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Writer's pictureJD Johannes

Big Shot or Big Win? How Status Aspiration Impacts Profit & Principle Agent Problem

Updated: Oct 18

Would you trade income for status and identity?


VCreek/AMG put that question to 405 telephone poll respondents in Florida asking:

“Which type of job sounds better? A job that allows you to use your skills, develop new abilities and is well regarded BUT pays less? Or, a Job that pays more, BUT does not allow you to use your skills or develop new abilities and is not as well regarded?”


The question has been asked in other formats by economists, psychologists and business professors.


University of California Berkeley business professor Cameron Anderson found that people generally prefer to have a higher status job inside the company they work for, than a lower status job in at a higher status company. In real life, this would be preferring to be a Senior Vice President at a well-known regional bank where the employee lives, than a lower rank employee at a well-known national bank. The situation reverses in a few different contexts. For example, if the employee has a lot of contact with people outside the banking industry, they will prefer to affiliated with the well-known national bank.1


Economist Robert H. Frank has studied the same phenomenon from a different direction—wages. Frank’s research has found that many employees accept lower wages from a company to maintain rank/status within that company. Frank argues that workers, “sort themselves among a hierarchy of firms in accordance with their demands for within-firm status.” Workers who care more about status will accept higher ranking positions in companies that pay less. Workers who care less about status, will gladly take jobs that have lower rank and status if the job pays more.2


“In every firm and occupation for which the relevant data are available,” Frank writes, “high ranked workers are paid less than the value of what they produce, while low ranked workers are paid more.”


Frank illustrates the mechanism in a delightful Twitter thread he posted on May 8, 2020.2


In a more direct example, a survey by the Human Resources firm Better Up found, “9 out of 10 employees were willing to trade a percentage of their lifetime earnings for greater meaning at work.”3


The response to the poll question VCreek/AMG asked of Florida residents age 18-64 in August of 2021 is in line with the findings of Anderson, Frank and Better Up. Sixty-two percent said they would prefer the job “that allows you to use your skills, develop new abilities and is well regarded BUT pays less.”


Workers in the United States are willing to trade income for Status, Identity & Meaning (SIM).


What happens then, when a person is on-the-job and must make a business decision where the tradeoffs include, or are between, status for the employee and profits for the company? It is a vexing post-modern twist on the classic Principal-Agent Problem.


Much of the research on the Principal-Agent Problem focuses on aligning economic incentives, like aligning the pay and bonuses of executives with shareholders, or incentives of rental property managers with the property owners, doctors and patients, pension fund managers and retirees/employees.


What is less explored is the how the gradual shift in U.S. culture away from material and economic concerns toward Status/Identity/Meaning (SIM) impacts the Principal-Agent Problem.


The Florida poll question is part of a trend VCreek has been tracking for several years which was first discovered in the Longitudinal DATA of the World Values Survey.

Ronald Inglehart, Director of the World Values Survey, has conducted in-depth polls for decades and found that as the prosperity of a country increases, younger people born into material well-being shift their values from the economic growth and “survival values” of previous generations to fulfilling the “needs for belonging, esteem and intellectual and self-expression.”4


This trend follows Maslow’s Hierarchy of Needs. At a macro level, as fewer people in Western and Developed countries struggle with the basic needs, their focus shifts to Status/Identity/Meaning. VCreek’s national and regional polling has found that political liberals tend to be expression oriented and political conservatives economic oriented. At a micro-level, respondents who grew up working class or in rural areas trend toward economic orientation regardless of their current economic standing or residential location. (VCreek has a concept called DFF; Distance from the Farm or Factory. The Distance is a combination of time, generations and geography.)


Inglehart further explains “Economic accumulation for the sake of economic security was the central goal of industrial society. Ironically, their attainment set in motion a process of gradual cultural change that has made these goals less central – and is now bringing a rejection of the hierarchical institutions that helped attain them.”


In a business, at the micro level, this preference for Status/Identity/Meaning (SIM) could lead the manager of a business unit to choose a course of action that increases their personal status at the expense of company profits—especially if the action is still profitable enough. It could lead a CEO to choose the esteem of people whose approval he desires, over the profit interests of shareholders and employees. (Unprofitable companies tend to shed employees.)


