Mind Your Decisions

Understand Counteroffers Through Game Theory and Three Questions

Every Tuesday is a Game Theory article at Mind Your Decisions.

Mahesh asks a great decision problem:

I am working at a firm. I get an offer from another firm. I declare my intention to leave. I get a counter offer with very little tangibles and a lot of promises. The promises look enticing. Should I take or leave? How does this game play out?

There are nuances to the counteroffer game that most people don’t account for. Instead of laboring every contingency, I’ve included the most important issues about counteroffers in this article. You can figure out whether to take (and most likely reject) a counteroffer by understanding three simple questions.

1. Why are you leaving?

If you hate your job environment, forget the counteroffer. If you worry about your company’s profitability, you cannot stand the hours, or you do not see the value of your work, a higher paycheck is unlikely to help you. These are signs you are ready for that next job.

But what if you just want more money?

Counteroffers feel great. You feel empowered when your boss explains how indispensable you are to the team. You are able to extract more money from your company, and you might even get other compensation like a quicker promotion or half-day Fridays. You might think you get all the benefits of a new offer without having to leave your company.

But before you get too excited, there is a rather disquieting statistic about counteroffers: over 85 percent of employees who accept a counteroffer leave their company within a year. The employees with longer tenures face other career challenges, like being typecast as someone unwilling to take risks. Even when you take a good counteroffer, regret and anger affect your long-term satisfaction at your job.

But for the sake of argument, let’s say you are sure you want to stay at the company, and you really do just want more money.

Why else do counteroffers fail?

Well, it’s not about you at all. The other half of the picture is your company. Remember, your company is playing the same game you are. And they play with their own agenda.

2. Why do companies give counteroffers?

Companies understand that counteroffers rarely work out, which makes it a risky proposition. So why do they give counteroffers?

For starters, there is never a good time for an employee to suddenly leave the company. Efficient companies are staffed to capacity and struggle to manage surprises. When someone leaves, an important project might be put in jeopardy, and other employees might have to give up vacation time to pick up the slack.

In short, companies hate being fired by you. A counteroffer is a way to keep you around temporarily until they can prepare to replace you when you ultimately do leave. One executive shares this story about counteroffers:

The senior partner cites a long conference he once attended with his boss and two subordinate managers, in which they approved a counteroffer and raise to an employee two levels down. “Immediately after that meeting, my boss called me and said, ‘We can’t afford to lose him now, but our No. 1 priority is to find a replacement, ASAP!’ he says…And we replaced him within a few months.”

And there is the sober truth: counteroffers are made primarily for the company’s profit. If you stay on, your loyalty will probably be under suspicion. Other employees may be jealous of you. And you might realize that money was not the real reason you wanted to leave.

You are not really in charge after all. And you need to keep that in mind when evaluating enticing promises that are not put in writing.

3. Will companies live up to their unwritten promises?

Probably not! Don’t be fooled like Mr. Coleman of Salary.com:

Mr. Coleman, at Salary.com, recalls an incident that occurred several years ago when he was working at another company. “I had had a performance review and was told I was doing very well, everything positive, ‘you’re a keeper,’ that kind of thing. I questioned my salary, and I was told budgets were tight. Completely coincidentally, I got a call from a recruiter with an opportunity. I went on the interview and got an offer that was effectively a 35% salary increase without negotiating,” Mr. Coleman says. “I went back and gave my notice. Within half an hour the salary was matched.” Mr. Coleman was taken aback at his employer’s abrupt about-face just weeks after being told that tight budgets precluded a higher salary. “I questioned the previous conversations,” says Mr. Coleman. “I felt like I was being cheated and lied to.” So he left.

Get it in writing. Once you accept a counteroffer, you lose your negotiating leverage. Your only recourse is leaving, and that is not much of a penalty, as your company is probably already finding your replacement.

Remember, your company made the counteroffer for its own benefit, and management expects you to be gone soon any way. There is not much reason they will live up to unwritten promises.

But if you do happen to accept a counteroffer for its enticing promises, there is one game theory tactic you can use. You can raise the stakes through the principle of embarrassment.

Make your counteroffer promises as public as possible so it would be embarrassing to the company not to live up to them. Tell your coworkers, your friends, and your other bosses. Write it on your blog.

Or, if you want to really stun your bosses, send me the promises and let me publish them.