Sunk Cost Fallacy

“Each is under the most sacred obligation not to squander the material committed to him,

not to sap his strength in folly and vice,

and to see at the least that he delivers a product worthy the labor

and cost which have been expended on him.”    

Anna Julia Cooper


“Know When to Cut Your Losses”
Warren Buffet



Last month I wrote about weighing an individual’s accomplishments against their transgressions when deciding to continue an employment relationship (Salvage Operations).  There’s value in reviewing your investment in someone or something before throwing in the towel.  On the other hand, when is it appropriate to part company with a person or a project because the return on investment isn’t worth the effort?

Sunk Cost Fallacy

There is an economic rule called the Sunk Cost Fallacy.  It’s a term that refers to the tendency for organizations and people to persist in an endeavor primarily because of the investment they have already put into the project (or person).  While normally referring to money, the investment can be of time as well.  As it relates to employees, both are applicable.  Initially, proper due diligence during the hiring process hopefully results in new employees that are worth your investment of time and resources.  After orientation, training and setting expectations, their tenure with your organization should be fruitful for the company and professionally rewarding for them.

That’s not always the case, however, and periodically new employees aren’t as good a match as you’d hoped and in some cases, long-term employees performance doesn’t meet expectations for various reasons and you’re faced with a decision; do they remain with the company or not.  We previously examined the viewpoint of salvaging poor performers whenever possible.  When that proves unsuccessful, what do you do when an employee cannot or is unwilling to change?

“Help Me Help You” (We’re All Adults Here)

In any relationship, there needs to be give and take.  In an employment relationship it may involve multiple levels (i.e., the employee, the manager, HR, etc.).  To make a sound decision when deciding the fate of an underperforming employee everyone needs to be on the same page.  This requires a willingness to:

·       Address the problem (the manager)
·       Deal with the behavior and not the personality (the manager)
·       Help the employee improve (the manager)
·       Believe the employee can improve (the manager)
·       Make the changes (the employee)

And, a process that includes: 

·       Clarification of the specific issue(s) or offense(s) (the manager/HR)

·       Expectations regarding what needs to change and by when (the manager/HR)

·       Regular feedback on progress towards making the improvements (the manager)

·       Good documentation of all of the above (the manager/ HR) 

The burden here falls on the company to drive this process.  A manager has to be willing to address the problem (confrontation, everybody’s favorite…).  In the past, I have seen managers who have not done so because:

·       “The employee has been with us for years”

·       They were “friends” with the employee

·       The employee had a relative who was a valued employee they were afraid they would lose

·       They just weren’t comfortable with confrontation

In these instances, I have seen employees who have languished with mediocre (or worse) performance for years because no one chose to address the issue with them.  Bear in mind that addressing performance doesn’t mean once or twice a year.  The most effective way to keep small issues of poor performance (and attendance) from becoming big ones is to address them as soon as they are evident.  Indifference or reluctance hurts both the company and the employee in the long-term.  It is important to evaluate the situation for what it is and decide a plan of action.  For timid managers, HR should come alongside them and assist in addressing the employee’s issues while also planning to support the manager in becoming more comfortable with confronting employees about their behaviors and performance in the future.

Therefore, what we’re really talking about are two issues.  The willingness to address employees’ performance issues and the ability to say, and “Enough is enough.”  In the case of an employee who responds to requests to improve their performance, the efforts yield a more engaged individual.  Sometimes that takes the form of a reassignment to another role more suitable to their talents and needs.  Other times it involves setting expectations and providing support that communicates to the employee that they have value to the organization but need to add that value through their own efforts.

In the case of an employee who does not respond to requests to improve their performance, it results in ending the employment relationship and cutting your losses.  It sounds cold but it’s sometimes necessary.  I am aware of companies that go as far as helping the employee find another job outside the organization before separating.  Zappos, an online retailer, offers new hires $3000 to leave their positions before they become bad employees.  According to their CEO, 2-3% take them up on the offer.  According to CareerBuilder, the average bad hire costs $25,000 so Zappos is potentially saving money for each new hire that chooses to leave with this strategy.

Ultimately, the process of choosing the “right” individual to fill an open position begins during the interviews.  A thorough process is a valid investment of time and money.  It should include HR, managers and coworkers.  When a new or existing employee doesn’t perform, they deserve prompt feedback and an opportunity to improve.  When an employee no longer adds value, you need to evaluate whether you’ll sink any more resources into them or do everyone a favor and let them know their ship has sailed. 

Here to serve,

John Duba

Next month:  Seeing Stars for the First Time

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