The Employment Prisoner's Dilemma

Or some observations from having been an executive, manager, employee, and professor

Employees.

This topic has come up repeatedly in the past few days, with two founders I really respect, with C-level executives and senior managers at major companies, with a VC who I think highly of, in group chats, and now this whole founder mode discussion.

Something is in the air about this. So I want to start with describing the problem that motivated some of these discussions from founders/owners/management down and then explore why I think the discourse around this is so profoundly broken from both sides.

First, what's the problem? I see posts circulating like the alleged Amazon engineer who has done zero work for years, I see things like Elon Musk taking over Twitter and massively downsizing the company without much impact, and I hear complaints of employees quiet quitting.

I also have managers telling me they cannot staff up effectively with good talent. That their best people are constantly on the move and tenure is now averaging less than 2 years for many hires. That it creates a constant treadmill meaning people spend more time onboarding and getting up to speed than working, and that they are increasingly unwilling to spend time training or investing in employees because the turnover rate is getting so high. Lastly, this drives things like RTO initiatives and paralyzes hiring managers, and everything freezes.

Second, let's do something important that doesn't happen enough, which is to look at the other side. Why do employees feel this way? The average millenial / gen z'er watched the paradigm shift from their grandparents having stable jobs for decades to their parents slowly tumbling down the hill, being laid off, bouncing around, and many of their older siblings, friends, or family members being unceremoniously fired in the financial crisis and then repeatedly switching jobs afterwards. 

Employers have been extremely clear, in the past 40 years, that employment is at will and can be terminated at any time, that the company owes you nothing, and that if they want to let you go to make the quarter's results look good, they will. More so, these decisions have not been remotely based on merit or efficiency, but rather internal politics, dysfunction, external signaling value, or honestly, just apparently random! The message is clear: you're expendable. This means there's no longer community, shared purpose, or meaning at work for a lot of these people. If you ask why they do their job for reasons other than the paycheck, here's the most common answer: no, it's just for the paycheck.

If you are an employer, stop right here. Pause. Go back and reread all of that. Really think about it.

This is where almost 100% of people who work for you are at.

Third, how did we get here? I'll start with a quote:

“Show me the incentive, and I’ll show you the outcome.” - Charlie Munger

Let's step back and dispassionately look at the incentive structure in which most employees operate, and I'm going to talk about a few frameworks so that we don't just over-focus on big tech or something.

One: most people get a salary. Sometimes these are quite good. But importantly, there is either no or very slow upside to salary. What this means is that while people need it, salary makes people risk-averse. You can lose it, but you can't really gain from it.

Two: some employees get a bonus, but outside of finance front office roles and execs (where bonuses are often several times larger than salary in many cases), that basically means salary dwarfs the impact of a bonus.

Three: public company employees are often paid in stock. Now, if these employees were long-term employees who felt a connection to said company and invested / involved in the results, this would align incentives well. However, in a world where the average tenure is below five years, this basically functions as just more cash. 

The fundamental structure of tying employees to a company and the results long-term does not exist because they are not long-term holders and, more so, a lot of the future comp can also be clawed back or voided if they are fired. Which I will remind you, companies can do for any reason. Or no reason! So employees naturally value this at zero until it is received.

Private company employees, not to leave them out, who are not early-round often view their small equity shares the same way.

And reminder, again: they can be fired at any time for no reason.

Fourth, where does that incentive structure leave most employees? If you are perceptive, you can already see the problem. Simply put, employees believe they have no personal control over upside (so the stock / equity is a lottery ticket), have a huge amount of downside from rocking the boat or trying to make changes (because political managers can eliminate them), and have no long-term ties to the company they work for because they can be eliminated at any time.  If this is the position you are in, and you are rational, you are going to do one of the following:

One: check out and quiet quit while collecting that salary for as long as possible. This is the nihilism position. None of this matters, you're just there for the salary, so the goal is keep up appearances, do minimum work, cut the check, go home.

Two: use it as a platform for your future. By which I mean try to get on notable projects, talk to the press, write a blog, or use the corporate platform as a vessel for personal reputation, and use that to leapfrog to the next job where you can rinse and repeat to move up.  It’s usually your best performers who can do this, too.

That tactic does have a shelf life (the 10th time you do this well into your 40s people are wise to it), but it's a powerful way to get from junior to mid/senior management very quickly in many cases. That's where the effect usually slows down. But in the interim, they have created a ton of value for themselves but often not much for the companies on the way. These people are returning the favor, so to speak, of corporate disloyalty.