The research on traits of executives is wide and scattershot with no fixed standard on the traits to be evaluated. In reviewing the literature, it seems that business school professors and consultants, of which there is significant overlap, conduct much of their research on executives and employees as a way to develop products and services to sell to corporate clients.


There does seem to be some consensus—studies using actual business executives found they score high in extraversion. Studies using MBA students and undergraduate students found that people with dominant personalities tend to gain status in project working groups. Research on civil service executives finds a strong trend toward dominant personalities combined with confidence and extraversion.5


A caveat should be noted on dominant personalities. Dominance as a personality trait is not always expressed as aggressive, threatening or intimidating behavior. After compiling the results of a series of experiments with project groups, Anderson noted, “dominant individuals attained influence …by displaying competence and signaling their value to the group. Dominant individuals may ascend group hierarchies by appearing helpful to the group’s overall success as opposed to aggressively grabbing power. Trait dominance might be best defined by its primary social outcome, the establishment of influence in interpersonal settings. Individuals higher in trait dominance are perhaps defined by their striving and attainment of control and power in dyads and face-to-face groups.”6


If business executives and managers are higher in extraversion and dominance than individual contributor employees, and if dominance is often, as Anderson observes, “best defined by its primary social outcome, the establishment of influence in interpersonal settings” And “Individuals higher in trait dominance are perhaps defined by their striving and attainment of control and power in dyads and face-to-face groups.”


Then it is a reasonable conjecture that dominant personality types strive for status.


Anderson has noted that high status individuals “respond to acute status threats more intensely than others.” After distilling a wide range of experiments, he provides a plausible explanation for this response-- “People place more weight on the prospect of losing status than they value possible gains in status; they are willing to pay more to avoid status losses than to achieve status gains and to put forth more effort to prevent status losses as opposed to status gains. Taken together, these findings suggest that as individuals attain higher status, they become that much more concerned about potential status losses, and therefore react even more strongly to potential status threats than do others.”7


The willingness to put more effort into preserving status than gaining status is similar to what Kahneman and Tversky found in Cumulative Prospect Theory which ties into the concepts around Loss Aversion, Endowment Effect, etc.


In a Principal-Agent Problem where the tradeoff is between Profits for the Principal and Status for the Agent, many of concepts developed by behavioral economists and game theorists could illuminate the mechanisms of action and strategies to align Status and Profits.


To understand the challenges of alignment, consider the following case study:

A junior investment strategist at a wealth management firm develops a unique strategy for generating income using options trades. The mathematics and mechanisms of the trades are very complicated and very sound. The team manager asks the junior strategist to develop a sales presentation for an upcoming client conference. The manager of the team presents the strategy at the client conference. Some potential clients who are savvy to the mathematics ask in-depth questions the manager does not know how to answer. Many clients put money into the strategy on the strength of the presentation despite the manager’s fumbling in the Q&A. The strategy is profitable for the clients and the firm.


Questions: First, how many more clients might have invested in the strategy, magnifying the firm’s profits, if the junior strategist had made the presentation or handled the sections on the mathematics and mechanisms? Second, what role could the manager’s desire for status have played in deciding to give the presentation himself without support from the junior strategist? Third, does this scenario seem familiar to you? (If it doesn’t you are the manager who fumbled the presentation.)


This case study scenario is likely to be common. A poll of corporate employees reported in the Harvard Business Review found that 47% of employees have managers who take credit for other people’s ideas and, in a likely related problem, 63% of employees said their boss doesn’t recognize employee achievements.8


Research by Northwestern University business professor Leigh Thompson found that “the mere presence of a splendid idea from an internal subordinate activates a threat response from that employee’s leader.” Thompson’s studies further found that it is not good ideas that manager’s find threatening. The perceived threat is from more competent or innovative subordinates that could challenge the manager’s status.9


In another series of experiments, Thompson found that good ideas from outside consultants were less threatening. “Insiders’ ideas triggered more threat and the managers avoided the insiders’ knowledge—that is, they minimized the time they invested in learning about the idea and, even more notably, reduced the research-and-development funds they would invest in exploring the idea,” Thompson explained in a Wall Street Journal article about her research. “Conversely, when faced with viable ideas from outsiders, managers didn’t feel as personally threatened and were more willing to pursue the ideas.


