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In Freakonomics, one of the first books to bring behavioural economics to popular attention, Steve Levitt argues that the incentive system for estate agents will necessarily produce inefficiencies in that market. The incentives between the parties involved are poorly aligned for the task at hand. If they sell your house at a £20,000 discount they still make a large fee – but you lose the actual sum of £20,000. Levitt describes analysis carried out of the housing market in the US – and in particular whether estate agents act differently when selling their own property and their own money is at stake.

Estate agents, in general, describe their properties that they are trying to sell in a different way, receive a higher price for their own properties and leave their own properties on the market for longer (10 days).  In other words as soon as they start acting on your behalf they are less concerned about getting the right result for you – and more concerned about making a sale. .

The proposal in Freakonomics to rectify the mismatch in incentives in the Estate Agency market involves subtle changes in mechanics . For instance, you could agree with an agency that they can keep a far higher percentage of the fee only if they are attain above recent market rate for your property. They therefore have a real incentive to beat market rate for your property.

In any profession you get good and you get bad – and if you make generalisations you get strong objections from those who like to see themselves as the former. However, in most professions, to the neutral observer at least, there is a recognisable set of traits that runs through the core of the worst offenders – a general ‘type’ of behaviour that most outsiders would recognise. It is the nature of the beast and it is quite often driven by poorly designed incentives.

Bad recruiters are the equivalent of estate agents for people.They might say they want you to be happy in your new home – but really they just want you to move home because there is money in it for them. It is about contracts signed and anything else is a supplementary benefit. The more honest ones may tell you this in an unguarded moment (if you provide them with a relaxed environment and just the right amount of alcohol).

You can argue it is the nature of the industry or you can argue it is the nature of people. The important thing is acknowledging the nature of reality. The following things are true of these ‘estate agents for people’.

  • They make their money through volume – they want to do things quickly and move onto the next opportunity. They aren’t looking for quirky character properties – they want to know the area, square footage and if you have room for an extension. The cup of tea arranged to view the property isn’t to get to know you. It is to sell their services and appraise how much work is needed to move you on.
  • They are looking for property that they can present to the market and move on quickly. Ideally, if you look exactly the same as a property that they shifted last month then that is great news as it is less work.
  • They don’t want to have to tidy up your home (in this case your CV), despite the fact they are supposedly experts in this area. Presentation is your problem. They are making significant sums from the transaction, but in sitting in the middle without having to refine your work is a much more efficient model for them
  • They don’t want to have to do much more than put your ad in the local paper (shuffle it towards some open positions), if you stay on their books for any length of time they are mentally writing you off. There is a promise to work on your behalf – that will only be the case if they can move you on quickly.
  • They want to sell you on for a good price – but placing you at a significant discount costs them far less than it does you. They get a slightly reduced cheque if you sign on for £5k less than you thought you were worth – you get £5k less this year and then indefinitely. In fact if you want to move again in a year that is a brilliant piece of news for them – remember they make their money based on volume.
  • Despite the fact you think that you are signing up with an agency for them to sell your house (you) they are aware that the buyer will sign the final cheque (the recruiting firm). They know which side their bread is buttered.

The issue in the recruitment market is that the fee is normally paid by the hiring firm – and competing on price for the hiring firm can reduce the quality of the candidate.  The incentives are possibly so poorly aligned and intertwined that they can’t be resolved simply by ratcheting commissions. Hiring someone through an agency is actually a highly complex web of incentives.

The candidate is in a vulnerable position and the firm is in a position where it is information poor (or it wouldn’t use an agency). The recruitment agency is in a position to exploit both positions.The better agencies do deliver exceptional service, but it is clear that there is enough complexity in the market for ‘estate agents for people’ still to survive.

The rise of LinkedIn and similar as recruitment tools should help resolve some of these inefficiencies, as it improves the market transparency for hiring organisations. It will doubtless mean squeezed margins for recruitment firms – but the pertinent question is who will be worse off once the ‘estate agents’ are competed out of the market? It should benefit the the recruiting firms, candidates and also the remaining agencies; which will have proved their worth through forming genuine partnerships.

The buyer (firm) should be in a position to receive better market data without paying a premium that isn’t proportionate to the work done. The seller (potential hire) should be able to present their own virtues without an intermediary charging a premium for moving that information on.

As I said at the start of the blog, within any profession there are good examples and poor examples, however I would wager candidates and firms recognise a grain of truth in the above. This isn’t to say there aren’t exceptional agencies out there, this is about understanding that free structures may be a disincentive to others to rising up to meet their standards.

Paying more if a candidate proves to be a top performer after a year may seem complex – but it may be a false economy not to examine that as an opportunity. Likewise if a recruitment agency won’t agree to give you a rebate on a fee if a candidate doesn’t turn out to be a top performer – well, it just might be worth asking the question as to why they are so keen for you to recruit that candidate.. Are you sure they would be guaranteeing great performance and cultural fit if they could lose money if proved wrong?

The better agencies will always operate in a more sustainable fashion and, over time, will always prove their value.

Hopefully an improvement in information and incentives can move us towards an industry of ‘Kirsty and Phil’ recruiters, working in genuine partnership to match needs – and see the end of estate agents for people.

 

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