Three: active hijacking is a third. This is when employees have a mission other than the corporate mission (political causes, pet projects, etc.) and they essentially use the company as a vessel to support these things. There's no meaning in the company itself, so they create that meaning by hijacking it for personal goals.

So employers, do any of those sound like your employees? Actually, multiple of them probably sound like your employees, right? Here's the problem: all of those are perfectly rational responses to the situations many employees find themselves in. If you want to be angry about that, you're being angry that the sky is blue or that the sun comes up every day. It's reality. And in this case, you helped create that reality, so you really, really don't get to be mad about it. It is what it is.

Fifth, these same poor incentives are also part of the problem with management. When you have that set of employees, it's easy to view them as costs to be minimized. Your high performers seem to constantly use you as a stepping stone and everyone else is slacking or hijacking. That’s not a healthy group, and they are annoying and troublesome to deal with, and getting more so by the day. Wow, these younger generations are terrible, aren’t they!? you think to yourself, angrily.

This sort of thing also just increases the problem, as now companies are more apt to treat employees like a cost to be minimized. It also leads managers to being scared of employees taking risks to change or improve things, because they don’t stick around and just create chaos and the manager will be left holding the bag. Also, when there’s a lot of hijacking, it’s hard to tell genuine requests for change from “hmm, is this really good” type nonsense. Essentially, this paradigm raises the effort level for good management and requires even more work from managers, or they can just fall into the same paradigm and start risk minimizing themselves which often means cutting the loudest employees down by laying them off or getting them to move on, and then managing large teams of quiet quitters and focusing on metrics that make you look good and are performative rather than actual indicators of quality. I guarantee you, if you are a c-level executive or founder at a company with 100+ people, you have managers doing this with near-certainty. I’m sorry. It is what it is.

This creates a vicious cycle between employees and employers, where everyone has essentially defected in the style of the Prisoner’s Dilemma, and thus everyone ends up worse off. I want to point out that while the PD is often over-cited, here we really do see that problem playing out in real time: if an employee commits to a company and makes sacrifices to make it better, then gets laid off with no concern by the company, that’s essentially the betrayal option in the classic dilemma. The rational response to that is to also betray, and thus we end up where we currently are. I say that to remind people again not to be angry about this. Given the current incentive structure, everyone is (unfortunately) behaving rationally and you would do the same thing in the other position.

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Sixth, so what are solutions to this? I’m going to start by, if you were already angry and upset by reading about this, making you even more angry and upset because I’m probably about to call out some of the things you have thought about as a manager or leader as bad ideas. Luckily for you, I have never given a flying fuck at a rolling donut¹ about being popular or being yelled at in public, so I’m actually going to tell the truth here instead of enabling you. Let’s do this:

One: return to office. Listen, there may be legitimate reasons for wanting some groups to be in an office, but often this comes down to lazy managers wanting to exert control over employees so they aren’t quiet quitting. I have bad news. They are going to quiet quit anyways. They just do it differently in the office, scheduling fake meetings, surfing the web on their machine, chatting with people at the water cooler, or starting useless projects that have nothing to do with reality to waste time. It just changes the shape of the behavior. As an additional benefit, you now make people waste 30-120 minutes per day commuting (while you don’t compensate them for this), shrink your potential talent pool from nationwide or global to only people who happen to live around whatever city or suburb you are in, and you piss off every single introvert who works for you who didn’t want to deal with all of this shit anyways.

For those of you about to say “Yeah, okay Austin, but we really did this because we needed to lay people off and we knew a bunch would quit”, I will point out to you there is literally a name for this problem in the business literature and it is called the Deadwood problem. You’re going to lose your best performers most capable of getting other jobs and keep the people without better options. Golf clap. 

Additionally, unless your employees are literal retards, they know you did this to lay people off, and now they trust you even less. So unless you employ complete idiots, you’ve kept your worst people and degraded trust. And if you do employ complete idiots, I have even deeper questions.

So this is not a statement that RTO is not valuable in some cases, but it is a statement that RTO to solve this particular set of problems I am laying out is likely counterproductive (and even if you have good reasons for RTO, you need to consider these downsides).

Two: emphasis on culture or the company as family. 

Bad news: most of you don’t have a culture, and if you do, it probably sucks. Again, people don’t like to hear this, but it’s true. I have worked at six different significant companies in my life, and only one of them had a culture that was worth saying anything about. Five out of the six thought they had a meaningful culture though (and props to the sixth who actually knew they didn’t).

