Hamlet: Do you see yonder cloud that’s almost in the shape of a camel?
Polonius: By the mass, and ’tis like a camel, indeed.
Hamlet: Methinks it is like a weasel.
Polonius: It is backed like a weasel.
Hamlet: Or like a whale? Polonius: Very like a whale.
-William Shakespeare, Hamlet, Act 3, Scene 2
For most of your career, you have toiled away getting bonuses, stock options and the like. Your CEO believes in pay for performance and the data says you have performed so you have been paid. You are so successful that promotion beckons – the CEO appoints you to a senior position, advising her on key investments your firm must make to expand. She has her eye on building a new factory in Shanghai and she asks you to look into it. The investment might be good or bad. Your hard work collecting data on potential demand and costs will help to inform the decision. But there is a key difference. In your old job, your hard work led to higher measurable profit and you were paid for performance. In your new job, information acquisition might as well lead to a signal that the investment is bad as to signal that it is good. In other words, a bad signal does not signal that you did not collect information while bad performance is your old job was a signal that you were not working hard. How can the CEO reward pay for performance in your new job?
Since there is no objective yardstick, the CEO must rely on a subjective performance measure. Your pay will depend on a comparison of your report with the CEO’s own signal. The problem arises if you get a noisy signal of the CEO signal. Then you have a noisy assessment of what she believes and hence a noisy signal of how your report will be judged and hence renumerated. In equilibrium, you will condition your report not only on your signal but also on your signal of the CEO’s signal. You are a “yes man”. The yes man phenomenon arises not from a desire to conform but from a desire to be paid! Prendergast uses this idea as a building block to study many other topics including incentives in teams. The greater the level of joint decision-making, the problematic is the yes man effect. He points out that if the CEO asks you to back up your opinion with arguments and facts, this mitigates the yes man effect. Plus he has the great quote above at the start of his paper.