Negotiation Skills: At Pimco, a Successful Threat and an Uncertain Payoff

In business negotiations, threats can be fraught with risk. There is the risk that a threat will escalate conflict. There is the risk that a threat will motivate a desire for revenge. And then there is the risk that your threat will work perfectly, but you’ll be unprepared for the aftermath.

That last scenario may describe what happened recently when a number of executives and investment officers at Pimco Investment Management threatened to quit unless Bill Gross, the firm’s co-founder and manager of its flagship Total Return Fund, was fired.

Gross, who started Pimco in 1971 and helped build it into a bond-trading giant, increasingly antagonized others at the firm with his alleged volatile behavior, including angry outbursts at coworkers. The firm’s executive committee reportedly warned Gross to improve his behavior, with little result.

After Gross sent out an angry e-mail outlining what he perceived to be Pimco’s major problems, some of the firm’s top executives filed one by one into the CEO’s office to deliver an ultimatum: “Either Bill goes or I do,” insiders told the Wall Street Journal.

Following a series of meetings, Pimco’s executive committee decided to fire Gross, who quit on September 26 before receiving formal notification of the decision. Bolstering the decision was the fact that Gross’s Total Return Fund, though still the largest bond fund in the world, had lost $65 billion of its approximately $294 billion in assets during the last 16 months, according to the Journal. Gross moved to manage a much smaller bond fund at Janus Capital Group.

Unfortunately for Pimco, it appeared to be “caught flat-footed” by Gross’s resignation, Kirsten Grind writes in the Journal. The firm reportedly failed to notify investors and financial advisers about how it would adapt to Gross’s departure and how the funds he managed would be affected. And the firm did not immediately have a new management structure in place when the news that Gross was leaving broke.

Even worse, upon Gross’s departure, investors began fleeing the Total Return Fund in droves. The fund lost $17.9 billion in the final days of September, according to CNBC.

For business negotiators, the story serves as an illustration of the perils of both making and responding to threats without thorough preparation.

Too often, negotiators make threats in the flush of anger. The next time you are tempted to make a bold threat, take time to allow yourself to cool off first.

Then, consider the range of possible responses you might receive—looking not just one but several steps ahead—and prepare accordingly. In Pimco’s case, this meant examining how investors were likely to respond to Gross’s departure and taking advance measures to restore their confidence in the firm’s leadership.

When more cooperative strategies have failed, threats can be an effective means of getting a counterpart’s attention. But before you make a threat, be careful what you wish for—because it just might come true.

Source: Program on Negotiation at Harvard Law School