If you are going to develop and maintain a corporate culture, that takes a huge amount of work and has to come from the top. There are entire books about this, but fundamentally, it’s exceptionally hard, gets exponentially harder with scale, and can only be set at the CEO level on down. This basically becomes your full time job as a CEO. More so, you have to live it, walk the walk and not just talk the talk, and make some hard decisions based on this to convince people you mean it. Constantly, not once. Forever. If you’re not doing this (and be honest about it), stop talking about culture as a selling point.

Also, companies are not a family. You don’t have at-will employment with your parents or siblings or children. You don’t get to fire them because of a bad quarter. You don’t put them on performance improvement plans. You don’t have 360 evals with your 3 year old. Employment is a job, and there is a performance bar, and people need to work. It’s not a family. If you try to act like it is, you’re both going to make dumb decisions and come across as a hypocrite. Unless you truly would keep an employee on staff who was a drug addict making terrible decisions and maybe going to jail, and let them drag the rest of the team down while supporting them to try to get them right, stop talking about your place of employment like you’re a family. 

Put differently: if you fire people for any reason short of a felony, you’re not a family, and don’t act like it. The better analogy is a sports team. Again, your younger employees are so attuned to and sick of this duplicitous bullshit that saying nothing is significantly better than lying to them.

Three: non-competes and other restrictive covenants to impede changing jobs. Note I’m not talking about trade secrets or IP here (those are fine to protect), but if you have non-competes for all your line workers, in addition to the FTC coming for your head and the story not being fully written there, understand that comes across to your employees as indentured servitude. If you want to maintain it’s at-will employment and you can fire them anytime you want, but also if they quit you can stop them from working, there’s a word for that: hypocrisy.

This stuff massively damages trust and creates an adversarial relationship from day one. More so, if you actually enforce this against people, you end up in one of two positions. One is that you make enemies for life and scare everyone else away from working for you as the stories get out there. Two is that the employees who remain feel trapped and do even more to quiet quit or get laid off so they can go get new jobs.

As a general rule, don’t have these for anyone other than your c-level execs and maybe one level down from them.

Four: outdated management practices as “improvements” for worker engagement. Guys, nobody wants that office pizza party, I’m sorry. You know they make fun of you for it, right? Likewise, you need to meet younger employees where they are. The number of companies demanding people use things like Microsoft Teams (I apologize for nothing, Microsoft) while being absolutely fucking skewered for being out of touch boomers is unbelievable. Essentially, forcing employees to conform to the 1990s ideas of good communication and management is going to come across as incredibly tone deaf. Since a picture is worth 1,000 words, let me give you a visual of how you look to your employees doing this stuff:

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Okay, so I’ve just angered almost everyone in management. Now let’s talk about what could actually work to get out of this situation. The good news is that there are genuinely meaningful solutions here that could massively improve things, but the bad news is that they are hard, and potentially disruptive, and likely going to give a lot of people heartburn to even read about these things. 

I will remind you that the goal is having a highly engaged, loyal, high-performing, high-trust group of employees overall. This is not a statement that those things should be blind (there will be bad apples and you will have to fire people for cause), but it is a statement that all is not lost. I’m also going to draw on some positive experiences I have had or know about, and reference something that a VC said to me describing his perspective (that they have a hard time hiring, but have a ton of exceptionally high performing partners… there’s a lesson in there).

Change how you compensate people. This means higher comp, but over longer timeframes, and equally important, it doesn’t go away (or only goes away in part) if people quit or get laid off. It can completely go away if people get fired for cause.

How does this look? If you’re a public company it means more equity, but over a longer timeframe. If you gave employees a five year vest but on twice the amount, and then keep a significant amount of that even if they leave (we can talk vesting, minimum tenure, etc. but the point is if someone who worked for you for five years leaves and you yoink every cent of remaining equity that didn’t already fully vest, they will always always think of themselves as a mercenary because you need that equity price to be in the future, not the past, for them to be aligned), you’re going to be surprised at what might start happening. 

Suddenly the long-term corporate results matter a lot more to people because it’s where all their money is, and if you aren’t saying “LOL JK” the moment they consider another job or you lay them off, that’s also pretty notable. This behavior is why some forms of partnerships outperform (see: GS historically), because everyone is aligned. Importantly, this works even better if you pay dividends or distribute cash or do buybacks on your stock because then employees double dip on good results between the dividend/etc. and the stock itself. 

