Information Asymmetry in the Workplace

Reid Hoffman, Ben Casnocha, and Chris Yeh recently published a book entitled The Alliance: Managing Talent in the Networked Age. Their premise is that we need a new employment framework that facilitates mutual trust, mutual investment, and mutual benefit. A framework that moves from a transactional to a relational approach, recognizing economic realities and allowing companies and employees to commit to each other. And a model that moves from expectations of lifetime employment to one of allies on a tour of duty. If you don’t have time to read the book, I recommend you look at the visual summary or watch the presentation that Reid and Jeff Weiner gave at LinkedIn.

Employee's Market Value

A key part of the Alliance framework is that the employer and employee develop a relationship based on how they can add value to each other. Employees invest in the company's success, while the company invests in the employee's market value.

But what is an employee's market value? According to Wikipedia, market value is the price at which an asset would trade in a competitive auction setting. There are certainly bidding wars for top talent. We've seen companies try to invert the hiring process by turning it into a developer auction. And Netflix, a company cited in The Alliance, encourages employees to understand their market value by finding out what other companies would pay them -- specifically suggesting that they interview at other companies to do so.

Information Asymmetry

But, if we're going to make the Alliance a reality, we have to overcome some of the asymmetry in the relationship between employers and employees. Starting with information asymmetry.

Consider the process of negotiating compensation.

Companies have people -- if not entire departments -- whose job is to collect market data and represent the company in this negotiation. Professional negotiators, armed with information not only from the company's records but also from commercial data providers.

Meanwhile, candidates and employees are information-poor amateurs. They don't know what their co-workers earn, and it's against social norms for them to ask. The aggregate information available to them from sites like Glassdoor and Salary.com is helpful, but nowhere near as accurate, specific, or comprehensive as the information available to companies. In practice, the best negotiating leverage for candidates or employees comes from competitive offers.

Share the Data

Information asymmetry erodes the trust that is required for the Alliance framework. That makes it imperative to resolve this asymmetry.

Companies can take the first step in this process by unilaterally giving up their information advantage and sharing the data they use for negotiating compensation. This may seem like a crazy strategy -- and it is crazy if the relationship between employer and employee is adversarial. But if the relationship is a true alliance, then it's incumbent on employers not to exploit employees' lack of knowledge to abuse the relationship.

Of course, sharing is a two-way street. If candidates and employees expect companies to be open with them, then they should be ready to reciprocate by being open about their compensation history, competitive offers, etc. The ideal scenario is for both parties to show all of their cards to each other, thus cooperatively determining the fair market rate as effectively as possible.

Embrace the Alliance

If companies aren’t willing to give up their information advantage, then it's up to employees to solve the problem collectively. But it would be so much better for employers and employees to work together at this, rather than using information asymmetry as a weapon.

Let's make the Alliance a reality -- a relationship founded on mutual trust and mutual benefit.