Vol. 46, No. 3
Before Daniel McFadden, 63, was named co-winner of the Nobel Prize in Economic Sciences, the University of California at Berkeley professor was accustomed to sharing his views with five or six colleagues informally over coffee. Now his phone is ringing off the hook with media and government requests for advice. He's even been awarded his own parking space on campus; a perk some say is harder to win than a Nobel.
McFadden is credited with revolutionizing our understanding of how people make critical choices about where to live, what occupation to select and which compensation package to choose. His statistical models enable government and businesses to predict consumer or employee decision-making based on the theory of discrete choice. For example, when putting together a wage package, his formulas help you measure what facets are most likely to attract and retain workers. "These models don't uncover factors that no one thought of," McFadden says. "They allow you to quantify what the impacts are. They tell you how much something matters to an employee in making a particular decision."
Self-interest drives most individual choices and, undeniably, there is a powerful link in the workplace between self-interest and economics. But McFadden has demonstrated there's more to it. "Economists used to say if employees are evaluating an employment package, they'll price-out the value of every fringe," he says. "In fact, people do it in less systematic ways. As a result, they may value some compensation components more than others."
What people see as their self-interest often involves psychological or perceptional issues more than cash. "Workers value being given respect in the workplace more than some traditional economic outputs," McFadden observes. "Or, they value perquisites that carry status and convenience--like parking privileges--disproportionately to their economic worth."
In making decisions people pay more attention to relatives than absolutes, he adds. "You care more about your salary relative to other people in your firm than your salary overall."
McFadden's work is well-known by marketing and consumer behavior professionals, but, perhaps because of its quantitative nature, has yet to be embraced widely by HR.
"What surprises me is that so many people in HR don't know that my models are useful tools in the workplace," he says. "Profits are being lost because people can't evaluate the value of their compensation packages."
His advice: "Hire a young econometrician for your staff who can run the numbers for you."