A new study looks at the value of ‘exploding offers' and other techniques in securing top talent
The beginning of the football season is rife with transfer news of who’s hired who. For organizations the search for expert talent is ongoing, all year round, and, as with the transfer market, the recruitment process is fraught with difficulty and uncertainty.
In a competitive jobs market, locating qualified candidates is difficult enough. Tempting them away from offers elsewhere and timing the job offer to secure their services is a further challenge – one that is not often well understood by managers and yet one that can be a mission critical capability.
Once a suitable candidate is found the chances are he or she will have other opportunities to consider. So, the recruiter has to decide whether to offer the job on the spot, perhaps wait until other candidates have been interviewed, or suggest the amount to time to give the chosen candidate to accept the job. One tactic which can work but can back-fire is to make an offer with a very short deadline – an ‘exploding offer' – to persuade the candidate to quickly accept before he or she receives better offers elsewhere.
New research from Ilia Tsetlin, Associate Professor of Decision Sciences at INSEAD, and Saša Zorc, Assistant Professor of Business Administration at Darden, considers these issues in their paper: Deadlines, Offer Timing, and the Search for Alternatives (see below). Using game theory and mathematical modelling, they reveal the factors that count when deciding a job offer’s timing and its acceptance deadline.
In their study, the researchers model two agents (recruiter and candidate) who can benefit from a mutual deal or partnership, yet are also searching for outside alternatives. This involves several decisions; the recruiter decides not only on the timing, deadline, and value of her offer but also on how to handle her outside alternatives; the candidate decides whether or not to accept the recruiter 's offer and how to handle his own outside alternatives.
The recruiter wants to structure her offer in a way that increases the odds of acceptance; but this is in conflict with her other criteria – to pay as little as possible and to get the benefit of the deal as soon as possible. And, on the other hand, she would also like to maximize her own available time for finding a better alternative. The candidate faces a similar decision – should he accept the offer or does he stand to gain more by continuing to look for a better alternative? This is a generic situation which can be observed in various settings but is particularly relevant in the job market for experts,
The researchers found that a candidate who holds an offer with a long deadline becomes more reluctant to accept other alternatives, as he has something to fall back on and can be more selective. They refer to this increased selectivity as the acceptance-deterrence effect. A recruiter's decision between exploding offers and longer deadlines can be distilled to just a single criterion: the strength of the acceptance-deterrence effect. When this effect is weak, exploding offers become optimal, whereas longer deadlines are optimal when the effect is strong.
After analysing how different aspects of the deal making process affect the strength of acceptance deterrence, the researchers found that in essence the recruiter needs only answer the following two questions:
(i) Will she be informed and able to react if the candidate receives another offer? In small markets, such as the job market for Assistant Professors or star football players the answer is likely to be ‘yes’. So, there is no reason to make a pre-emptive offer with a longer deadline. Rather, the proposer should wait until the time that is most convenient for her and then make an exploding offer. However, she should also be prepared to issue counter-offers or give a longer deadline if the candidate receives a better offer elsewhere. Yet if the recruiter will not be informed about (or cannot react to) the candidate's alternatives, then other considerations become important.
(ii) Will the probability of the candidate receiving another offer or such offer's value change over time? If not, then the recruiter can focus on exploding offers. If so, then the recruiter must consider making a pre-emptive offer with a long deadline, in order to deter the candidate from accepting common low-value alternatives while risking him finding rare high-value ones.
During the frenetic ‘transfer window’ activity in 2015, Real Madrid tried to sign David de Gea, the Manchester United goalkeeper. United reacted to this by making an ultimatum; they offered to trade de Gea for £35 million but only if Real accepted this offer within 24 hours, Real was unwilling to meet this ultimatum and rejected it, resulting in de Gea staying with United. This situation provokes several questions, which were widely discussed at the time. Did it benefit United to issue such an ultimatum, or would they have been better served by giving Real more time? How should Real have reacted to this ultimatum? What factors should be considered when making such decisions? These are the questions explored in this study.
Access the full research paper: ‘Deadlines, Offer Timing, and the Search for Alternatives’, Ilia Tsetlin, Ilia, Sasa Zorc, June 2019.. INSEAD Working Paper No. 2019/26/DSC.
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