The distinction on the source of the ideas is important. Managers are not opposed to good ideas that are not theirs. The opposition is to how the ideas may impact their status.


Stanford Professor Cecilia Ridgeway writes, in her book, Status, “People care about their social worth, their status, quite as much as they care about money and power.” Ridgeway explains frequently in her book that there are two main components to measuring status, “People experience status rankings as evaluative judgments that exist not only in their eyes but also, for better or worse, in the eyes of a relevant group audience of others.”


Individuals rank themselves against others—from their own individual perspective. AND receive feedback about how others rank them--especially how relevant others thank them. The individual may place a higher value on the approval of some select individuals.

In a Principal-Agent situation, the Agent may place more value on status than income and not place much value on the opinion of the Principal.


In the case study above, the Manager may have given the presentation to hold the Junior Analyst down, to impress just one client, or, in this social media age, to post some pics and clips of him speaking in front of a group to impress his outside social network. The permutations are wide and the Manager may not even fully understand why he did it.


The manager may defend his decision to give the presentation solo because he has a long track record known to the clients and strong relationships with the clients. The junior analyst may, in the manager’s assessment, not be ready to ‘put on the show’ in front of a group of clients. All the upper management may know is that the clients put in money and the strategy was profitable. The zone of ‘profitable but not optimal’ is a challenge for any business because optimal is difficult to know.


But upper management, the board of directors and shareholders must always be aware of Status implications for the Principal-Agent problem.


Professor Thompson’s research on status threats from the ideas of subordinates maps a path forward to mitigate the status tradeoff.


Thompson and her colleagues had managers engage in either a simple mental exercise to affirm their self-worth or a mental technique that reduced their self-worth. The managers whose self-worth was affirmed were more likely to advance the ideas of subordinates.

There might not be much buy-in from managers and executives for Stuart Smalley style daily affirmations.10


They might respond to a corporate culture that celebrates managers and executives who develop brilliant subordinates which is part of what VCreek calls Alpha Alignment.


In finance and investing, Alpha is profit or returns above the average. In the stock market, Alpha would be beating a benchmark like the S&P 500. In sports it would be consistent winning seasons.


In Alpha Alignment managers are measured against a reference class of similar peers across similar industries. Performance beyond the reference class is rewarded—and not just with bonuses and other financial incentives. Alpha performance is recognized visibly. Consistent Alpha is rewarded significantly more. The rewards and accolades are shared by the entire team or business unit and they are Instagram Worthy.


Alpha Alignment works best when there are quantifiable performance measures linked to revenue and profit that can be tracked over time. Alpha Alignment is not just hitting a sales target or product delivery target. It is consistent performance focused on revenue and profits year in, year out. It is consistent, deliberate focus on the objectives that lead to revenue and profits.


To use a sales cliché, the goal is NOT JUST to close more deals. It is to increase the number of quality prospects in the lead funnel.


This will require deep thought on the part of senior management, the board of directors and large shareholders to analyze every step of the value chain and dig deep into determining, with quantifiable precision, what really delivers Alpha on every single piece of the chain.

And then reward managers and individual contributors with the incentives—whatever they may be—that keep them aligned with Alpha.


As the wealth of the West grows, more and more people will be willing to trade Status/Identity/Meaning for income. The annual corporate awards banquet is not enough in this era. Managers and even executives may care more about the opinions of a wider network than co-workers. If they already have ‘enough’ income, an extra bonus may not matter much and be meaningless to align interests. It is incumbent on the Principals, and the Agents who truly owe a fiduciary duty, to provide employees the compensation they desire to achieve Alpha Alignment.


Notes:

2. https://twitter.com/econnaturalist/status/1258836306605625348?lang=en

Frank, R.H. (1988) Passions Within Reason.

Frank, R. H. (1985). Choosing the right pond: Human behavior and the quest for status. New York, NY: Oxford University Press.

4. https://www.researchgate.net/publication/253550249_Changing_Values_Among_Western_Publics_from_1970_to_2006

Civil service https://journals.sagepub.com/doi/10.2466/pr0.1992.71.3.979

7. https://web.archive.org/web/20150908035351id_/http://haas.berkeley.edu/faculty/papers/anderson_desire_for_status.pdf

8. https://hbr.org/2015/06/the-top-complaints-from-employees-about-their-leaders

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