This essentially solves for both the timeframe problem and the capital outperforming labor problem by aligning timeframes and turning labor into capital. You are co-opting the issue.

Guaranteed employment contracts. Employers are really not going to like this one, but here’s the punch line: if you want employees not to act like mercenaries who might be cut loose at any time, the number one way to achieve this is to not treat them like mercenaries who might be cut loose at any time. Giving people guaranteed contracts is a great way to do this. Put differently, would most employees be looking over their shoulder if they had three years of guaranteed work in front of them absent a fire for cause? Would that lead people to be more mission committed? Would it lead to more loyalty? More willingness to take risks or deliver hard messages to managers?

There’s also creative ways to do this to minimize the problem of freeloaders or people who are just not constructive to have around (how you structure length, when it extends, probation periods, etc.) that can be managed effectively, but what this essentially does is creates a bilateral bond between employer and employee in a way that is legally enforceable. I know most employers immediately look at that and start hissing, spitting, and freaking out, but if the thought of making that kind of commitment to your employees (or at least the better performers) scares you that much, I have to once again ask: why should they be committed to you?

This is also probably more plausible at large companies, as small ones (especially growing ones) simply might not know what they need or how many people they need. So be it. But it’s a tool that most employers never consider, which is ironic given it’s a way out of the prisoner’s dilemma. But this is the nature of said dilemma: everyone is too busy betraying each other right now to consider cooperating.

Effective management through trust and accountability. Have we stopped to consider just being good at managing, and only having managers you actually need and eliminating layers when you don’t? That maybe coming up with sound measures for evaluating both productivity and collegiality, enforcing them across the board, and then relentlessly rewarding the high achievers while relentlessly eliminating the poor performers (and being honest with everyone why they are being eliminated) might work?

This is hard. It takes work. And it will have to start at the top, where you’re going to have to make tough decisions, fire friends here and there, and generally run a tight ship. But on the other hand, if you tell people things like “work whatever hours you want, but get things done, be there for key meetings, and be responsive to key folks” and then actually live that life, you could do really well. To use a precise example, I know of a company that will remain nameless where one of my favorite people basically doesn’t work on Wednesday most weeks and goes golfing instead. This is the complete, god-honest truth. He’s also one of the best performers at the company. Why? He’s a developer who likes to work at night. If you had a standard manager heckling this dude to be in the office, he’d have been gone years ago. Instead, you have a guy who relentlessly delivers quality work, at hours he wants, who gets the hobby he wants.

Obviously this wouldn’t work for a trading desk (you can’t skip market hours), but the point is that good management is doing effective work through others and maximizing productivity. That is not maximizing hours spent fucking around on reddit pretending to work in the office, importantly. If it was, Japan would rule the world (again, sorry not sorry). It means actually evaluating competence effectively and then solving for it. Most companies could probably benefit hugely from having a hard look at themselves on this basis. Almost nobody will take this advice, though. Partially because a lot of senior managers would have to start by firing themselves under this framework if you understand the Peter principle.

Honesty. You know what else is weirdly refreshing? Just being honest about things. Don’t gaslight your employees. Tell them that yeah, the corporate world is stupid and unfair and you might get fired. That it’s okay to look for external jobs if they improve. That quiet quitting is pretty negative for everyone so if things are that bad, maybe we can find you a different job or help you transition out.

That if you can’t or won’t pay them more or extend loyalty, you can do things to at least make your company an excellent incubator for talent, with a good alumni network, and lots of good people, and you won’t be weird or stupid or hypocritical or strange when people leave for other opportunities.

This level of refreshing honesty about the reality of work, and asking everyone to treat it like a local optimization problem while they are there but not being upset when they leave, tends to help with both performance and the hijacking problem (much easier to call these people out).

So if nothing else is going to work, at least consider being realistic about the situation. Employees will respect you for that, which is a step up from the current situation for most.

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Finally, if you want to talk about this, reach out. I have (unexpectedly) found myself in the situation of having to help people with and talk through a lot of these problems. I’m sure this thread is likely to provoke some thoughts, piss some people off, resonate with some folks, and be roundly rejected by others. Such is the nature of life. But if you want help and to actually start making things better (or, if you can’t, at least understanding why and what to do), reach out.

Good luck out there.

1. Kurt Vonnegut remains an all-time great