding the Principal-Agent Problem helps you recognize potential biases that could negatively impact your decision-making during the job search.
Here are eight strategies to empower yourself and ensure your career moves align with your personal and professional goals:
Develop a Comprehensive Career Map
- Clearly define your career goals, strengths, technical skills, and financial objectives.
- Understand your risk tolerance to make informed decisions that fit your long-term career strategy. (Are you considering a startup? If so, how does the opportunity costs of buying your options weigh-in on your decision making? Are you considering the risk of losing your entire equity compensation alongside the possibility of achieving a grand slam?)
Develop a Marketing Plan and Optimize Your Online Presence
- Enhance your LinkedIn profile to increase visibility and ensure it is optimized for Boolean searches, helping recruiters and hiring managers find you more easily.
- Create an engaging story in your personal summary that connects with your audience, highlighting your relevant achievements, and interests as a thought leader in your industry.
Prepare Thoroughly for Interviews
- Craft a distinctive elevator pitch that highlights your unique qualifications and career achievements.
- Support your application with a well-written resume and an optimized LinkedIn profile. Stay away from writing about yourself in the third person. Keep in mind that the recruiter and their team are seeing hundreds of resumes a day.
- Practice through mock interviews to improve your confidence, body language, and performance.
Expand Your Job Search
- Don't limit yourself to single opportunities or rely solely on referrals. Broaden your search to include multiple options to compare and contrast company cultures, teams, and potential roles.
- Negotiate offers effectively by understanding the full scope of what can be negotiated, from role design, to salary, the leader you work for, and flexible working conditions.
Evaluate Potential Managers
- Since a significant portion of job satisfaction and performance is influenced by your direct manager, seek to understand their management style and the team culture during the interview process.
- Review the trajectory of the team members that are in their team. If the team is hiring a first line manager, ask why the position is open and why nobody on their team is being groomed for the position? According to Gallup, 70% of your emotional attachment to work is directly related to your manager!
Conduct Thorough Company Research
Before accepting any job offer, conduct in-depth research into the company’s financial health, leadership team, culture, and performance management systems.
- In the current "high interest rate for longer" environment, companies that have large debt burdens are under immense pressure.
- How has the stock price’s movement trended over the last year? Is the company's trading at a low P/E ratio relative to the market?
- Evaluate the company's long-term stability and growth potential to ensure it aligns with your career aspirations.
Be Wary of Commonly-Available Offer Evaluation Tools
I’d advise against using offer calculators that don’t take into account the full range of financial outcomes, potential risks, and the probability of total loss in equity compensation.
Establish a Personal Board of Advisors
Build a trusted network of mentors and advisors who bring diverse expertise to your career planning. This board should ideally include mentors and advisors who have your best interest in mind, know what you’re capable of achieving, deep insights into your strengths and career.
This board should have expertise in areas including tax, employment law, offer negotiation, compensation strategy, technology, and game theory.
Regularly consult with these advisors to gain insights and guidance on complex career decisions. This can help you navigate negotiations more effectively, understand legal implications, and make strategic moves that align with your career and financial goals.
Leverage their diverse perspectives to challenge your assumptions and help you see opportunities and risks from different angles, ensuring well-rounded decision-making.
By adopting these strategies, you can better navigate the complexities of managing your career, reduce the impact of the Principal-Agent Problem, and make choices that truly benefit your career trajectory.
I hope this advice helps you identify and address the challenges of navigating the Principal Agent Problem and our strategies to support rational decision making.
If you’d like to take the next step and learn how I support my clients as a career coach and talent manager, book a free consultation here.
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