Signals

When George Akerlof, Michael Spence and Joseph Stiglitz won the 2001 Nobel Prize in economics, their papers described the concept of information asymmetries.^{1, 2, 3, 4} Information Asymmetries exist when one party (e.g. the seller of something) knows more than another (e.g. the buyer). The information gap is common for consumers, particularly when buying used items. In their writing, the authors detailed a solution to the problem in that the seller can provide the buyer a “market signal.”² Signals can provide evidence that the item is of the expected value or quality and if found not true, provides financial protection. For example, if one were buying a used car, a signal might be a 2-year warranty from a reputable car dealer; it signals that even if there is a problem, the dealer will stand behind the car and if it is a "lemon," the buyer is protected.

These ideas are relevant to employment situations. Prospective employees know more about their skills than the employer and therefore provide a signal from a reputable educational institution that they have the skills needed.² This problem can also be particularly acute among workers after being hired. In fact, within organizations and between leaders and followers, information asymmetries exist; leaders know more about the direction and needs of the business. To solve this problem, employees search for ways to reduce these gaps, and signals provided by leaders can also lessen the deficiency. 

Workers are not always familiar with where the organization is headed or what is acceptable and unacceptable behavior. And if communication is lacking, they look for ways to understand what really is important and may use keen observation of the leader – what he/she says and behaviors – for clues. There also may be evidence found in the organization's structure and/or in the written (and unwritten) policies and procedures.

Since signals can provide an invaluable mechanism to answer important organizational questions, leaders must be deliberate about these signals or risk relaying misinformation. Here are some categories and examples of signals and the problems that can be encountered:

Management Measures and Reports: Measures and reports that a leader insists upon are extremely important. For example, if a leader asks for detailed sales statistics on a single product to the exclusion of others, it reveals what product is most important. Alternatively, if the leader fails to measure something, like employee satisfaction (a variable related to productivity, turnover, etc.), it conveys it is of lesser worth.

Questions: Leaders at all levels spend a significant portion of their day interacting with workers. What a leader questions during these interactions is significant. If a leader asks how long it takes to process a product sale, it signals its importance. Alternatively, if the leader fails to ask a question (e.g. do we sell our products ethically?), then that too sends a signal. While a signal can be misinterpreted (few would advocate unethical behavior), the apparent "lack of concern" sends a message; leaders need to control the messages they transmit whether intention or unintentional.

Behaviors: The leader’s behavior tells the workers much more than most realize; workers sense consistency or contradictions in what a leader is doing.

1.      Productivity: For obvious reasons, organizations need highly productive employees and the desire is to optimize production throughout a day. But what if the leader felt as though they were above it all? An example is when the leader leaves the office to do something that appears personal, even if it is for business purposes. What is the message or signal sent? What if a leader made the decision to cut expenses that caused pain in the organization and then flew the management team to a resort hotel for a meeting?

2.      Interaction: Leadership research suggests that it is very important for the follower and leader to have a positive relationship. And the leader needs to know their followers and be able to motivate them; motivation requires an understanding of what the worker can do and what is important to him or her.⁵ Thus, picture a leader who stays in his or her office and rarely interacts with his/her down-line supervisors and managers. Is this leader revealing the unimportance of worker interaction?

3.      Decisions: Leaders often describe the importance of participation; but what if the leader actually manipulated conversations so that he or she achieved the decision wanted? Will the workers feel they were included?

4.      Self-Serving: When a leader seems to have a self-focus (even the perception of this is enough), it signals that it is acceptable to behave this way. Imagine the leader who is asked to allocate a bonus pool, but then takes 60% for him or herself. What signal does this send? If the leader acts selfish, would a supervisor and manager think there is a requirement to do differently?

5.      Demeanor: If a leader is positive and upbeat and demonstrates that problems can be solved, it signals this is the appropriate behavior. To the contrary if the leader is negative and grumpy; it suggests being downtrodden is fine.

General Management: If the leaders of an organization permit things to happen that should not be happening (people are fired without reasonable cause, even in states that allow “at will” employment practices), then some important messages are conveyed; the continuation of dysfunction signals a great deal to all stakeholders. 

The end result of all these scenarios is that leaders, and the management structures they have permitted, tell the organization what to expect and what is acceptable; it becomes imbedded in the culture of the business. Leaders and their businesses are constantly on stage and everything that happens under their watch is important.  Some leaders think that they can do what they want (“I’ve earned it”), and perhaps they can, but if they want to run a good organization, it is necessary to pay attention to everything, including all of the signals sent. Positive signals work just as effectively as the negatives described above.

Leaders need not be perfect, but they need to be as diligent as humanly possible and use their leadership team to collectively send the right signals.

Please feel free to comment.

References

¹ Akerlof, G.A. (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, Vol. 84(3), p. 488-500.

² Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, Vol. 87(3), p. 355-374.

³ Stiglitz, J.E. (1985). Information and Economic Analysis: A Perspective. The Economic Journal, Vol. 95 (Supplement: Conference Papers), p. 21-41.

⁴ Lofgren, K., Persson, T., & Weibull, J.W. (2002). “Markets with Asymmetric Information: The Contributions of George Akerloff, Michael Spence and Joseph Stiglitz.” Scandinavian Journal of Economics [Retrieved Electronically, 7-24-2013], Vol. 104(2), p. 195-211.

⁵ Robbins, S., & Judge, T. (2011). Organizational Behavior (14th ed.). Upper Saddle River, NJ: Pearson Education.