The Economics Of Trust

The Economics Of Trust

We just changed the time-off policy at Nylon to give everyone unlimited vacation and sick days. I am convinced that this will not only raise morale by making employees feel like they have more control over their lives, but it will also actually reduce the number of vacation days people ultimately take. Additionally it will save the company money since we won’t have to pay out unused vacation days when people leave. Truly a win-win.

In my experience, if you set a ceiling, it becomes a floor. For example, by capping travel and entertainment expenses at a certain amount per day, you can be sure people will spend right up to that amount to make sure they squeeze every dollar out of the company they can. Indeed, in one specific instance, when I started at one of the companies I ran, there was a strict policy of a $30 limit per meal while traveling. Not even $90 per day, but $30 per meal. The unwritten message to employees was that the company didn’t trust them not to overspend and take advantage.

I decided to try an experiment and changed the policy to unlimited T&E. I expressly told the staff the reason for the change was that I wanted to treat them like responsible adults, and that I expected the respect I was showing them would be reciprocated.

Over the course of the first year under the new, unlimited policy, our T&E expenses actually dropped 15% from the previous year when the cap was in place. People felt more of a sense of ownership and were more conscious of how their actions affected the whole company. They felt respected. Trusting them paid off economically. (There were, of course, a few people who took advantage of the policy, but after I sat down with them and explained that they were ruining it for everyone and I needed to be able to trust them, they curbed their spending fairly quickly.)

I believe there are two major elements at work here: First, this is driven by a bit of game theory/prisoner’s dilemma psychology, where — in a very basic sense — people will usually bond together for the most positive outcome for everyone if you explicitly show them the benefits. The other key component is removing fear. The people at this company were made to feel afraid of going over the T&E cap, so they reacted angrily by spending as much as they possibly could. By showing them trust, they felt more comfortable and more in control, and without the specter of a powerful guard in place, they were freer to act with mutual respect.

Treating people this way isn’t just the right thing to do; it makes good economic sense for everyone.